Report and Recommendation of the President to the Board of Directors. Proposed Grant Nepal: Project Preparatory Facility for Energy

Transcription

1 Report and Recommendation of the President to the Board of Directors Project Number: September 2013 Proposed Grant Nepal: Project Preparatory Facility for Energy

2 CURRENCY EQUIVALENTS (as of 16 August 2013) Currency unit Nepalese rupee/s (NRe/NRs) NRe1.00 = $ $1.00 = NRs97.98 ABBREVIATIONS ADB Asian Development Bank DOED Department of Electricity Development EIA environmental impact assessment MOE Ministry of Energy MW megawatt NEA Nepal Electricity Authority PIC project implementation support consultant PIU project implementation unit PMU project management unit PPP public private partnership SIA social impact assessment NOTE In this report, "$" refers to US dollars. Vice-President X. Zhao, Operations 1 Director General J. Miranda, South Asia Department (SARD) Director Y. Zhai, Energy Division, SARD Team leader Team members Peer reviewer T. Limbu, Energy Economist, SARD M. Ajmera, Social Development Specialist, SARD H. Lozari, Senior Finance Officer, SARD P. Manandhar, Project Officer (Energy), SARD S. Sasaki, Environment Specialist, SARD Y. Seo, Counsel, Office of the General Counsel S. Shafiq, Financial Management Specialist, SARD D. B. Singh, Senior Environment Officer, SARD S. Subba, Senior Social Development Officer (Gender), SARD L. Subedi, Senior Social Development Officer (Safeguards), SARD L. Weidner, Senior Public Private Partnerships Specialist, SARD P. Wijayatunga, Principal Portfolio Specialist, SARD C. Cruz, Senior Operations Assistant, SARD R. Tuladhar, Senior Country Specialist, SARD In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

3 PROJECT AT A GLANCE CONTENTS Page I. THE PROPOSAL 1 II. THE PROJECT 1 A. Rationale 1 B. Impact and Outcome 3 C. Outputs 3 D. Investment and Financing Plans 4 E. Implementation Arrangements 4 III. DUE DILIGENCE 6 A. Technical 6 B. Economic and Financial 6 C. Governance 7 D. Poverty and Social 7 E. Safeguards 8 F. Risks and Mitigating Measures 8 IV. ASSURANCES AND CONDITIONS 9 V. RECOMMENDATION 10 APPENDIXES 1. Design Monitoring Framework List of Linked Documents 13

4 PROJECT AT A GLANCE 1. Project Name: Project Preparatory Facility for Energy 2. Project Number: Country: Nepal 4. Department/Division: South Asia Department/Energy Division 5. Sector Classification: Sectors Primary Subsectors Energy Large hydropower Electricity transmission and distribution 6. Thematic Classification: Themes Primary Subthemes Economic Growth Promoting economic efficiency and enabling business environment Private Sector Development Develop public sector goods and services essential for private sector development over time Regional Cooperation Cross-border infrastructure 6a. Climate Change Impact Adaptation Mitigation 7. Targeting Classification: General Intervention Geographic dimensions of inclusive growth 9. Project Risk Categorization: Low Risk Targeted Intervention Millennium development goals Low Low Income poverty at household level 6b. Gender Mainstreaming Gender equity theme (GEN) Effective gender mainstreaming (EGM) Some gender benefits (SGB) No gender elements (NGE) 8. Location Impact: National Regional Rural High Med Med 10. Safeguards Categorization: 11. ADB Financing: Environment Involuntary resettlement Indigenous peoples Sovereign/Nonsovereign Modality Source Amount ($ Million) Sovereign Project grant Asian Development Fund 21.0 C C C 12. Cofinancing: Total 21.0 Financier Category Amount ($ Million) Administration Type 13. Counterpart Financing: 14. Aid Effectiveness: Total Source Amount ($ Million) Government 5.25 Total 5.25 Parallel project implementation unit Program-based approach No No

5 I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on a proposed grant to Nepal for the Project Preparatory Facility for Energy. 2. The facility will help prepare several priority hydropower projects and a related electrical transmission project in Nepal to improve the country s energy security and make it an energy exporter. Developing public private partnerships (PPPs) for these projects will be a priority. The facility will have two components. Component A will involve preparation of the Sun Koshi 2, Sun Koshi 3, and Dudh Koshi hydropower projects, and a second 400-kilovolt transmission line across Nepal s border with India. Project implementation consultants (PICs) and a panel of experts will also be provided under component A. Under component B, the facility will provide PPP project development services for a hydropower project that will focus on the export of energy. 1 By preparing several candidate projects, the facility will help reduce the processing time of the Asian Development Bank (ADB) for potential ensuing investments. 2 II. THE PROJECT A. Rationale 3. Sector overview. Nepal has theoretical potential hydropower capacity of 83,000 megawatts (MW), 42,000 MW of which is considered economically feasible to develop. 3 Making full use of its hydropower potential can transform Nepal economically. Poor planning, weak regulations, ineffective institutions and legal frameworks, and a very poor tariff regime have held back investments, limited the role of the private sector, and left the country unable to properly tap this vast hydropower resource. As a result, it experiences acute shortages of power. Demand for electricity increased by 46% from 2007 to 2011, while installed capacity rose by only 16%. Of total installed capacity of 719 MW in 2012, hydropower accounted for 660 MW, or only 1.6% of the full, economically feasible potential. 4. While access to electricity has increased during 2007 to 2011 to reach 49% of rural households and 56% across the country, power is available only hours a day. Per capita electricity consumption is only 102 kilowatt-hours a year, the lowest in South Asia. Peak demand on the integrated national power system exceeds 1,000 MW, resulting in a supply deficit of about 460 MW during peak time. Because the country lacks hydropower plants that are powered by water stored in dam reservoirs to provide regulated output through the year, the power deficit is especially severe during the dry season, when its run-of-river plants run at reduced output due to low natural river water levels and flows. Power demand in Nepal is growing by an average 10% a year or the equivalent of 100 MW annually. A study by the Japan International Cooperation Agency (JICA) estimated that national demand could reach 4,279 MW in People and businesses are badly affected by this power crisis, which calls for rapid development of Nepal s hydropower potential to meet its current and future energy needs. 5. The current inadequacy and unreliability of the power supply result from a low level of investments in the past. Ongoing weakness in strategic, operational, managerial, and financial 1 The government in consultation with ADB will select a suitable hydropower project for development under PPP. 2 The facility was prepared without project preparatory technical assistance. 3 H. M. Shrestha Cadastre of Potential Water Power Resources of Less Studied High Mountainous Regions, with Special Reference to Nepal. Moscow Power Institute. 4 JICA, Interim Report on National Master Plan Study on Storage-type Hydroelectric Power Development in Nepal.

6 2 policies aggravated the problem. An uneconomic tariff regime dents the financial standing of the Nepal Electricity Authority (NEA), the power sector s only utility, leaving it unable to cover its new capital investments as well as the current operation and maintenance costs. The government lacks the financial means and institutional capacity to resolve the energy crisis alone, and if the private sector is to play a bigger role, it needs more and better entry points for investment. In addition to building greater generation capacity, Nepal must also upgrade and expand its limited transmission and distribution networks. A major obstacle to exploiting Nepal s hydropower export potential is the shortage of adequate infrastructure to transmit electricity to neighboring India. Instead of exporting power, in fact, Nepal imports it from India, despite the fact that its neighbor is also facing acute power shortages. 5 Developing Nepal s hydropower generation, transmission, and export infrastructure would benefit both countries. In 2012, India had a peak power deficit of 17,517 MW, or 12.9% of the total national demand. Northern India, which is the most practical destination for Nepal s potential power exports, already experiences a power deficit of 11.9% (4,860 MW) of regional demand, and this gap is growing. 6. Strategic framework. The government has prepared a 10-year roadmap for hydropower development during , with the aim of generating an additional 10,000 MW of hydropower. Nepal needs to develop large-scale reservoir hydropower projects to meet this target but has been unable so far to attract private investment for such undertakings. Some private capital has gone instead into run-of-river generation projects owned by independent power producers and oriented toward the domestic market Increasing private sector investment in Nepal s power infrastructure will need a robust pro-investment policy regime with strong political commitments by the government and credible off-takers, which in turn can bring prospective developers and third party financiers. High-quality technical due diligence will be needed to attract serious investors and financiers. Because the government is unable to provide this on its own, ADB will provide support for technical due diligence under the facility and may also play the strategic role of an honest broker by facilitating public private dialogue to remove impediments to private sector investments. The facility will support preparation of hydropower and transmission projects for development, including the preparation of a flagship PPP hydropower project with potential for exporting hydropower to India and to serve as a potential model for future similar PPP and export projects. This project can be developed under the South Asia Subregional Economic Cooperation program, which endorsed several regional cooperation initiatives at its general meeting on 9 November 2012 in Thimphu, Bhutan, including feasibility studies of large-scale hydropower plants and related transmission facilities in Nepal for implementation during The facility will therefore support ADB s regional cooperation and integration agenda and targets. 8. Energy was one of the priorities of ADB s Nepal country partnership strategy for Energy is expected to remain a principal area of ADB activity in Nepal under a new strategy being prepared for The facility is designed to support the new strategy s goals. The development of large hydropower projects and the related transmission infrastructure to be supported by the facility, along with its emphasis on private sector participation and regional integration, will increase access to commercial energy and cross-border energy trade. This will help achieve inclusive growth and sustainable development in the country. Accordingly, ADB s 2015 assistance pipeline to Nepal includes a PPP hydropower development project. 5 Imports from India have been growing and reached 746 gigawatt-hours in 2012, or 18% of Nepal s total electricity supply. 6 These include the Khimti (60 MW), Bhote Koshi (36 MW), and Chilime (22 MW) power plants. Independent power producers contributed about 28% of the total available electricity supply in ADB Country Partnership Strategy: Nepal, Manila.

7 3 9. ADB has been a longstanding partner in Nepal s power sector. Its assistance has focused on generation, transmission, distribution, rural electrification, and mini-hydropower projects for domestic requirements. ADB, together with the JICA, financed Nepal s largest hydropower project, the 144 MW Kali Gandaki A plant commissioned in With confinancing by the Government of Norway, ADB has also supported the strengthening of transmission and network infrastructure to deliver hydropower to Kathmandu. 8 In 2013, ADB cofinanced the $500 million 140 MW Tanahu reservoir hydropower project which will be in operation by B. Impact and Outcome 10. The impact of the facility will be developed infrastructure for hydropower. The outcome will be provision of high quality due diligence to support investments to transform the power sector. C. Outputs 11. The facility will have two outputs. 12. Output 1: Feasibility and detailed engineering studies. Output 1 will be delivered through the facility s component A and will include the following: (i) feasibility studies, including initial environmental examinations (IEEs), environmental impact assessments (EIAs) and social impact assessments (SIAs) of Sun Koshi 2 (1,110 MW, storage type) and Sun Koshi 3 (536 MW, storage type) projects; (ii) an update of the feasibility study, including IEE/EIA/SIA, and detailed engineering studies of Dudh Koshi (300 MW, storage type) project; (iii) a feasibility study including IEE or EIA and SIA for a second India Nepal 400- kilovolt cross-border transmission line as agreed upon between India and Nepal; (iv) provision of project implementation support consultants (PICs) and panels of experts; and (v) feasibility studies of any other suitable hydropower or transmission projects from savings. 13. Output 2: Public private partnership project development services. Output 2 will be achieved under component B, which will include: (i) PPP project development services to facilitate private sector investment to develop a hydropower project with a potential to export hydropower to India; and (ii) PPP project development services for any other suitable power projects from savings. 8 9 ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan, Grant, Technical Assistance Grant, and Administration of Grant to Nepal for the Electricity Transmission Expansion and Supply Improvement Project. Manila. ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan and Administration of Technical Assistance Grant to Nepal for the Tanahu Hydropower Project. Manila.

8 4 D. Investment and Financing Plans 14. The facility is estimated to cost $26.25 million (Table 1). Table 1: Project Investment Plan ($ million) Item Amount a A. Base cost b 1. Feasibility and/or detailed engineering studies Project implementation support Panel of experts Public private partnership project development services Others c 3.95 Subtotal (A) B. Contingencies d 3.27 Total (A + B) a Includes taxes and duties of $2.88 million equivalent to be financed by the government//nepal Electricity Authority. b In mid-2013 prices. c Includes staff salary ($0.59 million), taxes and duties ($2.88 million), and office accommodation and transport ($0.48 million). d Physical contingencies are computed at 5% of base cost, and shall be borne by the government/nepal Electricity Authority. Price contingencies are computed at inflation rates specified in This includes a provision for potential exchange rate fluctuation under the assumption of a purchasing power parity exchange rate to be financed by the Asian Development Bank grant. Source: Asian Development Bank estimates. 15. The government has requested a grant not exceeding $21 million from ADB s Special Funds resources to help finance the facility. The government will provide the equivalent of approximately $5.25 million to finance 20% of the total cost. The financing plan is in Table 2. Table 2: Financing Plan Source Amount ($ million) Share of Total (%) Asian Development Bank Special Funds resources (grant) Government of Nepal Total Source: Asian Development Bank estimates. E. Implementation Arrangements 16. The Department of Electricity Development (DOED) of the Ministry of Energy (MOE) will be the executing agency. The DOED will set up a project management unit (PMU) headed by a full-time project manager. The PICs will be recruited to support project procurement, supervision, and reporting activities during implementation. The PICs will report to both ADB and the PMU. Two panels of experts will be recruited to provide dam engineering and safety services and advise on environmental and social safeguard issues. The PMU will be responsible for the overall coordination of the activities under both project components and will supervise the outputs of the PICs and the panels of experts. The PMU in DOED will also be responsible for implementation with respect to the Sun Koshi 2 and Sun Koshi 3 projects under component A, and the existing Project Implementation Unit (PIU) in NEA will be responsible for implementing the component A activities involving the Dudh Koshi project and the second cross-border transmission line. The government, through the MOE, will establish a PPP project unit for PPP project development for component B. The PPP project unit will have a dedicated,

9 5 full-time PPP project manager to work independently. The PMU will coordinate with the PPP project unit during project implementation. The government has requested that ADB approve advance contracting and retroactive financing. The implementation arrangements are summarized in Table 3 and described in detail in the project administration manual. 10 Table 3: Implementation Arrangements Aspects Arrangements Implementation period September 2013 December 2018 Estimated completion date 31 December 2018 Management (i) Oversight body High-level officials from the Ministry of Energy, DOED, and NEA (ii) Executing agency DOED (iii) Key implementing agencies DOED and NEA (iv) Implementation unit 4 6 staff (DOED), 6 8 staff (NEA), and 3 4 staff (PPP project unit) Consulting services for QCBS 1,456.5 person-months $16.25 million component A Individual 19 person-months $0.65 million Consulting services for QCBS component B Individual To be determined $5.16 million Retroactive financing and advance contracting All eligible contract packages and eligible expenditures agreed between ADB and the government. Disbursement The grant proceeds will be disbursed in accordance with ADB's Loan Disbursement Handbook (2012, as amended from time to time) and detailed arrangements agreed upon between the government and ADB. Direct payment procedure and imprest account procedure will be followed unless agreed otherwise between ADB and the recipient. ADB = Asian Development Bank, DOED = Department of Electricity Development, NEA = Nepal Electricity Authority, PPP = public private partnership, QCBS = quality- and cost-based selection. Source: Asian Development Bank. 17. Procurement. Component A will require inputs of five consulting service packages, including one for the PICs and one for the panels of experts. To fast-track implementation, the government has asked ADB to assist the PMU in the selection and recruitment of the PICs. This will in turn help the PMU procure the other consulting services required for component A. ADB will only select the consultant, and the EA retains the responsibility for negotiating and signing the contract with the consultant, issuing the notice to proceed, and supervising the consultant s services. Consulting service requirements for component B cannot be assessed until the government has selected a proposed project for PPP development in consultation with ADB. 11 The PPP project development services will support due diligence (technical, financial, and legal) and advisory services for preparation of the flagship export-oriented PPP hydropower project up to signing of a concession agreement. ADB may play a strategic role of an honest broker by facilitating public private dialogue and to remove impediments to private sector investments. All procurement activities will be carried out in accordance with ADB Procurement Guidelines (2013, as amended from time to time), and consultants will be recruited using quality- and cost-based selection with a 90:10 ratio, in line with ADB s Guidelines on the Use of Consultants (2013, as amended from time to time). 18. The facility will be used over a 5-year period ( ). The government will ensure adequate budgetary allocation of counterpart funds for timely completion. 10 Project Administration Manual (accessible from the list of linked documents in Appendix 2). 11 It is envisaged that the selection process for the PPP project will take longer than 18 months. Procurement details for component B are therefore not included in the facility s first procurement plan.

10 6 III. DUE DILIGENCE A. Technical 19. Output 1: Feasibility and detailed engineering studies carried out. Project screening consultants have been engaged for screening candidate hydropower projects for the feasibility and detailed engineering studies under component A. The consultants have submitted their recommendations based on engineering, environmental, and social due diligence. The due diligence methodology included reviews of desk studies of the latest project-related reports and existing secondary data; the government's hydropower, water resources, and river basin development reports and policies; the legal and administrative framework for the projects; geographical maps; and data collected from sample site surveys. 20. The facility will support due diligence on the short-listed projects. The work will involve standard feasibility-related matters. It will also include active engineering work for projects that demonstrate a high possibility of success. The other areas of due diligence to be undertaken through the facility will include examination of factors related to hydrology, geology, the risks of glacial lake outburst floods, geotechnical and seismic risks at the project sites, potential environmental and social impacts, and the costs and economics of the projects. 21. The project screening consultants have shortlisted from among the candidate projects the Sun Koshi 2 and Sun Koshi 3 projects for feasibility, and Dudh Koshi project for detailed engineering studies (para.12 [i] and [ii]). They are also priorities of the government. Further prefeasibility and key stakeholders consultation will be conducted on the projects under para 12 (i). 22. Feasibility and detailed engineering studies of hydropower projects, particularly those powered from dam reservoirs, are challenging. The services from two panels of experts, one for engineering and dam safety (the dam safety panel) and one for social and environmental aspects (the social and environmental panel), will be engaged to review the reports at each milestone during the feasibility, environmental impact, and detailed engineering studies of the selected hydropower projects. The dam safety panel will comprise international experts in the fields of dam engineering and design, hydrology (for mountainous regions), and geology and geotechnical engineering. The social and environmental panel will comprise national or international experts with specific experience related to the impacts of large dams on populations, resettlement, and the environment. 23. Output 2: Public private partnership project development services provided. The government will identify and nominate a PPP hydropower project, in consultation with ADB. The preparation of the PPP hydropower project under component B will require the consultants inputs on the project s technical (including environmental and social), financial, legal, and commercial aspects. The facility will also provide assistance in structuring the PPP hydropower project, developing a concession agreement, and undertaking road shows to generate investor interest. B. Economic and Financial 24. The economic viability of all projects to be prepared by the facility will be assessed in accordance with ADB's Guidelines for the Economic Analysis of Projects. 12 This will include 12 ADB Guidelines for the Economic Analysis of Projects. Manila.

11 7 assessment of the economic life of the projects and identification of the economic benefits of each investment, comparing with- and without-project situations. The financial analysis of all such projects will be carried out in accordance with ADB s Guidelines for the Financial Governance and Management of Investment Projects Financed by ADB. 13 This will include calculating the financial internal rate of return for the overall investment and establishing financial viability by comparing the financial internal rate of return with the cost of capital, taking into account financial costs and benefits. C. Governance 25. A financial management assessment of the executing agency conducted during the due diligence has noted that the DOED's internal audit is weak and needs strengthening. 14 To mitigate the risks posed by this weakness, the facility will engage a finance expert in the PIC team to provide support for monitoring and reporting on the accounting and fiduciary aspects of facility implementation. The PIUs will have assigned accountants for project. During project implementation the facility will provide capacity development training to key DOED and NEA finance and accounts staff on financial accounting and project auditing, monitoring, and reporting. This arrangement, supplemented by an audit conducted by the government s District Treasury Control Office, is considered an adequate mitigating measure. The government does not have experience in preparing PPP projects. The facility s PPP project development services will therefore assist the government in structuring an export-oriented hydropower project on a PPP basis. 26. ADB s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the government, the DOED, and the NEA. The specific policy requirements and supplementary measures are described in the project administration manual. D. Poverty and Social 27. The facility will involve feasibility studies of hydropower and power transmission projects, with a focus on private sector participation and subregional power trading. It is not expected to have a direct impact on poverty and/or social issues. The projects that will be prepared under the facility may have such impacts, however. They will therefore be designed following the Guidelines for Gender Mainstreaming Categories of ADB Projects and the Handbook on Poverty and Social Analysis to incorporate poverty reduction opportunities, gender mainstreaming, and due regard for social concerns, such as the spread of HIV/AIDS and other communicable diseases, compliance with core labor standards, social conflicts, and unplanned migration Ensuing projects will also be prepared in compliance with ADB's Policy on Gender and Development (1998) and ADB's Handbook on Social Analysis 16. Gender, consultation and participation, labor, and other social issues will also be examined during preparation of such projects, and mitigation plans will be prepared to address the assessed risks. A gender equality and social inclusion action framework was prepared to ensure responsiveness in projects 13 ADB Guidelines for the Financial Governance and Management of Investment Projects Financed by ADB. Manila. 14 Financial Management Assessment (accessible from the list of linked documents in Appendix 2) 15 ADB Guidelines for Gender Mainstreaming Categories of ADB Projects. Manila; ADB Handbook on Poverty and Social Analysis: A Working Document. Manila. 16 ADB Guidelines for Incorporation of Social Dimensions in Projects. Manila; ADB Handbook on Social Analysis. Manila.

12 8 prepared by the facility. It will be applied as a guideline in the development of an action plan during project preparation. Based on the guidelines, gender and social analysis for these projects will be undertaken to determine how women and traditionally excluded groups will be affected. E. Safeguards 29. In compliance with ADB s Safeguard Policy Statement (2009), the facility is classified under category C for environment, involuntary resettlement, and indigenous peoples. The investment projects that will be developed following the feasibility studies will be categorized in accordance with the requirements of the Safeguard Policy Statement to determine the significance of potential impacts. 30. The facility will study hydropower development projects that depend on dam reservoirs. These projects could require the displacement of people in areas to be inundated for water storage. Those affected could include indigenous peoples whose livelihoods depend on natural resources in areas that may be flooded. The cross-border transmission line that the facility will study could also involve displacement and land acquisition for the construction of substations and tower footings. 31. To ensure that environmental and social safeguards are applied in all of the projects it prepares, an environmental assessment and review framework, a resettlement framework, and an indigenous peoples planning framework are designed for the facility. 17 Each project to be prepared by the facility will be subject to environmental and social screening to avoid adverse impacts, such as encroachment on habitats critical to biodiversity and on ecologically sensitive protected areas, areas important to indigenous peoples, sites of historical and cultural value, and areas vulnerable to such hazards as landslides and floods. Given the potential impacts, a resettlement plan and an indigenous peoples plan will be prepared under the feasibility and detailed engineering studies during facility implementation based on the Safeguard Policy Statement and relevant national laws and regulations. The resettlement plan and the indigenous peoples plan will be revised and/or updated during the project financing stage. F. Risks and Mitigating Measures 32. Major risks and mitigating measures are in Table 4 and described in detail in the risk assessment and risk management plan Environmental Assessment and Review Framework; Resettlement Framework; Indigenous Peoples Planning Framework (accessible from the list of linked documents in Appendix 2). 18 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).

13 9 Table 4: Summary of Risks and Mitigating Measures Risks Candidate projects could be vulnerable to natural disaster and climate change issues. Management Plan or Measures A preliminary disaster and climate change screening will be conducted to assess the exposure of the candidate projects to climate-induced risk and natural disasters. Capacity deficiencies could delay the start-up of facility implementation. Capacity issues could delay completion, as could procurement of substandard consulting services. Lack of capacity for PPP projects may cause delay in PPP development process. During the feasibility and detailed engineering studies and the design of the hydropower projects, consultants will be engaged to look into these risks through due diligence on such aspects as hydrology, geology, the risk of glacial lake outburst floods, and the geotechnical and seismic risks of the project site. The project design will be undertaken based on the basin-wide water resource. Project implementation support consultants (PICs) will be recruited to help the Department of Electricity Development (DOED) and the Nepal Electricity Authority (NEA) implement and monitor project activities. ADB will support the timely recruitment of consultants. The facility design provides for strong involvement by the Asian Development Bank (ADB) in the recruitment of consultants. Management and capacity-building support will be provided to the DOED and the NEA to assist in supervising and monitoring of the outputs. Two panel of experts one for dam safety and engineering and the other for safeguards will help ensure the quality of works. Subject to the PPP project development due diligence, advisory services will be provided to structure a PPP flagship hydropower project. Political interference and corruption The project steering committee will have representatives from could affect the procurement and the NEA, the DOED, the Ministry of Energy and ADB, and will project selection. ensure the transparency of processes. ADB = Asian Development Bank, DOED = Department of Electricity Development, MOE = Ministry of Energy, NEA = Nepal Electricity Authority, PIC = project implementation support consultant, PPP = public private partnership. Source: Asian Development Bank IV. ASSURANCES AND CONDITIONS 33. The government and the DOED have assured ADB that implementation of the facility shall conform to all applicable ADB policies, including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement, as described in detail in the project administration manual and grant documents. 34. The government, the DOED, and the NEA have agreed with ADB on certain covenants for the facility, which are set forth in the grant agreement and project agreement.

14 10 V. RECOMMENDATION 35. I am satisfied that the proposed grant would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the grant not exceeding $21,000,000 to Nepal from ADB s Special Funds resources for the Project Preparatory Facility for Energy, on terms and conditions that are substantially in accordance with those set forth in the draft grant agreement presented to the Board. Takehiko Nakao President 02 September 2013

15 Appendix 1 11 DESIGN AND MONITORING FRAMEWORK Design Summary Impact Performance Targets and Indicators with Baselines Data Sources and Reporting Mechanisms Assumptions and Risks Assumption Infrastructure for hydropower developed A large reservoir storage hydropower project constructed by MOE and other government publications Government provides sufficient counterpart funds and support on time. Risk Projects present large resettlement and safeguard issues. Outcome Assumption High-quality due diligence provided to support investments to transform the power sector Feasibility studies, EIAs, and detailed engineering study reports for at least 3 hydropower projects approved by the government by 2018 Government agreement to proceed with financial negotiations of a PPP project by 2018 For all indicators: Government project and budget publications National Planning Commission s periodic national planning report National Investment Board reporting Government provides a more investment-friendly regulatory environment. Risk Delays in EIA and other approval Outputs Assumption 1. Feasibility and detailed engineering studies carried out Feasibility study and EIA for second cross-border transmission line completed by 2016 Feasibility study, EIA, and detailed engineering study of at least 3 hydropower projects completed by 2018 For all indicators: MOE and Ministry of Environment s publication/notice DOED and NEA reports All statutory and non statutory approvals are received on time. Risk Geological complexities may lead to time overrun. 2. PPP project development services provided Government selection, in consultation with ADB, of a PPP hydropower project by 2015 Final PPP project due diligence completed by 2016 PPP project structured by 2016 PPP project tendered by 2017 Award of PPP concession contract by 2017

16 12 Appendix 1 Activities with Milestones 1. Feasibility and detailed engineering studies carried out Feasibility study and EIA of cross-border transmission line: 1.1. Complete inception report by Q Finalize EIA report by Q Complete draft feasibility report by Q Submit consolidated feasibility report by Q Inputs ADB grant (Special Funds resources): $21.00 million Government of Nepal: $5.25 million Feasibility study, EIA and detailed engineering study of Sun Koshi 2, Sun Koshi 3, and Dudh Koshi hydropower projects: 1.5. Recruit consultants by Q Complete inception report by Q Complete first interim report by Q Complete EIA report by Q Complete second interim report by Q Finalize draft project feasibility and detailed engineering reports by Q Finalize project feasibility and detailed engineering report by Q PPP project development services provided 2.1 Recruit consultants by Q Initiate PPP due diligence by Q Complete PPP due diligence by Q Initiate structuring of PPP project by Q Conduct road shows and initiate tender by Q ADB = Asian Development Bank, DOED = Department of Electricity Development, EIA = environmental impact assessment, MOE = Ministry of Energy, MW = megawatt, NEA = Nepal Electricity Authority, PPP = public private partnership. Source: Asian Development Bank.

17 Appendix Grant Agreement 2. Project Agreement LIST OF LINKED DOCUMENTS 3. Sector Assessment (Summary): Power 4. Project Administration Manual 5. Contribution to the ADB Results Framework 6. Development Coordination 7. Country Economic Indicators 8. Summary Poverty Reduction and Social Strategy 9. Risk Assessment and Risk Management Plan Supplementary Documents 10. Gender Equality and Social Inclusion Framework 11. Environmental Assessment and Review Framework 12. Resettlement Framework 13. Indigenous Peoples Planning Framework 14. Financial Management Assessment Report: Department of Electricity Development 15. Procurement Capacity Assessment Report and Recommendations: Department of Electricity Development 16. Climate Change: Project Adaptation Action Report 17. Peace Building Tool