Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 7461-NEP

STAFF APPRAISAL REPORT

NEPAL

ARUN III ACCESS ROAD PROJECT

MAY 12, 1989

Infrastructure Operations DivisionCountry Department IAsia Regional Office

This document has a resthicted distribution and may be used by recipients only in the perfonnance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorizatlon.

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CURRENCY AND EQUIVALENTS UNITS(As of May 1, 1988)

Currency Unit = Nepalese Rupee (NR)Nepalese Rupee - 100 paisaUS$1.00 = NRs 24.4

WEIGHTS AND MEASURES

1 meter (m) - 3.28 feet (ft)1 kilometer (km) = 0.62 mile (mi)1 hectare (ha) = 2.47 acres (ac)1 square kilometer (km2) 247 acres (ac)1 megawatt (MW) = 1,000 kilowatts (103kW)1 gigawatt (Gw) 1,000,000 kilowatts (106kW)1 gigawatt-hour (GWh) 1,000,000 kilowatt hours (lO6kWh)1 kilowatt-hour (kWh) 1,000 watt-hours1 ropani = 5.400 square feet

PRINCIPAL ABBREVIATIONS AND ACRONYMS

ACRP - Acquisition, Compensation and Rehabilitation PlanARC - Acquisition and Rehabilitation CommitteeCIDA - Canadian International Development AgencyDOR - Department of RoadsHMG - His Majesty's GovernmentIRR - Internal Rate of ReturnLCGEP - Least Cost Generation Expansion PlanMFSC - Ministry of Forests and Soil ConservationMWR - Ministry of Water ResourcesNEA - Nepal Electricity AuthorityPPAR - Project Performance Audit Report

GOVERNMENT FISCAL YEAR

FY89 = July 16 to July 15

FOR OFFICIL USE ONLY

NEPAL

ARUN III ACCESS ROAD PROJECT

STAFF APPRAISAL REPORT

Table of Contents

Page No.

CREDIT AND PROJECT SUMMARY ....................................- i

I. INTRODUCTION .............................................

II. SECTORAL BACKGROUND ...................................... 2

A The Energy Sector ..................................... 2B. Transport Sector ...................................... 8

III. THE PROJECT ...... .... .................................... 12

A. Background ........ ................................... 12B. Objectives ...... ... .................................. 12C. Socio-Economic Profile of the Project Area .... ........ 12D. Description ............. ......... 13E. Cost Estimates ........................................ 14F. Financing ............................................. 16G. Procurement ........................................... 16H. Disbursement .......................................... 17I. Project Execution and Supervision ..................... 18J. Environmental Protection and Conservation .... ......... 19K. Project Reporting ..................................... 21L. Accounts and Audits ................................... 21

IV. ECONOMIC EVALUATION AND RISKS ............................. 22

A. Background ............................................ 22B. Future Electricity Demand ............................. 22C. Base Case Scenario .................................... 23D. Sensitivity Analysis .................................. 25

V. AGREEMENTS AND RECOMMENDATION .25

This report is based on the findings of an appraisal mission to Nepal inFebruary 1988 and the post appraisal mission in May 1988. Missionmembers included Mrs. Inai Bradfield (Sr. Economist, Mission Leader),Messrs. Donal O'Leary (Systems Planner/Engineer), David Williams(Environmental Specialist), and Richard Leonard (Highway Engineer,Consultant).

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

Page No.

TEXT TABLES

5.1 Project Cost Summary .................. .......... ........ 153.2 Financing Plan .163.3 Procurement Arrangements .16

ANNEXES

1 Design Standards .................................... 272 Estimated Disbursement Schedule .303 Arun III Project Monitoring Committee . 314 Supervision of Construction, Terms of Reference .325 Environment Management Unit, Staffing and Work Program 376 Management of Environmental Impacts .417 Land Acquisition Guidelines 2045 .438 Acquisition, Compensation and Rehabilitation Plan ... ...... 489 Economic Evaluation Methodology .56to Selected Documents and Data Available in the Project File 64

CHART

Chart 1 Organization of Project Implement%tion .65Chart 2 Project Implementation Schedule .66

MAP: IBRD No. 21127

NEPAL

ARUN III ACCESS ROA) PROJECT

Credit and Project Summary

Borrower: The Kiagdom of Nepal

Beneficiaries: Nepal Electricity Authority, Ministry of Water Resourcesand Department of Roads. Ministry of Works and Transport

Amount: SDR 24.4 million (US$32.8 million equivalent)

Terms: Standard, with 40 years maturity

ProjectDescription: The project would include construction of an access road,

192 km long, to the site of the proposed Arun IIIhydroelectric development scheme, a road mairtenance depotat Tumlingtar, and consultancy services for constructionsupervision, training and for the preparation andsupervision of implementation of a land acquisition,compensation ard rehabilitation plan.

Benefits andRisks: The project's benefits are in large measure related to

those of the proposed Arun III hydroelectric developmentaeme, which is to fulfill Nepal's total power demands to

2010 at least cost. Tt would also provide developmentalaccess to an area presently served only by porteragetrails and inhabited by some half million people. Themain risks are delayed implementation of the hydroelectricscheme, and its increased cost. However, adequatesafeguards are being provided to minimize such risks.

Local Foreign Total-----(US$ million)-

Project Costs: a/

Road Construction 6.6 19.9 26.5Maintenance Depot 0.1 0.1 0.2Land Acquisition for ACRP 1.2 0.0 1.2Consultancy Services for:Construction Supervision 0.6 2.4 3.0Training 0.0 0.1 0.1Preparation/ Implementa-tion Supervision of ACRP 0.5 0.4 0.9

Base Costs 9.0 22.9 31.9

Physical Contingencies 1.3 3.4 4.7Price Contingencies 1.3 2.1 3.4

Total Project Cost 11.6 28.4 40.0

a/ Including taxes and duties of US$3.5 million.

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Financing Plan: Local Foreign Total-------(US$ million)---

Government 7.2 - 7.2IDA 4.4 28.4 32.8

Total 11.6 28.4 40.0

Estimated Disbursements:

IDA Fiscal Year 90 91 92 93 94---------------(US$ million)---------…--

Annual 12.2 9.0 6.5 3.5 1.6Cumulative 12.2 21.2 27.7 31.2 32.8

Economic Rate of Return; 142

NEPAL.

ARUN III ACCESS ROAD PROJECT

STAFF APPRAISAL REPORT

I. INTRADUCTION

1.01 The project consists mainly of the access road to the future damsite for the Arun III hydroelectric development scheme, needed to meetNepal's projected power demands through 2010 at least cost. Although theproject is an integral part of the hydroelectric scheme on which itsjustification depends, it is proposed as a separate project to allow thehydroelectric construction work to begin in early 1992. Preliminary andfinal designs for the access road have been completed, together with theinitial phases of institutional and environmental studies.

1.02 Nepal's vast hydroclectriL potential is estimated at 83,000 MIW, ofwhich only 160 MW has been developed to date. In addition to the need tocater for domestic demand, exploitation of this enormous resource as apotential export earner is one of Nepal's most important economicpriorities. To achieve these objectives, His Majesty's Government (HMG) ofNepal plans to: (a) in the medium term, identify and implement a series ofprojects which would meet generation requirements at least cost for Nepal'sinterconnected system, while at the same time, providing for increasingbulk sales to India from the current level of 21 GWh per year to upwards of400-800 GWh by year 2000; and (b) over the long-term, develop projects of2,000 MW capacity or greater (such as Karnali and Pancheswar) to help meetthe load demand in Northern India.

1.03 Recently, IDA and the Canadian International Development Agency(CIDA) assisted HMG in developing a least cost generation expansion plan(LCGEP) to determine priority investments on the basis of load forecastsand standardized cost estimates for eight potential hydroelectric projects.As a result of this study, the LCGEP identified, and HMG has proposed a twostage (201 MW each) development of the Arun III hydroelectric scheme as thenext generation project in line with the estimated growth of theelectricity demand of Nepal's interconnected power system. The first stage(1992-96), estimated to cost US$490 million, would ir.volve construction ofa dam, a tunnel, a power house and a switchyard. In the second stage (byyear 2003), the tunnel and generating capacity would be duplicated.

1.04 The optimum sequence of investment in the first stage Arun IIIhydroelectric scheme was derived without consideration of the bulk exportoption. However, potential benefits of the entire Arun III scheme could beincreased by accelerated implementation of its second stage development ifa satisfactory bulk export agreement with India to sell 200 MW at a 50Scapacity factor could be secured.

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1.05 To ernsure that the first stage of the Arun III hydroelectricscheme is commissioned by mid-1996, HMG and IDA have adopted a four-stepapproach of providing: (a) construction of an access road (subject of thisreport) to begin in October 1989 to permit transportation of constructionequipment in early 1992; (b) donor coordination to help HMG obtainagreement to the LCGEP and preliminary commitments to finance the Arun IIIhydroelectric scheme; (c) technical assistance under the Third TechnicalAssistance Credit 1902-NEP to complete the final engineering for the firstphase Arun III hydroelectric scheme, prepare d transmission/distributionmaster plan, conduct a long-run marginal cost and tariff study, andstrengthen institutional capabilities of the Nepal Electricity Authority(NEA), the implementing agency; and (d) construction of the hydroelectricplant and ancillary items, including a switchyard and connectingtransmission lines to the national grid, with a possible onward connectionto the Northern India grid. These activities form the basis of IDA's powersubsector strategy for Nepal, as indicated in the recent report Nepal:Power Subsector Review (January 1988).

1.06 The feasibility study for the Arun III hydro2lectric scheme,funded by the Japanese International Cooperation Agency, was completed in1987. The final engineering, together with related studies, would becompleted by early 1990. Based on the study findings, the Arun IIIhydroelectric schemie would be appraised in September 1990, with Boardpresentation tentatively scheduled for April 1991. Overall financing isnot yet final but ten donors made preliminary commitments amounting toapproximately US$590 million at the donor meeting on the Development of theNepal Power Subsector in May 1988 and subsequently at an Aid Group Meetingin Paris in November 1988, more than sufficient to fund the first phase ofthe Arun III hydroelectric scheme.

II. SECTORAL BACKGROUND

A. The Energy Sector

Energy Resources

2.01 Fuelwood. Accounting for 80% of total energy supplies, fuelwoodis the basic source of energy for cooking and heating in rural areas wherethe vast majority of the population lives. Forests cover some 38Z of thetotal land area and are fairly evenly distributed. Fuelwood consumptionexceeds the sustainable annual yield of the forests, and if present trendscontinue, the forests will be largely exhausted by the year 2000.Government fuelwood policy is to reverse deforestation by taking action onboth supply and demand sides, including energy conservation. This is to beachieved through an afforestation program, improved watershed managementand utilization of alternative energy technologies, including biogas,Lmini/micro hydro schemes, solar energy devices and more efficientwoodstoves.

2.02 Other Renewable Energy Sources. Dung production by livestock isestimated at 24.5 million tons per year. If convertel into methane inbiogas digesters, it has been estimated that dung could provide for thecooking and lighting needs of an estimated 4CZ of the population. However,

the projected number of units in 1990 is only 3,400 which would generate aninsignificant methane yield. AgriculturaL waste (straw, husks, etc.) iswidely used in rural and urban households and accounts for approximately 9Zof total energy consumption. Moreover, there may be scope for utilizingwind energy. Solar energy applications, so far, have been limitedprimarily to demonstration/pilot projects. The economic viability of solarenergy applications still has to be established.

2.03 Petroleum. Although no oil or natural gas reserves have beendiscovered, the prospects for oil discoveries are considered to be quitegood. Following completion of the seismic program under an IDA-financedpetroleum exploration project (Credit 1260-NEP), an agreement on one of theten blocks offered by the Government was signed in May 1988. HMG plans toopen the remaining nine blocks to competitive bidding after more seismicdata have been obtained.

Energy Consumption

2.04 Data on energy consumption in Nepal suffer from gaps andinconsistencies, especially for traditional fuels. However, they do pointto some very definite trends. The relative share of commercial energyincreased by 75Z to nearly 8% by FY85, probably mirroring economic growthin Nepal. Hydroelectricity accounts for only about 2% of energyconsumption, but this represents a significant increase from its FY71 levelof 0.1%. Overall, the trend points to the household sector beingpredominant in future total energy consumption, including traditional andcommercial sources, with the industrial sector playing an increasinglyimportant role.

Energy Supply

2.05 Energy imports (electricity from India, petroleum products andcoal) have been rising faster than internal energy production oftraditional fuels and electricity. The result has been that net energyimports increased from 4.6Z of net energy supplies in 1970/71 to 6.1% in1984/85. The rise in petroleum imports has been the main factor, but netelectricity imports also increased greatly from 12,000 tons of oilequivalent in FY81 to 21,000 in FY85. Overall, imports of petrol.eumproducts, coal and electricity were equivalent to about 16-21% of exportearnings during FY81-FY85.

2.06 All imported energy supplies are purchased from India (coal andelectricity) or have to be routed via India (petroleum products). Until1973, all of Nepal's petroleum product imports were from India, but sincethen Nepal has entered into international contracts with suppliers.

2.07 Until recently, coal was imported from India by licensed privatesector importers. Supply patterns have been erratic partly because of theunavailability of rail wagons in India for private sector importers. Thissituation is likely to improve with the recent formation of Nepal CoalLimited which is expected to negotiate supplv contracts with the Indianauthorities.

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Energy Pricing

2.08 HMG controls the prices of all commercial energy sources. Pricingproposals for petroleum products and electricity are prepared by Nepal OilCorporation and NEA, respectively; these must then be approved by theCabinet. Coal prices are set by the Government of India. The pricing ofcommercial fuelwood sold by the Fuelwood Corporation of Nepal is based onits proposals and approved by the Cabinet. Prices of all forms of energyhave risen substantially in real terms since 1V73, but much more so forimported energy (petroleum and coal) than for indigenous sources (fuelwoodand electricity), reflecting different Government policy approaches. Forpetroleum products, the policy has been to adjust domestic price- toreflect the trend in international prices. In addition, taxes on petroleumproducts are a major source of Government revenue. Coal is priced at itsborder price of supply, but is exempt from any taxes or duties.Electricity prices are below the long-run marginal costs of supply; thepresent average price of about NRs 1.39/kWh is only 42Z of the estimatedaverage long-run marginal costs of NRs 3.27/kWh. To address this tariffissue, consultants were appointed in December 1988 under TechnicalAssistance Credit 1902-NEP to prepare a long-run marginal cost and tariffstudy. The study recommendations for changing tariff levels and structureswill be reviewed with HMG and NEA during preparation of the Arun IIIhydroelectric scheme and agreements sought on appropriate tariff changes.Despite the relatively low tariffs, preliminary estimates indicate that NEAis in compliance with its rate of return agreement with IDA under theMarsyangdi Hydropower Project (Credit 1478-NEP).

Hydropower

2.09 The Ministry of Water Resources (MWR) has estimated (1985) theeconomically exploitable hydropower to be around 25,000 MW or abov . ofwhich about 20,000 MW have been investigated since 1966. Hydropowerdevelopment is hindered by relatively low levels of domestic demand whichdo not justify projects that could take full advantage of economies ofscale. An added problem is the relatively weak hydrological data base whichincreases the level of uncertainty in project analysis. There are alsotechnical impediments: lack of access roads, difficult geological andseismic conditions, extreme variation in river flows and heavy silt loads.Some potential projects are also very large (3,000 MW or above) and dependon developing bulk export markets in India.

2.10 A widespread use of traditional water mills for grinding cornindicates that there is considerable scope for developing micro-hydropowerschemes through individual or community effort. If all these mills werereplaced by dual-purpose mills (grinding corn and generating electricity),they could be used to operate small power generators with an averagecapacity of about 10 kW, giving a total potential of 300 MW. Analysisindicates that dual-purpose micro-hydro units could form part of the leastcost solution for meeting rural energy needs and also provide high returnsfor relatively modest investments by private sector entrepreneurs.

Institutions

2.11 Institutional responsibility for the energy sector is spread overmany entities including overseeing ,ministries, line ministries, sectorentities and subsector entities. The Mi;n:-try of Finance is responsiblefor coordinating and securing external sources of finance for developmentassistance in the energy and other sectors. The Planning Commission, whichis responsible for national economic planning, reviews the energy sectorprograms and projects, particularly in connection with the preparation ofthe national five-year development plans. The MWR, together with the NEA,are responsible for electricity supplies. Other bodies are responsible forthe supply of fuelwood, coal, gas, and oil and for mini hydro-projects.The Water and Energy Commission is responsible for, inter alia, thepreparation and coordination of short- and long-term plans for water andenergy development.

2.12 In the early part of Xhe century, electricity was supplied fromsmall privately-owned generating plants, with expatriate management. TheGovernment did not assume control of public electricity supply until the1950's when the Electricity Department was made responsible for electricpower development throughout the country and for the regulation ofprivately-owned utilities. In 1962, the Nepal Electricity Corporation wascreated. However, the fragmentation of responsibility and lack ofcoordination in the power subsector were seriously affecting itsefficiency. In August 1985, the Government established a single publicenterprise, the NEA, with responsibility for the planning, construction andoperation of all future public power facilities in Nepal, with theexception of isolated rural electrification projects.

Power Generation Planning and Project Identification

2.13 Although several generation projects had been identified in themid-1980s, there was uncertainty concerning the most economic generationexpansion program. NEA therefore developed a LCGEP with the assistance ofCIDA and IDA,1/ as follows:

(a) standardized cost estimates were prepared for eight candidatehydroelectric projects (each of which had been studied to eitherthe prefeasibility or the feasibility level) plus a thermalpeaking option (gas turbines). The costs attributed to eachproject included associated transmission expenditures which werenot common to all expansion sequences. All innuts were costed ineconomic terms;

(b) alternative expansion sequences, that satisfied the base case loadforecast for the Nepal interconnected system, were developed basedon combinations of the above-mentioned hydroelectric projects,supplemented by peaking thermal generation, as required;

1/ Nepal Electricity Authority, Least Cost Generation Expansion Plan -1987, Kathmandu, April 1987 (Report No. PD/SP/431124/3-2).

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(c) for each expansion sequence, the present value of the capital andoperating costs, over the planning period, was determined, and theleast (economic) cost generation expansion program was identified;and

(d) sensitivity analysis was conducted on the least cost sequence tovariations in the load growth, opportunity cost of capital, fuelprices, and generation planning criteria.

The analysis identified a combination of load management and the two-phase402 MW Arun III hydroelectric scheme as the least-cost sequence to meet theload forecast of Nepal's interconnected system.

2.14 The 228 m effective head Arun III scheme is located about 192 kmeast of Kathmandu on the Arun River near the Chinese border (IBRD Map21127). The powerhouse site is about 133 km from the Dhankuta-Basantapurroad. According to the Japanese-financed feasibility study conducted bythe NEA,J/ the layout includes a 65 m high concrete gravity dam with alateral intake leading to underground desanding facilities and two powertunnels. A gated spillway is provided for reservoir regulation and floodpassage. The study recommended two 11.35 km long power tunnels, leading toan underground powerhouse. A surface switchyard is planned, with separatetunnels for cables and access to the powerhouse.

2.15 The first phase Arun III hydroelectric scheme, planned to becompleted in 1996, is to meet the domestic demand which is projected toreach 272 MW, and the second phase, in 2003. However, construction of theintake desanding facilities, powerhouse chamber, transformer gallery andtailrace tunnel portal would cater for both phases. Only the second powertunnel, surge tank power shaft, penstocks, draft tubes and tailrace tunnelare needed to be constructed in the expansion to 402 MW. The project'seconomic merit could be substantially increased through developing thecomplete scheme in one stage at an estimated total cost of US$650 million,provided that satisfactory progress can be made on reaching agreement aboutbulk exports to India.

2.16 Even though in nominal terms the entire Arun III scheme would bethe largest investment project ever to be undertaken in Nepal, its'crowding out" impacts on other investments have been estimated to besmall, partly because it would be spread out over many years, and would notsignificantly affect other sectors' development.2/ Its impacts on the

1/ Nepal Electricity Authority. Feasibility Study of the Arun IIIHydroelectric Power Development Project, Kathmandu, June 1987.

2/ See Markandya, A., The Macroeconomnic and Budgetary Impacts of thePower Project in Nepal Over the Period 1989-1996 with Special Referenceto the Arun III Project Kathmandu, April 1988, which is available inthe project file. This document was prepared under UNDP ContractNEP/80/006.

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Government account are also generally small. However, its impact on theexternal account would be much more favorable if the scheme wereimplemented in one phase with power exports to India.

2.17 The Arun III hydroelectric scheme involves international waterrights issues. The project is located on the Arun River, which originatesin China and flows into Nepal where it joins the Koshi River. It thenflows into India and becomes part of the Ganges River which empties intothe Bay of Bengal. With regard to India, Nepal's right to use the water ofthe Arun River is covered by an agreement between the Government of Indiaand HHG on the Koshi Project, dated April 25, 1954, as amended on December19, 1966, which does not require formal notification regarding the projectcomponent. The Government oi China raised no objections in response toIDA's indication that it was considering supporting development of theproposed Arun III hydroelectric scheme.

2.18 Since the hydroelectric dam site is located at the end of the 192km access road, an assessment was needed of resettlement and environmentalimpacts of the overall development. Resettlement is not expected to be amajor problem for the Load and power projects because only a limited numberof households will be physically displaced by the selected road alignmentand no households are located at the dam and powerhouse sites. The majorresettlement issue is to identify the possible economic impacts of theproposed land acquisition procedures on individual families and to developseparate action plans for the access road project (para. 3.30) and thehydroelectric scheme (to be implemented by the NEA), to ameliorate negativeimpacts in accordance with IDA guidelines. For the first phase in the ArunIII hydroelectric scheme, an action plan satisfactory to IDA, will beprepared as part of the detailed engineering, financed under TechnicalAssistance Credit 1902-NEP.

2.19 Physical environmental resettlement issues for the access roadwere addressed as part of the detailed road engineering study (paras. 3.26and 3.27). For the hydroelectric scheme, the environmental issues relateprimarily to: (a) the ecology of aquatic species- and (b) the need tominimize the possible erosion and sedimentation problems, and the long-termimpact of the project works (including the work camps). The terms ofreference for the detailed engineering study of the hydroelectric schemerequire NEA to address these and other related issues, including thedevelopment of appropriate action plans that are consistent with IDAguidelines.

Preparation of the Arun III Hydroelectric Scheme

2.20 HMG has requested IDA to take the lead in coordinating thefinancing for the Arun III hydroelectric scheme. The four-step approachoutlined in para. 1.05 is intended to achieve the objective of completingthe first phase Arun III hydreelectric scheme by 1996 and strengthening theinstitutional capabilities and financial position of NEA. The project roadconstruction schedule is phased to provide access to the Arun III dam sitefrom Tumlingtar by January 1992 and from the road-head at Basantapur byJanuary 1993. To complete the four studies by early 1990 under Technical

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Assistance Credit 1902-NEP, with Kreditanstalt fuer Wiederaufbau (FederalRepublic of Germany) parallel financing, all consultants were appointed inJanuary 1989, including the engineering consultants wlo began work inDecember 1988. An important remaining step is the development by IDA of adetailed viable financing plan, satisfactory to 1HMG and the donors who madepreliminary commitments for the first phase Arun III hydroelectric scheme.

Previous Power Subsector Operations

2.21 In the power subsector, the Kulekhani Hydropower Project, 60 MW,(Credit 600-NEP) was successfully completed in 1985 (PPAR No. 6177), andimplementation of the Marsyangdi Hydropower Project, 69 MW,(Credit 1478-NEP) is progressing well after initial procurement delays. Inaddition, IDA is also sponsoring the development of potential regionalexport projects through the feasibility study for the Karnali scheme(Credit 1452-NEP) and the prefeasibi±ity work for the Pancheswar project aswell as a long-run marginal cost and tariff study and atransmission/distribution master plan under Technical AssistanceCredit 1902-NEP. As an integral part of the past and on-going projects,IDA has supported the creation and development of the NEA.

B. Transport SectorGeneral

2.22 For more than a century prior to 1951, Nepal maintained a policyof isolation from the rest of the world. Partly as a result of thispolicy, but mainly because of the formidable difficulties of internalcommunications, the country is still in the early stages of economicdevelopment. There is little interdependence between the economies of thescattered valleys; the country produces few exportable commodities, and nosignificant exploitable natural resources other than hydroelectric powerpotential have been discovered. Such physical characteristics, combinedwith the high costs of transport resulting from its mountainous terrain andland-locked position, have limited Nepal's opportunities co participate inthe international economy.

Road Network

2.23 In 1987, the highway network totaled about 6,330 km, of whichabout 2,800 km were paved, 1,820 km were gravel and 1,708 km wereunimproved earth roads (the project file contains a detailed description ofroads and road transport). All of the surfaced roads and a largeproportion of the earth roads are the responsibility of the Department ofRoads (DOR) under the Ministry of Works and Transport; the remainder areunder the jurisdiction of the panchayats or local governments. The threemair. national roads are: (a) the north-south road from the Indian borderat Birgunj to Kathmandu and then on to the Chinese (Tibet) border; (b) theEast-West Highway located in the Terai which, when completed in about 1990,will traverse the entire breadth of the country (1,040 km). A number oflocal roads in the Terai are not linked to the basic systems. Vast areasof the hills and mountains as well as parts of the Far Western Terai arenot served by roads at all. Sections of the road to China were washed outduring the 1987 and 1988 monsoons.

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2.24 Nepal's daunting topography and climate are the major impedimentsto inexpensive and reliable transport. They create a set of adverseconditions unparalleled in the world. As if the terrain were not obstacleenough, the many streams and rivers are seasonally swollen by the monsoonrains and make conditions for transport even more difficult, and conditionsfor road construction and maintenance exceptionally trying. Destructivefloods frequently occur in July and August when rainfall coincides withsnowmelt in the Himalayas causing extensive damage to roads, bridges andiLrigation structures.

2.25 Few road networks in the world are more difficult to maintain thanthat of Nepal. Some roads traverse tropical plains in extreme heat andmonsoonal flooding, some are perched on mountainsides subject to theopposite climatic extremes of ice and snow. The steep, unstable slopesoften give way to landslides, another hazard for both the road builder anduser. A consequence cf originally poor pavement designs and DOR's pastinability to cope with maintenance work effectively has resulted in thedeterioration of many sections of the road r.etwork to a state where theycannot be restored to good condition by routine maintenance procedures. Inresponse to these needs, a number of donors, including IDA, are providingfinancial and technical assistance to rehabilitate key sections of the mainroad network and to train DOR staff to improve maintenance planning,management and operations (para. 2.36).

2.26 The estimated revenues from road user charges amounted to NRs370.5 million in 1983/84 Rnd NRs 421.1 million in 1984/85, increasing toNRs 470 million in 1985/86. Overall, revenues from road user charges weremore than twice total maintenance expenditures in 1983/84, three timesmaintenance expenditures in 1984/85 and 4.5 times maintenance expendituresin 1985/86. The margini above maintenance expenditures covered 27% ofconstruction expenditures in 1984/84, 45X in 1984/85 and 702 in 1985/86.The estimated desirable levels of road maintenance expenditures vary fromNRs 250 million to NRs 300 million p.a., which are from 1.9 to 2.6 timeshigher than the actual budgetary allocations in 1985/86 and 1986/87. Thetotal collected revenues of NRs 470 million would still be in excess of thedesirable levels of maintenance expenditures indicated above.

Civil Aviation

2.27 To provide access to remote and otherwise inaccessible parts ofthe country, HMG has given a high priority to communications by air.Adequate air transport is not only a convenient, if high cost, means ofintegrating the country, but is also essential if tourism is to develop.The GovPrnMcr,L-uwed Royal Nepalese Airlines Corporation serves eightinternational airports and 24 domestic air fields by scheduled services andan additional eight landing strips by charter flights. Despite pastdomestic traffic growth, the potential of civil aviation has not been fullyrealized. Short take off and landing aircraft could be used moreextensively to provide social services in areas difficult to access bysurface transport. However, many factors, including shortages of equipmentand spare parts, poor navigational and landing facilities and the monsoonrains, have had the combined effect of closing more than half the domesticairports during the monsoon season (June-October) and contributing tounreliable services all year round.

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Railroads

2.28 There are three short, separate, narrow gauge railroad lines inNepal: the Janakpur line (53 km), built in 1927; the Nepal Railroad lines(8 km); and the Koshi line (35 km). The Janakpur line, which is anextension of the Indian Railways network from Janakpur, principally carriesabout 1.5 million pilgrims from India who visit the shrines in Janakpur, towhich there is no alternative land transport. The Nepal line, which nolonger operates, is also an extension of the Indian Railways, extendingfrom Raxaul to Birgunj, built mainly to transport bulk cargoes. The Koshiline, originally built to transport construction materials to the KoshiRiver Barrage, now operates only seasonally to transport materials for itsmaintenance.

2.29 Proposals for the development of various rail lines have beenadvanced from time to time. In general, they stem from the Government'sdesire to promote electric traction (railways, ropeways and trolley buses)to utilize the country's large hydroelectric potential and helping toconserve the scarce foreign exchange now expended on importing costlypetroleum. Studies show, however, that new lines or improvement ofexistLng ones would not be economically viable to carry forecasted traffic.

Ropeways

2.30 Apart from porterage, the first ropeway, built in 1928 to servethe Kathmandu corridor was, for many years, the only means of transportingfreight to and from the Kathmandu Valley. The present ropeway betweenKathmandu and Hetauda, which was opened in April 1964, has a length of42 km and is used mainly for bulk commoditiec.

Waterways and Maritime Transport

2.31 Because of the nature of Nepal's mountainous topography, theseasonality of rainfall and fast-flowing rivers with se.ere draftrestrictions, the use of waterways as a mode of transportation is limited.A few rivers in the Terai area are navigable by small craft and somemovement of grain by this means takes place to and from India. Morerecently, encouraging results have been obtained from the experiments witha jet barge (1.5 ton carrying capacity) on several rivers. HMG, with theassistance of United Nations Development Programme and IDA, is planning tocarry out rock blasting and/or removal on the Karnali and Arutn rivers tocreate navigable channels.

Transport Coordination and Planning

2.32 All modern modes of transport are regulated and/or operated by theMinistry of Works and Transport. Because of the relative infancy of thetransport system and the dominant position of roads, problems of inter-modal competition are minimal. Proposed investment plans are reviewed bythe Planning Commission and final approval for implementation is given bythe Ministry of Finance. Priorities are dictated firstly by the desire fornational integration, then on the need to give access to the Hill areas.Traffic counting is sporadic but improving with the establishment of thePlanning and Monitoring Cell (para. 2.36).

Organization and Regulation

2.33 There are few restrictions on the licensing of trucks and buses,and there is an abundance of truck and bus operators throughout thecountry. There are no regulations governing vehicle weights and dimtensionsdue to the absence of a legal framework. Although vehicle dimensions arenot regulated, the rugged terrain has, in the past, limited the operationof vehicles to not much larger than 5-8 ton nominal capacity trucks thoughvehicle weights are increasing on the flatter routes. HMG is carrying outa study on axle loads to provide a basis for drafting required legislationgLverning axle loads and vehicle dimensions. A road user charge study isalso being undertaken to help HMG devise means to retrieve from theoperators a propoltion of the costs of the increased wear and tear thatheavier vehicles inflict on the road pavements.

Previous Transport Sector Operations

2.34 The proposed credit would be the fifth IDA operation for transportin Nepal, the previous four also being largely for roads. The first,Credit 223-NEP (US$2.5 million), effective in February 1971, financed thereplacement of five road bridges, the construction of five pedestriansuspension bridges for porter traffic, a four-year road maintenance programand consulting services and technical assistance. The project wassatisfactorily completed in June 1977 but not without considerable delaysdue to shortages of materials and inefficiencies in administration (PPARNo. 2016 of April 7, 1978).

2.35 The second, Credit 730-NEP (TJS$17.0 million), closed on June 30,1985. It comprised the upgrading of about 18 km of a mountainous sectionof the main road from India to Kathmandu, the construction of about 50 kmof feeder roads, the procurement of construction equipment for use by thefeeder road contractors, consultancy services for technical and economicstudies of further roads and a training program for mechanics. Duringimplementation, the project suffered from long delays in procurement andpoor contractor performance. Training of mechanics similarly encounteredproblems of long delays, administrative chaos and poor performance of theinstructors (PPAR No. 6296-NEP of June 20, 1986).

2.36 The third project, Credit 1515-NEP (US$47.5 million), is stillunder implementation. It comprises the construction of 204 k1n of road tocomplete the East-West Highway, the construction of about 60 km of feederroads. The rehabilitation of 82 km of the Kathmandu-Birgunj road,including several bridges, the procurement of road maintenance andmaterials testing equipment, consulting services and technical assistanceand training. The training to the Planning and Monitoring Cell in DOR isto help it improve its capabilities to undertake economic planning andproject evaluation in addition to maintenance planning and highway designs.The project suffered from initial delays, but is now progressingsatisfactorily. The fourth Credit, the Flood Rehabilitation Project(Credit 1922-NEP, US$15.5 million), approved in June 1988, became effectivein January 1989. It will finance the first three years of HMG's emergencyflood rehabilitation program, consisting of flood protection works,bridges, culverts, causeways, roads and technical assistance for consultingservices.

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III. THE PROJECT

A. Background

3.0. The first critical element in the chain of activities needed forthe commissioning of the planned hydroelectric scheme on the Arun R'.ver izaccess to the construction site. Eight route alignment options wereanalyzed in the feasibility studies of an access road completed in 1987.The final alignment selected for the access road is the least costenvironmentally sound option, having the added advantages of traversingridges with minimum risks of washouts and serving the hill inhabitants.The final engineering for the access road was completed in 1988. Designstandards are given in Annex 1 and are satisfactory for this type of road,being similar to the standards used for the road from Dharan to Basantapur.The consultants assisted DOR with the bidding documents and contractorprequalification, and will assist with bid evaluation.

B. Objectives

3.02 The main objectives of the project are to:

(a) provide access for personnel, materials and equipment to the ArunhII hydroelectric construction site by the provision of an all-weather road for vehicles;

(b) strengthen HMG capabilities to administer rehabilitation offamilies affected by the project and manage environmentalprotection and conservation measures; and

(c) reduce the cost of transporting goods between the agricultural butfood deficit areas of the Koshi Hills and the more industrializedand productive Terai.

C. Socio-Economic Profile of the Project Area

3.03 The project area, known as the Koshi Hills, comprises theDistricts of Sankhuwasabha, Terhathum, part of Dhankuta and part ofTaplejung, with a total estimated population of one-half million.Agriculture is the main source of employment, followed by trading andcottage industry, notably brass work in Chainpur.

3.04 During 1985-86, it was estimated that 95,060 hectares of land wasunder cultivation. Of this area, 45% was devoted to maize, 33? to paddy,132 to millet, 5? to wheat and 4? to potatoes. Of the crops produced,potatoes by far were the most productive crop per hectare cultivated.Potatoes are grown in relay with other crops, except at the highestaltitudes, where they are the main staple crop of the inhabitants. Inaddition to staple crops, more than 150,000 citrus trees are currentlyproducing fruit.

3.05 The Koshi Hills area primarily exports citrus fruit, potatoes,medicinal herbs, and cardamom to the Terai using porters since there are nomotorable roads in the Arun Valley. In the Hills, Chainpur is a center ofwholesale and retail activities, including sales of livestock, mainly,

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sheep and goats. Food grains grown in the Terai are imported to the Hillsin small quantities. Transport costs by porterage are high and it takesfour to ten days to travel to and from the project area to the majortrading center in Dharan.

D. Description

3.06 To achieve its objectives, the project comprises:

(a) a gravel-surfaced road, 192 km long, from near the end of theexisting Dharan-Basantapur road to the Arun III hydroelectricconstruction site, including a 6 km spur road to the commercialand administrative center of Chainpur (US$33.2 million);

(b) a road maintenance depot at Tumlingtar (US$0.2 million) to supportmaintenance of the project road and monitor maintenance operationscarried out by contractors;

(c) rehabilitation of the families adversely affected by theconstruction of the access road through implementation of a LandAcquisition, Compensation, and Rehabilitation Plan (ACRP)(US$1.6 million); and

(d) consultancy services for: (i) construction supervision(US$3.7 milJion); (ii) the training of DOR maintenance personnel(US$O.l million); and (iii) the preparation and implementationsupervision of the ACRP (US$1.2 million).

3.07 Access Road. The gravel surfaced road would start at a point nearthe end of the existing road at Basantapur, and run via Mamling, Kharang,Tumlingtar, Khandbari and Chhyangkuti to the sites of the powerhouse, aditand intake works at the dam located near Num. The spur to Chainpur startsfrom a point near Kharang (IBRD Map 21127). The gravel pavement will be4.5 m wide on a 6.5 m formation.

3.08 The route selected as being most economical in terms ofconstruction and maintenance, consistent with sound environmental planning,is in mountainous terrain and follows the ridges wherever possible,descending only for crossings of the Piluwa Khola near Chainpur, theSabhaya Khola at Tumlingtar and at the sites of the powerhouse, adit anddam. The streams and rivers of this area are unpredictable and can be veryviolent and destructive. They cause excessive steepening of the valleysides and consequent instability of the slopes. The route has thereforebeen chosen to avoid rivers as far as possible, and to follow the contoursclosely in order to minimize the quantities of cut and fill, and to reducenegative environmental impact. The contract documents for roadconstruction also incorporate environmental conservation measures(para 3.26).

3.09 Construction will involve large amounts of rock excavation, and inorder to provide stability for the road, substantial lengths of retainingstructures consisting of rock-filled gabions or cement-mortared masonrywould be built. Bridges would be of concrete or modu,lar steel constructionon concrete abutments, designed to carry hydropower construction traffic.

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More permanent works to the road would be included in the proposed Arun IIIhydroelectric scheme to accommodate heavier construction-related trafficexpected in later years (1993 and onwards). There would be only one majorbridge, about 100 m long, spanning the Sabhaya Khola at Tumlingtar. Atcritical points, river training works to protect the road and bridges fromscour would be constructed.

3.10 Road Maintenance Depot. DOR's nearest road maintenance facilityis one financed by IDA under the Second Highway Project (Credit 730-NEP),located at Itahari, ebout 250 km from the dam site. Provision is madeunder the project for a maintenance depot to be built in the project areaat Tumlingtar. The depot comprises adm;.nistrative offices, stores, aworkshop for the repair and maintenance oi Zhicles and sleeping quarters.The depot, to be built as part of the road construction package, would beinitially utilized by the road contractor as a base camp where constructionequipment and vehicles would be serviced during the contract period.

3.11 Resettlement. To provide necessary compensation andrehabilitation measures for the population whose land, buildings and meansof livelihood would be either temporarily or permanently affected by theroad/dam construction, the project includes implementation of an ACRP. TheACRP contains an overall plan for the resettlement to be carried out underthe project as well as details on the nature and magnitude of theoperation, compensation packages offered to the affected families,development plans for relocation sites, transfer/transport arrangements,implementation timetable and costs. .he legislative basis for implementingthe ACRP is contained in the Land Acquisition Guidelines 2045 approved byHMG on January 5, 1989.

3.12 Technical Assistance. Provision is made under the project for thecosts of:

(a) supervision of the contractor by DOR's consultant;

(b) training of DOR road maintenance personnel and mechanics.Training would be carried out at the training center set up by DORwith the assistance of consultants at Patan Dhoka near Kathmandu.The initial training will be followed by further training on thejob at the existing workshops at Itahari and Butwal; and

(c) preparation and implementation supervision of the ACRP byconsultants.

E. Cost Estimates

3.13 The estimated total cost of the project, summarized below, isUS$40 million, including taxes and duties of US$ 3.5 million andcontingencies of US$ 8.2 million. The foreign exchange cost is US$28.4million. The costs shown for the road construction works and for themaintenance depot are based on mid-1989 prices and final quantities derivedfrom detailed engineering. Although too small to be itemized in the table,the costs of staffing the Environmental Management Unit within DOR ($5,000)and the Project Implementation Unit (US$5,000) are included in the total.

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Table 3.1: Project Cost Summary

--N Rupees (Million)-- ----US$ (Million)----- ForeignLocal Foreign Total Local Foreign Total Costs %

Road Construction 160 485 645 6.57 19.87 26.44 75Mainter.ance Depot 2 2 4 0.09 0.09 0.18 50Land Acquisitionfor ACRP 30 - 30 1.21 - 1.21 -

Construction Super-vision by Cons. 15 58 73 0.60 2.39 2.99 80

Technical Assis.Training 0 2 2 - 0.09 0.09 100

Preparation andSupervisionof ACRP 13 10 23 0.52 0.42 0.94 45

Base Costs 219 558 777 8.99 22.86 31.85 72

PhysicalContingency 33 84 117 1.35 3.43 4.78 72

Price Contingency 32 50 82 1.31 2.06 3.37 61

SubtotalContingencies 65 134 199 2.66 5.49 8.15 67

Total Project Cost 284 692 976 11.65 28.35 40.00 71_w= === === === ~==== ==s= ==

3.14 Price escalation for the three-and-a-half year construction periodhas been calculated based on !DA estimates of inflation rates as follows:41 p.a. foreign for the entire period and 72 local for FY89, thereafter at6% p.a. A 15Z physical contingency has been included to allow forunforeseen increases in quantities and cost overruns.

3.15 The foreign exchange component of the road works has beenestimated at 75Z, assuming the work will be executed by foreign contractorswith some subcontracting by local firms. This percentage, the 802 foreignexchange for supervision and 100I for technical assistance and training arebased on similar services provided under the Third Highway Project(Credit 1515-NEP). The supervision costs are based on the existingcontract rates and include 1,040 staff-months of local staff at US$1,000equivalent per month and 217 staff-months of foreign staff at US$12,500 permonth, including travel and subsistence.

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F. Financing

3.16 The Borrower would be the Kingdom of Nepal. The proposed IDAcredit of US$32.8 million would finance 100X of foreign costs and about 382of local costs, or about 82% of total project costs and would be passed onto DOR as budgetary allocations. HMG would provide US$7.2 million, orabout 62Z of the project's local costs, from (DOR) budgetazy resources.

3.17 The proposed financing plan is summarized as follows:

Table 3.2: Financing Plan

--- (US$ Millions)----IDA HMG TOTAL

Foreign 28.4 0.0 28.4Local (Excl. Taxes & Duties) 4.4 3.7 8.1Taxes and Duties 0.0 3.5 3.5

Total 32.8 7.2 40.0

During negotiations, it was agreed that eligible expenditures up to US$3.3million for all categories would be financed retroactively from January 31,1989.

G. Procurement

3.18 Procurement arrangements for the project components are summarizedbelow:

Table 3.3: Procurement Arrangements

--------------US$ (million)-------------Project Components ICB OTHER TOTAL

1. Civil Works 33.2 (27.6) - 33.2 (27.6)2. Maintenance Depot 0.2 (0.2) - 0.2 ( 0.2)3. Consultancy Services - 4.9 (4.9) 4.9 ( 4.9)4. Training 0.1 (0.1) 0.1 ( 0.1)5. Land Acquisition for ACRP - 1.6 1.6

Total 33.4 (27.8) 6.6 (5.0) 40.0 (32.8)

NOTE: All costs include contingencies.Figures in parentheses are the respective amounts to befinanced by IDA.

3.19 The civil works contract, to include both the road and maintenancedepot, will be awarded after international competitive bidding amongprequalified contractors in accordance with IDA/Bank Guidelines forProcurement. In order to minimize the risk of delay to the constructionschedule and hence to the hydroelectric scheme, the procurement procedures

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included a prequalification exercise, as well as a stringent post-qualification of tenderers. The prequalified firms have been invited tosubmit detailed technical proposals along with their priced bids. Eachtechnical proposal will be scrutinized to ensure that it meets all therequirements of the contract and that construction methods and programs arerealistic, achievable and environmentally sound. If a technical proposalis deemed not acceptable and realistic, the bid will be rejected. Awardwill be made to the tenderer with lowest evaluated bil, having also ar,acceptable technical proposal. Evaluation of the civil works bids will becarried out by consultants on behalf of DOR to ensure timely award ofcontracts.

3.20 All awards for contracts financed by IDA would be subject to priorreview by IDA. A preference of 7.5% would be given to domestic contractorsin the evaluation of the civil works contract.

H. Disbursement

3.21 Disbursements from the credit proceeds would be made on thefollowing basis:

- 83% of total expenditures for civil works;

- 100% of total expenditures for consulting services and training.

A schedule of estimated disbursements is shown at Annex 2 and summarized asfollows:

IDA Fiscal YearEstimated IDADisbursement 90 91 92 93 94

----------------US$ Million-

Annual 12.2 9.0 6.5 3.5 1.6Cumulative 12.2 21.2 27.7 31.2 32.8

Although the road construction work is expected to be completed in 1993,the final payment would not be made to the contractor until 12 months afterthe completion of the road when the contractor's required maintenanceperiod under the contract would be over in January 1994. Still, thedisbursement period is shorter than the seven-year disbursement profile ofNepal. However, the short disbursement period is dictated by therequirement to have the entire stretch of the road open for traffic byearly 1993 and can be achieved through measures recommended under theproject. Full documentation would be required by IDA to support withdrawalapplications for all expenditures under contracts above US$2^,000equivalent. Certified statements of expenditure would be used for allexpenditures under contracts less than US$20,000 equivalent. The accountsand documentation in support of statements of expenditure would be retainedby DOR and made available to IDA supervision missions on request. To theextent possible, withdrawal applications would be aggregated in amounts ofUS$50,000 or more prior to submission to the Association. The projectcompletion date is January 31, 1994, including the contractor maintenanceperiod, and the closing date will be July 31, 1994.

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3.22 Special Account. A Special Account would be established at NepalRastra Bank to facilitate payment of eligible expenditures. This accountwould be maintained in US Dollars with an authorized allocation ofUS$2,200,000, representing an estimated average of four month expendituresand would cover all categories. Except for expenditures greater thanUS$500,000 that would greatly deplete the Special Account, it is expectedthat all expenditures would be channelled through this Account. Statementsof expenditure documentation and the Special Account would be subject toaudit (para. 3.33).

I. Project Execution and Supervision

3.23 Project Monitoring Committee. To provide overall projectmanagement and coordination, HMG has established and will maintain aProject Monitoring Committee under the chairmanship of the Minister ofWater Resources. As a member of the Committee, DOR has been designated toact as executing agency and would approve procurement of the civil workscontracts and consultancy services, and report to the Committee which wouldmonitor progress on project implementation. During negotiations, HMGconfirmed that the Project Monitoring Committee has been established; thecomposition of the Committee is listed in Annex 3 (para. 5.01).

3.24 Project Implementation Unit. Project super-vision will be theresponsibility of the Project Manager appointed to the ProjectImplementation Unit established within DOR. The rosition of ProjectManager would be filled and kept filled with an incumbent of DOR on termsand conditions satisfactory to IDA. A suitable manager has been appointedby DOR. The organization for implementation, agreed in March 1989, isshown in Chart 1, and the implementation schedule is shown in Chart 2. TheProject Implementation Unit would be assisted by supervising consultants,and during negotiations, the terms of reference for constructionsupervision (Annex 4) were found acceptable by IDA (para. 5.01). It isproposed that the supervision contract be awarded on a sole source basis bythe design consultants on terms and conditions acceptable to IDA as theirperformance on the access road feasibility studies and detailed engineeringhas been satisfactory. Their appointment would be justified on thestrength of their intimate knowledge of site conditi.is, their presence onsite and their involvement with the design work.

3.25 Maintenance of the Project Road. Maintenance of the road from theend of construction until the completion of the first phase hydroelectricscheme would be undertaken by the hydropower construction contractor(s),who would be responsible for handing over the road in good condition at theend of the contract period. It may be appropriate to continue withcontractor maintenance in the event that the second phase of the Arun IIIhydroelectric scheme proceeds following the completion ot its first phase.DOR would assume the responsibility of maintaining the project road as apart of the national highway network after the completion of the Arun IIIhydroelectric scheme. During negotiations, an understanding was reachedthat under the terms of the contract, the road contractor would only beresponsible for the rectification of defects during the first ycar aftercompletion of the road and the hydropower construction contractor wouldundertake routine maintenance from completion of road construction to thecompletion of the hydroelectric scheme.

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J. Environmental Protection and Conservation

3.26 Environmental Safeguards Imposed on Contractor. The constructionof a new road in the mountainous terrain would involve cutting and fillingwhich, until vegetation is restored, would scar the countryside. However,to minimize the damage to adjacent fields and property and to ensure thestability of the road, the road alignment adopted would follow the ridgesas much as possible. Moreover, in order to minimize deforestation, providea supply of fuelwood for cooking and heating to the labor force andnutrition and medical facilities, the tender documents require thefollowing:

(a) bidders to furnish information on the size of labor force to beemployed and the location and layout of labor base camps andintermediate camps at the time of the submission of technicalproiposals;

(b) the contractor to provide guarded fuelwood stocks from legalsources close to work-gang activities or alternatively, to utilizekerosene stoves for cooking and non-wood fuel at base andintermediate camps for construction purposes;

(c) fair price shops for serving the work force to be established atconvenient intervals along the right of way, constructed by thecontractor and leased to local operators;

(d) the contractor to provide mobile medical facilities at places nearthe construction site; essential health services to be providedfree to the work force; and

(e) to avoid the danger of deforestation, the contractor is to erectcontrol gates: (i) at Basantapur; (ii) immediately north ofKhandbari; and (iii) at Num. They would be manned 24 hours a dayby the contractor's staff during the entire period ofconstruction. The staff would immediately report any illegalmovement of timber by wheeled vehicles to the contractor, thesupervising engineer and the Ministry of Forests and SoilConservation (MFSC).

3.27 At the end of the construction period, control of the gate at Numcovering the Sagarmatha National Park and the buffer zone and intensifiedsupervision of the whole Arun Valley from Basantapur to the Sagarmatha Parkbuffer zone would be undertaken by MFSC. A Forestry Action Plan for theArun Watershed has been prepared and contains the supervision plan for thearea noting the number of forest inspectors to be provided, theiroperational plan and equipment needed. During negotiations, the actionplan by MFSC for the control of illegal logging was discussed and foundacceptable by IDA. In addition, an understanding was reached that the roadconstruction contractor would be responsible for the operation of requiredcontrol gates during the contract period, and the MFSC would be responsibleafter completion of the construction contract. With all these safeguards,the project would not result in environmental deterioration but wouldprovide an opportunity to improve management of environmental problems.

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3.28 Environmental Management Unit in DOR. Because of the importantincreasing knowledge being accumulated on the relationship between naturalsystems and development projects and the impact of development projects onhuman settlement, DOR has agreed to establish, maintain and staff anEnvironmental Management Unit to carry out inter alia: (a) preparation ofenvironmental impact assessments of road development projects; (b) reviewoverall work programs of DOR with respect to environmental issues andsocial impact; and (c) preparatinn of planning and engineering practicesand procedures for road projects consistent with environmental and socialrequirements. During negotiations, i4G furnished a detailed proposal toIDA for the Staffing and Work Program of the Environment Management Unit inDOR. T'he establishment of an Environmental Management Unit, including theappointment of the required staff, was a condition of effectiveness.However, IDA was informed that such unit had already been established andstaff hired. During negotiations, an understanding was reached that theEnvironmental Management Unit will pursue the objectives and have theorganization and budget, as set forth in the Staffing and Work Programcontained in Annex 5, which is satisfactory to IDA. Therefore, thiscondition was considered complied with and deleted from the CreditAgreement (para. 5.01).

3.29 Management of Environmental Impact. Environmental studies for theUpper Arun Valley will be undertaken as part of the Arun III hydroelectricscheme to: (a) to conserve the forest, scarce and valuable plants,wildlife and the watershed upstream of the dam; (b) ensure environmentalmanagement of the Upper Arun Basin; and (c) control tourism and trekking inthe Arun Valley. During negotiations, the terms of reference for theproposed environmental and tourism management studies were discussed andwere found satisfactory to IDA (Annex 6).

3.30 Environmental and Resettlement Issues. Much of the land neededfor the access road to the hydropower electric scheme belongs to theGovernment. However, ir. the vicinity of villages, private ownership isinvolved and acquiring the land and resettling the affected families willbe necessary. A three-step process to respond to these issues has beenagreed as follows:

(a) Land Acquisition Guidelines. The HMG approved AcquisitionGuidelines (Annex 7), acceptable to IDA, on January 5, 1989 whichprovide the legislative basis for implementing the resettlementplan discussed below. It is a condition of effectiveness that alegal opinion be provided to IDA by the Secretary of Law andJustice confirming that provisions contained in the Guidelines areenforceable in accordance with the laws of Nepal. Acquisitionnotices for the land needed for the first year's constructionworks were posted in February 1989.

(b) Land Acquisition, Compensation and Rehabilitation Plan (ACRP). Tominimize the adverse effects of displac ent, HMG has avoidedtaking agricultural land and heavily settled areas whereverpossible. Nevertheless, there are a number of families whoseland, buildings and means of livelihood would be affected by theroad construction. To ensure that the people affected by theproperty and land acquisition would be at least as well off in

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terms of assets and livelihood after the project as they werebefore, HMG prepared an ACRP for the first year of constructionwhich was reviewed and found acceptable by IDA during negotiations(Annex 8). An implementation review report for IDA comment andconcurrence would be prepared by HMG by October 1, 1989 based onexperience during the fitst year's ACRP, and by March 1, 1990after the second year's ACRP. Any modifications to the ACRPsdeemed necessary will be incorporated into the second and thirdyears' ACRP. During the first year of construction, it isestimated that about 1,372 families will be affected, of whom 35may be seriously affected. The number of families likely to beaffected later will be determined during the preparation of theACRP for the second and third years. During negotiations, it wasagreed that the second year's ACRP will be submitted to IDA on orabout November 1, 1989, and the third year's ACRP on or aboutApril 1, 1990 (para. 5.01).

(c) Acquisition and Rehabilitation Committees (ARCs). To implementthe ACRP discussed above, it was agreed during negotiations thatHMG would establish and maintain an ARC in the Sankhuwasabha andTerhathum Districts in the project area. Each Committee will bechaired by the respective Chief District Officer and would includethe following members from the respective Districts: the LandRevenue Officer and representatives of the District Panchayats.The Project Manager would be the member-secretary of suchcommittees. Each ARC would be provided with the functions,responsibilities, funds, staffing and other resources necessary tocarry out the activities entrusted to it under the Guidelines.During negotiations, agreement was reached that each ARC would beempowered to: (a) negotiate for and acquire land (for the road andfor resettlement purposes); (b) approve rehabilitation packagesfor the project affected families in accordance with the agreedACRP; and (c) disburse compensation funds and transfer titles toresettled families (para. 5.01).

K. Project Reporting

3.31 DOR would be responsible for submitting quarterly progress reportson the project in accordance with an agreed format. The reports, to besubmitted not later than two months after the end of each fiscal quarter,would indicate progress made and problems encountered during the quarterunder review and steps taken or proposed to remedy problems.

3.32 DOR has agreed to present a project completion report to IDA, sixmonths after completion of the project, which, among other things, wouldinclude its key monitoring data such as cost, general characteristics ofits execution, socio-economic impact and the accomplishment of the purposesof the project. During negotiations, it was confirmed that HMG wouldfollow the agreed format, content, and the timing of project reporting,including the preparation of the project completion report.

L. Accounts and Audits

3.33 The Auditor General is responsible for auditing all accounts.However, the performance of HMG in fulfilling IDA accounting and auditrequirements has been weak, and in most projects, audits of accounts have

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been late. This is partly because expenditures related to IDA-financedprojects are audited as part of the overall financial records of theimplementing department, and the Auditor General does not release the fullaudit report until it has been cleared by all concerned officials. IDA hassuggested a format and content for auditors' reports to be prepared by anindependent auditor and submitted to IDA, without waiting for the AuditorGeneral's full report. Similar procedures are being instituted forspecific audit certification of all withdrawal applications based onstatements of expenditure. During negotiaLions, it was agreed that HMGwould cause DOR to: (a) maintain separate records and accounts for allproject expenditures, by individual project component, in accordance withappropriate accounting principles; (b) furnish to IDA the report on theSpecial Account, audited by an independent auditor acceptable to IDA inaccordance with sound auditing principles; (c) forward to IDA suchaccounts, together with the auditor's reports, within 12 months after theend of each fiscal year; (d) include in the annual audit reports a separateopinion from the auditor as to whether the disbursements made Gn the basisof statements of expenditure were for works and services completed andincurred for the purposes of the project; and (e) furnish to IDA such otherinformation concerning audits and accounts as IDA shall from time to timereasonably request, including submission within six months after the end ofeach fiscal year, of unaudited project accounts and financial statementsfor each fiscal year, certified as to their accuracy and authenticity by anindependent auditor, acceptable to IDA (para. 501).

IV. ECONOMIC EVALUATION AND RISKS

A. Background

4.01 The Arun III Access Road Project is a part of the Arun IIIhydroelectric scheme which in turn forms an integral part of NEA's leastcost expansion plan in electricity generation, transmission anddistribution. It was thus appropriate to carry out the economic evaluationon the entire NEA investment program. The investment program for theperiod FY89-FY2001 was analyzed for two different power export scenarios:(a) a base case scenario assuming power exports of 1.5 MW capacity untilthe 1995 commissioning of the first phase Arun III hydroelectric schemewhen they increased to 25 MW (both at a load factor of 0.50); and (b) abulk export scenario, which differs from the base case in that powerexports were assumed to increase to 125 MW from 1997 onwards. For bothscenarios, NEA's sales projections for Nepal's interconnected system wereused.

B. Future Electricity Demand

4.02 Total electricity sales increased at an average annual rate of12.5% over the period FY76-FY87 (Annex 9). The fastest growing categorieswere sales to industrial consumers (14.9Z p.a.), commercial (12.1Z) andresidential consumers (9.3%). The share of total sales to industrialconsumers increased from 30% to 37Z while the share to residentialconsumers fell from 54% to 42%. The increasing share of the industrialconsumption improved the interconnected system's load factor from 45% to50Z. Although, the numbers of industrial and commercial consumers grew

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more rapidly than residential consumers, the latter still account for 97%of NEA's customers Over the whole period, the total number of consumersrose from 79,000 to 208,000, representing an average of about 11,700 newconnections a year (9% p.a.). This relatively rapid rate of newconnections was the driving force behind the increase in electricityconsumption in Nepal's power system.

4.03 The methodology developed for the load forecast was a mixture of adisaggregated approach combined with econometric mode].s, trend analysis andlinkage with industrial output (Annex 9, Attachment 2). It was developedbased on a review of the effectiveness of different methodologies, such asextrapolation of previous experience, econometric models, energy input-output models and a disaggregated approach in the Nepalese environment andconsideration of their data requirements. The load forecast developedshows Nepal's total sales increasing at 8.2Z a year during FY87-FY2006.Sales to industrial consumers are projected to exceed those to residentialconsumers by 1996. The projected decrease in the sales growth rate t3 8.22compared with the historic level of 12.5% reflects the projected majorextension of service to new consumers, principally residential, with a lowinitial demand for electricity.

4.04 The load forecast also assumed that gross system losses would bereduced progressively from 282 in FY88 to 20Z in FY96 and subsequentlyremain at that level. Bulk sales would consist of the export to India of6.57 GWh up to the commissioning of the first-phase Arun III hydroelectricscheme and 109.5 GWh, thereafter. Units generated are projected toincrease at an average annual rate of 7.82 through FY2006. The overallload factor is expected to remain at about 50%. This is because of thecounteracting effects of projected increases in industrial sales (whichimprove the load factor) and rural residential connections (which worsenthe load factor because they have a load factor of about 252). Peak demandis projected to increase from 141 MW in FY88 to 501 MW in FY2006. Annualper capita electricity consumption is forecast to increase to about 77 kWhin FY2006.

C. Base Case Scenario

Capital Costs

4.05 Anticipated investments in the Arun III Access Road Project, ingeneration projects identified by the LCGEP, and in the transmission anddistribution projects, expressed in financial prices, were converted intoeconomic prices by: (a) expressing the import content at c.i.f. prices; and(b) applyirng an estimated standard conversion factor of 0.89 to localcosts.

Recurrent Casts

4.06 Annual operation and maintenance costs for the power systemcomponents were estimated as the following percentages of capitalinvestment: generation, 12; high voltage network, 2%; medium voltagenetwork, 32; and low voltage network, 62. For the Arun III Access RoadProject, annual maintenance costs are estimated at US$120,000 for theperiod 1993-2003 and US$84,000, thereafter. To value operation andmaintenance financial costs in economic terms, the distribution of costswas assumed to be 902 foreign and 10% local.

-24-

Benefits

4.07 Benefits were based entirely on a the power benefits associatedwith a "time-slice" of NEA's investment program for FY90-FY2001. Transportbenefits were not quantified. The base case scenario benefits wereestimated first in terms of total revenue using the average revenue per kWhin mid-1988. The projected average revenue of NRs 1.39/kWh in FY89 wastaken to represent the weighted average tariff rate defined over existingdomestic tariffs; the export tariff was NRs 1.0/kWh. Using costs measuredin economic terms, the internal rate of return (IRR) was estimated to beabout 5.6Z. This is less than the estimated opportunity cost of capital of10% and indicates that tariffs are currently less than long run marginalcosts (para. 2.08). The cost and benefit base case scenario streams (usingaverage revenue as the sole measure of benefits) are shown in Annex 9,Attachment 3.

4.08 The foregoing revenue-based measure of rate of return is, by itsnature, more a measure of the adequacy of tariffs than of the true economicworth of the investment program which includes the Arun III access road andthe hydroelectric scheme. The hydroelectric scheme would confer benefitsin excess of those measured by incremental power revenue, and thus 5.6% isa minimum measure of the benefits of the hydroelectric scheme.

4.09 A better measure of the rate of return can be obtained byestimating consumers' willingness to pay for the incremental electricitysales within Nepal. A conservative estimate of willingness to pay was madeas follows: for most low voltage consumers, willingness to pay wasestimated using the average existing tariff rates for supplies toresidential and commercial consumers from private sector schemes (NRs6.00/kWh). For other low voltage, medium voltage and high voltageconsumers, willingness to pay was measured in terms of the incrementaloperating costs (NRs 2.63/kWh) for meeting their demands for electricityusing captive generating plant (in 1987 these consumers had a totalinstalled capacity of about 17 MW). On this basis, the calculated weightedaverage willingness to pay for all consumer groups is NRs 3.94/kWh. Usingthis value and valuing export sales at NRs 1.0/kWh, the IRR is about 13.9%.This measure is still a lower bound measure of the IRR, since it: (a)assumes that consumers' willingness to pay for the improved reliability andquality of electricity supply is zero; and (b) excludes quantifiablebenefits resulting from the utilization of the access road by non-powerrelated traffic.

4.10 The primary benefits of the road project would be the developmentof least-cost electricity generation to be made available to domesticconsumers as well as for export markets in India. However, it would alsostimulate commerce between the Hills and the Terai by reducing transportcosts of agricultural products, milk and the brass work produced inChainpur. Exports of Chainpur brass products have been declining in recentyears in the face of rising porterage costs. The completion of the projectroad is expected to reverse this trend. Additionally, the introduction ofbus services would increase mobility in the area and make the health careservices in Dharan or travelling doctors available to the Hill population.

-25-

4.11 The studies conducted by the Koshi Hill Agricultural and RuralDevelopment Program to assess agricultural production potential in theKoshi Hills estimated that the use of chemical fertilizers could increaseproductivity in this area by 5% p.a. However, the Agricultural InputsCorporation estimated that about 700-1000 tons p.a. of the demand forfertilizers in the Koshi Hills is being unfilled due to inadequatetransport. The proposed project would, therefore, offer tbe opportunity torealize this production potential.

D. Sensitivity Analysis

4.12 Sensitivity analysis was carried out for the willingness to paybased measure of IRR (Annex 9) to ascertain the likely risk that the ArunIII hydroelectric scheme, including the access road, would be uneconomic.The analysis is presented in terms of the percentage change in a particularitem required to yield a specified IRR value. For example, either a 26.9Zincrease in capital costs or a 19.9% decrease in domestic sales wouldreduce the IRR from 13.9% to 12Z. The sensitivity analysis indicates thatthe base case IRR estimates are robust.

4.13 The base case analysis assumes continuation of the 25 MW capacityexport agreement with India. However, agreement has been reached inprinciple by the Governments of Nepal and India to increase exports to 125MW. In that case, the IRR would be a minimum of 16.0%. Further increasesin the level of exports are under discussion. Exports of 200 MW capacitywould increase the IRR to about 17.0Z.

V. AGREEMENTS AND RECOMMENDATION

Agreements Reached During Negotiations

5.01 The following agreements were reached during negotiations:

(a) a Project Monitoring Committee will be maintained under theChairmanship of the Minister of Water Resources (para. 3.23);

(b) a Project Implementation Unit maintained with DOR, and managed byan officer with qualifications and experience acceptable to IDA,will be responsible for the day-to-day implementation of theProject, and assisted by supervising consultants (para. 3.24);

(c) the MFSC would implement the Forestry Action Plan in the projectarea (para. 3.27);

(d) an Environmental Management Unit will be maintained within DOR,headed by an officer with qualifications and experience acceptableto IDA to implement the agreed staffing and work program (para.3.28);

(e) HMG would prepare the second year ACRP, to be furnished to IDA byNovember 1, 1989, and the final third year ACRP to be furnished toIDA by about April 1, 1990 following implementation reviews(para. 3.30);

-26-

(f) ARCs in the Sankhuwasabha and Terhathum Districts in the projectareas will be maintained (para. 3.30); and

(g) HMG would cause the DOR to keep separate accounts for projectcomponents and the Special Account, which would be subject toaudit (para. 3.33).

Condition of Credit Effectiveness

5.02 It is a condition of effectiveness that the provisions contained inthe Land Acquisition Guidelines approved by HMG on January 5, 1989 have beenissued and are enforceable in accordance with the laws of Nepal (para.3.30).

Recommendation

5.03 Based on the above agreements and condition of effectiveness, theproposed project is suitable for an IDA credit of SDR 24.4 million(equivalent to US$32.8 million) to the Kingdom of Nepal on standard termswith 40 years maturity.

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Annex 1Page 1 of 3

NEPAL

ARUN III ACCESS ROAD PROJECT

DESIGN STANDARDS

General

To enable work on the Arun III Hydropower Project to commence, anaccess road is required to the intake, adit and power house sites from thenearest Bansantapur-Hile road. Initially, however, a compacted gravel roadwith modular steel bridges and sidedrains will be provided after two and ahalf years of construction. It will require two additional years toconstruct a permanent road. The estimated construction expenditures are asfollows:

Percentage of TotalConstruction Cost of

US$50 M

First Year (1989) 15) First stage ofSecond Year (1990) 25) construction beingThird Year (1991) 20) carried out under

this project

Fourth Year (1992) 19) Second stage ofFifth Year (1993) 21) construction to be

carried out underHydropower Project

Design Standards

The final design standards adopted based on detailed engineeringare as follows:

Formation: (a) In general, 6.5 m wide, comprising a 4.5 m carriageway,0.5 m shoulders and 1.0 m allowance for a sidedrain (seebelow under sidedrain).

(b) In village areas and at bends the formation width isincreased to 7.5 m minimum, with a corresponding increasein carriageway width, or combined carriageway andshoulders.

Carriageway: Generally 4.5 m wide, consisting of an average 25 cm thickgravel surface (15 and 10 cm compacted thicknesses ofcrushed stone sub-base and base material respectively).Crossfalls on the carriageway will be a minimum 5 percenttowards a continuous longitudinal sidedrain at the inner(hill) side of the road, with increased crossfalls wherethe longitudinal gradients are greater.

Annex 1

-28- Page 2 of 3

Where the road is on embankment, or where the road haslongitudinal drains along both sides, as for instance mayoccur in box cut or where the terrain is flat, minimum 5percent cambers will be given.

After the first stage of construction, surface dressingwill be applied at sharp bends, on steep gradients and atother critical points to reduce damage to the pavement bytrucks.

Sidedrains: Generally, sidedrains will be masonry-lined and continuousalong the inner (hill) side for the road throughout itslength, except for sections on raised embankment. If thesubgrade material and road gradient permit, the sidedrainlining will be laid dry. Otherwise, it will be in cementmortar. However, in some circumstances, e.g. in rockyformations, the sidedrain lining may be entirely omitted.Where the road gradient is high, masonry check dams may beprovided to reduce erosion.

The size and shape of sidedrains wil!. vary depending on.the situation. In. some circumstances, subsurface drainswill be used. Area, or cut-off, drains may be provided atsome locations above the road cut to reduce erosion fromrun-off water on cut faces and to reduce infiltration ofwater behind cut faces. However, unless properlydesigned, installed and maintained, area drains cantrigger rather than prevent side slope instability. Theytherefore will only be provided after thorough examinationof the circumstances.

Gradients: Average 7 percent over any one kilometre, with a maximumof 10 percent over not more than 300 m length at a time.

Radius at Generally, not less than 25 m radius (at centre line ofCurves: the road), though radii of 15 m may be unavoidable in some

exceptional cases. In all cases, the formation andcarriageway width will be increased at bends. Also,gradients will be reduced at bends and at theirapproaches.

Shoulders: Generally, capped with 15 cm compacted subbase materialexcept where the formation is strong enough to withstandwheel loads. In village areas, the shoulders will have 10cm compacted base material as for the carriageway.

Retaining Will generally be of gabion, cement mortar fully bound orWalls: composite construction stone masonry, depending on

circumstances. Footings will be mass concrete.

Breast Walls: As with retaining walls, gabion and cement mortar fully-bound or composite construction will be used for t.aemajority of walls, though some smaller walls may be drystonework with mass concrete footings and cement mortarbound capping.

Annex 1-29- Page 3 of 3

Cross Genecally, concrete or steel pipe or reinforced concreteDrainage: box culverts of adequate size have been allowed for 11

streams and gulleys which cross the alignment. Eventhough these are dry for much of the year, they can carrylarge volumes of water in the wet season. Wherecircumstances dictate their necessity, appropriatelydesigned causeways (drifts) will be provided. Drifts areunsuitable, however, on steep gradients, or for deepgulley crossings, even when the water flow is small.

Bridges: Very short bridges over seasonal streams will be ofreinforced concrete construction, whereas the minor andmajor bridges spanning the main rivers will be ofprefabricated modular steel design for speed ofconstruction, with reinforced concrete decks. Loading ofbridges will be to AASHTOSH 20-44.

Bridge substructures (abutments and piers) are assumed tobe of reinforced concrete (especially with a view toincreasing the capacity of bridge to absorb seismicloading).

Foundations are assumed to be taken to rock, as verifiedduring detailed design, River training works and scourprotection will be by means of gabion matresses, rip rapor masonry structures.

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Annex g

NEPAL

ARUN III ACCESS ROAD PROJECT

ESTIMATED DISBURSEMENT SCHEDULE

IDA Fiscal Year Quarterly Disb. Estimated Cumulativeand Quarter Quarters USS Million Disbursement

US$ Million Percent

1990

10/01/89 - 12/31/89 1 6.2 1/ 6.2 1901/01/90 - 03/31/90 2 2.8 9.0 2704/01/90 - 06/30/90 3 3.2 12.2 37

1991

07/01/90 - 09/30/90 4 1.1 13.3 4110/01/90 - 12/31/90 5 1.9 15.2 4601/01/91 - 03/31/91 6 3.1 18.3 5604/01/91 - 06/30/91 7 2.9 21.2 65

1992

07/01/91 - 09/30/91 8 1.1 22.3 6810/01/91 - 12/31/91 9 1.8 24.1 7301/01/92 - 03/31/92 10 2.1 26.2 8004/01/92 - 06/30/92 11 1.5 27.7 84

1993

07/01/92 - 09/30/92 12 0.5 28.2 8610/01/92 - 12/31/92 13 1.1 29.3 8901/01/93 - 03/31/93 14 1.5 30.8 9404/01/93 - 06/30/93 15 0.4 31.2 95

1994

07/01/93 - 09/30/93 16 0.1 31.3 9510/01/93 - 12/31/93 17 0.1 31.4 9601/01/94 - 03/31/94 18 1.4 32.8 100

1/ Includes retroactive financing of US$3.3 million for expendituresmade after January 1, 1989.

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Annex 3

NEPAL

ARUN III ACCESS ROAD PROJECT

Arun III Project Monitoring Committee

As per the decision of the Ministry of Water Resources dated 21April 1987, the Arun III Project Monitoring Committee was formed under thechairmanship of the Minister of Water Resources. The members of.thecommittee are as follows:

Ministry of Finance- Minister *

- Secreta y *

Ministry of Water Resources:- Minister (Chairman)- Secretary

- Superintending Engineer (Member Cum Secretary)*

Ministry of Works and Transport- Minister- Secretary

NEA- Executive Director

DOR- Chief Engineer

The committee is to meet monthly unless a special meeting iscalled to consider urgent issues.

Note: Members marked * added to committee by decision of HMG/N on Julv 21.1988.

-32- Annex 4Page 1 of 5

NEPAL

ARUN III ACCESS ROAD

SUPERVISION OF CONSTRUCTION

Terms of Reference

1. OBJECTIVES

1.1 The Arun III Access Road will be about 192 km long and willprovide access for construction traffic serving the proposed Arun IIIhydroelectric scheme as well as for inhabitants of the Arun Valley. Thegravel-surfaced road will be 'b.5 m wide on a 6.5 m formation. The terraindictates the extensive use of retaining structures and the construction ofa large number of culverts. There will be five bridges varying in lengthfrom 129 m to 59.5 m. In order to fulfill the projected power demand inNepal in a timely manner, the construction period for the access road isconstrained to 30 months which will require a contractor to work on threeor four fronts simultaneously. It is intended that the northern section ofthe road from Tumlingtar to the hydroelectric construction site be open totraffic 24 months after the start of the contract period.

2. FINANCING

2.1 The Kingdom of Nepal has applied for a credit from theInternational Development Association (IDA) to finance eligibleexpenditures under the project, including the cost of constructions zpervision.

3. SCOPE OF WORK

3.1 The scope of work will be:

(a) supervision of the construction contract. including technicaland financial control; and

(b) preparation of the project completion report;

3.2 Locally Emvloyed Staff

The Government desires to maximize the use of and to developdomestic skills and to reduce foreign exchange requirements to the extentpracticable. Consequently, the Consultants are required to provide onlykey personnel for performance of the work. DOR will propose, andconsultants will select, suitably qualified supporting staff such asengineers and technicians who could be seconded to the Consultants by theGovernment on a full time basis to the extent that they are available fromeither within the DOR or local consultancy firms. Salaries and allowancesfor assigned staff will be paid by the Consultants at rates which theyconsider appropriate and the costs will be included in their financial

Annex 4-33- Page 2 of 5

proposals. Assigned staff will work under the direction and control of theConsultantS and will be directly responsible to them, for the duration oftheir assignment. Additional staff required by the Consultants and whichare not available from the Government shall be hired by the Consultants.To the extent that such staff are not available within Nepal, they may behired from any of the eligible source countries, subject to prior approvalby the Government. Detailed arrangements for supply and hiring of staffwill be discussed between the Consultants and the Government onappointment.

4. EXECUTION OF THE CONSULTING SERVICES

4.1 Supervision of Construction

4.1.1 The Engineer

The Consultants shall function on behalf of the Government and theDOR in all respects as the Engineer for the project.

4.1.2 Administration of Contracts

From the commencement of the construction of the Works, theConsultants shall provide such supervisory services as are reasonablynecessary to enable the Contractor to proceed with the construction of theWorks in accordance with the planned programme, or otherwise in accordancewith the Engineer's instructions and to ensure that the Works areconstructed and maintained in accordance with the contract and otherwise inaccordance with good engineering practice. These services include all orany of the following as may be necessary:

(a) Appointing of resident site staff.

(b) Giving all necessary instructions to the Contractor includingvariation orders, provided that the Consultants shall not,without the prior approval of the Government, give anyinstructions which are in their opinion likely substantially toincrease the cost of Works unless it is not in thecircumstances practicable for the Consultants to obtain suchprior approval.

(c) Measuring and calculating quantities of approved and acceptedwork and materials.

(d) Checking, procuring and issuing certificates for payment to theContractor.

(e) Reviewing and approving Contractor's working drawings and workschedules.

(f) Checking of setting out and staking of horizontal controls forthe road alignment, vertical control benchmarks and initial andfinal survey measurements to determine quantities.

Annex 4-34- Page 3 of 5

(g) Examining and reviewing the Contractor's proposals for carryingout the Works in relation to the proposals submitted with thetender and the actual progress achieved.

(h) Notifying the Government of any possible over-expenditure orcauses of delay in completion and recommending solutions to theproblems created thereby.

(i) Inspecting all materials and workmanship, including testing ofmaterials where necessary, to ensure compliance with thecontract drawings and specifications and, where necessary,giving immediate notice in writing to the Contractor andinforming the Government of any defects, deficiencies or non-compliance.

(j) Preparing any further designs which may be necessary forcompletion of the Works.

(Ik) Advising the Government on the need to carry out anygeotechnical investigations which may be necessary tosupplement the geotechnical information already available tothe Consultants.

(i) Deciding on the need for special inspection or testing andordering execution of the same, subject always to the approvalof the Government to costs which may be incurred.

(m) Applying the environmental control measures contained in thecontract documents in relation to, inter alia, temporary accessroads, removal of trees (in cooperation with Department ofForests), spoil and borrow areas and the use by the Contractorof fuel other than wood for domestic and constructionalpurposes.

(n) Maintaining liaison with the Land Acquisition andRehabilitation Committee and the progress of the LandAcquisition and Rehabilitatiov Plan to ensure land is availablefor the road right of way.

(o) Evaluating Contractor's claims and advising the Governmentaccordingly.

(p) Negotiating rates for unscheduled items in the bills ofquantities.

tq) Deciding any dispute or difference arising between theGovernment and the Contractor and submitted to the Consultantsfor their decision and, in the event of arbitration, making theservices of necessary staff available to the Government onterms and conditions similar to those agreed for supervision.

(r) Supervising the Works, preparing and submitting monthlyprogress reports in a format to be approved by the Governmentand IDA.

Annex 4-35- Page 4 of 5

(s) Preparing documents for acceptance of work executed by theContractor, inspecting the completed work and certifying thedate or dates on which work should be accepted by theGovernment.

(t) Delivering to the Government on the completion of the Works asbuilt drawin6s and such records as are necessary to enable theGovernment to operate and maintain the Works.

4.1.3 Supervision on Site

The Consultants shall be responsible for the supervision of allsite works. The Chief Resident Engineer will be given full powers by theEngineer to deal with ail natters arising on site whether of a technical oradministrative nature and including the issuing of certificates of paymentto the Contractor. The Consultants shall provide such suppoet as the ChiefResident Engineer may need for the satisfactory completion of the Works.

The Consultant shall appoint such suitably qualified technical site staffas they shall consider necessary to enable proper supervision to be carriedout. The names and qualifications of such staff shall be submitted to theGovernment for approval which shall not be unreasonably withheld.

The Government shall ensure that the contracts of employment of allseconded site staff employed by the Government shall stipulate that theperson employed will, in the execution of his supervisory duties, in nocircumstances take or act upon instructions other than those of theConsultants.

The Government may, at any time, require the Consultants to remove from theWorks any person employed by the Consultants who, in the opinion of theGovernment, misconducts himself or is incompetent or negligent in theperformance oi his duties or whose continued presence at the Works isconsidered undesirable in the interests of the Government.

6. FACILITIES TO BE PROVIDED BY GOVERNMENT

6.1 In connection with any work by the Consultants that requires thecooperation of other Government agencies, the Government will provideliaison and will ensure that the Consultants have access to all informationrequired for the completion of the services.

6.2 The Government will appoint a Project Manager and operate aProject Implementation Unit to assist the Consultants in performing theservices and to provide liaison with Government departments.

7. REPORTS

7.1 The Consultant shall submit the following reports, documents anddrawings to the Government during the execution of the project.

Annex 4Page 5 of 5

-36-

7.2 Supervision

(i) Monthly Progress Reports covering all construction and supervisionactivities on the contract works, and including descriptions ofwork accomplished, problems encountered during the report period.changes in the work. payments authorized, construction progress inrelation to approved time schedules and estimated finalconstruction costs (20 copies).

(ii) As built drawings within two months of completion of the works (1set of transparencies and 10 sets of prints).

7.3 Project Completion Report

(i) On completion of the works, the Consultants will provide acompletion report summarizing the events of the contract period(20 copies).

(ii) On receipt by the Government of the draft Project CompletionReport from IDA, the Consultants are to assist the Government inthe preparation of Part II of the report.

The format and content of the progress reports shall be agreed with theGovernment and IDA.

8. TIME SCHEDULE

8.1 The Consultants shall commence work in Nepal within thirty days ofthe effective date of the Contract for Services. The programme for theservices will depend on the timing of the bidding and award of Contracts.The assumed timings are shown in the timetable below:

Contract AwardReceipt of Letter of Acceptance andNotice to Commence Work andContract Commencement Date July 9, 1989

Completion of Northern SectionTumlingtar - Num January 9, 1992

Completion of Entire Works January 9, 1993

End of Maintenance Period January 31, 1994

Receipt by DOR of Draft ProjectCompletion Report from IDA August 3, 1994

Receipt by IDA of CompletedPart II of PCR from DOR October 5, 1994

Annex 5-37- Page 1 of 4

NEPAL

ARUN III ACCESS ROAD PROJECT

ENVIRONMENT MANAGEMENT UNIT STAFFING AND WORK PPOGRAM

1. ND

His Majesty's Government is concerned at the potential forenvironmental damage resulting from various developmental activitiesincluding road construction. The construction of roads in Nepal will leadto population migration and ribbon development which in turn can lead todeforestation, landslides, erosion and flood damage in the vicinity of theroad. In a wider context, there may be loss of agricultural land, changeresettlement. Given the requirement for development of the road networkand the consequent need to pay specific attention to the environmentalaspects, the Department of Roads (DOR) has established an environmentalManagement Unit (EMU) within the Department (attachment to this Annexcontains the Formation Order).

2. OBJECTIYES

The main objectives of tHe EMU will be tot

(a) collect and review existing reports, data and ongoing studiesrelating to the damaging physical aspects of road construction inNepal, and the consequential social changes;

(b) carry out further field investigations to record the principalsources of environmental damage on exi3ting roads and those underconstruction;

(c) establish a basis for quantifying the costs and benefits ofenvironmental damage and protection in both financial and economicterms for project evaluation;

(d) propose guidelines for predicting the environmental implicationsof socio-economic changes resulting from improved road transport;

(e) develop plans for acquisition, compensation, rehabilitation andresettlement of population affected by road projects;

(f) set out the framework and procedures for Environmental ImpactAssessments for highway projects:

(g) recommend design deta.ls, specifications and construction detailsto minimize environmental danmage including erosion, gullying.landslips, siltation and flooding;

(h) development guidelines for the use of vegetation to controlerosion and protect slopes;

(i) prepare design procedures and standard details for the safedischarge of highway drainage, river training and floodprotection;

Annex 5

-38- Page 2 of 4

Cj) ensure that Contract DocumentS have adequate provision for thelimitation of environmental damage, such as deforestation andreduction of agricultural production;

(k) monitor the design and constructlon of road projects to ensurethat environmental aims are achieved;

(1) recommend procedures and practices for the efficient and timelyexecution of road maintenance to minimize the risks ofenvironmental damage;

(m) establish pilot projects to enable elements of environmentalprotection to be monitored and reappraised through practicalexperience:

(ni suggest further areas for research and investigation intoenvironmental aspects;

(o) propose, if necessary, any changes in administration orlegielation to improve procedures for dealing with environmentalaspects of the road development programe.

3. OR"N!ZATION

D4U will be established as a key section of DOR, with thefollowing staffs

(a) Highway Engineer 1 No(b) Geotechnical Specialist 1 HoCc) BLo-engineer I NoCd) Office Assistant (non-gazetted) 1 No*e) Draughtsman (non-gazetted) 1 No(f) Tracer (non-gazetted) 1 NoCg) Typist 1 No(h) Peon 3 NoCi) Economist/Agronomist Part Time(j) Hydrologist Part Time

In addltion to office accommodatior and vehicles, it is anticipated thatlaboratory facilities will be required in the future.

4. BUDGE?

About 1.5 milllon NRs. will be needed for EU. The process ofcreation of new posts of manpower will be carried out by the PersonnelAdministration Section of DOR. Till the new posts are processed and agreedupon, the existing manpower within the DOR will start functioning effectivefrom the start of the new month. i.e., 1st of Marg 2045 (16th Nov. 1988).

S. DWLUUUTATION

After the establishment of EMU as suggested and budgetary releaseof the amount proposed in the next fiscal year starting from the 3rd weekof July 1989 the following stages of implementation are anticipatedt

Annex 5-39- Page 3 of 4

(a) Stage 1 (3 months) - carry out the reviews and investigationsunder 2 (a) and (b) and prepare an InceptiOn Report summarizingthe findings and setting out the scope and timing for Stage 2.

(b) Stage 2 (about 6 months) - establish standards and procedures forobjective 2 (c) to 2 (1) inclusive, and prepare DraftEnvironmental Guidelines for Road Design and construction fordiscussion and approval.

(c) Stage 3 (about 1 month) - prepare procedures for monitoringprojects and recommendations for maintenance (items 2 (j) and (k)]as Annexes to the Guidelines.

(d) Stage 4 (about 2 months) - finalize Environmental Guidelines.Make recommendations for objectives 2 (1) to (m) inclusive.

(e) Stage 5 (2nd year onwards) - carry out ongoing monitoring,checking, research, etc., and maintain Guidelines incorporatingexperience gained.

In order to carry out these tasks EMU will need access to previous andongoing work, and the cooperation of the local project, zonal and districtoffices of DOR.

N. D. SharmaChief Engineer, Department of Roads

Annex 5Page 4 of 4

(Translation)

His Majesty's Government

Department of Roads

Babar Mahal

Ref. No. 830 Dated 2045-7-29

Mr. Suresh Kumar ReqmiSenior Divisional EngineerIllam Phidim Roads ProjectMochi Rajmarg. Illam

As per the decision of His Majesty's Government dated 2045-7-16, you have beentransferred in this department and have been placed as the Head of theEnvironmental Unit of the Department of Roads from your present position. Youare informed to assume duties and responsibilities in the transferred unit.

Signatured/Senior Administrative Officer

cc: 1. DOR E.R. Off.2. Civil Servant's Record Office3. Provident fund4. Illam-Phidim Road Project5. Arun III Access Road Project6. Environmental Unit Babar Mahal7. Finance Administrative Division Babar Mahal8. Office Syst. Branch Babar Mahal

Annex 6-41- Page 1 of 2

NEPAL

ARUN III ACCESS ROAD PROJECT

MANAGEMENT OF' ENVIRONMENTAL IMPACTS

i. introduction

The introduction of the Arun III hydroelectric dam and the associatedaccess road of some 192 kilometers into the isolated Arum Valley will havea significant and perhaps profound effect on tho use and managoemet of landand resources in the valley. and on the econoaLc and social circumstancesof the population. The road in particular is likely to generate changeddemands on the use of both developed and currontly undeveloped land andresources. In this remots valley, the use of land and resources hasevolved ovor long periods. The suddec availability of vehicle access andthe associated opportunities. vhilo potentially of great econocic benefit.are likely to genersteo considerable change and disruption to the physical,social and econmic environment.

The presence of the road will cause changes in conomic activity andemployment pattern, and the road is likely to attract new types ofactivity along the road corridor.

The upper Arun catchment above the dam sLto has particular environmeltalconsiderations that need to bo taken into account. Part of the catchmenthas been identifLed for addition to Sagarmatha National Park, and thLsreflects its very high scaiic and ecological valuec. in the uppercatchment generally, thore is a need to work closely with the residents ofthe area to integrate their needs with that of the, national park proposaland with catchment management requirements.

The resources of the Arun Valley &ro also under pressure because of otherfactors, in particulat the incteasing population, and a croful andcoordinated planning approach is timely, regardless of th6 ieodiate neodcreated by the road and dam proposal.

There are various actions under way to deal with the direct impacts of theroad and dam projects. these lnclude measures for road access controls,forestry protectLon, labour force management, assessment of the impact ofthe dan on aGLiatlc life, road desig to Liaimsie environntal degrtadation,establishment of an environmental unit vithLi W01, and preparatlon of anaction plan for litensified supervision of the road influence areas duringconstruction to minize tree cutting.

To address concerns about the impact of the road on the existing unroadedtowns, an urban planner has been added to the ACIP team.

The teorms of reference for the detailed engineering for the dam projectprovide for physical aspects of dar catchment management.

What still needs to be provided for is broader management studles to dealwith catchment management, conservation and tourism, vith consideration ofthe implications of the road and dam for these aspects.

-42- Annex 6Page 2 of 2

2. conservation and Tourism

These is a need to undertake a careful and planned approach to theconservation of natural and cultural resources in the valley, ranging fromthe pristine vildernes of the Barun Valley to the unique architectural andcultural character of the unroaded towns which are nov to receive roadaccess. The inevitable increase in tourism which will occur vith roadaccess is intimately linked vith the conservation issue, both because theunique resources of the valley provide the basis for tourism development,and because of the potential impact of tourism on these resources.

This is the primary area where specific nev actions are required and, aftercareful consideration of the issues involved, tho following approaches areproposed.

(a) Upper ArunlCatchment Management Plan

The area which will comprise the catchment of the Arun III dam within Nepalwill remain as a remote, unroaded area. Both because of its natural valuesand because of its function as the dam catchment area, it must be maneedprimarily for conservation purposes, and it can logically be treatedsomevhat separately from the remainder of the valley.

It is proposed to provide financial/technical support to enable theextensiou of the study of the Makela-Barun area currently being undertakenby agroement betvwen the Department of National Parks and WlIdlifeConservation an the Woodlands Mountain Institute. The study would beeztended both in geographical extent and scope so that it fulfills theobjectives both of the Makalu-Barun Study and of catchment managemnt.

Because of the primary function of tho area for conservation management.the need for an integrated approach to catchment management, and thedifficulty of distinguishing an effectLve boundary betvwen the nationalpark extension study area and the remainder of the catchment, lt isproposed that the Department of Natlonal Parks and Wildlife Conservationshould assume responsibility for directLng the study on behalf of hLsMajoesty's Government. It is expected that implementation of the findingsof the study vill Lnvolve not just the DNPWC. and there will of course be aneed to consult closely with other agencies during the course of the study.Terms of reference are available in the project file.,b) Lower Arun Conservation/Tourist Plan

The area of the valley below the dam vill come under pressure for tourismdevelopment. Ccnservation of the valloy's natural and cultural cesourcesand the development of a sustainable tourist industry are closely linkedand interdependent'. and it is appropriate to undertake a coordinated studycovering both aspects.

Because this study needs to have strong elements of conservation promotion.conservation education, community participation and development, and thedevelopment of a range of conservation mechanisms, it is seen as a logicalfunction for the King Mahendra Trust for Nature Conservation.Terms of reference are available in the project file.

-43- Annex 7Page 1 of 5

NEPAL

ARUN III ACCESS ROAD

Land Acquisition Guidelines 2045

Published: January 5, 1989

In exercise of the power conferre' by Sections 16 and 27 of theLand Acquisition Act 2034, His Majesty's Government, tLrough the authorityvested in the Ministry of Transport, has issued the followinr. "Guidelines"with immediate effect.

1. SHORT TITLE, EXTENT AND COMMENCEMENT:

(a) These "Guidelines" may be called "Land Acquisition Guidelines2045".

(b) These 'Guidelines" shall be applicable to Arun III Access RoadProject activities only.

(c) These 'Guideliies" shall come into force with immediate effect.

2. DEFINITION:

In these "Guidelines" unless the extent of the subject otherwiserequires:

(a) "Act" means the Land Acquisition Act 2034.

(b) "Project" means the Arun III Access Road Project.

(c) "Project Manager" means the Project Manager of the Arun III AccessRoad Project representing DOR.

(d) "ACRP" means the Acquisition, Compensation and RehabilitationPlan.

(e) "ARC" means the Acquisition and Rehabilitation Committeesconstituted as per Section 5(a) of these Guidelines.

(f) "Project Team" means the team entrusted by HMGIN to assist DOR incarrying out the activities set forth in Section 3(a) of theseGuidelines.

(g) "DOR" means the Department of Roads.

(h) "Project Affected Family" and the acronym "PAF" means a family whois adversely affected by the Project, including those whose assets

-44- Annex 7Page 2 of 5

although not compulsorily acquired for the Project, arenevertheless damaged by the construction activities thereunder.

(i) 'Seriously Project Affected Family" and the acronym nSPAF" mean aproject affected family, as defined: (i) whose main source ofincome is derived from or dependent upon a land holding (whetheragricultural land or houseplot or business) which is under theirdirect cultivation or management--either as owner, tenant orphysical possession; or (ii) whose main residence, place ofbusiness or main source of income earning activity is ahouse/houseplot--either as owner, tenant or physical possessor,and who as a consequence of the acquisition for, or damage by, theProject of such land holding, house or houseplot is either:(a) left with no such holding; or (b) left with holdings of suchland, houseplot or house which are are not adequate to ensure themthat after a reasonable transition period they will at leastregain the standard of living enjoyed prior to the implementationof the Project.

,j) 'Main Source of Income' means the source or sources of income thatprovides for at least half of the gross income of a ProjectAffected Family.

(k) 'Family" means the social unit composed of adult male and femaleand their minor offspring and other direct related dependentsliving in the same household as of the cime of the compulsoryacquisition.

3. GENERAL GlT'DELINES TO BE FOLLOWED BY ARC:

While acquiring land and other properties for the project andproviding compensation and other rehabilitation measures to PAFs and SPAFs,the ARC shall observe the following principles as basic guidelines inadditioni to those as prescribed under Section 16 of the Act.

(a) The DOR/Project Manger shall, with the assistance of the ProjectTeam, be entrusted to: (i) carry out the cadastral of land andother assets to be acquired or damaged due to the Project;(ii) survey the population to be affected; (iii) assess thestandard of living and sources of income of the population to beaffected; and (iv) value the land and other aesets to be acquireddue to the Project. The survey shall identify the population bytheir main and secondary activity, i.e., agriculture land owners,agriculture labourers, tenants and house owners, merchants,shoppers, merchant labourers and combinations thereof. TheDOR/Project Manager, with the assistance of the Project Team,shall prepare a Compensation Statement for each PAF and SPAF, suchCompensation Statement to include all the components ofcompensation and rehabilitation measures to be provided withamounts and timing of delivery. The Compensation Statement shallbe furnished to the ARC for approval. The DOR/Project Managershall be responsible for finalizing all agreements required andprovide the compensation and rehabilitation measures set forth inthe Compensation Statement.

_45_ Annex 7Page 3 of 5

(b) The method of valuation of assets to be compulsorily acquired ordamaged by project activities, i.e., land, house, building, shops,etc., must be based on comparative market values of similar assetsin the vicinity not to be compulsorily acquired.

(c) To ensure that after a reasonable transition period, PAFs andSPAFs will be able to regain, if not enhance, their previousstandard of living, the ARC shall establish rehabilitationmeasures to be provided to the PAFs and SPAFs which shall includecompensation in cash and in kind for the assets to be compulsorilyacquired or damaged by the Project, rehabilitation grants for thesuffering and hardship caused, and employment and training toSPAFs.

4. For the purpose of the implementation of the rehabilitationmeasures of PAFs and SPAFs the following criteria shall be used:

(a) On the basis of the Compensation Statement prepared and approvedpursuant to Section 3(a) of these Guidelines, the DOR/ProjectManager shall furnish the Compensation Statements approved by theARC to the respective PAFs and SPAFs by a notice which shallexplain and quantify each of the rehabilitation measures, allowinga period of time of not lens than 30 days to react. The noticeshall also state that failure to react within the prescribed timewill be considered as accepting the Compensation Statement andthus allowing the commencement of Proiect works on the assets tobe acquired or damaged.

(b) In the case of PAFs, the Compensation Statement shall include:(i) compensation in cash for the asset(s) acquired or damaged dueto the Project, which valuation to be made pursuant to theprinciples set forth in Section 3(b) of these Guidelines; and(ii) a rehabilitation grant to cover the suffering and hardshipcaused which would be based on family size and other criteria tobe determined by ARC.

(c) In the case of SPAFs, the Compensation Statement shall include:(i) a substitute asset(s) of equal productive potential to theasset(s) acquired or damaged by the Project; (ii) a rehabilitationgrant for the suffering and hardship caused which would be basedon the fam.ly size and other criteria to be determined by ARC;(iii) employment for at least one member of the SPAFs; and (iv)provision of training as required. For purposes of providing thesubstitute asset(s) the SPAF shall either: (1) directly or withthe assistance of DOR/Project Manager identify a substituteasset(s) and negotiate its purchase price with the owner(s) withina ceiling price determined by ARC based on the prevailing marketvalues; or (2) accept the substitute asset(s) offered by HMG/N.In the case of Option (1) the SPAF shall be allowed 30 days toidentify and reach an agreement on the purchase price. Thepurchase price shall be paid directly by HMGIN on behalf of theSPAF to the owner(s) and title immediately transferred to theSPAF. If the SPAF is not able to obtain a substitute assetthrough Option (1), the substitute asset to be offered by HMG/N

-46- Annex 7

Page 4 of 5

under Option (2) shall be of equal productive potential and in thenear vicinity, either by direct purchase as provided for inSection 6(a) of these Guidelines or through HMG/N ResettlementCompany.

(d) Having taken action under Section 4(a) above and not later than 30davs prior to the commencement of construction activities on theassets acquired or damaged, the DOR/Project Manager shall takenecessary steps for payment of the compensatory amounts, issuingof ownership title, provision of employment and training, paymentof rehabilitation grants, and other rehabilitation measures agreedupon.

(e) In cases where expressly or otherwise the PAFs or SPAFs haverejected the Compensation Statement, the total armount ofcompensation shall be deposited into an escrow account (suspenseaccount) on the name of the PAF or SPAF, prior to the commencementof work on the land or other assets, as proyided by law.

(f) In cases where land ownership or tenureships are disputed,compensation will be paid into a suispense account to await thedesision of the Courts, and the land may then be entered forconstruction activity.

(g) The agreement signed by and between the DOR/Project Manager andthe authorized representative of the concerned PAFs or SPAFs, asthe case may be, shall be legally binding on both parties.

5. (a) The Acquisition and Rehabilitation Committees for acquiring orallowing damaging the land and other properties due to the Projectshall consist of the following persons and shall be established byHMGIN:

- The concerned Chief District Officer Chairman- The concerned Land Revenue Officer Member- Representative of the concernedDistrict Panchayat Member

- Land Reform Officer of the concernedDistrict Member

- The.Project Manager Member-cum-Secretary- And such other person or persons asshall be appointed from time to timeby HMGIN.

(b) The Project Manager shall execute the ACT" approved by the ARC inaccordance with the criteria and provishAis of these Guidelines.

(c) Whenever appropriate for implementing the ACRP, the ProjectManager may seek and receive necessary help from the localconcerned Chief District Officer andlor Zonal Commissioner and thelatters may provide the help so sought.

(d) The ARC may delegate some of its power to the Project Manager asand when it deems necessary.

-47-Annex 7Page 5 of 5

6. ARC MAY ACQUIRE LAND THROUGH NEGOTIATION:

(a) Subject to the provisions of the Land Acquisition Act 2034, theARC may acquire land and/or other properties through directnegotiation with the PAFs, if it is deemed appropriate in theirbest interest, or with other landowners to obtain land on behalfof SPAFs that opt for this option.

(b) ARC may initiate land acquisition process in accordance with theprovision of these Guidelines at any stage of the normal landacquisition process under the Act already in progress, if any.

(c) In exercise of the power delegated to the ARC as per sub-clause(a) above the ARC shall issue necessary orders and noticesdefining the property to be acquired and conduct negotiations withthe concerned PAFs or other landowners or their authorized legalrepresentatives in order to acquire land or other properties forthe purposes of the ACRP.

(d) The ARC may instruct the concerned Land Revenue Office (MalpotKaryalaya) to freeze the sale or transfer of land or properties tobe acquired at any time as it deems fit for purposes of the ACRPand on the receipt of such instruction the concerned office shallbe under obligation to follow the same.

7. POWER TO REMOVE DIFFICULTIES:

In case of any difficulty that may arise during the course of theimplementation of the "Guidelines" His Majesty's Government, exercising thepowers derived from the prevailing laws, may issue necessary orders orinstructions to remove such difficulty and the same shall be deemed to havebeen included in these "Guidelines".

8. LEGAL REMEDY SYSTEM:

The PAFs and SPAFs may present their claims and grievances to theZonal Commissioner and pertinent Courts in accordance with the provisionsof the Act and other pertinent legislation.

-48- Annex 8Page 1 of 8

NEPALJanuary 24, 1989

ARUN III ACCESS ROAD PROJECT

ACQUISITION, COMPENSATION AND 3ZEABILITATION PLAN

1. Obiective of the Land Acquisition, Compensation and RehabilitationPlan (ACRP)

1.1 The objective of the ACRP is to implement the provisions foracquisition, compensation and rehabilitation set forth in the LandAcquisition Guidelines, 2045 applicable to Arun III Access Road Project, soas to ensure that after a reasonable transition period, the projectaffected families (PAP) and seriously project affected faw'lies (SPAP)(para. 2.2) will be able to regain, if not enhance, their previous standardof living.

1.2 This ACRP is based on the principles and procedures set forth inthe Land Acquisition Guidelines. 2045, applicable to Arun III kccess RoadProject. It covers the first year road construction (approx. 70 km) basedon cadastral survey of all land parcelt and structures directly affectedand on projection of the socio-economic characters of SO families surveyed.The ACRP is subject to revision, as may be required, to respond to theneeds of thq remaining families according to the principles of theguidelines noted above.

2. Gross Income and Compensation Packages

2.1 Gross Income of PAFs and Income from Land on the Right of Way

The annual gross income and the income from land falling withinthe Right of Way (RoW) of the SO PAP random sample is given in Table l.

The gross income includes that from their total land holding(i.e., the value of crops produced in one year, whether these are sold or,as is more frequent, consumed by the PAFs themselves), as well as all othersources of income (e.g., sale of dairy products, animals, vegetables,interest on loans, labour wages, business income, service pensions,priestly services, tailoring, portering, etc.).

The income from land within the RoW is the estimated cash value ofcrops produced in-one year (including fruit and vegetables grown on theland).

2.2 Proiect Affected Families and Seriously Project Affected Families

The criteria for aetermining which of PAFs are SPAPs are set outin the Land Acquisition Guidelines, 2045 applicable to the Arun III AccessRoad Project, paragraphs 2 (h), (i). (j) and (k).

There are 10 PAFS in the random sample whose principal residencefalls within the RoW, and who therefore become SPAFs. They are:

In Manakamana Panchayat: PAFs Nos 40, 70, 99 and 168

In Pangma Panchayat: PAFs Nos 21, 24, 42, 51, 70 and 97.

-49- ~~~~Annex 8Page 2 of 8

To determine whether any of the other PAFs of the sample areSPAFs, it is necessary to know the percentage of income lost due to landfalling within the RoW. If the income from land lost represents half ormore than half of the PAF's gross income, then he becomes a SPAF. Thepercentages of income lost to the sample PAFs are shown in Table 1, fromwhich it is seen that three PAFs fall in this (SPAF) category. None ofthese three SPAFs are amongst those losing their houses, so the totalnumber of SPAFs in the 50 PAF sample becomes 13 (26 percent), 20 and 6percent as a result of loss of residence and loss of substantial income--creating landholding respectively.

2.3 Types of Compensation Packages

Of the 50 PAFs in the sample, 43 (862) prefer cash compensation, 6(122) prefer replacement land either in the same District or in the Terai,and only 1 (2Z) said he would prefer to be resettled elsewhere (in his casein the Terai). Nobody expressed a preference for compensation in the formof employment or training. The options preferred are summarized inTable 2.

The total amount of land lost by the 7 PAFs (of whom two areSPAFs) who said they would prefer replacement land is 14.1 Ropani (0.72hectares), of which 6 Ropanis is irrigated. Though the amount appearscomparatively small, nevertheless, surplus cultivatable land either in thehills or in the Terai is in very short supply. For those stating this(replacement land) preference, the SPAFs themselves and the authoritieswill locate alternative land of satisfactory ,aality.

Table 3 lists the PAFs1SPAFs expressing a preference forreplacement land/resettlement. In our summary tables of amounts ofcompensation, we have included these PAFs/SPAFs, so that the cost ofcompensation can be assessed, even though the amount of money may be usedto acquire alternative land.

2.4 Land Values

Generally, in the area, current prices for land which is not closeto footrails are in the region of Rs 5,000 and Rs 3,000 per Ropani (equals5,400 sq ft, say 500 sq metres) for khet and bari, respectively.

Khet lar.d is flat, either naturally or (more commonly) formed byterracing, and is capable of holding water and could therefore be used forthe cultivation of paddy (rice). It sometimes is irrigated, but workingirrigation schemes in the areas traversed by the road are few. Therefore aseparate general val4ation category of "irrigated land" does not appear tobe at this stage justified, and when irrigated land is encountered it willbe treated on a case by case basis (in the Pangma area which is the subjectof the current report, there are some irrigated fields where land values ofRs 7,200 per Ropani have been suggested).

Bari land differs froni khet in that it is often sLoping. It is byfar the most common category of cultivated land through which the alignmentpasses, accounting for an estimated 842 of the whole land to be acquired.However, in the area between Tlumlingtar and Chhyangkuti, where the socio-

Annex 8-50- Page 3 of 8

economic survey has been conducted, and where the random sample was taken.The proportion of khet land is higher than in the road alignment area as awhole. In the sample area, the ratio bari to khet land is 79/21, comparedwith 84/16 generally for the whole alignment. This factor needs to betaken into account when using the random sample to produce projections forthc whole road.

Also, typical current land prices vary considerably depending onhow close the land is to foot trails and to bazaar areas. The socio-economic survey has been conducted in Pangma and Manakamana Panchayats,which are relatively densely populated and farmed. The road alignment inthis area is nowhere very far from footrails, and all within easy walkingdistance of the administrative centre of Khandbari, from the commercialcentre at Manebhanjang and from Tumlingtar, where the District's soleairstrip is located and t4here signs of increasing economic activity,undoubtedly in anticipation of the road, is already apparent.

These factors appear already to have pushed up land prices whichhave been used as a guide to access the "compensation packages' for thePAFe and SPAFs. For instance, some land transactions in the Khandbari areaat Rs 90,000 per Ropani have been reported, and because the compensationpayable is supposed to be equivalent to the "current market value' of theland, these (admittedly very high) values have been applied to some similarareas of land to be acquired. The land values applied to the PAFs in orderto derive suggested amounts of compensation as given on Table 4 have beenarrived at from local enquiries into recent land transactions in the studyarea. More accurate values of land transactions will be obtained throughthe District Land Value Office of land transactions covering one yearperiod. The values given in Table 6 may therefore have to be modified onreceipt of the comprehensive data.

It is known that Khet and Bari land in the Manakamana and PangmaPanchayat areas are in general valued higher than in most other Panchayatstn the District. However, since compensation to be paid should reflectcurrent market values, these have been used in this ACRP. Elsewhere, asstated above, average values of Rs 5,000 and Rs 3,000 for Bari and Khetland, respectively, have been used, with a multiplying factor of 10 percentto allow for higher values in special locations (e.g., close to bazaars,etc.).

2.5 Buildins Values

Using current rates for building materials, a typical cost forplinth (floor) area of Rs 95 sq ft (say Rs 1,000 per sq metre) has beencalculated. This is. for a simple thatched-roof single or double storeyhouse (for a double storey house the 'plinth' area is simply doubled, orplinth area added to first floor area) built in mud-mortared masonry. Onacquisition by HMG, a contractor is employed (by the project) to carry outthe demolition, but the materials from the house (e.g., timbers and stone)remain the property of the (former) owner. The Rs 95 per sq ft unit ratefor acquisition/compensation was checked against prices stated by localinhabitants to be the values of their houses, and gives good correlation.Prices of individual houses will of course vary considerably, depending on

-51- Annex 8-51- ~~~~~~Page 4 of

their construction (e.g., whether corrugated iron roofing or cement areused), and location, but for the current estimating exercise the above ratehas been employed. Table 5 gives the estimated value of houses fallingwithin the RoW.

In arriving at the above per sq ft building value, the followingassumptions have been made:

(1) Depth of foundation 3'-0", width 2'-6"(2) Height of one storey 7'-0'(3) Walls of dressed stone masonry in mud mortar(4) Roofs thatched(5) No masonry partitions (plank or bamboo partitions only)(6) Wall thicknesses 1'-3"

Based un the above, the estimate has been made as follows:

(1) Earthwork, 255 m ft e Rs 0.85 per m ft(2) Stone masonry, 820 m ft e Rs 9.70 per m ft(3) Timber, 15 m ft e Rs 90 per m ft

Above gives per sq ft (plinth) estimated cost of Rs 95.20, say Rs95 per sq ft.

2.6 Crop and Tree Values

Typical crop productivities and market prices for agriculturalproducts for the study area are given in Table 6 and 7, respectively.Based on these data, the values of standing crops on land within the RoWwill be calculated (this has not been done in the present case, asexplained in 2.7 below), as also the hardship allowances payable to SPAFsas described in 2.8 below.

Similarly, typical prices of fruit and other trees have beencollected, as also their yield (for fruit trees) and prices of fruit.These data have been used to calculate 'normal' compensation payable aswell as hardship allowances for SPAFs, as described in 2.7 and 2.8 below.Details are given in Tables 8 and 9.

2.7 The Amount of "Normal" Compensation

The amount of 'normal" compensation (i.e., excluding hardshipallowances payable to PAFs and SPAFs. and other rehabilitation measures, asdescribed in the Guidelines) comprises sums for the value of land lost(i.e., falling within the RoW), for the value of trees on that land, forstanding crops (if in place when the land is acquired) and for houses andbuildings within the RoW.

The values for compensation purposes. for land, houses and trees,have been dealt with above, based on which the "normal" estimatedcompensation payable to each of the 50 PAFs his been calculated, and issummarized in Table 10 (2 sheets. L each for Manakamana and PangmaPanchayat). These estimates do not include any compensation for standingcrops, because it is not known precisely when the land will be acquired,

Annex 8-52- Page 5 of 8

and what (if any) crops will be on the land at that time. The amounts ofland owned by PAYs, on which the compensation amounts given in Table 10 arebased, are summarized in Table 11.

A sample "Recomnendation for Compensation Form* is attached at theend of this report.

2.8 The Amount of Hardship Allowances

The Guidelines allow for the purchase by HMGIN of a 'substituteasset' (e.g., alternative land) for SPAPs, if that is what they prefer tocash compensation. The number of PAFs who are SPAPs by virtue of losingland, the income from which is 502 or more of their total income, is small(3 PAFs, representing 62 only of the 50 PAP sample), and none of thesePAFa/SPAF. stated a preference for replacement land rather than cashcompensation. However, two of the PAFs who are SPAFs by virtue of theirhomes falling within the RoW were amongst the seven PAPs who stated apreference for replacement land, and so this option, as set out in theGuidelines (para. 4 (c)l, will need to be followed up.

The critetia used to determine hardship allowances are as follows:

(i) A cash amount equivalent to the annual income from crops on theland lost will be provided.

(ii) Where fruit trees fall on the asquired or damaged land, thereplanting costs for respective tree varieties plus a cash amountequivalent to the value of (fruit) produced by the trees over afour year period will be provided.

(iii) For the loss of a principal residence falling within the RoW,compensation (in addition to normal compensation of the value ofthe house) in the form of house rent for a one year period will beprovided according to market rates.

2.9 Number of PAFs and S}PAFs for Whole Alignment

Wherever possible. in the built up areas the RoW will be decreasedto suitably reduce acquisition and demolition of houses. Below is anestimate of the total length of road passing through cultivated land andfor which the 30 m width RoW will therefore need to be acquired. The roadlengths are divided into "khet" and 'barin land (see 2.4 above fordefinitions).

Section Estimated Length (Km)Khet Bari Total

Basantapur/Maya Khola 4.96 16.57 21.53Maya Khola/Sabhaya Khola 2.24 24.70 26.94Sabhaya Khola/Chhyang!uti 8.62 20.12 28.74Chhyangkuti/Phaksinda 1.17 6.24 7.41Chhyangkuti/Power House 6.62 8.08 14.70Route to Adit - 8.80 8.80

Total 23.61 84.51 108.12

Annex 8-53_ Page 6 of 8

The length of cultivated land of the 504 PAPS for which the Socio-Economic questionnaire has been carried out is 23.14 km, so the average numberof PAFs per kilometre is equivalent to

504----- m 21.7823.14

For the whole alignment, therefore, the total number of PAFs isestimated to be 2,355 (108.12 km x 21.78).

Using the 50 PAF sample as a basis, the number of SPAFs on the wholealignment would be 0.26 (26Z) x 2,355 - 612.

In fact, it is thought likely tlat the number of SPAFs elsewhere in thealignment could be less, because the area through which the survey has beencarried out is more densely populated than most other areas, and so the numberof SPAFa resulting from their principal residences falling on the RoW is likelyto be fewer (this category comprise 20 of the 26 percent SPAFs in the samplearea).

3. Summary, Conclusions and Comments

3.1 General

The amounts for compensation of land, assets and hardship as providedin this document are sufficient to re-establish the PAPs and SPAFs pre-existingstandard of living after a reasonable period of time. The total estimated cashcompensation based on an analysis done as carefully as possible in accordancewith the Guidelines, of the 50 PAF random sample taken from the 504 socio-economic questionnaires completed so far, is Rs 2,317,133, comprising Rs2,105,037 (91Z) and Rs 212,096 (92) for "normal' compensation and hardshipelement (payable to SPAFs), respectively.

A summary of the results of the analysis is given in Table 12.

Based on this sample alone, total cash compensation (including hardshipallowances) for acquisition of land (including trees) and property within theroad RoW for the whole project would be of the order of Rs 109,137,000 (Rs 10.9Crores). This is based on the assumption that the number of PAFs and SPAFswould be 2,355 and 612, respectively (see section 2.9), for an estimated 108 kmof the alignment (say 60Z) passing through cultivated land.

For the 50 PAF sample, the 'normal' compensation amount consists of:

Compensation for land - Rs 1.036,945 (492). trees - Rs 347,280 (17Z). houses - Rs 720,812 (34Z)

Total Rs 2,105,037

For the whole alignment this would represent Rs 99,147,242 (Rs 9.9Crores), for which almost 50z is for land compensation. We estimate that theproportions of Khet and Bari land elsewhere along the alignment (outside the

Annex 8-54- Page 7 of 8

Hanakaans and Pangma Panchayat9 where the survey was carried out) will be 16and 84 percent, compared with the 21 and 79 percent of this area, and that Khetwill generally bt more costly than Bari Land (averaging Rs 5,000 and Rs 3,000per Ropani, respectively). In the study area, Bari was often more costly thanKhet Land, the values being distorted by potential for residential/commercialdevelopment.

Based on the assumption that the 50 PAF sample reflects only thesituation in the 23.14 km cultivated stretch of Manakamana and Pangma Panchayats(Sabhaya Khola to Chhyangkuti--see section 2.9 above) covered by the survey, andthat elsewhere the ratio and prices of Khet and Bari would be more as describedin the preceding paragraph, the total 'normal" cash compensation for landthroughout the whole alignment is likely to be of the order of Rs 30,000,000rather than Rs 48,582,000 (492 of Rs 99,147,242) as given if the sample study istaken as typical.

However, it is estimated that the total cash compensation payable islikely to be substantially less than the above figure, because the surveyconducted has been through the most densely populated and intensely farmed areaof the alignment, which has given per PAF or per kilometre compensation amountsin excess of the likely average for the whole alignment.

A further factor is that the number of fruit trees elsewhere along thealignment is less than in the study area, and the number of buildings encroachedon will also be less. If a (admittedly arbitrary) 10 percent reduction in these2 elements is assumed, the total "normal cash compensation becomes say Rs75,000,000 (Rs 7.5 Crores), comprising:

Compensation for land - Rs 30,000,000 (40Z)' trees - Rs 15,000,000 (202)0 houses - Rs 30,000,000 (402)

Total Rs 75,000,000

For the estimated 108 km cultivated land traversed by the alignment,this represents Rs 694,444 per kilometre compensation, for an average of say Rs395,000 per kilometre of road (bearing in mind that while some substantialstretches of road will encroach on no cultivated land, so requiring noacquisition cost, other stretches will require extensive acquisition).

3.2 First Year Construction

Assuming that the first year's construction will cover a 70 km roadwaylength, 90 percent of which will be through cultivated land for which the 30 mRoW width will need to be acquired (together with assets on this width), thetotal road length for acquisition will be 63 km (90Z of 70 km).

The 90 percent cultivated land figure is higher than is likely to beencountered, and is of course higher than for the alignment as a whole.

Annex 8-55- Page 8 of 8

The first year construction progranme is assumed to include thefollowing:

km To Be Acquiredof road Khet Bari Total

Basantapur Northwards 20 2.88 15.12 18Tumlingtar Southwards 20 2.88 15.12 18Tumlingtar Northwards 30 5.67 21.33 27

70 63

Based on the sample survey and conments above, the number of PAFs to becompensated in order to enable the first year consoruction to go ahead isestimated to be 1,372, of whom 35 would be SPAFs. The possible amount ofcompensation (suggested compensation packages are subject to the scrutiny andapproval of the Acquisition Rehabilitation Committee) will be of the order of Rs55,000,000 (5.5 Crores) comprising:

30 km through Manakamana andPangma Panchayats e Rs 826,786 per km of road - Rs 27,088,800

40 km total Basantapur Northwards andTumlingtar Southwards e Rs 694,000 km of road - Rs 27,760,000

Total Rs 54,848,800

(Say Rs 55 million)

Already the centre line setting out and cadastral work for theBasantapur and Tumlingtar northwards sections are completed, and currently workis proceeding on the section from Tumlingtar southwards. Cadastral work onthis, and publication of the appropriate acquisition notices, will be completedby the end of January 1989.

NOTE: Attachments located inAttachments: Project File.

Table 1: Details of Current and Lost IncomeTable 2 Types of Compensation OptionsTable 3: List of PAFs/SPAFs Expressing Preference for Replacement Land or

ResettlementTable 4s Estimated Valuation of Land Fallen on RoWTable 5: Type and Estimated Value of Houses Falling Within the RoWTable 6s Crop Productivities in the Study AreaTable 7: Market Price of Agricultural ProductsTable 8: Price of Fruit TreesTable 9: Price of Fodder TreesTable 10: Normal Estimated Compensation Amounts (Excluding Hardship)Table 11: Amounts and Type of Land Owned by PAFsTable 12: Summary of Compensation for Sample Survey

Sample: Fecommendation for Compensation

Annex 9

-56- Page 1 of 8

NEPAL

ARUN III ACCESS ROAD PROJECT

ECONONIC EVAWUATION METHODOLOGY

A. Least Cost Generation Expansion Plan

1. The economic viability of the Arun III hydroelectric scheme as theleast cost alternative has been determined based on Nepal's Least CostGeneration Expansion Plan. The Plan was developed by HMGN using a rigorousfour-step approach, as follows:

(a) standardized cost estimates were developed for eight candidatehydroelectric projects, each of which had been studied to eitherthe prefeasibility or the feasibility level, and thermal peakingplants (gas turbines-GTs). Each project's costs includedtransmission costs which were not common to all expansionsequences. All costs were measured in terms of border prices;

(b) alternative expansion sequences that satisfied the load forecastwere developed based on combinations of hydroelectric projects,supplemented by peaking thermal generation (GTs), as required;

(c) for each expansion sequence, the present value of the capital andoperating costs was determined using a discount rate of 102, andthe least (economic) cost generation expansion sequence wasidentified; and

(d) sensitivity analyses were conducted on the least cost sequence tovariations in the load growth, discount rate, fuel prices andgeneration planning criteria.

2. The least cost sequence consisted of load management and thestaged development of the 402 MW Arun III project. HMG/N has proposed thatthe first three 67 MW units be installed during 1996-1997 in line with theprojected growth in electricity demand. The second three 67 MW units wouldbe commissioned during 2000-2006. The implementation of the second stagecould be accelerated if agreement is reached on bulk export sales (100 MWor more) to India.

B. Economic Internal Rate of Return

3. Although the joint Arun III Access road/hydroelectric scheme wouldplay a crucial role in the optimal development and operation of Nepal'spower subsector, its benefits cannot be separated from those of otherleast-cost generation, transmission and distribution development programsand institutional improvements. In these circurstances, having establishedthat the project is part of NEA's least-cost exiansion program, it isappropriate to carry out the cost benefit analysis on NEA's entireinvestment program to ensure that the entire plan Is justified. For thisreason, a "time-slice" of NEA's investment program for 1989/90 - 2000101

-57- Annex 9Page 2 of 8

was analyzed. Capital, operation and maintenance costs, including thecosts of the access road, and benefit streams are shown in Attachment 3.All costs were expressed in terms of their equivalent border values.

4. A minimum measure of the benefits associated with the time-sliceof NEA's investment program is given by incremental sales revenue. Usingthe average tariff revenue of NRs 1.39/kWh prevailing in July 1988 forsales within Nepal and rJRs 1.0/kWh for export sEles to India, the (IRR wasestimated to be 5.6Z. H4owever, this rate of return is not based onconsumers' willingness to pay (WTP) for electricity. It reflects the factthat the 1988 tariff rate is equal to only about 382 of the long runmarginal _osts associated with the least cost of electricity supply,including the Arun III Project. Therefore, a further analysis was carriedout to estimate consumers' willingness to pay (WTP) for incrementalelectricity sales that would represent a truer measure of potentialbenefits. A lower bound estimate for WTP was obtained as follows: formost low voltage (LV) consumers, their WTP was based on average existingtariffs for private sector schemes for supplying residential and commercialconsumers (NRs 6.00/kWh). For other LV, high voltage and medium voltageconsumers, WTP was measured in terms of the incremental operating costs ofmeeting their demands for electricity using auto-generators which would bedisplaced by the public supply of electricity (i.e., NRs 2.63/kWh). Onthis basis, the calculated weighted average WTP for all consumer groups isNRs 4.11/kWh, and the economic internal rate of return (IRR) is about 142.This measures is still a lower bound to the estimated (IRR because itassumes that consumers' WTP for the improved reliability and quality ofelectricity supply is zero. Also, the measure excludes any benefitsresulting from the utilization of the access road project of 192 kms bynon-power related traffic.

Annex 9-58- Page 3 of 8

Attachment 1

NEPAL: Electricity Sales by Sector, 1976 - 1987 a/ b/

1976 1981 1987 Growth Rate. t p.a.1976 1981 1976

GWh X GWh Z GWh G -81 -87 -87

Residential 61.8 ( 58) 78.6 ( 48) 164.9 ( 42) 4.9 13.1 9.3Industrlal 32.1 ( 30) 50.2 ( 31) 147.4 ( 37) 9.3 20.0 14.9Commercial 9.2 ( 8) 23.2 ( 14) 32.3 1 10) 20.4 5.7 12.1Others 4.1 ( 4) 11.2 ( 7) 45.1 ( 11) 21.9 26.1 24.4

Total 107.2 (100) 163.2 (100) 391.1 (100) 8.8 15.7 12.5

a/ Fiscal years.b! For consistency, the figures are all based on the tariff classification

existing before April 1983, in which the residential category includedschools, hospitals, offices, etc. (now included in the scommercialOcategory), and the commercial* category included irrigation and watersupply and transportation (now reported separately).

Sourcest NE. and IDA estimates

LOAD FORECAST FOR THE NEPAL INTERCONNECTED SYSTEM / / c/ / /

sales (Gwh) Annual Crowth Rate (5Sector 1985 1987 1983 1989 1990 1991 1996 2006 1987-2006

Domestic 141.0 158.9 175.? 19K.8 228.9 245.2 835.5 529.1 6.Industrial 110.4 147.4 148.7 160.8 190.2 210.1 868.4 652.8 3.2Comercial 19.4 22.1 26.0 26.9 26.0 21.0 86.6 72.4 6.4Non-comercial 31.1 86.7 58.5 U5.2 52.0 48.3 67.7 188.2 7.0Street Lighting 9.6 6.7 8.0 8.6 4.8 4.4 4.9 6.0 0.1Drinking Water 5.6 7.2 6.8 6.o 7.2 7.8 11.2 28.0 6.8Transportation 1.7 1.6 1.9 1.9 2.0 2.0 2.2 2.? 2.2Irrigation 5.6 *.0 21.6 22.9 26.2 89.0 60.0 108.9 14.5Self Consuption/Temporary Supply 0.1 7.1 0.6 9.7 10.7 11.9 17.5 J0.5 8.0

Sub-Total 824.4 894.7 440.2 492.2 640.5 604.8 992. 1,668.4 7.6

Loss Reduction Sales 12.6 21.1 81.2 48.2 127.6 221.9 n/a- s _M == -3

Total Soles 824.4 804.7 452.0 511.8 577.5 047.5 1,019.8 1,776.8 8.2

Losses 181.4 166.2 176.1 109.9 202.9 216.0 254.9 448.3 6.7Bulk Sales to India 21.5 20.0 0.0 6.0 0.6 6.6 8.6 6.6 / n/aBulk Import from India 52.8 92.C 0.0 0.0 0.0 0.0 0.0 0.0Total GOneratlo. 425.0 588.8 685.5 709.7 767.0 169.0 1,261.8 2,226.7 7.s

/ 1906 data are *ctutl. 1907 data are att mted.. HUG/N plane to extend the Npal Interconnected system to include Mecbt A Raptl-Sheri (1990). Sagermath (1191) and

Seti-Mahakali (1990). Koshi & Janakpur were connected In 1996.c/ Som numbers my not add up due to rounding., Because the sectoral sources of non-technical looss baov not be ideatified, the loss reduction savings have bee put In a

saparate cteory./ Year roefer to fiscal year./ n/s n not applicable

2/ Bulk sales will Increase to 109.6 Cabh once the Arun-$ project Is comilosioned.

Soure : NEA

P N m0 o

rt o £

Annex 9-60- Page 5 of 8

Attachment 3

Page 1 of 2

ECONOMIC INTERNAL RATE OF RETURN a/ b/

Capital c/ OperationsYear Costs and Maintenance Benefits Balance

1989 5.96 0.00 0.00 -5.96

1990 17.73 0.00 0.00 -17.73

1991 15.31 0.00 0.00 -15.31

1992d/ 37.02 0.00 0.00 -37.021993 81.15 0.16 0.00 -81.31

1994 121.69 1.47 0.00 -123.16

1995 169.62 3.10 0.00 -172.72

1996 105.84 5.45 4.43 -104.86

1997 35.68 7.15 14.96 -27.871998 47.55 8.03 19.75 -35.83

1999 116.36 9.05 24.61 -100.802000 81.43 10.79 29.65 -62.572001 31.42 120.20 34.90 -8.722002 25.34 13.13 40.36 1.892003 26.38 14.04 46.08 5.66

2004 27.41 14.97 52.01 9.63

2005 28.94 15.95 58.17 13.29

2006 30.81 16.97 64.58 16.792007 32.81 18.05 71.55 20.68

2008 ,.98 19.21 78.96 25.772009 23.83 20.43 86.71 42.462010 11.08 21.46 94.51 61.97

2011 0.00 22.12 100.69 78.57

2012 0.00 22.12 94.51 72.39

2013 0.00 22.12 100.69 78.57

2014 6.95 22.12 107.30 78.23

2015 8.97 22.12 114.38 83.28

2016 8.85 22.12 121.95 90.972017 6.05 22.12 130.05 101.87

2018 16.27 22.12 138.71 100.32

2019 13.62 22.12 138.71 102.972020 15.90 22.12 138.71 100.69

2021 16.06 22.12 138.71 100.53

2022 24.93 22.12 138.71 91.66

2023 30.32 22.12 138.71 86.27

2024 56.06 22.12 138.71 60.53

2025 114.39 22.12 138.71 2.14

2026 72.28 22.12 138.71 44.31

2027 25.88 22.12 138.71 90.71

2028 28.98 22.12 138.71 87.61

2029 91.81 22.12 138.71 24.78

2030 81.03 22.12 138.71 35.56

Annex 9-61- Page 6 of 8

Attachment 3Page 2 of 2

Capital Operations

Year Costs and Maintenance Benefits Balance

2031 31.72 22.12 138.71 84.872032 20.61 22.12 138.71 95.982033 21.53 22.12 138.71 95.G62034 34.49 22.12 138.71 82.102035 23.32 22.12 138.71 93.272036 19.49 22.12 138.71 97.102037 17.19 22.12 138.71 99.402038 17.55 22.12 138.71 99.042039 6.67 22.12 138.71 109.922040 6.93 22.12 138.71 109.662041 7.21 22.12 138.71 109.382042 7.51 22.12 138.71 109.082043 7.84 22.12 138.71 108.752044 8.14 22.12 18S.71 108.452045 -792.88 22.12 138.71 909.47

Rate of Return - 5.62

a/ All costs are expressed in economic terms. Benefits are based on the1988 average tariff revenues of NRs 1.39 per kWh: for domestic sales andNRs 1.0/kWh for export sales. The benefits were the product of forecastsales and the average tariff revenue.

b/ This analysis is based on the following investment schedule for the Arun-3Access Road based on project base costs plus physical contingencies only(Phase 1 and Phase 2).

c/ The economic cost stream for road construction is as follows: US$5.96 million

(1989); US$13.63 million (1990); US$10.81 million (1991); US$8.52 million(1992); US$12.29 million (1993); US$10.4 million (1994).

d/ Include capital expenditures on the second stage of access road construction.

-62- Annex 9Page 7 of 8

Attachment 4

ECONOMIC INTERNAL RATE OF RETURN AND SENSITIVITY ANALYSIS

Base Case Average tariff revenue a/ 5.6Base Case WTP b/ 13.9

Variation in Sales

Base Case WTP with domestic sales - 15Z 12.5Base Case WTP with domestic sales + 15Z 16.02

and export sales reaching 125MWequivalent in 1996197

Variations in Costs

Capital Costs + 15Z WTP 1.2.8Capital Costs - 152 WTP 15.3

a/ NRs 1.39/kWh for domestic sales and NRs 1.0/kWh for exports; domesticsales as per load forecast and maximum exports reaching 25 MWequivalent in 1996/98.

b/ WTP is 3.9/kWh for domestic sales and export tariff is unchanged;SCF 0.89.

Switching Value (Z Change in Parameter to Reduce IRR to 10Z)

Parameter Switching Value %)

Domestic Sales (WTP) 38.0Capital Costs 67.3

-63- Annex 9

Page 8 of 8

Attachment 5

KINGDOM OF NEPALARUN 3 (ACCESS ROAD / HYDROELECTRIC PROJECT) WITH 25 MM EXPORT

ECOMIC INTERNAL RATE OF RETURN CALCULATIONVALUATION SASED ON WILLINGNESS TO PAY

DISCONT TOTAL TOtAL tOTAL TOTAL I N.P.V.RATE TNEFItS COSTS INVEST. FIXED OEMI MS I.R.R.

0.00X 16,533.1 2,150.4 1,159.2 991.2 14,382.72.00X 7,941.8 1,522.6 1,018.1 504.S 6,419.3 O.OOX4.00X 4,093.9 1,098.8 820.5 278.3 2,995.0 0.00%6.00X 2,252.5 821.9 657.0 165.0 1,430.5 0.00%8.002 1,313.5 637.3 533.4 103.9 676.2 0.00O

10.00 805.7 509.3 440.4 68.9 296.4 0.0012.00X 516.1 416.9 369.3 47.5 99.2 0.00O14.00X 342.9 347.6 313.6 33.9 (4.6) 13.91X16.00X 23S.1 294.0 269.1 24.9 (58.9) 0.00C20.00X 119.3 217.2 202.9 14.3 (98.0) 0.00224.00X 65.5 165.7 156.9 8.8 (100.2) o.o028.00X 38.3 129.5 123.8 5.7 (91.2) 0.00O32.002 23.4 103.1 99.3 3.8 (79.6) 0.00O36.00% 14.9 83.4 80.8 2.6 (68.5) 0.00240.002 9.8 68.4 66.5 1.9 (58.6) 0.002

SENSITIVItY TO SENSITIVITY SENSITIVITY NEWDONSTIC TO CAPITAL TO TOTAL I.R.R.

SALES COSTS COSTS x

-88.62 1240.8 668.82 0.082.52 630.5 421.6% 2.0

-74.92 365.02 272.62 4.0-65.22 217.72 174.02 6.0-53.02 126.82 106.1X 8.0-38.02 67.32 58.22 10.0-19.9X 26.9X 23.8X 12.0

1.42 -1.52 -1.3X 14.026.22 -21.92 .20.OX 16.086.52 -48.32 -45.12 20.0

162.12 -63.86 -60.52 24.0254.32 -73.72 -70.42 28.0364.42 -80.22 -77.3X 32.0494.5X -84.8X -82.12 36.0k46.X5 -88.11 -85.72 40.0

I.R.R. I.R.R. I.R.R.-15.002 12.46X 15.002 12.842 10.002 13.10215.00 15.10 -15.00 15.33X -10.00 14.93X

- 64 -

Annex 10

NEPAL

ARUN III ACCESS ROAD PROJECT

Selected Documents and Data Available in the Project File

1. Scott Wilson Kirkpatrick and Partners, Arun Access Study, Volumes Iand II, September 1987

2. Scott Wilson Kirkpatrick and Partners, Arun Access Road DetailedEngineering and Design, August 1988

3. Scott Wilson Kirkpatrick and Partners, Arun Access Road BidDocuments, Volumes I -V, August 1988

4. JICA, Arun II Hydropower Project Feasibility Study, June 1987

5. Acres International, Ltd., Least Cost Generation Expansion Plan -Nepal, prepared for Nepal Electricity Authority, April 1987

6. Nepal - Reviewq of Power Subsector, January 1988

7. Computer printout on the Arun III Hydroelectric scheme economicanalysis, October 1988

8. Markandya, A. 1988. The Macroeconomic and Budgetary Impacts of thePower Program in Nepal over the Period 1989-1996 with SpecialReference to the Arun III Project, Kathmandu, April 1988. Thisdocument was prepared under UNDP contract NEP 80/006.

9. NEPAL: The Processing of the Arun-3 Hydroelectric Project. Paperpresented by World Bank at Donors Meeting on the Development of theNepal Power Subsector, Paris, France, May 10-11, 1988.

10. Nepal Electricity Authority. The Role of NEA is the Development ofthe Nepal Power Subsector, Kathmandu, February 1988

11. Transcript of Proceedings of the Donors Meeting on the Development ofthe Nepal Power Subsector, Paris, May 10-11, 1988.

12. NEPAL: Arun III Hydroelec ic Scheme - Technical Review

13. NEPAL: The Roads and Road Transport

14. Forestry Action Plan Arun: Watershed (An Action Plan of Arun AccessRoad and Arun III Dam)

15. Management of Environmental Impacts (with term of reference)

16. Acquisition, Compensation and Rehabilitation Plan (with 12attachments)

17. Acquisition, Compensation and Rehabilitation Terms of Reference andWork Plan

-65-

Chart I

NEPAL

ARUN III ACCESS ROAD PROJECT

Organization of Project Implementation

|The Employe;-oft/N-Projct

Ch tE Engine r

Project MSnagetlnpls cnt tion Unit_DOR

Sintr Rsidnt Snlor Resident R oesidet reurveyEngineer E Engineer Engin r r Enngnr r _(1 * 2) _ (3 * 4)_ _

rSupport A Admin.Recid nt R id nt R zid nt R cid nt ~~~~Staff of OThe

(I nO ngnr En lner n nr Engne r Engine rl

DOR support AA Admin Staff for

EnAinet r e Project Minagera Nos.

Surveyors, Technicians,Draftsmen, Clerical StaffLocal Staff Employed byConsultant (same may beavalloble from DOR

NEPAL

AIRUIN III ACC£SS ROAD PRWECT

Project Iwle_tmtion Schedule

_169 1960 1991 12 1995 1994

1 2 3- 4 1 2 3 4 1 2 3 -4 1 2 3 4 1 2 34 _ _ 2_ 3 _

Road ConstructionTuilingtar-luu …X

Bas.ntapur-Tuml ingta -r--…

Maintenance Oepot

Road Maintenance

Consultancy Services -…

Training

LOIC- - -

MAP SECTION

IBRD 211 127

X J n 3 rl Fuhre Hydrn Powel FoellUlos~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~m Ftu Hd.P.e Fciite

ID y IN DIA,LI NEPAL Rwrds. 30.

DARCHULA i ' 0MA %sARUN III ACCESS ROAD PROJECT = GoeldErhnod

> _) e t . \ ~~~~~~~~~~~~~~~~~ ~~~~~~~~~~PROJECT LOCATION - Rods UPde, Const-tdi-) ,,<>_ -BA]HANG r, ,Aipt,

S.QAITADI FAR ,Z B R nenton

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rDADELDHURA U.I

f ) w%/SSTER1R ~~~~ACHHAM is -AIhO "i M ,A3t Notimnl Capital

w MID'' 'R r

L t {1 t i DA!ISKH I ~~~~~~~~~ ~~IAARKOI < /I.At tDiwr& s-d.d.ris< ;X; < °#mndrnaw 1FC -- \ _ ¢ (>YX 9 7 Internotinnal Boundories~~~~~~~~~~~~~~~~~~Zw Bo,,d,ie

> _DIYA \ ,tr tsBi,aR~W ES Tn EO Pb N c D.Ipe Reio go d.ND t . t , W,H

,^~~~~~~~~~~~~~~~~~ I,. P,O& GT A[P I;N .) A | * 1P ;Ei RAL. I -- D;°6KA° ' , ,

| /p >.^ . ll I N D ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~I A < - Ln,~

b 0 5 t0 IjUi 20 l 0 40 EX 120 t60 KIIOMeTERS~0 8 IN I ASTE

<07,. t | 0 2D 40 60 SO lOD FIES~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~0UK:E1.RI - 1-11~~~~~j>Dhorer 1 26@ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~4~~~~~~~~ ineK~~~~~~~~~~~~i V-

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