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1 Document of The World Bank Public Disclosure Authorized FOR OFFICIAL USE ONLY Report No IMPLEMENTATION COMPLETION REPORT NEPAL NARAYANI III IRRIGATION PROJECT (CREDIT 1715-NEP) MAY 1,1996 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Agriculture and Water Operations Division South Asia Country Department II This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS Currency Unit = Nepalese Rupee US$1.0() 0 NRs (at appraisal June 1986) US$1.00 = NRs (1994/95 rate used in ICR) WEIGHTS AND MEASURES I meter (m) = 3.28 feet I kilometer (km) = 0.62 miles I hectare (ha) = 2.47 acres 1.50 bighas I million cubic meters (Mm 3 ) 810 acre-feet or 35.3 million cubic feet I cubic meter per second (m3/s) = cubic foot per second (cfs) I cubic foot per second (cfs) = cubic meters per second (m3/sec) I metric ton (t) = pounds FISCAL YEAR OF BORROWER Julv 16 - Jtlv 15 ABBREVIATIONS AND ACRONYMS ADB DBC DOI ERR IMGN ICR IDA LCF MWJV NEC NPV NZIDB NZIDP O&M PCR PPAR POP RWS SAR SDC SCF TII WUC WUCCs WUGs kiharij rabi Asian Development Bank Don Branch Canal Department of Irrigation Economic Rate of Return His Majesty's Government of Nepal Implenmentation Completion Report International Development Association Labor Conversion Factor Manufacturers Unit Value Nepal Eastern Canal Net Present Value Narayani Zone Irrigation Development Board Narayani Zone Irrigation Development Project Operation and Maintenance Project Completioni Report Project Performance Audit Report Project Operation Plan Rotational Water Supply Staff Appraisal Report Swiss Development Cooperation Standard Conversion Factor tertiary irrigation unit Water Users' Committee Water Users' Coordinating Committees Water Users' Groups Wet Season (June to October) Drv Season (November to February)

3 NEPAL FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT NARAYANI III IRRIGATION PROJECT (CREDIT 1715-NEP) CONTENTS PREFACE... EVALUATION SUMMARY... ii PART I PROJECT IMPLEMENTATION ASSESSMENT... 1 A. Statement and Evaluation of Objectives... 1 B. Achievement of Objectives... 4 C. Major Factors Affecting the Project... 6 D. Project Sustainability... 7 E. IDA Performance... 8 F. Borrower Performance... 9 G. Assessment of Outcome H. Future Operation... 9 I. Key Lessons Learned PART II STATISTICAL TABLES Summary of Assessments Related Bank Loans/Credits Project Timetable Loan/Credit Disbursements - Cumulative Estimated and Actual Key Performance Indicators Key Indicators for Project Operations Studies Included in the Project A Project Costs B Project Financing Economic Costs and Benefits Status of Legal Covenants Compliance with Operational Manual Statements Bank Resources: Staff Inputs Bank Resources: Missions This document has a restrictedistribution and may be used by recipients only in the perfornmance of their official duties. Its contents may not otherwise be disclosed wivhout World Bank authorization.

4 APPENDICES A Aide-Memoire of Supervision/Implementation Completion Reporting Mission B Financial and Economic Re-Evaluation Table 1: Crop Pattern and Yields of Stage I & Stage II at Appraisal & ICR Table 2: Estimated Farm Budgets and Project Rent at Full Development Table 3: Estimated Project Rent and Cost Recovery (Rs/ha) Table 4: Prices used for the Financial and Economic Analyses Table 5: Derivation of Economic Prices for Internationally Tradable Commodities Table 6: Exchange Rate, Price Indices and Derived Inflators Table 7: Economic Rate of Return Calculation for Stage I and Stage II Table 8: Flood Damage from Bagmati and Lal Bakeya Rivers Table 9: Flood Damage in Block 15 of NZIDP Table 10:Annual Flood Protection Benefit Table 11 :Economic Rate of Return Calculation (Flood & River Protection) Project Data Sheet - Histogram of Don Branch Canal Supply to NEC C Borrower's Evaluation of the Project D CoFinancier - Swiss Development Cooperation's Evaluation Report Map: IBRD Narayani III Irrigation Project Location.64

5 i NEPAL IMPLEMENTATION COMPLETION REPORT NARAYANI HI IRRIGATION PROJECT (Credit 1715-NEP) PREFACE This is the Implementation Completion Report (ICR) for the Narayani III Irrigation Project in Nepal, for which Credit 1715-NEP, in the arnount of SDR 21.6 million (US$24.5 million equivalent), was approved on June 19, 1986 and made effective on March 20, The project was cofinanced by a Swiss Franc (SwF) 15.0 million (US$7.5 million equivalent) grant (Swiss Grant N.umber 01680) from the Government of the Swiss Confederation, administered by the Swiss Development Cooperation (SDC). The Credit was closed on June 30, 1995, one year later than the originally planned closing date of June 30, On May 31, 1994, SDR 7.3 rnillion of the IDA Credit and SwF5.0 million were canceled due to restructuring of the project. An unused amount of SwFO.5 million was canceled in June Final disbursement of the IDA Credit took place on February 1, 1996, at which time the undisbursed balance of SDR million was canceled. Approximately US$17.1 million of the IDA Credit and approximately SwF9.5 million (US$6.3 million approximately) of the Swiss grant were disbursed. A draft ICR was prepared by a Food and Agriculture Organization/World Bank Cooperative Program (FAO/CP) rnission which visited Nepal in February/March SDC representatives also participated in the field visit of FAO/CP ICR mission. Preparation of the final ICR was initiated during IDA's final supervision-cum-icr rmission in March/April The draft ICR was based on materials in the project files and discussions with project staff and beneficiary farmers. The ICR was finalized by the Task Manager, Ohn Myint, Agriculture and Water Operations Division, South Asta Country Department II, and reviewed by Mr. Shawki Barghouti, Chief, Agriculture and Water Cperations Division, and Ms. Kazuko Uchimura, Project Advisor. The Borrower and the cofinancier provided comments that are included as Appendices C and r to the ICR. The Bt rrower also contributed to the preparation of the ICR by providing a detailed Project Completik.n Report and a draft Project Operation Plan, which are available in the Asia Information Center.

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7 ii INPLEMENTATION COMPLETION REPORT NEPAL NARAYANI m IRRIGATION PROJECT (Credit 1715-NEP) EVALUATION SUMMARY Introduction 1. The project was designed as a third time-slice of IDA support for modification and rehabilitation of the N4arayani Zone Irrigation System. The system was designed to enable Nepal to use 24.1 m 3 /sec of Gandak river water for irrigating a total area of 37,400 ha, in accordance with its 1959 agreement with India (see Figure 1). The system receives water supply from the Don Branch Canal (DBC) from Gandak Barrage in India. IDA's involvement was in a phased manner. 2. The first stage of IDA's support for the Narayani Zone Irrigation System was under the Birganj Irrigation Project (Credit 373-NEP, US$6.0 million equivalent, 1973). Its objective included completing and upgrading the irrigation and drainage system on 28,700 ha of the 37,400 ha commanded by the Nepal Eastern Canal (NEC). Because of implementation delays and thus considerable cost overruns, the project area was later reduced to 16,300 ha, designated as Stage I. The reduced project was completed in 1981 and was followed by the Narayani Zone Irrigation Development Stage II Project (Credit 856-NEP, US$14.0 million equivalent, 1978), which was designed to develop the 12,400 ha deferred from the Stage I project and to provide intensified agricultural support services. Although progress in the achievement of physical targets was satisfactory, operation and maintenance (O&M) and the full involvement of farmers in water distribution at the farm level needed to be improved. The Stage II Credit closed on December 31, The Stage m Project under review was to complete the modification and rehabilitation of the remaining command area of 8,700 ha of the system and to cure the deficiencies of the Stage I and II areas. Project Objectives 3. The objectives of the project were to: (i) increase dry season agricultural production by introducing an equitable, predictable, and reliable irrigation system in the project area; and (ii) to reduce the risks to monsoon crop production by making protective irrigation available when requested. Flood protection and drainage improvemrents would reduce the risks to crops and the physical

8 iii infrastructure. Management objectives were to develop fu11 fanner participation and cooperation in the O&M of the tertiary water distribution system. 4. The project included: (a) improvements to NEC, including lining of selected canal reaches, construction of control and access structures, and repairs to the Tilawe weir; (b) irrigation and drainage down to the farm level in Stage IIn area (8,700 ha) and providing about 40 shallow tubewells, (c) improvement and repairs of irrigation and drainage systems in Stages I and II areas (28,700 ha) down to the farm level; (d) flood protection and river training works on the Lal Bakeya and Bagmati rivers (Stage III area) and flood protection on.eight rivers crossing the Stages I and II areas; (e) technical support including consultancies for: (i) design and supervision of construction; (ii) project monitoring and evaluation; (iii) studies; and (f) support of project establishment and O&M costs. 5. Project Reformulation. The objectives were clear but the unpredictability of the water supply from the DBC in India made it unrealistic to expect predictable and reliable irrigation on the full project area of 37,400 ha. The DBC supply was erratic and always lower than the treaty amount. Taking account of actual flows received from India, the project was reformulated after a mid-term review in 1993 so that: (a) the area to be filly developed would be reduced to 24,500 ha comprising mainly of Stage I and some Stage II areas; (b) rehabilitation works already started for main and secondary canals for the rest of the Stages I and II areas would be completed; (c) Stage HI irrigation development of 8,700 ha would be excluded but increased iiver training and flood protection works on the Lal Bakeya and Bagmati rivers would be completed; (d) river training and flood protection works on rivers crossing the NEC, the extent of which has already been increased to safeguard the NEC from further flood damage, would be completed; and (e) all further construction of tertiary canals would be by farmers in accordance with HMGN's new Irrigation Policy, Implementation Experience and Results 6. Construction of the reformulated project has been substantially completed (over 80 percent) except for tertiary canals (about 33 percent), which are to be constructed by farmers. Development of furll fanner participation and cooperation in the distribution of water have been partially achieved. These were delayed by there being almost no water to distribute from 1986 to June 1991 at the time of the Stage II project due to the failure of the DBC in India in late August Water supply from India's DBC was restored in mid-june 1991, although full supply with the agreed amount of 24.1 m3/sec was not received. The supply hardly reached 60 percent of the agreed full supply amount (see data sheet on page 48). Many farmers need convincing that the redesigned project works will supply the irrigation water they require and that the structures provided at secondary and tertiary levels are appropriate for their needs. 7. The Bank and the Borrower relied on the 1959 treaty with India on the amount of water supply. However, this was never realised in the supply history of the DBC. The failure to take account of the fact that the supply from the DBC was substantially less than the treaty amount was a serious deficiency in project preparation and design. The commitment of the Government and the implementing agency to the project was not in doubt, but there is no evidence that beneficiaries were

9 iv given an opportunity to influence the design of the project, which included the fornation of water users groups. The area irrigated was not monitored carefully which made evaluation of project results difficult. IDA's relations with the co-financier were satisfactory. 8. It is expected that at full development in the year 2000/01, the targets for incremental production of vegetables, sugarcane and pulses will be exceeded despite reduced areas, and that there will be incremental production of maize which was not included in the cropping pattem at appraisal. The incremental production of paddy is expected to be less than estimated for the whole project at appraisal, but about the same as was estimated for the Stage I and II areas. Incremental production of wheat and oilseeds is much less than estimated at appraisal due to smaller incremental areas for both crops and lower incremental crop yields for wheat. The risks of flood damage to crops in the Stage m area, human life and physical infrastructure (for a districtown - Gaur) have been reduced by river flood protection and drainage works. 9. The project management made considerablefforts to implement the project with due diligence and efficiency but, for most of the implementation stage, the project suffered severe shortage of funds and was not provided with adequate budget for efficient implementation. Although the procedure for collectng water service charges has been reviewed, the levels of charges, which would not be enough to cover the cost of O&M of the system, have not been reviewed. No water service charges have yet been collected because of the unreliable supply. Because of the shortfalls in budget, slow procurement for the main ICB contract, and above-mentioned deficiencies, the project was rated as a "problem project" for the last three years of implementation. 10. The re-estimated economic rate of return (ERR) is 16 percent for the restructured project as a whole, including flood and river protection benefits. For the irrigation-only scenario of the improved Stages I and II under the restructured project, the re-estimated ERR is 19 percent. No reestimation of ERR was made for the original scope of project as it was not implemented. Both reestimated ERRs are less than estimated at appraisal. Summary of Findings and Future Operations 11. The implementation of the project was delayed by: (a) floods in 1986, 1987, and 1993 that caused heavy damage to both the NEC and the DBC in India, which supplies Gandak water to the NEC'; and (b) IDA's insistence that the Borrower change the system of water distribution. The trade and transit disagreement between India and Nepal from about March 1989 to mid-1990 resulted in a severe shortage of diesel fuel which compounded the delay, as did inadequate budget provisions by HMGN and uncertainty in reassessing the reformulation of the project. 12. Slow procurement for the main ICB contract caused by serious underestimation of the contract cost by consultants, acting for the implementing agency, also delayed the project by almost one year. The total cost of the project is estimated to be about US$25.5 million (NRs million). ' Repair of NEC was completed by early 1989, but repair of the DBC was very slow. No water was received from the DBC betwee August 1986 and June 1991, i.e., five consecutive project years.

10 v This is about 72 percent of the SAR estimate in US Dollar but, due to devaluation of the Nepalese Rupees in relation to US Dollar in the rate of exchange, it is about 132 percent of the SAR estimate in Nepalese Rupees. Approximately SDR million (US$17.1 million equivalent) of the IDA Credit and approximately SwF9.5 million (US$6.3 million approximately) of the SDC grant have been disbursed. Final adjustment from the IDA Credit was made in February SDR 9.1 million and SwF5.5 million were cancelled from the Credit and grant respectively. The main construction works outstanding are tertiary canals and field channels to be built by farmers. 13. The success of the project depends on: (i) availability of water from the DBC; (ii) adequate budget for O&M; (iii) completion of construction of tertiary canals; (iv) applying generally simple rules for operation of the irrigation system; and (v) water users understanding the importance of maintaining essential features of the system. Three important elements need strengthening: (a) the development and application of operating rules which cope with the erratic water supply from DBC; (b) maintenance of the main and secondary canals and structures; and (c) training water users in the O&M of the system. 14. Based on the assumptions described in Appendix B, the Net Present Value (NPV) of the irrigation componet of the restructured project when cash flows are discounted at 10 percent is positive. However, the assumptions are based on sustainable benefits following completion of construction of tertiary canals. The outcome cannot be rated as "satisfactory" since the project was reformulated without inclusion of the Stage HII area and at the same time the completion of the tertiary canal system was also partial at the Credit closing. Thus only some of the original objectives were met and the works included in the reformulated project were partly completed. The ERR can be affected if the benefits are not sustainable. Due to the uncertainty of these tertiary canals being completed by farmers and the unreliability of assured supply of water from DBC, the project sustainability is rated "uncertain". Key Lessons Learned 15. The key lessons learned are: (a) (b) (c) A water right based on an international treaty may be insufficient guarantee of reliable physical delivery. A critical evaluation of the situation should be done prior to the project investment. Before embarking on a new stage of a project such as Narayani, the availability of water should be reassessed. Unreliable water.supply for any reason destroys farmer confidence in the ability of the irrigation authorities and can lead to a lack of cooperation. Participation of beneficiaries in the design, construction and implementation, and O&M is very important in a large public irrigation system where available water resources have to be shared among many beneficiaries in an organized and

11 vi timely manner. Training farmers to understand the design of the water system and its performance is necessary for large public irrigation systems where water have to be shared according to agreed time and quantity. (d) (e) (f) (g) The design of a large public irrigation systems must be flexible, simple and socially acceptable to small farmers and their communities. Social acceptability should be tested before committing heavy investment. Water User Groups can function effectively only when reliable irrigation supply can be assured. Service charges to cover full O&M costs of public utilities after improvement must be imposed and this should be considered a country-wide issue in any investment project. Regular evaluation of project impact on beneficiaries is more likely to be successful where the work is carried out by independent consultants rather than by project staff Public and government awareness of proper utilization of natural resources must be developed through various means of investment lending.

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13 IMPLEMENTATION COMPLETION REPORT NEPAL NARAYANI III PROJECT (Credit 1715-NEP) PART I: PROJECT IMPLEMENTATION ASSESSMENT Statement of Objectives A. STATEMENT AND EVALUATION OF OBJECTIVES 1. The objectives of the project were to increase dry-season agricultural production by introducing an equitable, predictable, and reliable irrigation system in the project area, and to reduce the risks to monsoon crop production by making protective irrigation available when requested. Flood protection and drainage improvements would reduce the risks to crops and the physical infrastructure. Management objectives were to develop full farmer participation and cooperation in the water distribution and management of the system. 2. Background. The appraised project was the third phase of IDA funding for development of a scheme in central Terai for modification and rehabilitation of Narayani Zone Irrigation System, which was designed to enable Nepal to use 24.1 m 3 /sec of Gandak river water, in accordance with its 1959 Indo-Nepal Agreement. Narayani Irrigation System receives water supply from Don Branch Canal (DBC) of the Gandak Barrage in India. Before the Bank's involvement, the original system consisted of regulation structures built only on secondary canals and the distribution network was terminated at turnouts serving an area of more than 100 ha. HMGN requested IDA assistance to overcome the shortcomings of the original project. 3. IDA's involvement in the project has been divided into stages. The objective of the Stage I project (Birganj Irrigation Project - Credit 373-NEP, US$6.0 million in 1973) was to complete and upgrade the irrigation and drainage on 28,700 ha, out of the total 37,400 ha, and to provide groundwater irrigation to 2,700 ha outside the command area of Narayani Irrigation System. The surface irrigation area development was reduced to 16,300 ha because of implementation delays and cost overruns. There was also less success in groundwater development. The project was completed in According to the Project Performance Audit Report (PPAR No of December 30, 1982), the failure of the groundwater development was mainly due to inadequate attention to O&M, weak well design, and the then unreliable power supply. The report's re-estimated economic rate of return (ERR) of the project was 21.0 percent. 4. The Stage I project was followed by a Stage II project (Narayani Zone Irrigation Development Stage II - Credit 856-NEP, US$14.0 million in 1978) which was designed to complete the 12,700 ha deferred from Stage I, and to develop five community-managed tubewells and fifty

14 2 shallow tubewells on another 800 ha. The Credit was closed on December 31, 1986 after three extensions. The Project Completion Report (PCR) of June 1990 stated that the irrigation and drainage system was substantially completed by 1985, but initial operations in early 1986 experienced management difficulty in the minor distribution system. No further trial could be made in Stage I and II areas as the parent supply canal, the DBC, was breached by a major flood in late Since then and up to June 1991, the system's water supply was interrupted for five years. Funding for community tubewells was eliminated in 1982 due to non-cooperation of farmers. Twenty-five shallow tubewells were drilled, but the wells were never developed as a result of farmers' refusal to take over the tubewells because the Agricultural Development BaDk's (Nepal) financing was apparently unattractive to the farmers. The ERR of the Stage II project as recalculated for the PCR was 16 percent, which assumed that the Don Canal water supply would be restored by mid The actual water supply was restored in mid With the intention to consolidate the projects' achievements and to incorporate lessons learned from the earlier stages, the Stage III project was approved in mid The project was to be implemented over a seven-year period, incorporating the following main components: (a) (b) (c) (d) (e) (f) (g) Improvements to Nepal Eastern Canal (NEC) and repairs to the Tilawe weir. Works on NEC would include lining of selected canal reaches, canal slope protection, strengthening of canal embankments and construction of control and access structures. The Tilawe weir, severely damaged during the 1985 monsoon, would be extensively repaired. Stage III area (8,700 ha). Irrigation and drainage works down to the farm level (approximately 4 ha sub-chak) would be built on the remaining area of 8,700 ha of the system, together with about 40 shallow tubewells. Stages I and II areas (28,700 ha). Improvement and repairs would be made to irrigation and drainage systems down to the farm level constructed under earlier projects (Credits 373- and 856-NEP). Floodprotection and river trainingworks. Embankments on the Lal Bakeya and Bagmati rivers (Stage III area) and flood protection on eight rivers crossing the Stages I and II areas would be provided. Improvements to village and service roads. Vehicles and equipment for O&M of the completed system. Construction and equipping of a regional workshop.

15 (h) (i) 3 Technical support, including consultancies for: (i) design and supervision of construction; (ii) project monitoring and evaluation; and (iii) studies. Support of project establishment and O&M costs. Evaluation of Objectives 6. Realism. The project was neither complex nor unusually demanding for the Borrower and the implementing agency. The objectives were clear but the unpredictability of the water supply from India's DBC, which was known at appraisal, made it unrealistic to expect predictable and reliable irrigation on the full project area of 37,400 ha. Taking account of actual flows which never exceeded percent 1 of the agreed amount according to the past records before and after the 1986 breach, the project was reformulated in 1993 as follows: (a) (b) (c) (d) (d) (e) the area to be fully developed down to tertiary irrigation unit (TIU) level would be reduced to 24,500 ha (Blocks 1 to 10)2; the rehabilitation works already started for the main and secondary canals in Blocks 11 and 12 (Stage II) would be completed; Stage I1I irrigation development would not be included, but increased river training and flood protection works on the Lal Bakeya and Bagmati rivers would be completed; river training and flood protection works on rivers crossing the NEC, the extent of which had already been increased to safeguard the NEC from further flood damage, would be completed; all further construction of tertiary canals would be by farmers in accordance with HMGN's new 1992 Irrigation Policy; and shallow tubewells were earlier excluded from the project on the grounds that they could be installed without the assistance of HMGN. 7. Innovation. The originally designed specific discharge of 0.66 I/sec/ha was low for the paddy-based irrigation system. With the original specific discharge there were competing demands at the time of peak requirements. This specific discharge has been doubled in the design ' The flow records of the Don Branch Canal showed erratic and uncertain supply even when it was normally in service. Prior to the 1986 breach, nominal deliveries amounted to 56 percent ot the scheduled volume and the number of closures averaged 191 days per year as against 45 days of scheduled closures. The flow in individual weeks sometimes fluctuated percent. The pattern and character of supply did not change even after the Don Branch Canal resumed supply in mid Assumed to be achieved before 1999.

16 4 of rotational supply in the tertiary system of Stage I and Stage II to closely satisfy peak demands. The standard practice of introducing gated 8 ha sub-chaks in Stages I and II has been changed to ungated 4 ha sub-chaks in the project, after experiencing the difficult management in operation of Stages I and II. The minor canal networks are to be transfered to farmers after the project. The project was innovative in that it was built around eventual beneficiary farmers' ownership and management of the tertiary distribution system after the project. B. ACHIEVEMENT OF OBJECTIVES 8. Construction of the reformulated project has been substantially completed i.e. over 80 percent (Table 5) in the main and secondary canal system as well as in flood protection works, except for tertiary canals to be constructed by farmers. Only 33 percent of the tertiary canal modification was completed at the Credit closure. The Credit had been extended for one year solely for the purpose of ICB's retention money, which must be reimbursed only after the one-year warranty on the completed infrastructure. 9. Although increased dry season agricultural production was the main objective of the project, with wet season production being safeguarded, the appraisal also forecast almost as great an increase in wet season production of rice. The increases in production in tons/year at full development 3 estimated by the ICR mission, as compared with appraisal estimates, are shown below. Paddy Wheat Oilseeds Pulses Vegetabl Sugarcane Maize e Appraisal Stages I, II 30,910 34,267 5,825 2,352 4,045 X 16,815 0 &ll Appraisal Stages I & 22,088 24,384 4,573 1,760 1,435 13,683 0 Stage II ICR Stages I & I 22,735 10,567 2,296 2,411 2,870 24,395 3,087 ICR as %.of Appraisal Stages I & II ICR as % of Appraisal Stages I, III fi _~-, - =! =7 It is expected that at full development the targets for incremental production of vegetables, sugarcane and pulses will be exceeded despite reduced areas, and that there will be incremental production of maize which was not included in the cropping pattem at appraisal. The incremental production of paddy is expected to be less than was estimated for the whole project at appraisal, but about the same as was estimated for Stages I and II areas. Incremental production of wheat and 3Assumed to be achieved in 2000/2001.

17 5 oilseeds is much less than was estimated at appraisal due to smaller incremental areas for both crops and lower incremental crop yields for wheat. 10. The risks of flood damage to crops and physical infrastructure have been reduced by flood protection and drainage works along the major rivers passing the irrigation system. There are some intangible benefits obtained by having Bagmati River flood protection works which protect the cultivable land in the Stage m area, as well as a district town named Gaur. In addition, the flood damages of Tilawe Barrage, which is supplementing the irrigation water supply to the system, have been repaired by the project. 11. Development of farmer participation and cooperation in the distribution of water has been only partially achieved. No tertiary system has yet been fully completed and turned over to water user groups. This was delayed by the lack of water for distribution from 1986 to June 19914, and the switch over from the existing gated system of water distribution to a new system involving non-gated structured irrigation distribution network and rotational water supply (see para. 25). 12. In Blocks I to 5 (14,644 ha), 472 out of 548 WUGs have been formed and 162 have been maintaining tertiary canals, but none have yet collected water charges from members. Three Water Users' Coordinating Committees (WUCCs) have been formed. It is proposed that one WUCC with its Water Users' Committee (WUC) and 6 WUGs should very soon take over a secondary canal in Block 1-Branch Canal 7 serving an area of 156 ha. Many farmers need convincing, through training on the newly introduced rotational water supply, that the redesigned project works will supply the irrigation water they require and that the structures provided at secondary and tertiary levels are appropriate for their needs. The future success of the project requires: (a) the provision of a wellplanned, realistic and sustained program for the further development of water users' associations (WUGs, WUCs and WUCCs) and the taking over of responsibilities by them; (b) the completion of tertiary canals; (c) the building of confidence between the project O&M staff and water users' associations; (d) a high level of O&M of the project's main infrastructure by the Department of Irrigation (DOI); and (e) accountability of DOI for poor O&M and service delivery to the users. 13. Economic Rate of Return. No re-estimation of the ERR was done for the original scope of the project since it was never implemented. The ERR has been re-estimated for the re-scoped project at 16 percent and 19 percent, respectively, with and without flood control benefits, as compared with 22 percent estimated at appraisal, based on the projected costs and benefits of the project. The re-estimated ERR, which includes benefits from a separate flood and river protection works of the project, estimated over a 25 year period, is 13 percent. Assumptions used in the calculation of cost and benefit streams are described in Appendix B. However, the assumptions used are based on sustainable benefits following completion of construction of tertiary canals even for the rescoped project. 4 Due to failure of the Don Branch Canal in India in late August Water supply from India was restored in mid-june 1991.

18 6 14. The average net income of a farm family from crops is estimated to increase due to the project by about 35 percent from about NRs. 21,100/year to about NRs. 28,600/year in 1994/95 prices (see Appendix B, Table 2). C. MAJOR FACTORS AFFECTING THE PROJECT 15. Factors Not Generally Subject to Government Control. The major factor affecting the project is the unreliability of water supply from the DBC in India, which brought into question the scope of the project resulting in its eventual reformulation (para 6), causing uncertainty and delay. The implementation of the project was delayed by: (a) floods in 1986 and 1987 that caused heavy damage to both the NEC and the DBC which supplies Gandak water to the NEC 5, and (b) IDA's insistence that the Borrower change the minor system of water distribution. 16. The ERR has been only slightly affected by changes in economic prices of commodities as shown below in 1994/95 NRs./ton. SARI' ICR Paddy 10,547 10,716 Sugarcane 762 1,705 Wheat 12,100 11,913 Oilseeds 16,846 17,670 Urea 18,104 13,100 "' Source: SAR, Annex 1, Table 12 converted to US$ at the 1986 exchange rate, inflated by the MNIV index and converted to NRs. at the 1994/95 exchange rate. 17. The trade and transit disagreement between India and Nepal from about March 1989 to mid resulted in a severe shortage of diesel fuel which contributed to a delay in implementation of the project. 18. Factors Generally Subject to Government Control. Implementation of the project was delayed by inadequate budget provisions by HMGN and uncertainty in reassessing the reformulation of the project. 19. Factors Generally Subject to Implementation Agency Control. Implementation of the project was delayed by slow procurement for the main ICB contract caused by serious underestimation of the contract cost by the consultants acting for Narayani Zone Irrigation Development 5 Repair of NEC was completed by early 1989 but repair of the DBC was very slow and no water was received from the DBC between August 1986 and June 1991.

19 7 Project (NZIDP). In order to reduce the cost of the project the ICB contract was re-tendered with reduced quantities of road metalling and drainage. 20. Costs of flood control and river training increased by about US$3.8 million and costs of the Stage III irrigation works decreased by about US$5.8 million. The total cost of the project is estimated to be about US$25.5 million (NRs million) 6 This is about 72 percent of the SAR estimate in US Dollar but, due to the devaluation of the Nepalese Rupee in relation to the US Dollar, is about 132 percent of the appraisal estimate in Nepalese Rupees. Approximately US$17.1 million of the IDA credit and approximately SwF9.5 million (US$6.3 million approximately) have been disbursed. After project restructuring in May 1994, SDR 7.3 million and SwF5.5 million were cancelled from the Credit and grant respectively. Final adjustment on the credit was made on February 1, 1996 and the unused SDR million was also cancelled. The main construction works outstanding are tertiary canals and field channels to be built by farmers. Additional drainage works not detailed at appraisal are required at a cost of NRs. 5.0 million (US$100,000), as estimated by NZIDP, and are still to be completed. D. PROJECT SUSTAINABILITY 21. Water Availability. In view of the major siltation problems at India's Gandak headworks and the head reaches of DBC, as well as the vulnerability of DBC to floods at its cross drainage, sustained water supplies at the agreed levels are unlikely to be provided. This was recognised during project reformulation when the area to receive reliable irrigation was reduced from 37,400 ha to 24,500 ha. There is, nevertheless, a risk that reliable water would not be provided even for this reduced area. Furthermore, the system's conveyance design was based on the preventive irrigation principle so that even when a fully supply discharge of 24.1 m3/sec is provided by DBC, the resulting specific discharge for the Stage I and Stage II areas (28,700 ha) will be less than 0.75 I/sec/ha, which is considered low for paddy peak demands in Nepal. It is also necessary to agree with the Bihar authorities on a schedule of closures for maintenance of DBC at times suitable to agricultural demands. The Ghora Sahan Branch Canal, which takes off from DBC in India immediately upstream of the head of NEC, has a major breach which, when repaired, will divert more water into the Ghora Sahan Branch Canal thereby decreasing the flow of water to NEC. Thus water availability for the system is very uncertain even for the re-scoped area. 22. Budget for O&M. The Project Operation Plan (POP) prepared by NZIDP assumes an annual maintenance budget of NRs million in 1994/95 (NRs. 831/ha for 24,500 ha) diminishing steadily to NRs million in 1999/2000, when it is assumed that all canals serving areas less than 1000 ha would have been handed over to water users' committees who would pay for O&M. However, the agreed budget for O&M construction in 1994/95 is only NRs million, which includes preparation of irrigation boundary maps (NRs. 1.2 million) and organisation of WUGs (NRs. 1.5 million), leaving only NRs million for maintenance. This corresponds to NRs. 462/ha for 24,500 ha and also has to cover the reach of NEC serving Blocks 11 and 12 and the secondary canals 6 The US$ amounts in the ICB contract have been converted to NRs at current exchange rates.

20 8 in these blocks, which are likely to receive some irrigation, flood protection and road works. It is quite clear that the amounts allocated for O&M is insufficient. 23. The success of the project is also dependent upon: (a) completion of construction of tertiary canals by farmers; (b) applying generally simple rules for operation of the irrigation system; and (c) water users' understanding the importance of maintaining essential features of the system. The Government's continued support to the above principles, coupled with motivation of O&M staff, are important for the successful implementation of the project after the Credit closure. Three important elements need strengthening: (i) the development and application of operating rules which would mitigate the erratic water supply from DBC; (ii) maintenance of the main and secondary canals and structures in accordance with the project design which would ensure full supply level in the delivery canal; and (iii) training water users in the operation and maintenance of the system. Based on these issues and concerns, the sustainabiity of the project is rated as "uncertain". E. IDA PERFORMANCE 24. Before and during appraisal, IDA failed to take account of the fact that the supply from the DBC was substantially less than the treaty amount agreed with India. This was a serious deficiency in project design and should have been a major deciding factor for investment. The commitment of -HMGN and NZIDB to the project was not in doubt, but there was no evidence that beneficiaries were given an opportunity to influence the design of the project which included the formation of WUGs. There should have been more incentives for beneficiary participation to sustain the project. The financial package was generally appropriate but not adequate due to underestimation of civil work costs by consultants employed by the implementing agency. The appraisal mission based quantities and costs on estimates supplied by the Borrower's consultants, which were later found to be inaccurate. The consultants' estimates should have been more thoroughly checked by the appraisal mission. The appraisal report has some minor inconsistencies in Annex 10 that shows detailed design drawings and modifications to consultants' drawings of hydraulic structures for tertiary canals in a pilot area. The implementation plan and performance indicators were adequate. 25. Based on past experiences in Stages I and II, IDA convinced the Borrower and its consultants to change its minor network water distribution from the existing gated system of 8 to 10 ha sub-chak where many WVUGs had already been formed, to a new system involving structured irrigation networks and rotational water supply with 4 ha sub-chak. This required different chak sizes and, therefore, different WUGs, remodelling of secondary canals and structures, additional structures and rearrangement of the tertiary canal layout. The concept was not thoroughly discussed with farmers resulting in delays, additional expenses, confusion and loss of confidence in NZIDP. There is a risk that the expected benefits from this change would not be realised until NZIDP staff and water users understand and accept the concepts involved under the rotational supply system. 26. IDA provided frequent and generally good and helpful supervision and adopted a flexible approach to the implementation of the project. However, the area irrigated was not monitored by the project using their irrigation boundary maps. That made evaluation of project results difficult. IDA's relations with the co-financier were satisfactory.

21 9 F. BORROWER PERFORMANCE 27. Only at the later period of the project after DBC was repaired, the Borrower made considerable efforts to implement the project with due diligence and efficiency. For most of the implementation stage, the project suffered severe shortage of funds and was not provided with adequate budget for efficient implementation. Audit reports were often late. The Borrower was tardy in appointing agricultural staff to the project. The Borrower's consultant seriously underestimated the cost of the main ICB civil works contract, resulting in a delay of about one year due to the need to retender. There are large variations between the quantities of works estimated and actual quantities (see Table 5). A detailed Project Completion Report 7 and a draft POP were prepared. The POP was ilevised after the ICR mission, taking into account comments made by IDA's and FAO's ICR missions. The procedure for collecting water service charges has been reviewed and found acceptable. However, the current level of charges, which is inadequate to cover the cost of operation and maintenance of the system, has not been reviewed. DOI is now responsible for collection of water charges through the WUC. No water service charges have yet been collected. G. ASSESSMENT OF OUTCOME 28. Based on the assumptions described in Appendix B, the NPV of the irrigation component of the project when flows are discounted at 10 percent is positive. However, the assumptions are based on sustainable benefits following completion of tertiary canals (paras. 21 to 23). Because of the erratic supply system, there is hardly any evidence in the project to organize farmers to enlist their cooperation in the construction of tertiary canal systems. The project was reformulated without inclusion of the Stage III area and therefore the ERR of the original project could not be assessed. Thus only some of the original objectives were met within the reformulated project, and the works included were only partially completed. The uncertainty of tertiary canals being completed on time and the reliability of the supply of water from DBC in the future make the assessment of outcome to be rated "unsatisfactory". H. FUTURE OPERATION 29. NZIDP has prepared a POP 8 which describes the present and proposed future organisation and management of the project with detailed job descriptions. The POP assumes that minor canals with command areas of less than 1,000 ha would be operated and managed by water users' associations, and that these works would be handed over bynzidp to the associations by 1999/2000. The POP states that a field outlet would generally receive water one day per week when the secondary canal is running - generally one in two weeks during kharif and one in three weeks during rabi. The POP describes the proposed formation of WUGs. The POP needs to be supplemented further with details: (a) describing working procedures for assessment and collection of irrigation service charges; (b) on estimated Dated January 1995 containing 35 pages of text and many tables. No summary has been prepared. 8 Dated January 1995 and revised again in March 1995.

22 10 demand and timing of water from DBC and schedule canal closures; and (c) describing the monitoring of water levels and flows in the irrigation system. 30. Future performance of the project can be evaluated by monitoring: (a) (b) (c) (d) area irrigated in each season by the project using the established irrigation boundary maps; area and amount assessed for water service charges, amount of water service charges paid; and agricultural production. 31. For the lower three blocks (Blocks 13 to 15) that have been eliminated from the Narayani Irrigation System, the Government should promote the development of private shallow tubewells. The experience with private shallow tubewells in the neighboring Simra area is quite positive and can be replicated in the project. 32. Monitoring and Evaluation. Systems and computerized data bases have been established at the NZIDP offices for agricultural monitoring, covering both socio-economic and routine crop production surveys. Socio-economic surveys are required at intervals of three or more years and are best assigned to experienced consultants. Despite the absence of a responsible officer specifically appointed for the task, project staff have successfully undertaken regular crop cutting surveys but have difficulty in presenting the results in a coherent report. Assistance from an experienced consultant from time-to-time would overcome this difficulty. Constraints on the sustainability of the monitoring are budget commitment and computer literacy of project staff 33. Water management monitoring at present consists only of measuring the flow entering the NEC from DBC. This monitoring is now well established and there is no reason to think that it will not continue. More extensive water-management monitoring of flows in NEC and secondary canals is reconmmended both as a record of water delivered to water users and to assess whether improved operations could be evolved. Records should be kept of the supply to the main, secondary and other important canals, indicating whether full supply water level has been maintained and, where practicable, the flow entering the canal. Measurement of the flow in the NEC passing from the reformulated project area at Block 10 into Blocks 11 and 12, as well as the water supplied to the project area from the Tilawe weir and other cross-drains, would provide valuable information for the future development of the project. 34. The results of all monitoring should be reported to the General Manager for analysis and action. The General Manager should draw the attention of DOI, Department of Agriculture, and other agencies to areas where action is needed and act as a catalyst to ensure necessary action is taken.

23 The main lessons learned are: I. KEY LESSONS LEARNED (a) (b) (c) (d) (e) (f) (g) a water right based on an international treaty may be an insufficient guarantee of reliable physical delivery. A critical evaluation of the situation should be done prior to project investment; before embarking on a new stage of a project such as Narayani, the availability of water should be reassessed. Unreliable water supply for any reason destroys farmer confidence in the ability of the irrigation authorities and can lead to a lack of cooperation; participation of beneficiaries in the design, construction and implementation, and O&M is very important in a large public irrigation system where available water resources have to be shared among many beneficiaries in an organized and timely manner. Training farmers to understand the design of the water system and its performance is necessary for large public irrigation systems where water has to be shared according to agreed time and quantity; the design of a large public irrigation system must be flexible, simple and socially acceptable to small farmers and their communities. Social acceptability should be tested before committing heavy investment. Water User Groups can function effectively only when reliable irrigation supply can be assured; service charges to cover full O&M costs of public utilities after improvement must be ir-iosed and should be considered a country-wide issue in any investment projea; regular evaluation of project impact on beneficiaries is more likely to be successful where the work is carried out by independent consultants rather than by project staff, and public and government awareness of proper utilization of natural resources must be developed through various means of investment lending.

24 12 PART II. STATISTICAL TABLES Table 1: Summary of Assessments A. Achievement of obiectives Substantial Partial Negligible Not Applicable Macro policies L L L L Sector policies 7 7E1 Financial objectives Institutional development FE7 Physical objectives El F Poverty reduction Gender issues K] K K E: Other social objectives ] El K Environmental objectives ] El K] Public sector management ] ] K [ Private sector development ] El K] Other (natural resources manage) K]E K] K El El B. Project sustainability Likely Unlikely Uncertain The sustainability of the project is uncertain because of the unreliability of the main supply from Don Branch Canal, and the uncertainity of sufficient O&M support by the Government, and farmers' cooperation in completion of tertiary canals and in water managemnent.

25 13 Highli C. Bank performance satisfactory Satisfacton Deficient Identification L F2 E Preparation assistance [ E] Appraisal E7 [ ] Supervision [I E The project identification, preparation, and appraisal are rated deficient due to inadequate evaluation on reliability of water supply for the project. The project was processed at the time of interruption of the water supply. Hfighly D. Borrower performance satisfactory Satisfactorv Deficient Preparation [1 ]i L[3 Implementation 7 1 F31 Covenant compliance ld I E 13 Operation (if applicable) E z E Main deficiency in the preparation was failure to assess the reliability of the main water supply. Water charges issue was addressed under the project because of the long disruption of water supply. Project implementation improved only after the restoration of water supply from DBC. Highty H E. Assessment of outcome satisfacton Satisfacton Unsatisfactorv unsatisfacton The original project scope was revised. Moreover, uncertainty of tertiary canals being completed timely by farmers and reliable supply of water from the parent supply canal, DBC of India, in future make the assessment of outcome to be rated "Unsatisfactory".

26 14 Table 2: Related Bank Loans/Credits Loan/credit title Purpose Yr. of Approv. Status Precediing operations 1. Birganj Irrigation Project Complete & upgrade 1973 Complete PPAR (Naravani Zone) irrigation & drainage for 1982 Cr. 373-NEP 28,700 ha 2. Narayani Zone Irrigation Develop 12,700 ha deferred 1978 Complete PCR, Development Stage II from Stage I May 91 Cr.856-NEP Following operations 1. Possible Irrigation Subsector Project To finance private farmer Under preparation managed irrigation schemes. for FY98 lending Table 3: Project Timetable Steps in project process Date planned Date actual! latest estimate Preparation June 1984 Appraisal November 1985 November-December 1985 Negotiations 17 March April 1986 Board presentation 20 May June 1986 Signing 14 November 1986 Effectiveness 20 March 1987 Mid-term review (if applicable) Reformulation Report June 1992 Project completion June 1994 Loan closing 30 June June 1995 Closing date was extended by one year to permit disbursement of retention money due to ICB contractor, 12 months after substantial completion of the contract. Table 4: Loan/Credit Disbursements: Cumulative Estimated and Actual (US$ thousands) FY87 FY88 FY89 FY90 FY91 FY92 FY93 FY94 FY95 Appraisal estimate 800 3,100 6,500 11,500 18,000 21,700 24,000 24,500 24,500 Actual ,340 2,787 5,299 8,274 10,830 15,310 17,193" Actual as % of "/ estimate Date of final disbursement'' I/ Final cancellation of unused amount was made on February 1, 1996.

27 15 Table 5: Key Indicators for Project Implementation Description unit Estimated in SAR Actual Actual as %of SAR -1 NEC IMPROVEMENT 0 Ia) Canal lining km 3.6 b) Canal Slope Prot. & Shaping _ km_2 c) Bank Strengtlhening km d) Service Road krn 18.5 ll e) Additional Structures: (1) Check No. 167 (2) Cross drain No. 33 ll (3) Car bridge No. 7 I 1_4_ (4) Foot bridge No _ (5) Observ. bridge No. O I o (6) Observ. wellst (7) Downstreamn protection No A-2 REHABILITATION OFl TILAWE BARRAGEl (a) Rehabilitation Works (I) Civil works _ No (2) Metal works No. II100l (b) D/S Protection Works No. 0 1 B. IRRIGATION AND DRAINAGE WORKS IN STAGE III AREA (a) MSC, BSC & SSC Construction. _l (I) Earthwork km (2) Structures 0 X No (b) TC and OFD.l (I) Earthwork km (2) Structures No. 1, (3) OFD ha 8, [c) Drainage System (I) Major ad minor drainage canal km (2) Structures No [d) Canal Service Road km (e) Drainage Service Road km (f) Shallow Tubewells wells C-1 UPGRADING OF STAGE I AREA (a) MSC, BSC & SSC Upgrading. (1) Earthwork km (2) Canal lining km (3) Structures -New No Remodel No (b) TC and OFD (1) Now TC construction km (385.8) (2) Structures: -New No. (4209) Remodel No. (1547) c) Canal Service Road km

28 16 Description Unit Estimated in SAR Actual Actual as %ofsar C-2 UPGRADING OF STAGE II AREA (a) MSC, BSC & SSC Upgrading (1) Earthwork km (2) Structures: - New No Remodel No. (491) (b) TC and OFD (I) New TC construction krn (292.2) 30.1 (2) Structures: - New No. (3058) Remnodel No t(c) Drange Syster (1) Major & niinor drainage canal km (2) Structures No d) Canal Service Road km p-1 Flood Protection Works a) Lal Bakeya River - Right Bank km Left Bank km (b) Bagmati River (1) Flood dyke km (2) Guide Bund kmn (0.3) (3) Spur No. 6 D.2 River Training (a) Tilawe km (b) Bangari km (c) Pasaha km (d) Ganjol km c E. Upgrade Roads (a) Upgrade village link roads km (b) Gravel MSC2 BSC roads km Source: PCR, July Note: Figures in the brackets stand for quantities as per final design

29 17 Table 6: Key Indicators for Project Operation I. Key operating indicators in SAR Estimated in SAR ICR Estimate at Full Development 1. Area irrigated 37,400 ha 24,500 ha 1 ' 2. Increased food grain production 68,490 t/yr (65,178){65,825} ) 36,389 t/yr 3. Increased oilseed 6,760 t/yr (5,825) {6,757}) 2,296 t Increased sugarcane 16,815 t/yr 24,365 t 5. Directly benefitting farm families 31,500 23,900 (at 1:2 ha/farm) 6. Generated farm employment 9,300 man-years/year 4' 6,300 person-years/yr (at 250 days/yr) 7. Value added to local economy NRs206 million/vear NRs252 million/yr [II. Additional indicators for future Revised targets operation (if applicable) 1 Area assessed for water service 24,500 ha charges 2. Amount of water service charges Full cost of O&M assessed 3. Amount of water service charges 100% collected I' Estimated benefits are based on 24,500 ha, some irrigation water may be supplied to an additional 4,200 ha. 2' According to SAR, para Annex 1, Table 2 figures in (brackets). Annex 1, Table 11 in {brackets}. 2' 38,685 t/yr including pulses. -' SAR, para 8.02 says 10,700 man-years/year. Table 7: Studies Included in Project Purpose as defined Study at appraisal Status Impact of study 1. Baseline agro-economic To provide benchmark Data collected but no analysis Nil survey against which development can be measured 2. O&M Study To establish physical Report on water management 3/93 O&M plan will and budgetary O&M plan 10/94 provide basis of requirements future O&M 3. Cost recovery study for all To improve cost Study financed by ADB completed. No action. major projects recovery. Remote sensing study 3/93 for No direct impact. 4. Planning & design of Narayani suitable irrigation projects in Terai

30 18 Table 8A: Proiect Costs Appraisal estimate (USSM) Actual/latest estimate (USSM) Item Local Foreign Total Local Foreign Total costs costs costs costs 1. NECumprovementandrepairs to the Tilawe Barrage 2. Irrigation and drainage (Stage Ill Area) 3. Irrigationanddrainage(StageI and II Areas) 4. Floodcontrolandrivertraining Upgrading ofroadnetwork Equipmentandradio communication system 7. Regional workshop Technical support Establishmernt and O&M Land acquisition and crop compalstion Total Baline Costs Physical Contingencies Price Contingencies Total Project Coats Table 8B: Project Financing Appraisai tsdrmate (US$Nf) Actual/latest estimate (US$M) Source Local Foreign Total Local Foreign Total costs costs costs costs IDA Cofmiancing institution ' Domestic contribution TOTAL ' " Foreign component of Technical Support, Establishment and O&M from SAR, para 4.01, +37.6% for contingencies.

31 19 Table 9: Economic Costs and Benefits Appraisal Estimate ICR Estimate Net Present Value at 10% Stages I & H (MNRs) Net Present Value at I0% Whole Project (MNRs) 610 Economic RateofRetumnStages I&I (%) Economic Rate of Retum Whole Project (%) Underlying Assumptions: - Project Life 25 years 25 years - Standard Conversion Factor Unskdlled Labour Value at x Financial Wage Rate (NRs/day) Table 10: Status of Legal Covenants NEPAL Narayani M Irrigation Project Origsal Revised fulfillment Covennt type Present fulfillment date Descnption of A,-n-t Section status date covenant Comments DCA 3.01 (a) Project implementation CP Due diligence Budget sometimes aeznents and efficiency. insuificient Procurument C Procurement to Complied be as Schedule Eviromentl C Take meuures Complied. to minimize malrna4 etc Accounts/audits CD 9 months 12 months Fumish audit repats. Sometimes late. after FY after FY Deadline postponed (a) Studies/technical CD 31 Dec86 22Mar88 Study O&M needs. Complied lte. Revised aince (b) Studies/technical CD 30 June 87 Furnish study Cornplied late. Revised assistance to IDA and implement Financial C 31MarS7etxeq Fumish Complied atimates for next fiscal yew (a) Coat recovezy/ C 31 Dec86 15May87 Set water chage Cornplied. priciug at NRs 200/ha (b) Coet ecovey/ C 16 July May 87 Assign Revenue Dept Complied but 1989 Law pricing with collection. easigned collection to DOI.

32 20 Original Revised fulfillment Covenant type Present fulfillment date Description of Agement Section status date covenant Comments (c) Cost recovery/ CP 31 Aug 88 and Review charges. Procedure reviewed but pricisg evety 2 yrs not level of charges. NC FY 93 Charges to cover full Rates fixed are less than cost of O&M. O&M cost. No charges yet collected. 405 Studies/technical CD 1 April 89 Study of cost recovery Study by ADB-assisted assistance for all major irrigation. TA. Schedule 3 Studies/technical C Employ consultants. Complied. assistance Schedule 4 (a) Insttutional CD I July 87 May 88 Issue permits for radio Complied late. system (b) Project implementation C GM satisfactory to IDA. Complied. arrangements (c) Project implementation CD 31 Dec 87 and Revise GMs limit of General order issued arrangements every 2 yrs contractual commitment (d) Project implementaton CD I Jan 87 et seq Fumish training Complied, sometimes arrangements programme. late. C I April 87 et seq Implement training Some training dore. programme. (e) Monitoring/ 'D 30 June 87 and Conduct agro-economic Survey completed but reviews every 2 yrs survey. results not processed. Schedule 4 (f) Project implementation CD 30 June 87 Appoint AADO & SMS Complied but late. arrangements to each district. l (g) Institutional NC 30 June 87 Maintain farm research Cancelled because programme. similar exists at Parwanipur (h) Project implementation CP 31Dec86 Establish WtUGs. But suspended in arrangements (i) Institutional CD 30 Sep 87 April 89 Constitute WUGs as Late. statutory bodies. (j) Facilities maintenance C I July 91 Jan 89 Fumish proposal for Complied. organization for O&M. (k) Monitoring/ C' Fumish semi-annual Complied. reviews reports. (I) Project implementation C 31 Jan 87 Implement water Complied. arrangements management plan. Table 11: Compliance with Operational Manual Statements Statement number and title Describe and comment on lack of compliance :OP 4.07 Water Resources Management No comprehensive framework for water resources developmerat. Pricing policy does not achieve cost recovery. BP POP was not able to provide to ICR mission aide-memoire due to some revision

33 21 Table 12: Bank Resources: Staff Inputs Planned Revised Actual Stage of project cycle Weeks US$ Weeks US$ Weeks US$ Preparation to n.k. n.k n.a. appraisal Appraisal n.k. n.k n.a. egotiations through n.k. n.k. ) oard approval ) )95.3 n.a. ) Supervision n.k. n.k. Completion n.k. n.k. 5.0 n.a. TOTAL I. I I I I I / According to World Bank records on 4 January n.k. = not known; n.a. = not available. Table 13: Bank Resources: Missions Performance rating Number Specialized 1/ lmplemen- Develop- Stage of Month/ of Days in staff skills tation ment Types of project cycle year persons field represented status objectives problenm2/ Through appraisal Appraisal through Board approval Supervision 1. Sep / I nr nr nr 2. Nov S6 P T nr P 3. Feb S7 4/ 4. May A, W 2 2 M 5. Oct A, 2 2 M 6. May E 2 2 F, M 7. Nov E 2 2 F 8. April A, I 2 2 F 9. Nov-Dec , C, A 2 3 F July 90 I E 3 3 F 10. Nov F, P, T

34 Mar F, P, T 12. Sep F,P,T 13. April I 3 3 F, P, T 14. June 92 1 I nr nr nr 15. Nov 92 1 I 3 3 F, C, P, T 16. April , A, P 3 3 F, C, P, T 17. Oct , A, P, F 3 3 F, P 18. Mar94 5 I,A,P,F 3 3 F,P 19. April 95 4/ 2 2 I Conipletion Feb I,E 1/ I = Irrigadion Engineer, P = Procurement; A = Agriculturalist; E = Economist; C = Construction; F = Farmers Organization; P = Associate Programme Officer; W = Water Management Expert. 2/ P = Procuremet; F = Available Funds; M = Project Management; C = Compliance with Legal Covenants; T = Traininig. 3/ Includes other projects. 41 No report on file for this mission. r = not reported.

35 23 Introduction Nepal Narayani III Irrigation Project (Credit-1715-NEP) Implementation Completion Report Mission April 1995 Aide Memoire 1. An IDA mission comprising Messrs: 0. Myint (SA2AW) and C.P. Rauniyar (SA2NE), supervised the Narayani III Irrigation Project (NIP) on April as a follow-up mission to the FAO/WB CP Implementation Completion Reporting (ICR) mission, who visited Nepal from February 19 to March 3, This aide memoire is based on the detailed findings of the FAO/WB-CP mission which was available to the mission in the form of draft aide memoire of March 2, 1995, and further discussions with Government, IDA staff, staff of the Narayani Zone Irrigation Development Project (NZIDP). The Project Completion Report dated July 1994 prepared by the Project Consultant, Nippon Koei, and NZIDP, the Project Operation Plan (POP) dated December 1994 and the ICR dated January 1995 prepared by NZIDP have been major sources of information used in this follow-up. The mission endorsed the findings and recommendations of the FAO/WB-CP ICR mission of February-March The aide memoire of the FAO/WB CP mission is attached herewith for easy reference. 3. The draft aide memoire of the present mission was distributed to the Ministry of Finance (MOF), Ministry of Water Resources (MOWR), Department of Irrigation (DOI), and the concerned project manager, and discussed at a wrap-up meeting at Department of Irrigation (DOI) on April 28, Amendments agreed at the meeting have been duly incorporated. The findings of the mission is subject to the approval of the Bank management. The mission wishes to thank the Director-General of the Department of Irrigation (DOI), and the General Manager (GM) of NZIDP for their cooperation, assistance and hospitality. The Project 4. The appraised project was the third phase of command area development (CAD) NZIP system designed to enable Nepal to use 24.1 cubic metres per second (cumecs) of Gandak river water, in accordance with its agreement with India. It was to be implemented over a seven year period, incorporating the following main components, the details of which are mentioned in the aide-memoire of FAO/WB CP mission : a) Improvements to Nepal Eastern Canal (NEC) and repairs to the Tilawe weir. b) Stage III area CAD (8,700 ha). c) Stage I and II areas (28,700 ha). d) Flood protection and river training works. e) Improvements to village and service roads. f) Vehicles and equipment for operation and maintenance (O&M) of the completed system. g) Construction and equipping of a regional workshop. h) Technical support including consultancies for (i) design and supervision of construction, (ii) project monitoring and evaluation and (iii) studies.

36 24 i) Support of project establishment and O&M costs. 5. The total project cost of US$35.5 million was to be financed with the help of an IDA credit of SDR21.6 million (US$24.5 million) and a grant from the Swiss Development Co-operation of 15 million Swiss francs (US$7.5 million). The project was to increase the irrigated area from about 22,900 ha to 37,400 ha. Incremental agricultural production was estimated to be 30,900t of paddy, 34,900t of wheat, 6,700t of oilseeds, 4,000t of vegetables and sugarcane which would produce 1500t of sugar. The economic rate of return was estimated at 21%. Misuion's Findingu 6. Project Iriplementation. The implementation of the project was started in April 1989 with some delays due to : a) Floods in 1986 and 1987, which caused heavy damage to both the Nepal Eastern Canal (NEC) and the Don Branch Canal (DBC) in India, which supplies water to the NEC from Gandak Barrage. Repair of NEC was completed by early 1989 but repair of the DBC was completed only in June b) Slow procurement for the main ICB contract caused by underestimation of the contract cost by consultants acting for NZIDP. c) Inadequate budget provisions by HMGN throughout the project period. d) A severe shortage of Diesel fuel during the trade and transit disagreement between India and Nepal. In order to reduce the cost of the project the ICB contract was retendered with reduced quantities of road metalling and drainage. 7. Refonmulation. The project water supply was disrupted after 1986 flood in DBC and it was restored only in June The project was continued without water supply for about five years. After restoration of the water supply, the repaired DBC supplied reduced and erractic amount which is far less the Indo- Nepal agreed amount of 24.1 cumec (the designed capacity of the NZIP system). This caused the scope of the project to be questioned (and eventually to be reformulated), which caused uncertainty and delay. Narayani Zone Irrigation Development Board (NZIDB), with the recommendation of IDA, reformulated the project scope in April 1993 as follows: a) The CAD to be fully developed down to tertiary irrigation unit (TIU) level would be reduced to 24,500 ha (Blocks 1 to 10); b) The rehabilitation works already started for main and secondary canals in Blocks 11 and 12 would be completed. c) Stage III irrigation development would be omitted but increased river training and flood protection works on the Lal Bakeya and Bagmati rivers would be completed. d) River training and flood protection works on rivers crossing the NEC, the extent of which had already been increased to safeguard the NEC from further flood damage, would be completed. e) All further construction of tertiary canals would be by farmers in accordance with HMGN's new Irrigation Policy, f) Shallow tubewells were earlier omitted from the project on the grounds that they could be installed without the assistance of HMGN. 8. Completion. The project as reformulated has generally been satisfactorily constructed down to the turnouts to tertiary systems. The ICB contractor generally performed satisfactorily and most of the problems experienced with local contractors in Stages I and II were not repeated. The regional workshop has

37 25 been built and partly equipped. The main changes were in the amounts spent on flood control and river training (increased by about US$5 million) and on the Stage III irrigation works (decreased by about US$4 million). The total cost of the project at the time of the Credit closure is estimated to be about US$26.1 million (NRs million). This is about 74% of the SAR estimate in US$ but, due to alterations in the rate of exchange between the Nepalese rupee and the US dollar, the expenditure for the project in real term is about NRs 952 million or 131% of the SAR estimate in Nepalese rupees. To date, approximately US$17.13 million of the IDA credit and approximately SwF9.4 million (US$6.7 million approximately) have been disbursed. SDR7.3 million and SwF5 million were cancelled from the credit and grant in June That is about 87% of the IDA revised credit and 94% of the Swiss Grant had been disbursed. The Credit is opened up to end June 1995 only for the disbursement of ICB-contract's retention money, the payment of which will be due by end May The retention money amount is about SDR million. Accounting that amount which will be disbursed by middle of June 1995, the total disbursement from IDA Credit will be about SDR million. About SDR (12% of the revised credit) will remain unused and has to be canceled. Vehicles and equipment for O&M have been provided. The main construction works outstanding are tertiary canals and field channels to be built by farmers and drainage works not detailed in SAR. Benefits 9. Project benefits derive from the provision of supplementary irrigation during the kharif season and irrigation during the rabi season. 'However, due to the absence of water supply for five out of seven project years, there was no proper record on the yearly irrigated area by the system. Only the indicative crop areas are available for the estimate of benefits. 10. However, the incremental benefits of the project will clearly depend on reliability of water supply from NEC and the speed with which the reformulated project area can be effectively irrigated. This requires development of tertiary canals or other means of ensuring that the full command area is brought under irrigation. Due to the somewhat higher without-project situation and the slower build-up of benefits relative to costs it can be expected that the ERR will be below the 21% calculated for the Stage I and II areas at appraisal. Benefits could also be claimed for the flood protection and river training works as well as for the improvement of roads. Performance of the Borrower 11. The Borrower made considerable efforts to implement the project with due diligence and efficiency but for most of the implementation stage the project suffered severe shortage of funds and was not provided with adequate budget for efficient implementation. Audit reports were often late. The Borrower was very tardy in appointing agricultural staff to the project. The Borrower's consultant seriously underestimated the cost of the main ICB civil work contract, which caused delay due to the need to retender. A detailed PCR, an ICR and a revised POP were prepared. The mission endorsed the comments of the FAO/WB-CP mission on the POP, which needs further elaboration on the following points which are to be approved by DOI and the Ministry of Water Resources. The mission provisionally accepted the submitted POP contigent upon availability of the following details by end June An explanation was given to GM for the analysis.

38 26 (a) Detailed procedures for assessment and collection of water charges from the rescoped project areas (Block 1 to 10), which are receiving water from DBC. (b) Based on the past performance of DBC, estimate the timing of water supply from DBC and find out the extent of area that can be irrigated with different reliabilities (70% to 90%) in Kharif and in Rabi seasons. (c) Procedure for monitoring of the full supply level in the irrigation system at different canal levels during O&M. Performance of IDA 12. At and before appraisal IDA took account of strength of the Indo-Nepal treaty without considering the fact that the historical supply from the DBC was always substantially less than the treaty amount since inception of NZIP. IDA also failed to consider seriously about the continuation of the project after DBC's stoppage of water supply for five continuous years during implementation. However, after the restoration of DBC supply in June 1991, IDA provided frequent good and helpful supervisions and adopted a flexible approach to the implementation of the project. Project Sustainability 13. Water availability. The mission has the same view as FAO/WB CP mission that, in view of the major siltation problems at the Gandak Barrage and DBC as well, the vulnerability of DBC to floods in its cross drainage, sustainable water supply even in the reduced amount in long run is very uncertain. This was recognised when the project was reformulated and the area to receive reliable irrigation reduced to 24,500 ha. There is nevertheless a risk that reliable water would not be provided even for this reduced area. The mission suggests that taking account of the presently proposed cropping pattern, the General Manager should prepare revised estimates of crop water requirements and the dates and quantities of water required from the DBC. Based on this formation regular discussions with India should be held to find a way to avoid further reduction of DBC supply and of channelling funds from Government of India to be used specifically for maintenance and repair of DBC. 14. Budget for OWM. The Project Operation Plan (POP) of February 1995 assumes an annual repair and maintenance budget requirement of NRs54.5 million in 1994/5 (NRs2200/ha for ha including costs of tertiary structures and secondary canal gravelling) reducing steadily to NRs 18.7 million (NRs 760/ha) in 1999/2000 by when it is assumed that all canals serving areas less than 1000 ha would have been handed over to water users committees, who would pay for O&M of these smaller canals. However the alloted budget for O&M in 1994/5 is only NRs22.2 million, with no budget for tertiary canal structures, NEC repairs and road maintenance. With this kind of budget reduction, optimum performance of the rescoped project becomes doubtful. The mission suggests that the following year budget should reflect to the requirement mentioned in the agreed POP. However, there is a risk that the amounts allocated may be insufficient. 15. Formation of Water Users Groups and Turnover program. Up to March 1995 in blocks 1 to 5 (14,644 ha) 524 out of 552 Water Users Groups (WUG) have been

39 27 formed and 176 have been maintaining tertiary canals. Out of that, Blocks 1 and 3 WUCCs have been registered, and the Blocks 2 and 5 are being planned to register soon. General Manager assured to the mission that arrangement are being made to turnover (TO) Block 1 and Block 3 to the respective WUCCs in this fiscal year. The water charges collection can be realized only after the TO. The mission shares the views of FAO/CP mission on the requirements mentioned in their aide memoire for the future success of the project. However, the mission has a view that the main thrust of sustainability of the WUGs formed under the project depends upon how reliably system can supply irrigation water to the users. 16. Tertiary Irrigation Units. Unless a close supervision and organization activities are pursued it is very unlikely to complete the remaining 466 km of tertiary canals which are to be constructed by beneficiary farmers as per HMGN's irrigation policy. There is no proven success of this kind of attempt so far in the country. Consequently progress has become very slow and achieving the full benefits from the tertiary development is likely to be delayed. 17. Water Management. The project is now designed on the rotational principle that NEC would be running continuously during the irrigation seasons, supplying water to a cluster of secondary canals at a time. Secondary canals on turn serving less than about 1000 ha would run either at full capacity (on) or be closed (off). When they are running at full capacity, water would automatically be distributed into the non-gated tertiary irrigation units (TIU) proportionately to the area served. Water delivered to a TIU (which serves about ha) would be distributed in rotation to field outlets serving about 4 ha each. The design requires that, when secondary and tertiary canals are running, they run at full supply discharge and levels. It is sensitive to the fluctuation of water levels supplied in canals. For water users to be able to see that the full supply is being delivered, the mission recommends that, if the system is to operate satisfactorily as designed, FSL should be marked on each dividing structure. However under the erractic water supply pattern of DBC, the water level in secondary canals on turn would be difficult to maintain at constant full supply level unless a careful and perpetual attention are given to the operation. The mission fully agrees with the FAO/CP mission's findings that the suc:ess of the rotational water supply depends upon Ci) the reliability of the water supply, (ii) applying generally simple operating rules, (iii) maintenance of canal system infrastructure and (iv) water users understanding the importance of maintaining essential features of the system. Three important elements need further strengthening: (a) the development and application of operating rules which cope with the erratic water supply from DBC; (b) maintenance of the main and secondary canals and structures; and (c) training water users in the operation and maintenance of the system. The mission has found success of similar rotational water supply system in other projects (Sunsari Morang, Mahakali). 18. Monitoring and Evaluation. The missions recommends the project management that the systems and computerised data bases established at the NZIDP for agricultural monitoring, covering both socio-economic and routine crop production surveys be maintained and keep functional. Water measuring and monitoring is now well established and there is no reason to think that it will not continue. More extensive water management monitoring of flows in NEC and secondary canals is recommended both as a record of water delivered to water users and to assess' whether improved operations could be evolved. Records should be kept of the supply to main secondary and other important canals, with a record of whether FSL

40 28 has been maintained and, where practicable, the flow entering the canal. Measurement of the flow passing from the reformulated project area at Blocks 1 to 10 as well as the water supplied to the project area from the Tilawe weir and other cross-drains would provide valuable information for the future development of the project. The analysis on the measured data should be regularly done and the results be properly compiled and reported to GM. Issues at OEM Stage 19. Next Steps. It is very important to pay proper attention to (a) the continued development of water users' associations which can undertake the construction of tertiary canals and field channels and the operation and maintenance of the parts of the system which have been taken over by them; (b) the establishment of the DOI organisation for the O&M of part of the system that has not been handed over to water users' associations; and (c) the provision of adequate annual budget for full O&M of the part of the system for which DOI is responsible. No decision has yet been made on the future organization for O&M of the system although the staff requirements are mentioned in the POP. The mission urges that HMGN ensure to achieve the above points. 20. Staff for OUM of Narayani Project. Now that the construction of major works by DOI is substantially complete, DOI has appointed a task force to consider the future staffing and how best to keep the staff necessary for O&M and withdraw the surplus staff. It is likely that the Narayani Zone Irrigation Development Board (NZIDB), which employs many of the present staff, will after two or three years, be replaced with a board containing representatives of the WUCCs. As many as 260 staff out of the currently employed 372 staff will be required for the continued O&M of the project. A decision will be made in this fiscal year. 21. Irrigation Service Charges. The level of charges for surface water in the Narayani project area has been set at NRs200/ha/year. No charges have been demanded or paid since the supply was disrupted in The POP needs to provide clear description of the procedure for assessment and collection (see para 11). The mission endorses the FAO/CP recommendations that (i) for each season a record is kept of the areas irrigated of all users or groups to whom water is supplied using the irrigation boundary maps now established in the system, (ii) an assessment is issued before the end of the main irrigation season to each user or group, (iii) the charge is collected preferably through WUGs and (iv) sanctions for non-payment are instigated and enforced. The POP should be revised to take account of this. The level of charges proposed, NRs200/ha/year, is insufficient to cover the estimated cost of O&M of the system and should be revised so that it covers at least the whole cost of O&M. Lessons Learned 22. A water right based on an international treaty may be insufficient guarantee of reliable physical delivery. 23. Participation of beneficiary farmers in any development works from the beginning is very important, especially in large public irrigation system, where the available water resources has to be shared among many beneficiaries.

41 Unreliable water supply for any reason destroys farmer confidence in the ability of the irrigation authorities and can lead to a lack of cooperation. 25. The design adopted for a large public irrigation system must be simple and socially acceptable for small farmer community. Social acceptability should be tested before comrmitting heavy investment. 26. Regular evaluation of project impact on beneficiaries is more likely to be successful where the work is carried out through a contract with an outside agency rather than remaining the responsibility of project staff who have other conflicting duties. Suimy of Reconmmndations 27. The following reconmendations of the ICR/Supervision mission have been agreed by HMGN, DOI, and the project management: (a) that the project management will submit IDA by June 1995 : (i) detailed procedures for assessment and collection of water charges from the rescoped project areas (Block 1 to 10), which are receiving water from DBC, (ii) based on the past performance of DBC, estimate the timing of water supply from DBC and find out the extent of area that can be irrigated with different reliabilities (70% to 90%) in Kharif and in Rabi seasons, and (iii) procedure for monitoring of the full supply level in the irrigation system at different canal levels during O&M (para 11); (b) that based on the water requirement data and supply of DBC information regular discussions with India be held to find a way to avoid further reduction of DBC supply and of channelling funds from Government of India to be used specifically for maintenance and repair of DBC (para 13); (c) that the following year budget should reflect to the requirement mentioned in the agreed POP (para 14); (d) that, if the system is to operate satisfactorily as designed, FSL should be marked on each dividing structure (para 16); (e) that the systems and computerised data bases established at the NZIDP for agricultural monitoring, covering both socio-economic and routine crop production surveys be maintained and keep functional (para 18); (f) that (i) for each season a record is kept of the areas irrigated of all users or groups to whom water is supplied using the irrigation boundary maps now established in the system, (ii) an assessment is *issued before the end of the main irrigation season to each user or group, (iii) the charge is collected preferably through WUGs and (iv) sanctions for non-payment are instigated and enforced (para2l).

42 30 NMAY.I III IRRIGATION PRWECr (Cr NEP) SUPERVISION/ICR MISSION - APRIL 1995 CONPLIaCE WITH PREVIOUS MISSION S RECCSIDATIONS Mimsion's Recommendation Compliance with recommendation Com t th empining.items unde IC: condrat (gate The aontrct period was. xtende 1994 to Mg fenin, ean r?isinp, etc. 6Y tne erl o the The h ema1ning 1 u works and 993 con eer ajtp peri3d end y 19: it not tloo damage repairs. co e, agree to exten e contractual period as rea3 lrel Priori tize and complete the repair wobks for 1993 flood damages by.revising the Annual Veve oppent bryogram ano acuiring the require additionae gudget Detore June ly ovid the, required logi stis in training of WUGs of ock and ck I(e.g. white boar f ip ch art and our ilcyc es or O0s and Supervisors) by hot later in rst wee of March I994, and agreed to request ananual udget repu rement Tor continuing WU s a14.ucs torma ion after the credit closing In June The.flood repair works were.comgleted and an additional budget was sanctionea. Budget reqyirement.in FY 1994/95 for WUG formation was provi ed. he requirements or the fo Iow1ag years are requested in the project operation p an rur) solid atn th alrtdy formef WUGs and WUfs of Block The projectried,to cons?lidgte the forine WUG byut y steyaping owp ne p aceo moramtiqn T new not su cessf y u7plem n e ue t erfac ic supp y of gro ta by deg oying the AP in rther water Mrom tne source- on granch anal. rai ing O armer, leaders and in re abili ation ano constrvcti of lljs betore the onset of monsoon ror rmation of WUGs n the remaining blocks incuding t IC?1, balance the availabe s between these P fenarearevised iplrementatgon lrogram and training The prorram submitted and reviewed and remarked by plah for conso idatint the SW a ready forme an in ay 1 en d comd ete with a detailed syllabus. program for indoor and on-the-jo4 training, program for study tours ased on the experience gained to date in farmer organi ation. nd time rsuireo fo the ohased Droqram. to sumit for I review ADri UpkeeR the orinci ole of electing WUG member by Tass meeti aas of concerned U athou he nlh er ob com,itte may vary according to the armer prceived neers1tw1ethmhne pregencevqt,resou ce ersons tor ex ension suppo ty in it tion Dasis Retain the Orgnizait Supervisors and the AOs who are exerience wi te ohp-oinr organization actiyst'les of e projec throu? out.its. le up till COStmtDi$cn fra' 1rgan'czationaT activities Followed the suggestions. Stfe up the preparation of irrigable area boundary map The rep ration oirrlation o hodevel ares and to hadu an te comp ete up to c over respe ro iv eore the closing o re it Instalj the tele hone line as well s he VHF posts at mo haria and w e tn sel the next monsoon torovi e a In witg Me project neadquarters at ibrganji TYo groups of AOs led by one supervisor are retained tit now. Under installation. boundary maps was Revise and send IDA for review by Apri] 15, 1994 a A consolidated plan comorisi q all the suggested detailed u&m program prepared previously, including prnpts are m etloned under the project ope rat on plan mechanism for collecting water charges. a ater OTregruary TMb. measurement and water management Ian staff and dnnval udget re uirements, tor tne wfore Narayani grrigation Syster bytaking into considera ion a Phased out turn over program of TUs to WUGs. SWmiat Id5Da fn4ize rylliegycr i r7quiwent program for Tahprnel' fin3 un t eauir nent was submitted to IDA. IDA and cy C en: portion prl sapprove in une a

43 31 Attachment Guidance on Government's Contribution to the ICR. Government's own final evaluation of the project implementation is an important part of an ICR. It is attached, unedited, to the ICR sent to the WB Board. It can be selective in its coverage and should address issues and lessons learned in project implementation, from the borrower's perspective. Topics covered can be the same as in the ICR, namely, project design, appraisal, implementation and project results. At each stage of the project the contribution should comment on both IDA and the implementing agencies' performances, with the observations, where possible, supported by evidence or reasoned argument. For project design the contribution could address such questions as the appropriateness of the project's objectives, the size of the project and scope of the investments proposed, aspects of design leading to easy (or difficult) implementation and the effect on government institutions. For project appraisal comments should concentrate on any significant changes in the objectives, size and scope of the project and whether these were appropriate. Project implementation experience should be divided into an assessment of IDA performance in supporting and supervising the project and the performance of the implementing agencies. Project results include an assessment of the direct physical benefits leading to financial and economic benefits. Since financial and economic reanalysis of the project will be undertaken as part of the ICR, it is suggested, if HMGN so wishes, that the contribution could most usefully comment on the effect of the project from the Government's perspective. Such an analysis would be a most useful contribution to the ICR. Based on the foregoing sections the contribution should list the main lessons learned from the implementation experience and arising from the above analysis. WB suggest that if the contribution is more than ten pages it should include a summary. The latter is recommended for all but the shortest contributions. The mission will be happy to provide any further elaboration or clarification required to assist in preparation of the contribution.

44

45 32 NEPAL: Narayani III Irrigation Project hnplementation Completion Report Appendix B: Financial and Economic Analysis IMPLEMENTATION COMPLETION REPORT NEPAL NARAYANI m IRRIGATION PROJECT (Cr.1715-NEP) Appendix B Financial and Economic Analysis Background 1. Agriculture has considerably developed in the Narayani scheme area since the project was appraised. This has been the result, not only of the project investments in irrigation, but also improvement in road communications, both by the project and other programmes, introduction of new technology and as a result of investment by farmers in pumps and engines for shallow tubewells and low lift irrigation. Farmers are increasingly changing from a main or monsoon paddy crop followed by wheat to an early paddy crop, followed by a faster maturing main season paddy crop, followed by wheat pulses or other crops. Improved access to both water and markets has also resulted in increased production of vegetables. Whereas the SAR cropping pattern projections anticipated the main increase in cropping to be in wheat, oilseeds and pulses, the predominant change appears to have been increase in paddy, pulses, maize and vegetables, which generally provide better returns than growing wheat. 2. As a result, the cropping intensities reported by the project staff are already around 200%, which may be compared with 175% at full development in the SAR Although at the present time this may be an overestimate, it appears quite reasonable to expect that when the tertiaries are completed this average level of intensity could reasonably be achieved. 3. However, a significant part of these benefits, perhaps around 40%, is attributable to farmers' own investments in pumps and motors. Accordingly, for both the financial and economic analyses, reasonably conservative estimates have been made of expected benefits in increased cropping and higher yields as a result of the project investments. As set out in Table 1, it is projected that in Stage I areas the cropping intensity would increase from around 150% in the without project situation to 184% and in the Stage II area from 145% to 171%. In both Stage I and Stage II, the area under

46 33 NEPAL: Narayani IH Irrigation Project Implementation Completion Report Appendix B: Financial and Economic Analysis vegetables is assumed to be constant in both the without and with project situations. Yield increases for both paddy and wheat are projected at less than those used in the SAR as shown in Table 1. Financial Analysis 4. Re-estimation of financial returns to farmers has been based on information included in the government Implementation Completion Report, supplemented by data collected by the project stafg reports and studies on similar nearby areas, Department of Agricultural Development production cost data and interviews with farmers. Output and input items have been valued at late 1994/early 1995 prices. As in the SAR, it has been assumed that about 300/o of total labour requirements are hired. Estimated farm budgets in Stage I and Stage II areas, set out in a comparable manner to those presented in the SAR, are given in Table 2. These show that net retums to the 1 ha farm would increase by 38% in the Stage I area and by about 34% in the Stage II area. This compares with a 56% increase projected for both areas combined in the SAR Gross return from arable crops, cost of inputs (including hired labour) and net return per family labour day in the two areas are estimated as follows: I [,'',~~~~~~~~~~~~. ','''"'''''"'''"'''""'"'"... " "'"';i'..e~~~~~~~~~~~~~~~~~~~~~~.. ::..''... I ~~~~~~~~~~~~ 5. The above production costs exclude water charges, which have been waived since 1991/92, but are due to be reintroduced at Rs200 per ha. As shown in Table 3, this level of water charges would only recover about 7% of capital and operating costs of the scheme over a 30-year period, or about 21% of operation and maintenance costs to be paid by government. This is considerably less than the projections made in the SAR of 14% and 102% respectively.

47 NEPAL: Narayani imrrigation Project Implementation Completion Report Appendix B: Financial and Economic Analysis Economic Analsis 6. The economic analysis refers to the project as reformulated, namely the Stage I and Stage II areas. Capital and operating costs therefore exclude costs associated with development of Stage III and flood and river protection works. Land acquisition costs have also been excluded and a proportion taken of common or overhead costs such as the workshop (600/6), technical support (80%/6) and establishment operation and maintenance ( 8 0%). As a result of all the above adjustments, investment costs included in the analysis over the implementation period are about 68% of total project expenditures. 7. Unsldlled labour in construction, assumed to make up about 30% of the costs of works on the Nepal Eastern Canal (NEC), Stages I and II irrigation works, road construction and establishment operation and maintenance as well as all agriculturalabour has been adjusted by a labour conversion factor (LCF) of 0.7. All local costs (including labour) and the value of local traded commodities have been adjusted by a standard conversion factor (SCF) of 0.9. Production value of the main crops and cost of fertilizers at the farm gate have been calculated based on World Bank price forecasts for the year 2000 in constant 1994/95 US$ terms. The prices used for the financial and economic analysis are set out in Table 4 and the derivation of economic prices of internationally traded commodities in Table Project expendituresince 1986 have been converted to 1994/95 prices by applying an inflator based on the Nepal Consumer Price Index for local costs and an inflator based on the MUV Index for foreign exchange costs (Table 6). Foreign expenditures under the ICB contract were converted from US$ at current exchange rates. 9. Since the Don Canal in India supplying water to the NEC was out of commission from 1986 up to mid-1991, it is assumed that incremental benefits only started from the 1991/92 year. The project was intended to construct irrigation infrastructure down to, and including, the tertiaries. However, few have so far been built and government has decreed that tertiary construction should be undertaken by the farmers themselves. In line with the Project Operating Plan, it has been assumed that farmers would complete tertiary construction over the period up to 1998/99 and it has therefore been assumed that full development of project benefits would only be achieved from 2000/01, i.e. building up over a 10 year period. 10. On the basis of the above assumptions and adjustments, the economic rate of return for the Stage I and II areas over 25 years is recalculated at 19%, slightly less than projected at appraisal. The result is clearly dependent on the rate of build up of incremental benefits, relative to capital and other costs. This will be largely determined by how quickly farmers complete tertiary development. Ihe effect of slower or faster build up in benefits are summarised in Table 7 and range from a low of

48 35 NEPAL: Narayari III Irrigation Project Implementation Completion Report Appendix B: Financial and Economic Analysis 16% where increase in incremental benefits are phased over a 14 year period starting from 1991/92 to a high of 21% where benefits are fully developed over only 8 years. 11. In view of the difficulty referred to in para. 3 above in apportioning these incremental benefits due to the project investments and those due to farmers purchases of pumped irrigation equipment, a second method of analysis has also been adopted. This assumes a further increase in cropping intensity beyond those projected above. Cropping intensity in the Stage I area is projected to increase to 200% at fuill development, and that in Stage II to 183%. Increases in intensity are largely due to increased paddy growing (both early and main or monsoon crop) and increased area of other crops, including vegetables - the latter increasing in the Stage I area from 2% without project to 8% with project and from 2% to 4% in the Stage II area. Cost of pumped irrigation to farmers has been assumed at Rs5O per hour - the rate quoted by farmers in the area. Farmers also reported that about 1 in 4 had pumpsets. It has therefore been assumed that probably on average about a third of the area receives some form of pumped irrigation at full development, amounting to about 257 hrs/ha/year (around 11,500 m 3 /ha). It has been further assumed that these pumped irrigation costs paid by farmers build up over a 10 year period in the same fashion as agricultural net benefits. 12. The economic rate of return based on the above method of evaluation is calculated at about 25%. Since greater reliance on pumping could be argued to make the project less dependent on completion of tertiary development, it could also be argued that benefits would build up more rapidly than the 10 year period assumed in the base case. The economic rate of return, assuming a faster build up in benefits, as well as cost of pumping, would be as follows: ".''*...0N,..''S.lz"... ;t" "t' Se 2Se 13. A separate analysis has been made of project expenditure for flood and river protection works. Adjustments to the capital costs have been made in a manner similar to that used for the irrigation works in Stages I and II and costs include 10% of project expenditures for the workshop, technical support and establishment operation and maintenance. Maintenance cost of the works constructed is estimated at 0.4% of the total cost starting in 199 1/92 increasing to 2% of the total cost from 1995/96 onwards.

49 NEPAL: Narayani Ilrrigation Project Implementation Completion Report Apperndix B: Financial and Economic Analysis 14. Estimated benefits detailed in the Study on Reformulation of the Project (Nippon Koei, June 1992), and presented in the government's Implementation Completion Report, have been adopted for the analysis. These are based on flood events and subsequent damage caused by the Bagmati and Lal Bakeya rivers in 1988 and 1990 and are detailed in Tables 8, 9 and 10. The annual flood control benefit estimated in the government's ICR of Rs26.76 million annually has been adjusted to 1994/95 prices by multiplication by the local price inflator for 1991/92 of It has been assumed that these benefits would be achieved from 1994/95 onwards and would build up at a flat rate starting from 1989/ On the basis of these assumptions and adjustments, the economic rate of return of the flood protection works over a 25 year period is estimated at 13% (Table 11). The economic rate of return for Stage I and II development and the flood and river protection works together is calculated at 16%.

50 37 Nepal Table 1 Original on r03/04/96 NEPEC2.WK3 Range M233..V261 TablA 1-Cropping PattArns and YiAlds. STAGE ONE Cropping Intensity: Crop Yields: S A R I C R S A R I C R W'out Proj. With Proj. W'out Proj. With Proj. W'out Proj. With Proj. W'out Proj. With Proj.... as.percentage decimal... tons per hectare. Early paddy Main paddy I ) Wheat Pulses Oilseeds Vegetables Sugarcane Maize Total Intensity STAGE TWO Cropping Intensity: Crop Yields: S A R I C R S A R I C R W'out Proj. With Proj. W'out Proj. With Proj. W'out Proj. With Proj. W'out Proj. With Proj.... as.percentage decimal... tons per hectare. Early paddy I ) Main paddy ) ) Wheat Pulses Oilseeds Vegetables Sugarcane Maize Total Intensity

51 Table 2 38 Original on NEPFIN2.WK3 Table 2-Estimated Farm Budaets and Promect Rent at Full Develooment.1/ Range A349..H391 04/23/95 Staff Appraisal Report. Implementation Completion Report Irrigated Farms2/ Stage I Stage II W'out Proj. With Proj. W'out Proj. With Proj. W'out Proj. With Proj.... per ha...rs. Farm Budget Gross Value of Production Less: Input Cost Depreciation Allowance3/ Cost for Hired Labour Land Tax & Water Charges4/ Total Costs Net Farm Family Income5/ Reward to Family Labour NetReturntoFarm Proiect Rent Net Return to Farm Taxes & Water Charges6/ NetReturnbeforetax Less: Managementfee(10%)7/ Risk Equivalent8/ Implicit Land Rent Project Rent9/ / In current Rs, i.e. SAR in terms and ICR in mid 1994/95 prices. 2/ Headreach farms near NEC in Stage I and Stage II areas. 3/ Cost in ICR based on SAR estimate adjusted by the local inflator(1 986 price x 2.227). 4/ ICR estimate as reported by farmers. 5/ Net Farm Family Income solely from arable cropping (excluding tree crops and livestock). 6/ Since project rent should show the incremental land rent before water charges are paid, water charges are added before calculating project rent. 7/ Premium for management and entrepreneurial skills, assumed as 10% of net return to the farms. 8/ Risk equivalent for uncertain availability of water assumed as 5% of gross value under without project unreliable irrigation, and as 2.5% under irrigated conditions with project. 9/ Project rent is the incremental land rent due to the project.

52 39 Table 3-Estimated Proiect Rent and Cost Recoveryl/ (Rs/ha) Project Rent SAR ICR Gross value of production Less Production Cost Less Labour Cost Net Income Less Management Fee Less Risk Equivalent Project Rent Proj Rent as% Net Income 85% 82% Cost Recovery Water charges Cost Recovery as % of Project Rent 20% 3.3% Proiect Cost Capital Cost Irrigation infrastructure2/ Remodelling Works Sub-total O&M Costs Total Cost Cost Recovery as % Project Cost 14% 6.6% Cost Recovery as % O&M Costs 102% 21.2% 1/ SAR expressed in incremental present values discounted over 30 years at 10% in constant 1986 prices. For ICR incremental present value in financial terms, discounted over 30 years at 10% in constant 1994/95 prices. 2/ In the SAR the capital cost of works completed by the Stage I and 11 projects were adjusted to 1986 price levels, excluding interest. For the ICR the SAR valuation has been adopted, on the assumption that re-valuation at 1994/95 prices would be completely offset by the depreciation of the asset over the period. Table 3 NEPFIN2.WK3 04/23/95 Range A:A430..H464

53 Table 4-Prices Used for the Financial and Economic Analyses Financial Economic Output prices.... Rs per ton. Paddy Wheat Oilseeds Pulses Sugarcane Vegetables Maize Input prices.... Rs per kg. Paddy seed Wheat seed Oilseed Pulses seed Sugarcane sets Vegetable seed Maize seed Urea DAP Muriate of Potash Crop chem Rs per day. Labour Draft animal(per pair) Table 4 04/23/95 NEPEC2.WK3 range A:Hl1..M29 40

54 41 Table 6-Derivation of Economic Prices of Internationally Traded Commocitles. A. AT IMPORT PARITY. Rice/Paddy Wheat Maize Soyabeans Sugarcane Urea DAP MP... per ton.... U$ Worldpriceforecast1/ Quality adjustm t factor Adjusted fob value Freight and insurance cif value at Calcutta Port dues and handling Transport to border cif value Nepal border per ton... cif value Nepal border Handling/trans./storage Value ex-store/market Processing cost Processing ratio Transport/handling Farmgateprice / World Bank Commodity Price Projections, February Projection for 2000 in constant 1994 US$ terms. Table 5 Originally from NEPEC2.WK3 Range A:Q1..AB23 I

55 NEPAL: Narayani 111 Irrigation Project hnplementation Completion Report Appendix B: Financial and Economic Analysis 42 Table 6. Exchange Rate Price Indices and Derived Inflators NEPAL CONSUMER PRICES MUV INDEX Rate Calendar Year FY Year Derived Calendar Year FY Year Derived Rs/US$ (1990 = 100) Inflator (1990 = 100) Inflator 1986/87 = FY (e) (f) () For FE cost in each year adjusted as follows: Amount in Rs in Year X x Inflator in x Exchange Rate Exchange Rate in Year X Year X in FY'95 (e) Estimated. (f) Forecast

56 43 NEPAL: Narayani III Irrigation Project Implementation Completion Report Appendix B: Financial and Economic Analysis Table 7. Economic Rate of Return Calculation Stages I and II Irrigation Development (NRs million) Capital Operating Incremental Balance Costs Costs Agricultural Benefits 1986/ / / / / / / / / / / / / / / / / / / / / / / / / Economic Rate of Return: Base case 19.11% Full net benefits lag 2 years 17.19% Full net benefits lag 3 years 16.34% Full net benefits lag 4 years 15.55% Full net benefits I year earlier 20.21% Full net benefis 2 year earlier 21.43%

57 NEPAL Narayani III Irrigation Project Implementation Completion Report Appendix B: Financial and Economic Analysis Table 8. FLood Damage from Bagmati and Lal Bakeya Rivers Flood Damage in 19)0 1/ Flood damage in / Village Damaged Devastated Sand deposited Crop damage due to Damaged Devastated Sand deposited Crop damage due to houses land area Devastation Submergence houses land area Devastation Submergence Z (nos) (ha) (ha) (ton) (ton) (nos) (ha) (h) (ton) (ton) Brambapuri Rajdevi Kataharban _ Patahi Barharwa - - Bellbichawsa Lakshmipur Sirsiya Hajiminiya Basatpur Badharwa Total 9to Data source I1 DOI Distari Office Rautahat 'Comprehensive Protection of NZIDP Command Area' April 1991, N1ulti Disciplinary Consultants (P) Ltd. : ' Flood Damage Assessment of Bagmati River' March 1989 Multi Disciplinary Consultants (P) Ltd.

58 45 NEPAL Narayani 1II Irrigation Project Implementation Completion Report Appendix B: Financial and Economic Analysis TabLe 9: FLood Damage in BLock 15 of NZIDP (I) Flood Damage Estimate in 1990 (Flood discliarae: ctm/sec : 10 vea;s reltirn nerio Description Quantity Unit Unil Amotiint valiue (NRs) (l) Cultivated land 130 ha 150,000 19,500,S00 which was washed away (2) Sand deposited are 123 ha 75,000 9,225,000 in agricultural land (3) Damaged houses 930 nos ,860,000 (4) Devastated crops 266 ton 3, ,800 (5) Crop yield damage 89 ton 3, ,500 (6) Suspension of wor 300,000 person ,000 opportunity (20,000 x 15) -day Total 38,074,300 (2) Flood Damage Estimate in 1988 (Flood Discliarne : ctin/sec 2 Years reuiin neriod) Description Quantity Unit Unit Amount valuo (NRs) (I) Cultivated land 182 ha J50,000 27,300,000 which was washed away (2) Sand deposited are 0 ha 75,000 0 in agricultural land (3) Damaged houses 331 nos 2, ,000 (4) Devastated crops 0 ton 3,300 0 (5) Crop yield damage 0 ton 3,500 0 (6) Suspension of wor 140,000 person 21 2,940,000 opportunity (20,000 x 7) -day Total 30,902,00 Estimates made by the District Development Committee of Rautahat.

59 46 NEPAL Narayani III Irription Project Implementation Completion Report Appendix B: Financial and Economic Analysis Table 10: Annual FLood Protection Benefit Discharge Return period Flood daniagc (cum/sec (year) (1,000 NRis) 1, , ,902 6, ,074 Annual flood damage 26,763 (Annual flood control benefit) Equiv.USS 625 x l,o(o) Avertme annual flood damaec d - jd(q) P(Q) dq Where, Average annual flood damage Q Flood discharge D(Q: Damage caused by flood discharge, Q P(Q Probability of occurrence of nood dischnrgc Q Q. Design flood discharge Q Innocuous discharge

60 47 NEPAL: Narayani Ill Irrigation Project Implementation Completion Report Appendix B: Financial and Economic Analysis Table 11. Economic Rate of Return Calculation Flood and River Protection Works Capital Maintenance Flood Protection Balance Costs Costs Benefits 86/ / / / / / / / / / / / / / / / / / / / / / / / / Economic Rate of Return: Base case 12.94%

61 Project Data Sheet Implementation Completion Report NBPAL- Narayani III Irrigation Project Historgram of Don Branch Canal's SuIDDl to Narayani System (m3/sec) Yr/Month Jan Feb Mar Apr May Jun Jul Aug I Sep Oct Nov Dec Yr.Aver Average Averaqe Prob.80% AvwrtI&II

62

63 49 APPENDIX C NEPAL: Narayani III Irrigation Project IMPLEMENTATION COMPLETION REPORT Narayani Zone Irrigation Development Project (Credit No NEP) BORROWERS REPORT I Introduction: The project was the third phase of command area development of Narayani Zone Irrigation development project. This project was appraised in 1986 after the completion of IDA financed Narayani I Irrigation Project t Cr 373-NEP ) and Narayani II Irrigation Project ( Cr 856-NEP ). In accordance with the agreement between His Majesty's Government of Nepal (HMG/N) and government of India (GOI) it is enable to use 24.1 cumec of Gandak river water. 2. Proiect Objectives The objectives of the project were to increase dry season agricultural production by introducing equitable, predictable and reliable irrigation system in the project area and to reduce the risk to monsoon crop production by making protective irrigation when required. Flood protection and drainage canal construction were to be provided to reduce the risks to crops and physical infrastructure. Management objectives were to develop full farmers participation and cooperation in both water distribution and operation and maintenance. To achieve the objectives the following main components were to be implemented in Narayani III project :- a) Improvement to Nepal Eastern Canal (NEC) and repair to the Tilawe barrage. b) Construction of Stage III area (8,700 ha) c) Upgrading Stage I and Stage II area (28,700 ha) d) Flood protection and river training works a) imdrovement to villaae and service roads

64 50 f) Vehicles and equipments g) Regional workshop h) Technical Support & i) Support of project establishment and O&M. 3. Proiect Finance The total project cost of US $ 35.5 Million was to be financed with an IDA credit of SDR 21.6 Million (US$ 24.5 Million) and a grant from the Swiss Development Corporation of 15 Million Swiss francs (US$ 7.5 Million). 4. Proiect Desian : The basic design concept applied in the upgrading works of Stage I and Stage II areas and construction of Stage III area were: (a) (b) Canal systems were designed to run at full supply level and rotational supply system is applied. The blocks are organized into 'ON' and 'OFF' groups. Intake gates are provided only at the head of main secondary canals offtaking from NEC. Inside the blocks, Irrigation water is supplied to each canal without gate control. (c) One tertiary canal is provided to command ha and it has 7 field outlets (F.O.) and each F.O. receives full flow during 'ON' period. 5. Frliect Reformulation The Don Branch Canal of India, from which the project should receive water was damaged by the flood of 1986, before the credit agreement of Stage III project. The supply was

65 51 stopped for about 5 years. Even though the supply was resumed in June 1991, the flow received was less and erratic as usual. The Bank Mission of April 1992 suggested to review and examine the area that can be irrigated from the historical discharge that is being received from-don Branch canal. The study report prepared by the project recommended to scale down the irrigable area of the project. After the discussion with the Bank Mission, the NZIDB decided to reformulate the project in April 1993 and eliminate the following works from the original scope of the project. (a) Construction of Stage III area (b) NEC improvement below Block 10 (c) Construction of tertiary canals in Block 11 and Proiect ImDlementation The project construction works were started in 1987 by employing local contractors. Tender notice for main Civil works (ICB) was first published in January 1988 and because of high tender prices than the engineer's estimate retender was announced in september The main civil works under ICB contract was started in March The implementation of the project was delayed by (a) floods in 1986, which caused heavy damage to NEC (b) slow procurement of main civil works caused by underestimation of the contract cost by the project consultant. (c) shortage of fuels and construction materials during the trade and transit disagreement between Nepal and India. (d) additional new tertiary canal construction works

66 52 scattered all along the command area was difficult for foreign contractor due to farmers non cooperation. Due to reasons cited above, ICB contract period was extended twice and finally the main civil works contract was completed in May 1994 including the flood damage repair works of 1993 flood. The reformulated project has been completed before the credit closing date (June 30, 1994). The main outstanding works are graveling in secondary canal roads, construction of drainage works, tertiary canals construction which was included in the ICB contract in the beginning & is now to be built by farmers. The key indicators for project implementation are shown in table Consequences of Design According to new design concept NEC will operate continuously throughout a cropping season with full or less than full discharge depending on crop water requirements, rainfall pattern or availability of water from Indian Don Branch Canal. Secondary canals (MSC/BSC) offtaking from NEC will be operated in rotation either with full discharge or kept completely closed (ON/OFF). Regulation of flow in secondary canals offtaking from NEC will be through gated intake structures. Check structures provided in NEC will be used to maintain full supply level in it during low supplies in order to feed MSC/BSC to their design discharge.water flow inside the block will be distributed through ungated proportional structures and semi-module turnouts automatically without manual interference and thus each land holder will receive full flow of TC water for a period in proportion to the area of his holding. With the above operational concept, number of staff required for operation shall be reduced and illegal operation of gates by head reach farmers shall be avoided and thus equitable water distribution is achieved up to the tail end. Also by

67 53 providing one tertiary canal for ha, the length of a tertiary canal and field channels shall be decreased. Discharge flowing into a tertiary canals shall be less and easily controllable and thus operation & maintenance shall be easier. But the development of full farmers participation and cooperation in water distribution has not been fully achieved and water supplies from Don Branch Canal are unpredictable and variable, the project is facing the following difficulties in operation. For the canal to run always at full supply level, canal sections should always be maintained at design standard. In O&M Stage, it will be difficult to maintain the canal sections if the budget allocation be inadequate. Supply of water to NEC is fluctuating so it is difficult to provide full supply discharge to all the blocks of 'ON' period. If few blocks are only operated, there will be objections from the farmers. Regulating structures are constructed in the canals inside the block without gates. So supply less than the full supply can not be diverted to offtaking canals which was possible if the gates were provided. Thus the farmers have a tendency of breaking the crest of regulating structures. Also Farmers are reluctant to the construction of additional new tertiary canals as the tertiary canals for 50 ha area were already constructed during Stage I and Stage II project. So many additional new tertiary canals are yet to be constructed. 8. Prolect Cost The credit agreement was made in November 1986 and the closing date of credit (except for the release of retention money) was June 30, The cost cumulated up to FY 1993/94 is NRS Million or equivalent to US$25.5 Million including IDA credit, SDC grant and HMG/N source. In addition NRS 15.7 million or equivalent to US$ 0.60 Million was

68 54 required for the release of retention money of ICB contractor in 1994/95. Thus the total cost of the project is assessed to be NRS Million or equivalent to US$ Million. A detailed breakdown o the actual project expenditures is presented in table Credit Disbursement By the end of credit closing date, the project had settled all expenditure except the release of retention money. The total disbursement to date as recorded in the project is SDR 12.4 Million and SFR 9.5 Million. The remaining retention money to be paid to the contractor to date is NRS 3.3 Million or equivalent to US$ 0.12 Million. The undisbursed surplus amount of SDR 7.3 Million and SFR 5.0 Million were canceled from the credit and grant in June Bank Performance: The bank supervision mission visited the project 17 times from 1986 to The mission consisted of Bank personnel, SDC personnel and staff consultant of the Bank. NEC started receiving water from DON Branch canal in 1980 after the completion of Stage I command area development works. After it received water for six years ( , during this period Stage II project was constructed), Narayani Stage III project was appraised. Even though the historical supply from the DON Branch canal was always substantially less than the treaty amount, the Bank took account of strength of the Indo-Nepal treaty and suggested to extend the command area development work in 8,700 ha of Block 13 to 15 in addition to 28,700 ha area already developed under Stage I and Stage II projects. This resulted in the reformulation of the project and omission of already contracted civil works of Stage III area contracted with the ICB contractor. The quantities and cost shown in the appraisal were not

69 55 very accurate. It is felt that consultant estimates should have been more thoroughly checked by the appraisal mission. The variations between the estimated quantities and actual work done quantities can be seen in Table 1. The already developed 28,700 ha in Stage I and Stage II with a tertiary canal construction for 50 ha chak was encouraged to change to 25 ha chak by providing additional tertiary canal. Likewise the gated system of operation was proposed to change into ungated system by removing the already constructed gates and replacing them by regulating structures. The result is that : a) the farmers are hesitating to provide land for new tertiary canals and so full development of the system has been delayed. b) farmers are attempting to break the crest of regulating structures & canal banks to divert low flow. The Bank also suggested the borrower to employ ICB contractor for the construction of Civil works and hence an ICB contractor was hired even for doing small natured works like T.C. construction. Because of this, T.C. construction works could not be progressed in the beginning due to farmers objections and contractors inability to convince the farmer due to language problem. Many of these problems would have been solved if these works were to be done by the contractor who could also dialogue in local language. The Bank's supervision Mission task officers of various periods were found to be more concerntrated in the field of their own professional experties, while advising the project during their Mission. However the Bank Mission's frequent helpful supervision and flexible approach ease the implementation of the project.

70 Borrower Performance : The borrower made considerable efforts to implement the project with due diligence. During implementation, the project suffered mostly from shortage of O&M funds and funds for equipment and tools. The budget for other civil construction works was made available even with additional budget being provided when requested by the project. The audit reports were often sent within the period fixed by IDA except for one year. The borrower's consultant underestimated the cost of the main civil works contract, which caused delay by one year due to the need to retender. The estimate of quantities prepared by the consultant during appraisal Mission also shows large variations between the quantities of works estimated and actual quantities (see table 1). The borrower's consultant made error in the design of Tilawe Barrage because of which the downstream protection works was to be carried out afterwards and thus causing additional financial burden to the project. Even though the borrower had employed the same consultant for Stage I, Stage II and Stage III works and was very much familiar with the project, could not give proper suggestions to the borrower regarding the changes in design of already constructed gated system into ungated system and the borrower too could not visualize the consequences of the changes. Also the borrower couldn't visualize to separate the small natured works like Tertiary canal construction from the big works and implement those separately through LCB and ICB bidding. A detailed Project Completion report, an implementation completion report and Project Operation Plan (POP) has been prepared and the comments made by IDA and the ICR Mission in POP has been incorporated. 12. Economic Evaluation : The economic rate of return (ERR) has been estimated at 20.66% slightly less than 21% estimated at appraisal, based

71 57 on the cost of and benefit from Stages I and II area and flood protection works in Bagmati and Lalbakeya rivers. The benefit of flood protection works has been assessed as an amount of flood damage which will be incurred if there is no flood protection works. The details are shown in ICR, Jan 1995, table 9-1 to 9-10) 13. Future Operation The project has prepared a POP, which describes the present and proposed future organization and management of the project with detailed job descriptions. The POP also describes a detailed plan of WUG formation, TIU Construction and rehabilitation. The yearwise performance indicators for project operation and annual operation and maintenance work plan are also shown in POP. As envisaged by the irrigation policy 2049, the POP assumes that the management of canal systems having command area less than 1000 ha, would be done by the water users associations. By the year 1999/2000, this project will fully run in joint participatory management (JPM). 14. Main Lessons Learned: a) Extension of command area development of a project such as Narayani should be thought of only after proper analysis of the availability of water. b) The design adopted for a large irrigation system must be simple and socially acceptable. Social acceptability should be tested before committing heavy investment. c) A water right based on an international treaty may by insufficient guarantee of reliable physical delivery. d) Unreliable water supply for any reason destroys farmers confidence in the ability of the irrigation authorities and can lead to a lack of co-operation. e) Effective operation and maintenance in large public irrigation system, where available irrigation water has to be shared among many beneficiaries, is not possible without the participation of beneficiary farmers.

72

73 58 APPENDIX D NEPAL: Narayani ItI Irrigation Project Implementation Completion Report Appendix..: Report oi the Co-Financier IMPLEMENTATION COMPLETION REPORT NEPAL NARAYANI III IRRIGATION PROJECT (Cr NEP) APPENDIX.. REPORT OF THE CO-FINANCIER A. INTRODUCTION 1. Agreements. On 14 November 1986, the Government of the Swiss Confederation under an agreement with the Kingdom of Nepal (HMG/N) made a grant of sfr million to assist in financing the Narayani Ill Irrigation Project. This sum, known as the 'Swiss Contribution, together with a Credit of US$ 24.5 million from the International Development Association (IDA), provided the foreign financial component of the project (Development Credit Agreement, 1715-NEP). The Swiss Grant was allocated as follows: Technical services/consultancies: (Category 3a): Project establishment, O&M costs (Category 4): sfr. 7.0 million sfr. 4.8 million Salaries and allowances of project staff (Category 5): sfr. 3.2 million Whereas category 3a costs have been fully financed through the Swiss Grant, category 4 and 5 have been subject to the following cost sharing arrangement: Switzerland (%): HMG/N (%): Financing of 1994 costs have been based on a special arrangement which has taken into account delays during project implementation. 2. Joint financing arrangement. The Swiss Contribution has been administered by IDA under a joint financing arrangement. In this arrangement, the Swiss Government authorized IDA to carry out procurement decisions on behalf of Switzerland and to enter into special commitments with third parties; and IDA agreed to supervise the execution of the project in accordance with its normal practices and procedures.

74 59 NEPAL: Narayani III Irrigation Project Implementation Completion Report Appendix.: Report of the Co-Financier B. VISION, REALITY AND CRITICAL ASSUMPTIONS 3. Targets and achievements. Narayani zone irrigation development has started in It has been marked by optimistic planning followed by sobering adjustments. First phase planning has foreseen the development of 28,700 ha of irrigated land. However, two project phases were required until 28,700 ha were declared to be under irrigation. Third phase planning has foreseen to increase the irrigated area to 37,400 ha. Today, the primary and secondary canal system development has been completed for an area of 24,500 ha and the tertiary distribution system is still under construction. 4. Objectives and planned activities of Narayani 1II. The objectives of the Narayani IlIl irrigation project, as stated in the staff appraisal report, were: i) Increase dry-season agricultural production by introducing an equitable, predictable, and reliable irrigation system in the project area and to reduce the risks to monsoon crop production by making protective irrigation available when requested; and ii) Develop full farmer participation and cooperation in the water distribution system. Planned works included: i) Upgrading of the irrigation, drainage, flood control and road infrastructure for the entire Nepal East Canal (NEC) command (37,400 ha); ii) Completing the irrigation and related civil works infrastructure for an area of 8,700 ha; iii) Introducing an efficient water management system; and iv) Providing a farm road network, and improve the canal service roads. 5. Changing the already existing irrigation system. A significant feature of the project should be the replacement of the already existing system through a new "supply controlled" system of rotational water delivery to farmers. The old system has been characterised as an "on-demand" supply in the head reaches with deteriorating service levels in the tail reaches. The new system utilises the original main and secondary canal network, but modifications have been introduced by: i) Remodelling and introducing mostly ungated control structures on the canals; ii) Providing modular outlets to tertiary units of about 30 ha; and iii) Providing simple pipe outlets to field plots of 4 ha. 6. Critical assumptions. The success of remodelling the water distribution system relies on a number of critical assumptions including: i) Steady, reliable water supply of 24.1 m3/sec to the NEC according to the international treaty between India and Nepal; ii) Well organized main system operation; iii) A functioning drainage system; iv) Adoption of similar cropping pattern by the farmers; v) Water Users Groups organizing operation and maintenance on tertiary level; vi) Routine maintenance of canals and structures on main and secondary level.

75 60 NEPAL Narayani 11 IrrIoation Project Implementation Completion Reporl Appendix. Report oi the Co-Financier C. PROJECT IMPLEMENTATION 7. Implementation planning. Well conceived project planning within the frame of a consistent implementation concept is a prerequisite for successful project implementation. Certainly, the long interruption of water supplies to the NEC (1986 to June 1991) has negatively influenced project implementation; but, so has also the lack of consistent planning. Until project reformulation in 1993, continuous ad hoc shifts in project implementation have taken place, e.g.: i) Elimination of flood protection works, drainage measures and access roads in order to meet the limits of the civil works tender; ii) Reintroduction of Lal Bakeya flood protection works; iii) Inclusion of major flood protection works for Bagmati river training: iv.) Proposals to include Jhanj irrigation rehabilitation and additional water resources development form the Jamuni river. 8. Progress monitoring. Progress monitoring does rely on: i) A well established monitoring system; ii) Readily available and reliable data; iii) Continuity with regard to the monitoring personnel; and iv) A clear understanding of the role of a monitor. In Narayani Ill, a frequent change of monitoring personnel has taken place. Supervision mission members spent considerable time in attempting to clarify data. The interpretation of the role of a monitor has been quite variable, giving preference from time to time to the role of a "super consultant focusing on technical details". 9. Technical assistance for project implementation. In September 1987, the NZIDP signed the fourth amendment to the consultancy contract with Nippon & Koei Co. covering the time period of April 1987 to September The consultancy comprised 167 person-months of expatriate consultants' staff and 740 person-months of local consultants' staff. The fifth amendment was signed in mid-1993 and provided for 8 person-months of expatriate and 95 person-months of local staff. The following table provides a comparison between planned and effectively implemented technical assistance. Discipline Appraisal Amendment Amendment Actually No. 4 No. 5 Provided Foreign Local Foreign Local Foreign Design engin..'tl Construction eng O&Mengineer Water management WUG organization Others Total

76 61 NEPAL: Narayani III Irrigalion Project Implemenlation Completion Report Appendix..: Report oi the Co-Financier A change in focus can be observed, clearly emphasizing the discipline of design and construction. 10. Performance of the project consultants. In general terms, the consultants can be said to have met the requirements under the terms of reference in often difficult conditions, e.g.: i) The difficulty in meeting targets where consultants have an advising and assisting role; ii) The difficulty of implementing a remodelled irrigation system where farmers lack confidence in the concept and in the ability of Department of Irrigation (Dol) to provide a reliable water supply; iii) The inadequate budget provisions made by HMG/N during the contract; and iv) The lack of supply of water from the Don Branch Canal (DBC) between 1986 to 1991 which made operation of the system, as designed, impossible. However, criticism could be made of the consultants not attempting to impose themselves more forcefully on the project, through suitable contingency planning under these conditions, rather than wait for successive supervision missions to recommend appropriate actions. Furthermore, there is a clear indication that greater emphasis should have been laid on water management, operation and maintenance and formation of water users associations, and that this should have been started earlier in the programme than it was. 11. Technical assistance for monitoring and evaluation. A contract was signed in June 1992 between Binnie & Partner, GEOCE and the NZIDP to provide services to strengthen NZIDP in: i) Project planning and programming; ii) Agricultural monitoring; and iii) Computing and data handling. The consultancy included 9 person-months foreign and 20 person-months local support. In general, the consultants have met the terms of reference, although the continued commitment of NZIDP staff to the established monitoring procedure may be questioned. D. SUSTAINABILITY ISSUES There are six main issues to be addressed: 12. Water supply from Don Branch Canal. Water supplies from the Don Branch Canal are erratic and far from the nominal value of 24.1 m3/sec. The following table provides monthly average supply values to the NEC. Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

77 62 NEPAL: Narayani III Irrigation Project Implementation Completion Report Appendix..: Report of the Co-Financier During project reformulation in 1993, it was concluded that it is unlikely that there is sufficient water to irrigate more than Blocks 1 to 10 reliably. Furthermore, the Ghora Sahan Canal taking off at the head the NEC and commanding a gross area of 52'000 ha has so far been out of service. Continued pressure on the Indian Authorities may be required in order to secure at least the present average supply levels. 13. Construction and maintenance of tertiary units by farmers. Only about one-third of the tertiary canals planned in the Stage I and Stage II areas have been constructed. Construction and maintenance of them is now the responsibility of farmers. Without assistance it is unlikely that these canals will be constructed in the way envisaged by the designers of the project and the operation of the project will be badly affected. Technical assistance to farmer groups must be maintained, if the project is to develop satisfactorily. The sustainability of the tertiary irrigation units depends on the formation of well led, cohesive WUGs who can take on the responsibilities of operation and maintaining the units and who can take part in the joint participatory management process proposed by the Dol. This is as yet unproved at Narayani. 14. Water Users Associations and Joint Participatory Management (JPM). The future success of the project relies on the long term commitmen to: (i) The provision of a well planned, realistic and sustained programme for the development of water users associations and the satisfactory handing over of responsibilities to them; (ii) The building of confidence between the Narayani 0 & M staff and water users associations; and (iii) A high level of maintenance and operation of the project's main infrastructure by the Department of Irrigation. Plans exist to meet these objectives, but these are difficult tasks requiring a high degree of commitment and adequate funding. The introduction of JPM, which has not yet been accomplished in any project in Nepal, has many implications. It has still to be thought out in detail before implementation. 15. O&M budget and effective maintenance. The project will fail unless sufficient maintenance budget is committed to the project and maintenance procedures are foilowed rigorously. The budget did not meet the requirements. 16. Operation and water management practices. The development of relatively simple operating rules, but which cope with the erratic water supply from the Don Branch Canal, is required, together with the education and training of water users in the use of the rotational system that is being introduced. The sustainability of the system relies on the understanding of the farmers and their cooperation in maintaining key structures. 17. Adequate drainage. The issue of drainage infrastructure has not been adequately addressed neither at the tertiary unit level nor at the tail end of secondary canals. The extent of drainage measures required (and these may not be extensive) needs evaluation so that any potential problems arising from inadequate drainage can be eliminated and farmers groups can be reassured that the irrigation supply system is not inducing drainage and waterlogging problems.