€¦ · Document of The World Bank Report No: 2363 1-NP PROJECT APPRAISAL DOCUMENT ON A PROPOSED IDA CREDIT SDR 36.80 MILLION IN THE AMOUNT OF (US$50.40 MILLION EQUIVALENT) AND PROPOSED

Document of The World Bank

Report No: 2363 1-NP

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED IDA CREDIT

SDR 36.80 MILLION IN THE AMOUNT OF (US$50.40 MILLION EQUIVALENT)

AND

PROPOSED IDA GRANT OF SDR 18.40 MILLION IN THE AMOUNT OF (US $25.20 MILLION EQUIVALENT)

TO

KINGDOM of NEPAL

FOR A

NEPAL POWER DEVELOPMENT PROJECT

April 25, 2003

Energy and Infrastructure Sector South Asia Regional Office

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CURRENCY EQUIVALENTS (Exchange Rate Effective February 2002)

ACRP ADB AEPC BME CAS CEF DANIDA DDC DOED EIA EMP ESAP FMR GTZ HMGM KoN IAS IDC IDA JBIC KfW MHFG MOPE MOST MOWR NEA NORAD OM PCI PDF Board PDF RAP REDP REDS SEA S I A SFR S&R TA UNDP USAID VDC VCDP

Currency Unit = Nepalese Rupees NPRs. 1 = US$0.0133

US$1 = NRs.78.3 FISCAL YEAR

July 16 -- July 15

ABBREVIATIONS AND ACRONYMS

Acquisition Compensation Rehabilitation Plan Asian Development Bank Altemative Energy Promotion Centre Benefit Monitoring and Evaluation Country Assistance Strategy Community Energy Funds Danish Intemational Development Agency District Development Committee Department of Electricity Development Environmental Impact Assessment Environmental Management Plan Energy Sector Assistance Program Financial Monitoring Reports Deutsche Gesellschaft fur Technische Zusammenarbeit GmbH His Majesty's Govemment of Nepal Kingdom of Nepal Intemational Accounting Standards Interest During Construction Intemational Development Association Japan Bank for Intemational Cooperation Kreditanstalt fur Wiederaufbau Micro-hydro Functional Group Ministry o f Population and Environment Ministry of Science and Technology Ministry of Water Resources Nepal Electricity Authority Norwegian Agency for Development Cooperation Operational Manual Participating Credit Institution Power Development Fund Board Power Development Fund Resettlement Action Plan Rural Energy Development Program Rural Energy Development Section Sectoral Environmental Assessment Social Impact Assessment Self-financing Ratio Screening and Ranking Technical Assistance United Nations Development Programme United States Agency for Intemational Development Village Development Committee Vulnerable Community Development Plan

Vice President: Mieko Nishimizu Country Director: Kenichi Ohashi

Task Team Leader: Mudassar Imran Sector DirectorManager: Vincent GouamePenelope Brook


CONTENTS

Page . . A . Project Development Objective .......................................................................................................... 1

1 . Project development objective ........................................................................................................ 1 2 . Key performance indicators ............................................................................................................ 1

B . Strategic Context ................................................................................................................................ 1 1 . Sector-related Country Assistance Strategy (CAS) goal supported by the project ......................... 1 2 . Ma in sector issues and Government strategy .................................................................................. 2 3 . Sector issues to be addressed by the project and strategic choices ................................................. 3

C . Project Description Summary ............................................................................................................. 5 1 . Project components ......................................................................................................................... 5 2 . Key policy and institutional reforms supported by the project ....................................................... 7 3 . Benefits and target population ........................................................................................................ 8 4 . Institutional and implementation arrangements .............................................................................. 8

D . Project Rationale .............................................................................................................................. 13

2 . Major related projects financed by the Bank andor other development agencies ........................ 15 3 . Lessons learned and reflected in the project design ...................................................................... 16

5 . Value added o f Bank support in this project ................................................................................. 17 E . Summary Project Analysis ................................................................................................................ 19

1 . Economic ...................................................................................................................................... 19 2 . Financial ........................................................................................................................................ 19 3 . Technical ....................................................................................................................................... 21 4 . Institutional ................................................................................................................................... 22 5 . Environmental ......................................................................................................................... 25 6 . Social ............................................................................................................................................ 31 7 . Safeguard Policies ......................................................................................................................... 36

2 . Critical Risks ................................................................................................................................. 40 3 . Possible Controversial Aspects ..................................................................................................... 41

1 . Effectiveness Condition ................................................................................................................ 42 2 . Other ............................................................................................................................................. 42

. ............................................................. 1 Project alternatives considered and reasons for rejection 13

4 . Indications o f borrower commitment and ownership ................................................................... 16

F . Sustainability and Risks .................................................................................................................... 39 1 . Sustainability ................................................................................................................................. 39

G . Main Credit Conditions .................................................................................................................... 42

H . Readiness for Implementation .......................................................................................................... 44 I . Compliance with Bank Policies ......................................................................................................... 44

Annexes

Annex 1: Annex 2: Annex 3: Annex 4: Annex 5: Annex 6: Annex 7: Annex 8: Annex 9: Annex 10: Annex 11: Annex 12:

Project Design Summary ........................................................................................... 46 Detailed Project Description ...................................................................................... 49 Estimated Project Costs ............................................................................................. 58 Cost Benefit Analysis Summary ................................................................................ 61 Financial Summary .................................................................................................... 68 Procurement and Disbursement Arrangements .......................................................... 75 Project Processing Schedule ...................................................................................... 95 Documents in the Project File* .................................................................................. 96 Statement o f Loans and Credits ................................................................................. 98 Country at a Glance .................................................................................................... 99 Environmental Assessment and Management ......................................................... 101 Eligibility Criteria for Project Components ............................................................. 109

MAP(S)

IBRD NEP28875

... . 111 .


IDA CREDIT IDA GRANT FOR POOREST COUNTRY LOCAL COMMUNITIES LOCAL. SOURCES OF BORROWING COUNTRY SUB-BORROWER( S ) UN DEVELOPMENT PROGRAMME Total:

Project Appraisal Document South Asia Regional Office

SASE1

11.70 38.70 50.40 5.50 19.70 25.20 1.10 0.00 1.10 2.80 0.00 2.80

38.00 0.00 38.00 0.80 0.00 0.80

75.00 58.40 133.40

Date: April 25, 2003 Team Leader: Mudassar Imran Sector Managermirector: Penelope Brook, Vincent Gouarne Sector(s): Power (SO%), Other industry (lo%),

Sub-national government administration (10%) Country Managermirector: Kenichi Ohashi Theme(s): Other environment and natural resources Project ID: PO433 11 management (P), Other public sector governance (P), Lending Instrument: Specific Investment Loan (SIL) Other financial and private sector development (P)

[ ]Loan [XI Credit [XI Grant [ ]Guarantee [ ]Other: For Loans/Credits/Others: Amount (US$m): IDA 75.6 [Credit US$50.4 m; Grant US$25.2 m]

Proposed Terms (IDA): Standard Credit

Grace period (years): 10

Commitment fee: 0.50

Years to maturity: 40

Service charge: 0.75%

- iv -

3orrower: KINGDOM OF NEPAL

IDA Grant Annual

Cumulative

Responsible agency: MINISTRY OF WATER RESOURCES Address: Singh Durbar, Katmandu Contact Person: Secretary Tel: 977-1-4228046 Fax 977-1-4227536

4.00 4.00

Department of Electricity Development (DOED) Address: Thapa Gaun, Anamnagar, Katmandu Contact Person: Director General Tel: 977-1-4480218 Fax: 977-1-4480257 Email:

Other Agency(ies): Nepal Electricity Authority ("EA)

Address: Durbar Marg, Katmandu Contact Person: Managing Director Tel: 977-1-4227725 Fax: 977-1-4227035 Email: [email protected]

7.00 11.00

Alternative Energy Promotion Centre (AEPC) Address: Krishna Galli, Lalitpur Contact Person: Executive Director

rel: 977-1-5539237 Fax: 977-1-5542397 Email: energy @aepc.wlink.com.np

6.00 17.00

5.00 22.00

3 .OO 25.00

0.20 25.20

I I I I I I

Project implementation period: 6 years Expected effectiveness date: 07/01/2003 Expected closing date: 06/30/2009

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A. Project Development Objective

1. Project development objective: (see Annex 1) The project objectives are to: (a) develop Nepal's hydropower potential in an environmentally and socially sustainable manner so as to help meet electricity demand; (b) improve access o f rural areas to electricity services; and (c) promote private participation in the power sector as a way to improve sector efficiency and to mobilize financing for the sector's investment requirements.

The K o N has identified the development o f i t s hydro-recourse potential as a key priority to serve the energy needs o f a vast majority o f i t s population who have little or no access to electricity, and to reduce poverty. The objectives o f this project are therefore consistent with the developmental and poverty reduction objectives o f the KoN.

2. Key performance indicators: (see Annex 1)

The key specific project performance indicators are outlined as follows and further detailed in Annex 1:

(a) Service coverage in rural areas w i l l be improved and number o f villages served with electricity w i l l increase. About 30,000 new households w i l l be electrified involving 125 to 150 new systems. There would be sustained build-up o f pipeline o f schemes emerging from village development committees.

(b) A pipeline o f bankable projects w i l l be developed through PDF. A t least 12 private power projects are expected to come on stream by 2008.

(c) Transparent and objective processes for inviting investment offers for medium sized hydro projects w i l l be adopted, thus achieving more competitive terms and conditions for private power purchases by the grid.

(d) One 220kV transmission line and other smaller transmission lines and sub-transmission lines w i l l be constructed, and the associated substations, and distribution schemes w i l l be expanded. About 34,000 consumers, including 17,000 new consumers, w i l l benefit through the distribution scheme.

(e) Financial efficiency o f NEA would be improved. This would be evidenced by a DSCR of at least 1.2,6% ROR; and 90-day levels o f accounts receivables and payables.

(f) Operational efficiency o f NEA would be improved by reduction o f losses from 23.4% to no more than 17% by 2007.

(g) The capacity o f MOPE and DOED to assess and monitor environmental and social impacts of hydro projects would be improved.

B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: 18578-NP

The project supports the CAS goal o f developing basic infrastructure to promote broad-based economic growth and improve resource utilization. In particular, the CAS sector strategy calls for increasing domestic power supply and facilitating private sector investments in power. The micro- hydro village electrification component o f this project fits well with the CAS strategy o f bringing resources closer to the beneficiaries and supporting decentralization and community-based projects.

Date of latest CAS discussion: 12/13/98

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2. Main sector issues and Government strategy:

Nepal has vast hydro resources, which represent a source o f potential wealth. Commercially exploitable hydropower generating potential i s estimated to be about 43,000 MW. However, despite the hydropower generation potential, only 522 MW has so far been developed with another 119 MW under construction. Based on the 2001 census, 40 percent o f Nepal's households have access to electricity. Disparity in access i s stark with over 90 percent o f the urban population connected, in contrast to an estimated 30 percent in rural areas.

M a i n Sector Issues: Nepal's power sector performs well in comparison to other public sector institutions operating in power development in South Asia, especially, in terms o f cost recovery and financial viability. However, the sector i s beset with a series of institutional problems that constrain its efficient development and mobilization o f private capital. These problems are identified in the Bank-financed sector work (Nepal Proposed Power Sector Development Strategy Report No. 21912-NP, dated March 19,2001). The most prominent are the following: (i) overlaps in the policy, regulatory, and operational functions o f public institutions operating in the electricity sector; (ii) inadequacies o f the existing institutional structure o f the Nepal Electricity Authority (NEA) to meet future needs o f the power sector; (iii) insufficient institutional arrangements for the promotion of power trade; and (iv) weak institutional support for improving electricity access to rural areas. The consequences o f these constraints are reflected in poor quantity and quality o f supply, high systems losses, minimal power exchanges with India, and high cost o f power. The retail price electricity in Nepal i s one o f the highest in South Asia and has now reached the l i m i t s o f affordability for a vast majority o f the population.

Government Strategy: Recognizing the need to address these issues and to develop its water resource potential, the Government has made the development o f Nepal's hydro-electric potential to serve the energy needs o f i t s people and for export, one o f i t s key developmental objectives. The Government's Ninth Plan (1998-2002) for the sector called for: (i) production of sufficient and reliable hydroelectricity at cheaper cost to meet domestic demand, and for export; (ii) reduction o f rural-urban and regional disparities in electricity supply; and (iii) linkage o f rural electrification with rural economic activities. Similar goals are envisaged under the Tenth Plan with the aim o f increasing generation capacity to 800 MW by 2008.

This emphasis on power development follows the adoption o f the Hydropower Development Policy in the early 1990s which, combined with changes in electricity legislation and the opening up o f the power sector to local and foreign private investments, was intended to make institutions operating in the power sector efficient and creditworthy, as well as increase the participation o f the private sector in the provision o f electricity services o f the people. While under this policy and regulatory framework K o N has been able to attract some private (foreign) investments in power generation, there was recognition that more needed to be done to attract private capital in the sector, and to improve the efficiency and creditworthiness o f NEA.

The revised Hydropower Development Policy, o f 2001, addresses many o f the sector's issues. Accordingly, i t envisages an increased involvement o f private investors in the production, distribution, and management o f electricity, while recognizing the need for institutional and structural changes in the power industry to meet the sector's development objectives. The revised Policy calls for the creation o f a more competitive environment for private sector participation, including introduction o f more transparent and investment friendly procedures. Development o f small hydro projects as well as o f district level projects under decentralized schemes in hi l ly and remote areas are also highlighted. Finally, special attention i s required to be paid to the social and environmental aspects o f hydroelectric development to ensure that adverse effects on the environment and communities are reduced to the minimum.

While progress has been made on several fronts, further actions are needed. For example, while unbundling has been done to the extent that there are several private generation facilities in place as well as some internal unbundling in distribution, additional work may be needed to examine alternative restructuring options, in the longer term, for NEA and implementation o f the most suitable one in the context o f Nepal. While the NEA, the Government owned grid operator, generator and distributor added some 132,000 new connections in 2001/2 and various transmission and distribution links were extended including those in 42 hi l ly districts, increasing access to remote areas though decentralized schemes remains a challenge. The Tariff Fixation Commission has been put in place, but i t presently falls short o f a fully fledged regulator. Furthermore, implementation o f some elements o f the hydropower policy, such as private sector participation, are hampered by country economic and security risk, and the lack o f adequate domestic capital market, issues which are beyond the control o f the power sector.

3. Sector issues to be addressed by the project and strategic choices:

To a large extent the sectoral issues identified above, such as those related to improvements in the efficiency o f the NEA system, creation o f a framework for mobilizing private capital into the sector, increasing access to power in rural areas and generally those related to improvements in the quality and quantity o f power supplies and the high cost o f power are addressed in the project though the assistance i t provides with the implementation o f the Hydropower Policy (detailed above).

The capital needs o f the power sector vastly exceed the availability o f resources from the traditional multi-lateral and bi-lateral agencies. The need for raising financing has now become even more important given the declining trend in the availability o f concessional resources for power sector development, and the recognition that scarce public resources are needed for the development o f social sectors. Increasingly, therefore, investment resources for power development w i l l need to be mobilized through the private sector. The proposed project would help attract private financing in hydro electric generation by establishing the Power Development Fund (PDF) to support small and medium hydro investments. The project further supports the implementation o f the Government's Hydropower Development Policy by promoting private development by establishing a transparent process for inviting offers for medium-sized hydropower, on an international competitive basis, and thus i s expected to lower the average cost o f private power sold to the grid.

The project gives importance to development o f hydro resources in a socially and environmentally sustainable manner to ensure that investments are supported by the communities, and are thus successfully carried out while also protecting the Country's resources. A Screening and Ranking (S&R) study, financed under Power Sector Efficiency Project (Cra2347-NEP), was aimed at reducing project implementation r i sks by selecting hydro-electric schemes through a transparent and public process, in addition to application o f techno-economic criteria. The medium-sized hydro schemes to be supported under the project come from the set o f schemes recommended as appropriate for meeting Nepal's domestic electricity needs.

The project provides opportunities to the local private sector to develop generation projects that w i l l help to further develop indigenous s k i l l s and resources. While the project does not directly support export-oriented projects, i t w i l l help build experience in developing hydropower projects with the private sector, paving the way for private power export initiatives in the future.

At present, only about 200,000 rural households are electrified leaving about 3.5 mil l ion households without access to electricity. The current rate o f electrification i s not sufficient to keep pace with growth in the rural population. The Hydropower Development Policy's objectives o f

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reducing rural-urban disparities in electric supply and linkage o f electrification with rural economic activities are being supported by the project through financing o f grid and off-grid rural electrification activities. In particular, the community-based village electrification component which involves social mobilization and training, w i l l nurture development o f indigenous s k i l l s and local resources, and improve access o f communities to other rural development programs. Further, the project supports the Government's decentralization efforts inasmuch as the micro-hydro component involves active participation o f district development committees and village development committees

The project also promotes improved functioning o f the grid, and fosters commercialization and reform o f the electricity industry. An efficient and financially viable NEA i s key to the successful implementation o f the Government's policies in the power sector. The project supports institutional strengthening o f NEA in the areas o f financial management, including implementation o f a more rigorous accounting and internal control systems, which meet international accounting standards. NEA's corporate financial performance w i l l be monitored to ensure that NEA remains creditworthy and can stand by i t s power purchase agreements with private power developers.

Finally, the project supports ongoing adoption by NEA o f organizational reforms in order to achieve efficiency improvements and more competitive service. The Nepal Power Sector Development Strategy report identified a number o f institutional reform options for NEA ranging from internal reforms o f the NEA system (in which NEA's functions are internally separated through profit centers) to unbundling generation, transmission, and distribution (and subsequently privatization o f the unbundled utilities). As a f i rs t step, NEA have already taken actions to implement the internal reforms. The project provides an opportunity to evaluate alternative options in more detail and pave the way for supporting, in the future, the option that i s most suitable for Nepal.

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C. Project Description Summary

1. Project components (see Annex 2 for a detailed description and Annex 3 for cost breakdown):

The Project consists o f three components, namely: (a) establishment o f a Power Development Fund (PDF) to finance private development o f small and medium-sized hydro schemes; (b) community-based village electrification through construction o f micro-hydro systems (sizes o f up to 100 kW); and (c) grid transmission and distribution improvements. Total project cost including interest during construction (IDC) i s estimated at US$ 133.4 million, equivalent, o f which IDA financing i s US$75.6 mil l ion comprising an IDA credit o f US$50.4 mill ion and an IDA Grant o f US25 .2 million.

Part A. The PDF Component

The Power Development Fund wi l l be a financing facility to be established by the Government under this project. The Fund wi l l provide long-term financing for private-sector small and medium-sized hydropower developments in Nepal to overcome: (a) the lack o f sufficient debt financing for private-sector hydropower projects; (b) inadequate maturity o f available debt financing; and (c) the need to provide comfort to private investors wishing to become involved in "f irst time" projects. The fund wi l l be wholly owned and operated by the Government, but with administrative management contracted out to a commercial bank. Init ial financing o f sub-loans for investment projects through the PDF wi l l be provided by IDA. Over time, i t i s envisaged that resources from other international and domestic financial institutions w i l l be mobilized, which together with reflows o f debt service payments from the sub-borrowers, w i l l augment the corpus o f investment funds accessible through the PDF. Under this credit operation, the PDF w i l l finance small hydro schemes with an aggregate capacity o f about 25 MW and one medium-sized scheme o f about 30 MW. The US$35 mill ion from IDA Credit i s expected to leverage financing from other sources, i.e., developers' equity and commercial banks, of about US$40 million. There has been significant interest in participation in the fund already expressed by developers and bankers.

The PDF wi l l be managed by a Fund Administrator, which w i l l be a private commercial bank operating in Nepal and selected by the Government through a competitive bidding process agreed with the Bank. Following an evaluation process satisfactory to the Bank the Government has approved selection o f a local well established commercial bank, and the Bank has provided i t s no- objection to this selection. An PDF Board formed by the Government w i l l be responsible for approving sub-loans in accordance with the recommendations of the Fund Administrator. Technical assistance from IDA grant o f about $2.5 mil l ion (in addition to the credit noted above) w i l l finance the Administrator's fees, as well as the operating expenses associated with the PDF Board during initial years o f operation o f the PDF. Once this capacity i s developed the fund i s expected to become self-sustaining.

In parallel with the PDF project there are several technical assistance activities which were not all designed solely to support the PDF initiative but which w i l l facilitate the implementation: (a) technical assistance i s being provided by GTZ, under i t s Small Hydro Promotion Project to assist local entrepreneurs in ensuring that their investment proposals are bankable; (b) the Government o f Norway i s extending technical assistance to the Ministry o f Population and Environment (MOPE) for institutional building, with special emphasis on strengthening MOPES functional capabilities, in the exercise o f i t s regulatory mandate o f monitoring environmental conditionalities o f the license for development o f hydropower schemes to be financed under the PDF; (c) technical assistance to the Department o f Electricity Development (DOED) i s being provided by USAID through consultants under i t s Private Sector Hydropower Development Project, to develop DOED's capability in managing the private power solicitation and award processes for medium- and larger-

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sized hydro schemes; and (d) USAID i s also supporting the strengthening o f DOED's capacity to review the environmental and social impact assessments o f the investment schemes. Technical assistance provided by USAID i s in i t s second phase. I t was renewed in 2001, for an additional period o f five years to 2006, after which the need for further assistance w i l l be reviewed.

Part B. Micro-Hydro Village Electrification

This component w i l l support the scaling-up o f community-based micro-hydro village electrification by developing about 2.5 to 3.0 MW of new micro hydropower systems to serve some 30,000 new consumers. The project w i l l be build on the successes achieved under the UNDP- financed Rural Energy Development Program (REDP) and w i l l extend electrification activities from the 15 districts currently served to another ten more districts. Program implementation wi l l be decentralized through local government, Le., District Development Committees (DDC) and the Village Development Committees (VDC), and involves formation o f a micro-hydro functional group (MHFG) at each participating community. The Alternative Energy Promotion Centre (AEPC), which i s the agency responsible for promotion and development o f alternative and renewable energy technologies in Nepal, w i l l assume overall management o f this project component. Further, through UNDP co-financing, the existing REDP project support unit w i l l be strengthened to support the increased level o f micro hydro system development envisaged.

The total cost o f this project component i s estimated at US$ 8.9 million. Of this, the Bank would provide IDA grant o f about US$5.5 mil l ion to finance the Government subsidies for the construction o f micro hydro schemes, and support the administration o f community mobilization, trainingkapacity building, and associated activities. The remainder o f the costs w i l l be financed by UNDP (US$O.8 mil l ion for program suppodmanagement), community contributions (US$ 1.1 million) D D C N D C investments (US$0.7 million), and the balance from loans to the community from local banks, e.g., the Agricultural Development Bank o f Nepal.

Part C. NEA Component

This component involves investment support for the construction o f a 220 kV double circuit transmission line (with one circuit strung initially) from Khimti Power station to the existing 132 kV Dhalkebar substation. Further transmission and sub-transmission investments would be selected based on N E A s priority least cost investment plan and the project eligibility criteria set out in Annex 12, part C. This may include the financing o f a 132 kV transmission line from Dhalkebar substation to Bhittamod on the Nepalese side o f the border with India (joining the Indian grid at Sitamarhi substation in Bihar about 40 km from the Nepalese border) to facilitate cross border power trade, and the extension o f 132 kV line bays at the associated substations. But financing o f the Dhalkebar to Bittamod transmission line, and the associated sub-station i s contingent on the appropriate institutional, administrative, legal, social and environmental arrangements being in place and satisfactory to IDA.

The IDA financing w i l l likewise finance supply and installation o f equipment and materials, and c iv i l works for the extension o f NEA's sub-transmission and distribution systems to rural areas and towns not electrified, and rehabilitation and reinforcement o f N E A s existing distribution systems in urban and semi-industrial centers.

The transmission lines w i l l enhance grid reliability and stability reduce system losses. Sub- transmission and distribution schemes w i l l improve access, quality, reliability and operational efficiency o f power supply to consumers. Acquisition o f spare parts and protection equipment i s also included. IDA financing for these investments i s estimated at US$ 3 1 .O million, comprising an IDA credit o f US$ 15.4 mil l ion and an IDA grant of US$ 15.6 million.

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Technical assistance (TA) activities w i l l involve several institutional building initiatives at NEA. These include strengthening o f NEA's financial management, audit and accounting systems. The TA wi l l also support the conduct o f marketing studies to review opportunities for productive use o f surplus energy, extension o f service to rural areas, power wheeling, and associated pricing studies that would enhance opportunities for private sector participation in the power sector. Also to be financed i s the engagement o f engineering consultants to assist NEA in undertaking the 220 kV transmission scheme. IDA Grant financing for TA i s estimated at US$ 1.6 million.

Component

Part A l . PDF Investment Funds Part A2. Technical Assistance for PDF Administration

Part B 1. Micro-hydro Village Electrification Investments Part B2.1 UNDP-financed TA

Part C1. NEA Transmission and Distribution Investments Part C2. TA for NEA institutional strengthening Part C3. NEA Project Administration and Engineering

75.00 2.90

8.10 0.80

33.7 1.80 2.00

% of Bank- Total financing

Credit Grant Total 56.2 35.00 35.00 2.2 2.50 2.50

6.1 5.50 5.50 0.6

25.2 15.4 15.6 3 1 .OO 1.4 1.60 1.60 1.5

Total Project Costs 124.3 93.2 50.40 25.20 75.6 Interest during construction 9.10 6.80

Total Financing Required 133.40 100.0 50.40 25.20 75.6

I t i s envisaged that separate financing from the Global Environmental Facility (GEF), under i t s Climate Change Operational Program, would be availed by K o N during the course o f project implementation. GEF financing would be explored for activities on removal o f market entry barriers to micro and small hydro development in Nepal, capacity building and policy support.

2. Key policy and institutional reforms supported by the project:

See Section B.3.

46.3 3.3

7.3 0.0

41.0 2.1 0.0

100.0 0.0

The project supports implementation o f policy and institutional reforms outlined in the Hydro Power Policy especially policies related to improving the enabling environment for private sector participation. This involves (a) establishment o f a transparent and objective process for inviting offers, on an internationally competitive basis, for private power development o f power facilities; (b) formulation o f appropriate policy and pricing incentives to attract investments for smaller-sized hydropower; and (c) establishment o f a long-term funding facility, the Power Development Fund (PDF), to support private initiatives.

To improve electricity access to rural areas, the project also supports supplementing existing institutional methods o f delivering electricity services to rural areas with innovative approaches, such as by developing community based systems. The importance o f approaches involving local communities i s also highlighted in the Nepal, Power Development Strategy Report.

100.0

An efficient and financially viable grid operator i s key to the implementation o f the Hydro Power Policy. Although in the South Asia Regional context NEA as an integrated utility has been performing better than many other public utilities in terms o f project efficiency and cost recovery,

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further changes are required to improve operational efficiency. Some restructuring has recently been carried out and studies are underway on a new grid code and schedule o f wheeling charges. The project supports such further improvements in the efficiency o f the NEA system and also improvements in financial management. Substantial institutional reform i s not within the objectives o f this project, but the project will, nonetheless, provide an opportunity for opening up dialogue with NEA to identify and implement in the long-term the most suitable institutional design for NEA that improves efficiency and meets the future need o f the sector. These discussions w i l l take as their starting point the recent institutional changes and also consider the proposals outlined in the Nepal, Power Development Strategy report.

3. Benefits and target population: Mobilization o f private sector investments in hydropower would result in additional power supply to meet the growing demand for electricity in Nepal. This w i l l support the country's socio- economic development, help reduce reliance on imported petroleum products, as well as develop indigenous s k i l l s and entrepreneurship. About 30,000 consumers in remote rural communities would have better access to electricity supply from micro-hydro systems in their localities. Grid- connected electricity consumers would benefit from the project in terms o f extension o f new connections, as well as improvements in quality and reliability o f service as a result o f the strengthening o f NEA's transmission and distribution network. About 37,000 new consumers w i l l be added to the NEA grid through the distribution scheme. The Nepal, Power Sector Development Strategy report outlines the positive impacts access to electricity has on the lives o f the people. Improved access i s beneficial for education and health services; improved communications and household and industry productivity.

4. Institutional and implementation arrangements:

Implementation period: six years

Project Coordination and oversight

Part A: The Power Development Fund (PDF) wi l l be administered on behalf o f the Government by a competitively selected commercial bank in Nepal (called the Administrator), pursuant to the terms o f a PDF Administration Agreement. As the administering agency for the PDF, the PDF Administrator, wil l: (a) review proposals for PDF financing according to the criteria laid down in the operations manual and make recommendations to the PDF Board; (b) negotiate the terms o f loans approved by the PDF Board and prepare the loan documentation; (c) operate the PDF account; (d) monitor sub-borrower performance under loans from the PDF; (e) handle debt service collections; (f) maintain the books o f account o f the PDF, which w i l l be audited annually by auditors acceptable to IDA; and (g) provide trimestral financial monitoring reports to the Ministry o f Finance, Ministry o f Water Resources, the PDF Board and IDA on the pipeline o f pending projects and the status o f outstanding loans.

An PDF Board w i l l be established and w i l l be responsible for the overall policy direction and supervision o f the PDF. The functions o f the PDF Board wil l be to: (a) approve proposals for loans in accordance with a recommendation o f the PDF Administrator and with the concurrence o f IDA; (b) certify financial institutions as Participating Credit Institutions (PCI); (c) provide the Government with advice, as required, concerning the management reports to be provided by the PDF Administrator; and (d) monitor the performance o f the PDF Administrator and to make recommendations to the Government concerning the termination or renewal o f the Administration Agreement. Recommendations for sub-project funding would be proposed by the Administrator to the PDF Board. Funding decisions would be based on financial and commercial grounds in

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accordance with the policy and operating guidelines o f the PDF. The PDF's lending policies, terms and conditions, sub-project eligibility criteria, and approval process are summarized in Annex 12.

The Department o f Electricity Development (DOED) in the Ministry o f Water Resources (MOWR) i s responsible for conducting competitive solicitations for development o f hydro generation schemes. Technical assistance i s being provided by USAID to select qualified private developers for identified medium-sized projects. Prospective private developers for Kabeli-A (30 MW) and Rahughat (27 MW) have been pre-qualified, and the Request for Proposals (RFP) i s expected to be issued as soon as funding i s secure. At the same time, DOED, with the assistance o f GTZ-financed consultants, w i l l take measures to strengthen the pipeline o f hydroelectric schemes sized below 10 MWs. At present, there i s an indicative pipeline o f small hydro schemes at mature stages o f preparation.

Part B: The Alternate Energy Promotion Centre (AEPC), w i l l be responsible for implementation o f the community-based micro-hydro development component. The AEPC, i s an autonomous body under the Ministry o f Science and Technology (MOST). I t was established in late 1996, with the main objective o f promoting and developing alternative and renewable energy technologies through local organizations, to raise l iving standards o f rural people. The project w i l l be guided by the decisions o f the Project Management Committee which w i l l have the following membership: AEPC's Executive Director as Chairperson, representatives from the National Planning Commission and the Ministry o f Local Development (MOLD), a representative o f the Association o f District Development Committees o f Nepal (ADDCN), District Energy Network, Association o f Village Development Committees o f Nepal, and REDP's Manager. (See Annex 2). UNDP wi l l provide technical assistance to AEPC for implementation o f this component.

Part C: The Nepal Electricity Authority (NEA) wi l l be the executing agency for Part C o f the project. NEA has the capacity to implement these transmission and distribution investments using i t s own project management resources, as demonstrated in previous credits, but to ensure continued capacity building, NEA wi l l contract consultants for a limited amount o f technical assistance in the area o f project implementation and for financial management improvements. During the course o f the project there w i l l be further discussion o f the organizational development o f NEA, outlined in the Nepal, Power Sector Development Strategy report, on which NEA has already embarked. This support w i l l be aimed at shaping NEA in the appropriate form, in the longer-term, to support the ongoing development o f the power sector in Nepal in the future.

Policy guidance

M O W R i s responsible for the overall policy guidance in the power sector. The Ministry i s responsible for the licensing o f generation, transmission and distribution projects through DOED. DOED also functions as a one-stop window for private investors in the power sector. M O W R wi l l ensure that close coordination between NEA and DOED would be maintained, particularly with respect to sub-projects involving private power sales to or through NEA-operated facilities. The Ministry o f Population and Environment (MOPE) provides overall policy guidance in the context of the 1997 Environmental Protection Act, and i s responsible for providing environmental clearances. Policy guidance for the micro-hydro component would be provided by MOST through AEPC. The project w i l l be pursued in accordance with the Government's policy on Subsidy for Renewable Energy (2000) and Renewable Energy Subsidy Delivery Mechanism (2000).

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On-lending terms

The IDA credit and IDA grant wi l l be provided to K o N on standard IDA terms, with the applicable service charge in the legal agreements there i s also a “commitment charge”. Foreign exchange risks w i l l be borne by KoN, and to some extent by medium-hydro developers who avail o f foreign currency loans from the PDF. There are three on lending streams from K o N for this project. For Part A, the PDF would extend financing directly to local investment enterprises, or to participating credit institutions (PCIs) for on lending to private companies, promoting projects involving generating stations o f 1 O M W s and below. Sub-loans for these small projects would be in local currency, at prevailing market interest rates, and at maturities justified by the economic l i f e o f the project. For medium-sized hydro(s), i.e., either Kabeli-A or Rahughat, sub-loans from the PDF would be provided in foreign currency at interest rates for foreign currency loans prevailing at time o f sub-loan negotiations, with maturities ranging up to twenty-three (23) years and with maximum grace periods, from execution o f loan agreement through project commissioning, o f up to eight (8) years. Loans for medium-sized hydro could also be offered in local currency based on market terms prevailing among the local banking community. For Part B o f the project, proceeds from IDA grant w i l l be utilized as grants to be extended to communities for financing o f eligible micro- hydro village electrification schemes. For Part C, under a Subsidiary Loan Agreement to be entered into between K o N and NEA, proceeds from the credit and the grant w i l l be on-lent by K o N to NEA at an interest rate, acceptable to IDA, and for a twenty-five year term with five year grace period.

Funds Flow and Disbursement Arrangements

A Special Account w i l l be separately established for each component o f the project.

For Part A, disbursements w i l l be made against sub-loans released by the PDF for investment projects as well as for the service fees payable to the PDF Administrator as specified in the Administration Agreement and the expenses of PDF Board. All sub-loan interest, repayments and associated fees w i l l be received by the PDF Administrator on behalf o f K o N in an operating account. After the recurrent cost o f operations o f the PDF Board and the PDF Administrator are covered, the balance in the operating account w i l l then be administered by the PDF Administrator and be available for new sub-projects, in accordance with the Administration Agreement.

For Part B, fund f low and disbursement arrangements w i l l be in line with the Government’s systems. Accordingly, based on budget provisions from the Government, AEPC wi l l extend grants and other project support funds to the District Energy Fund (DEF) managed by District Development Committees (DDCs) for financing o f approved micro-hydro project proposals. Funds are released from the DEF to the Community Energy Funds (CEF) only after the acquisition of land for the power house, right o f way for the canal and distribution lines, and collection of collateral for any required local loan. Investment grants or subsidies, which are currently set at an average o f Rs 80,000 per kW capacity, are released based on output verification, while other costs such as for social mobilization, training, etc. are paid on actual cost basis. Expenditure statements on the use o f CEF are submitted through the DDCs to AEPC. AEPC w i l l confirm the eligibility o f expenditures, consolidate the accounts and draw down from the Special Account for reimbursement o f said expenditures.

For Part C, disbursements w i l l be made against withdrawal claims by NEA for eligible project expenditure based on contracts approved by IDA.

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Accounting, Financial Reporting and Auditing Arrangements (see Annex 6 for details)

The PDF Board (through the PDF Administrator), AEPC and NEA w i l l implement Part A, Part B, and Part C o f the IDA financing, respectively. Each implementing entity w i l l establish and maintain separate project financial management accounts. Since implementation o f each component under the project i s independent o f each other, there w i l l not be a consolidated set of accounts for the IDA financing as a whole. Once appointed, the PDF Administrator, in accordance to the RFP and Administrative Agreement, has to establish a financial management system to meet project accounting needs, based on i t s internal accounting system. A preliminary assessment has already been carried out by IDA, which w i l l have to be finalized and signed off, before any disbursement for Part A can take place, to confirm that financial management arrangements for Part A are satisfactory. AEPC wi l l follow the financial management system that i s already in place, following the ncial administration framework o f Nepal. The use o f standard Kingdom o f Nepal systems, together with the fact that AEPC has appointed a full-time qualified finance officer to manage the project accounts, i s considered satisfactory for the management o f this component. Similarly N E A s financial arrangements are deemed satisfactory for the implementation o f the project as there i s an acceptable financial management system in place, a responsible officer has been deputed as the project finance officer, and NEA have satisfactorily implemented IDA credits before.

The PDF Board w i l l implement the Power Development Fund component o f the project through the assistance o f the Power Development Fund Administrator (PDFA), which has already been identified through a process o f competitive selection. The PDFA wi l l be responsible for technical operation and administration o f the PDF. Kingdom o f Nepal w i l l also establish an PDF Board under the chairmanship o f the Director General o f the DOED to oversee and monitor the program implementation. Project accounts (including statement o f expenditures and special account) o f the PDF wi l l be maintained and w i l l be audited by the Office o f the Auditor General o f Nepal (OAGN) as required by the Constitution o f the Kingdom o f Nepal, with audit reports due within six months o f the end o f each fiscal year. OAGN wi l l appoint qualified auditors acceptable to IDA for the purpose o f audit o f project financial statements o f Part A. In addition, IDA wi l l also receive a copy o f the PDF Administrator’s financial statements within six months after the end o f the fiscal year for monitoring purposes. The PDF Board w i l l submit the financial monitoring reports on a trimester basis.

AEPC wi l l follow Kingdom o f Nepal’s planning and budgeting system. A separate budget head w i l l be assigned in the Government’s Budget (Red Book) which w i l l allow reporting o f expenditures and accounts under IDA funding under a separate budget head. AEPC wi l l be responsible for overall project coordination. All accounting records and documentation o f transactions of release o f grants to districts w i l l be maintained at AEPC to facilitate the auditor’s work, allowing for timely visits to only one cost center for audit purpose. AEPC wi l l be accountable for overall reporting on implementation progress with respect to Part B o f the project, preparation of a trimesterly financial monitoring reports, and preparation o f project accounts for Part B. AEPC w i l l also submit the audited project accounts (including statement o f expenditures and special account) within six months after the end o f the fiscal year.

For the purpose o f preparing project financial statements, NEA w i l l follow Kingdom o f Nepal procedures. A separate budget code w i l l be defined in the Government’s Budget which wi l l allow reporting o f expenditures and accounts under IDA funding. NEA’s project accounts (including statement o f expenditures and special account) and utility’s financial statements w i l l be audited on an annual basis by qualified private auditors appointed by the OAGN, acceptable to IDA. The audit reports w i l l be submitted to IDA within six months after the end o f the fiscal year. In addition, NEA wi l l also submit financial monitoring reports on a trimester basis. NEA have an

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action plan in place to improve the timeliness o f their accounts and also bring them further into line with acceptable accounting standards. NEA have already made a good progress in remedying some o f the deficiencies identified in i t s system, and have been closely monitoring and following up on the qualified observations o f the auditors. Through the technical assistance to be provided both under this proejct and ADB’s rural energy project, which NEA i s implementing, NEA wi l l continue to further improve the accounting and internal auditing system.

Procurement Arrangements

The Bank conducted an assessment o f the institutional capacity o f the various implementing entities to carry out procurement in accordance with IDA procurement guidelines (see Annex 6) and found the arrangements satisfactory. In particular, DOED wi l l continue to avail o f technical assistance from USAID, while AEPC wi l l be supported by the UNDP-financed Program Support Unit-the Rural Energy Development program. NEA has implemented satisfactorily several IDA- financed projects.

Monitoring and evaluation arrangements

The PDF Administrator and project coordinator in AEPC and NEA, respectively, w i l l be responsible for preparing project progress reports and financial monitoring reports, on a trimester basis, in a format agreed with IDA covering both physical and financial progress o f the project components. Whenever relevant, specific monitoring o f environmental and social aspects o f project components w i l l be included in the progress report. A mid-term review w i l l be held thirty months after credidgrant effectiveness to review all aspects o f the project and assess whether modifications should be made in the implementation arrangements. Within six months o f the closing o f the project, the Borrower, in collaboration with the executing agencies, w i l l prepare an Implementation Completion Report (ICR).

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D. Project Rationale

1. Project alternatives considered and reasons for rejection: The alternative to the project considered was the traditional IDA lending strategy o f supporting large hydro projects and associated transmission and distribution facilities with public resources; and to provide access to energy services in rural areas by extending the national grid. However, given the difficulty o f raising financing for large hydro projects, which are capital intensive, involving large upfront costs, and the environment and social problems associated with such projects, an alternative strategy aimed at mobilizing private and commercial funds into the sector, for small and medium sized hydro projects needed to be devised. Furthermore, given the prohibitive cost and technical difficulty o f reaching the remote communities where most o f the poor reside, by extending the national grid to these areas, an alternative strategy, which aimed at mobilizing communities to support rural power development needed to be mobilized.

In support of this strategy, the project i s designed to catalyze private funding through the establishment o f the PDF. Project investments through the public sector would be limited to the financing o f critically needed transmission and distribution investments.

The inflow o f private capital into Nepal has been modest and the domestic capital market i s extremely thin. Experience so far gained with the mobilization o f financing for the private hydropower projects, which are, now under implementation, confirms that additional risk mitigation measures are necessary to enable Nepal to successfully tap private capital markets. Availability o f long-term financing through the PDF would provide additional comfort and encouragement to private lenders and investors.

Adverse experience in Nepal with pursuing large hydro projects has led to the adoption o f an alternative strategy with an init ial focus on an accelerated pursuit o f smaller-sized hydropower projects for meeting Nepal's power requirements. Public consultation to create consensus on the proposed investments i s considered an essential tool for mitigating social and environmental impacts as well as implementation risks. For this purpose, a comprehensive screening and ranking (S&R) process o f project alternatives was conducted with funding from Cr.2347-NEP.

The establishment o f the proposed PDF has advantages over conventional IDA project financing, since it could contribute to a number o f small to medium scale projects in the private sector that would otherwise be too small and costly to process as separate IDA operations. It would have considerable flexibility in the choice o f projects and the way in which they could be supported. Quality assurance would be imposed through detailed technical, environmental and social assessments and monitoring o f individual projects.

Creation o f a new institution to administer the PDF was not deemed desirable given that the intention i s for the Fund to serve as a catalyst for mobilizing private and commercial capital, and it i s anticipated that over time, financing o f hydro schemes in Nepal would eventually be part o f the business mainstream o f domestic and international commercial lending institutions. The choice of using a private commercial bank in Nepal as the PDF Administrator i s based on the Government's policy to make maximum use o f local capabilities. The requirement that the commercial bank selected as Administrator would associate itself with an international or parent bank with expertise in international project finance, w i l l ensure that adequate expertise w i l l be available to successfully complete transactions in the international capital markets.

A larger initial investment funding for the PDF was considered, but was subsequently reduced since i t i s estimated that disbursement requirement during the short and medium term w i l l be

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modest until the investment pipeline expands and strong market appetite for the Fund i s demonstrated. Specifically, although feasibility studies for several medium hydro schemes that have passed the S&R exercise have been completed, the process for inviting tenders from private investors through international competition has commenced just for two schemes (Kabeli-A and Rahughat Khola). Actual loan proposals from winning bidders w i l l likely emerge only after at least a year, with financial closure expected only in 2004.

Support for the scaling up o f the micro-hydro village electrification program was included as a component in recognition o f the urgent need to improve access o f the remote rural communities to electricity supply. This component involves significant social mobilization activities which w i l l result in credit formation, s k i l l development and productive use o f electricity, and i s thus expected to help alleviate poverty in the participating communities.

Finally, the project scope and cost, particularly with respect to NEA activities, i s significantly reduced from earlier proposals discussed with the Government. Support to NEA i s limited to financing o f critical transmission and distribution facilities needed to deliver the output from power generation stations to the load centers, as well as improve access o f rural communities to the grid. A dialogue between the Government and IDA on implementation strategies for development o f Nepal's energy sector has ensued as a result o f the findings o f the Power Sector Development Strategy report. This report, inter alia, highlighted a number o f alternative restructuring options for NEA, and most importantly, the broad principles that need to be followed to improve sectors efficiency and for private capital to be successfully mobilized, irrespective o f the type o f institutional reform ultimately adopted. These include: eliminating conflicts o f interest and leveling the playing field for private investors; an adequate regulatory system, and transparent systems operating rules. NEA has instituted work on some restructuring issues including creating separate commercial centers and reconstituting the Board to include private sector members. Furthermore, the report advises that before deciding on an exact configuration o f the unbundled power sector most appropriate for Nepal, preparatory studies are required which would include, inter alia, definition o f technical boundaries, allocation of assets, liabilities and personnel, transfer pricing, dispatch and system operating rules, wheeling arrangements etc. N E A s role in a restructured power industry where greater private sector participation i s envisaged w i l l need to be redefined. This, in turn, w i l l determine the nature and level o f future IDA assistance to support reform initiatives o f NEA.

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2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned).

Sector Issue

Ban k-f inanced Completed projects: Meet domestic power demand; developing a commercial electric utility. Development o f Nepal's hydroelectric export potential; improving planning capacity.

Improvement o f N E A s operational efficiency and financial viability.

3ther development agencies Asian Development Bank (ADB) and JBIC: To meet electricity demand, and institutional and financial strengthening o f NEA. ADB: To extend grid electricity service to the rural areas

GTZ: Need for appropriate incentives to facilitate development o f small hydropower stations by the private sector. UNDP: To contribute to sustainable rural development through community-based electrification through micro-hydro development. DANIDA: Rural electrification through entrepreneurial development o f micro hydros and solar photovoltaic home systems. KfW: Development o f hydropower resources. ITSAID: To promote private nvestments in hydropower.

Project

Marsyangdi Hydroelectric Project (Cr. 1478-NEP approved in May 1984) Third Technical Assistance (Panc hes war) Project (Cr . 1902-NEP approved in April 1988) Power System Efficiency Project (Cr.2347-NEP approved in March 1992)

Ka l i Gandaki A Hydro- Electric Project

Rural Electrification, Distribution and Transmission Project (ongoing) Small Hydro Promotion Project (ongoing)

Rural Energy Development Program (REDP) (ongoing)

Energy Sector Assistance Program (ESAP) (ongoing)

Middle Marsyandi Project (ongoing) Private Sector Hydropower Development Project (ongoing)

Latest Supervision (PSR) Ratings

(Ban k-f inance Implementation

Progress (IP) S

U

S

orojects only) Development

Objective (DO)

S

IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)

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3. Lessons learned and reflected in the project design:

KoN’s past experience o f hydro development has led to the design and implementation o f a transparent and participatory process for selection o f hydro projects as an integral part o f project preparation. Consultation with the stakeholders in Nepal in general, and the project affected people in particular, has been made an integral part o f the preparatory process.

There i s a need to introduce transparency and competition in the selection o f private independent power producers (IPPs) to ensure efficient pricing and raise credibility o f the country’s privatization program. The project supports establishment o f a transparent process of inviting offers on an internationally competitive basis.

Recent experience in Nepal has demonstrated that delivery o f infrastructure services to rural communities are more effective and sustainable when beneficiaries are able to actively participate in project planning and design. Accordingly, the village electrification component adopts a community-driven approach, which involves the community through every stage o f the development process including, inter alia, organization development, woman’s empowerment, sk i l l s enhancement, capital formation, technology promotion and environmental management.

More effective coordination among members o f the donor community i s required to enhance the likelihood o f successful achievement o f project outcomes. In this connection, the Bank has been holding regular dialogue with other donors to apprise them o f the progress of the project. Thematic Donor Group on Energy and Power was established in 1999, and the features and progress o f the project regularly discussed during the Group’s meetings. Further, to foster common understanding of emerging sector issues, the preparation o f the Nepal, Power Sector Strategy report involved the active participation o f ADB and JBIC, and close coordination with USAID.

A

Based on experience from past IDA operations with NEA, financial accounting issues in NEA need to receive greater attention so as to conform to international accounting standards. Accordingly, technical assistance i s being provided to NEA under the project to finance upgrading of financial management systems complemented by on-going TA support from ADB. Further technical assistance w i l l also be provided to consider NEA’ s pricing policy and future power purchase strategy.

4. Indications of borrower commitment and ownership:

Recognizing the key role o f increasing energy supplies for Nepal’ s economic development, the Government has given high priority to power sector investments, especially in development o f hydro-electric power with the participation o f the private sector. The latest revision o f the Hydropower Development Policy manifests the Government’s continued commitment to opening up the electricity industry to private investments not only in generation, but also in transmission and distribution.

K o N has carried out the screening and ranking exercise to build up a pipeline o f projects for the PDF for which feasibility studies have been prepared.

A comprehensive environmental and social impact assessment policy framework for the project and associated policy guidance has been prepared by the Government. Specifically, an Operational Manual o f Environmental Impact Assessment (OM) has been prepared by DOED which presents detailed guidelines for prospective project developers on the operational processes for the preparation, clearance and monitoring o f sub-project specific SIAs, RAPS, and VCDPs. I t also specifies E W S I A procedures to be followed for transmission and distribution lines to be financed under the NEA component.

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The E W S I A Policy Framework, have been prepared. These present a detailed discussion on operationalizing the social development aspects o f the project. Process guidelines and principles for undertaking social assessments, RAPS and VCDPs are presented in detail, as well as a strategy for information dissemination and consultation.

An implementation framework for the proposed PDF has been prepared. DOED has selected the PDF Administrator.

Procurement documents for solicitation o f proposals from the private sector for development o f two medium-sized hydros, Kabeli-A and Rahughat, are under preparation. Requests for Qualifications (RFQ) documents have been issued and prospective developers pre-qualified.

There i s a pipeline o f small hydro schemes involving a total capacity in excess o f 58 MW which are in relatively advanced stages o f preparation, including five with signed outline Power Purchase Agreements (PPA) with NEA. Local private developers have expressed keen interest in availing o f financing from PDF. An additional set o f small hydro schemes have been identified which are in early stages o f preparation.

To advance village electrification, the Government established AEPC in 1996 as an agency dedicated to the promotion o f renewable energy, such as micro-hydropower. In year 2000, a revised subsidy policy for renewable energy, including for micro-hydropower development was i s sued.

An init ial pipeline o f some 30 possible micro-hydro schemes has been identified in 10 districts with an aggregate capacity o f 454 kW for financing under this project. O f these, several schemes are at detailed survey and design stage, and the remainder are at feasibility study stage. Identification of further potential schemes i s underway.

Since November 1999, NEA effected two rounds o f tariff increase to help improve overall financial performance and a further application i s pending with the Tarif f Fixation Commission. Moreover, an action plan has been developed and updated by NEA outlining the remedial measures that the Company would be taking to ensure that issues raised in past audit reports are addressed. The short term key issues under this action plan have already been implemented and the remainder w i l l be undertaken either by NEA alone o f with the assistance o f technical assistance under this project or the ADB financed rural energy project. urther, in 2002, NEA initiated an internal reorganization involving the creation o f distinct business units for generation, transmission and distribution, respectively, with the end-in-view o f enhancing NEA's commercialization and improving customer service.

Separate, detailed project implementation plans have been prepared for all three aspects o f the project.

5. Value added of Bank support in this project: By sharing the Banks global knowledge, the Bank i s able to assist K o N in developing a policy incentive framework for encouraging private investment in the context o f sound natural resource management. This includes providing guidance in carrying out the participatory screening and ranking process for selecting hydropower projects, and formulation o f a comprehensive framework on environmental and social policy and procedure.

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Participation o f World Bank Group through PDF and NEA activities, would provide additional comfort to private sector investors at this early stage of the development of private interest in the power sector.

Bank presence through this investment operation provides a credible platform from which the important dialogue with the Government on power industry reform and restructuring can be carried out.

Bank participation improves prospects for closer donor coordination to ensure sustainability o f external assistance to Nepal's energy sector. The World Bank group i s taking the lead in providing investment funding for private development o f small- and medium-sized hydros, while technical assistance support i s provided by bilateral donors in preparing the investment pipeline.

Bank support for community-based village electrification through development o f micro-hydro systems ensures that positive demonstration effects o f the UNDP Rural Energy Development Program are sustained and scaled up, so that more communities can avail o f the benefits from the program.

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E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8)

1. Economic (see Annex 4): 0 Cost benefit NPV=US$ million; ERR = 10 to 33 % (see Annex 4) 0 Cost effectiveness 0 Other (specify)

The economic rates o f return for the entire project are estimated in the range o f 10-33%.

The rates o f return o f the pipeline o f small hydro investments under the Power Development Fund for which feasibility studies have been completed are in the range o f 30 to 33 percent. The long- run marginal cost o f generation was used to value the electricity production from these investments.

The Micro Hydro Village Electrification component i s estimated to yield an average economic rate o f return of 10.9 percent for the program as a whole, with returns for individual schemes ranging from about 10 percent to over 12 percent. Benefits are estimated based on avoided cost o f diesel generation for productive uses and the avoided cost o f kerosene in the case.of supply to households.

The economic rate o f return for NEA's system expansion plan for the time-slice FY2002/03 to FY2006/07 i s estimated at 14.3 percent, with NPV o f NRs. 7510 mil l ion at a discount rate o f 10 percent.

Preparation o f economic analyses would be required for sub-projects to be financed under the PDF; for each micro hydro scheme under the village electrification component; and for rural electrification schemes and other transmission and distribution works implemented by NEA. Only schemes yielding economic returns o f 10 percent or higher w i l l be financed.

2. Financial (see Annex 4 and Annex 5): NPV=US$ million; FRR = 15.17% (see Annex 4)

Financial Rates of Return: For small hydro investments, real financial rates o f return on investments range from 15 percent to 17 percent; while real returns to equity (post tax) range from 16 to 19 percent. Revenues are based on prevailing prices paid by NEA for power purchases from small-sized private power stations. For micro-hydro village electrification schemes, the financial returns on investments range from 10 percent to 14 percent. For N E A s time-slice expansion program, the FRR i s estimated at 14.2 percent.

N E A s Past and Present Financial Performance. During the period FY92 to FYOO, NEA's financial performance was marked by steady achievement o f some profit, but in FYOl a loss was incurred as a result of the commissioning o f some expensive IPP stations which increased the cost o f supply. FY02 i s expected to show a slight profit as the full year o f tariff increase implementation allows revenues to catch up with the cost o f supply. Total electricity sales grew f rom 756 GWh in FY94 to 1,574 GWh in FY02. The average revenue per unit has also increased steadily from NRs. 3.3 per kWh in FY93 to NRs. 6.6 per kWh (about 8.5 cents/kWh) in FY02. Further, provisional accounts for FY02 show debt service coverage ratio (DSCR) i s at 1.3 and net accounts receivables at 2.5 months.

NEA has consistently been able to meet i t s loan covenants with IDA with respect to the minimum DSCR of 1.3 under previous credit operations. However, while i t was earlier able to comply with the expected higher levels o f annual contribution to local investment cost from internal sources,

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NEA was unable to attain the target level o f 75 percent o f local cost contribution in FY99 and failed to meet the rate o f return (ROR) covenant o f 5 percent in FY95 and 6 percent starting FY97 specified under the previous credit. For the future NEA w i l l aim to achieve adequate self financing and also a rate o f return o f 6 percent on historic net fixed assets. Since the construction o f major ongoing projects and the asset appraisal o f existing facilities are expected to be completed by the end o f FY04, a fair evaluation o f the return on asset w i l l be possible with the newly-established asset base.

Given the absence of any tariff increase since 1996, adjustment o f NEA's electricity tariff became imperative in FY2000 to allow NEA to fully cover i t s debt service obligations, capital expenditure and operating expenses. The Government committed to implement a two-stage NEA tariff adjustment, the f i r s t o f which was effected in November 1999, and the second in September 2001. The f i rst increase involved a 25 percent hike in industrial rates, and 30 percent adjustment for all other consumers, while the second gave an average increase o f some 20 percent. A major focus o f tariff rationalization i s to ensure that N E A s liquidity position i s sound during the next two years o f system expansion, to this end, NEA have designed a semi-automatic tariff increase formula which has been posed to the Tariff Fixation Commission (in December 2002). This formula should ensure inflation based increases as necessary. However, current indications are that cost increases w i l l be in excess o f inflation and necessitate NEA filing for a further increase during 2003.

Projected Financial Performance. Financial projections based on the proposed tariff increases and efficiency improvements show NEA wi l l achieve satisfactory financial performances as a whole during FY03 through FY07. NEA 's financial viability i s expected to improve with reasonable and timely tariff increases in real terms. Electricity sales are estimated to increase steadily from 1,574 GWh in FY02 to 2,782 GWh in FY07. The total operating revenue i s expected to increase from NRs. 10,766 mil l ion in FY02 to NRs. 24,137 mill ion in FY07. Debt service coverage ratio during the period o f FY02 to FY07 w i l l be in the range o f 1.5 and rate o f return i s forecast at over 6% after FY05 (based on the current estimates o f the value o f assets). Thus NEA i s expected to meet the covenanted levels o f performance, indicative o f sustainable operations, agreed with IDA which are: (a) Debt Service Coverage Ratio o f at least 1.2; (b) Net Accounts receivable at less than three months; (c) Accounts payable at less than three months; and (d) Rate o f Return on historic assets o f 6 percent from FY05. These covenants are in line with those agreed with ADB on their Rural Electrification, Distribution and Transmission project, currently under implementation with NEA.

Fiscal Impact:

The fiscal impact o f the project i s expected to be positive. The majority o f capital and current expenditure i s funded through an official development assistance from donors. Foreign currency expenditure i s fully financed by various grantlloan sources through on-lending arrangements. A part o f the local currency contribution o f K o N i s also financed by foreign grandloan sources. K o N w i l l benefit from the concessionary terms o f the IDA credit and grant funds to NEA and o f the IDA Credit to the PDF borrowers are on-lent at higher interest rates and shorter maturities. NEA i s financing the balance o f expenditures for the transmission and distribution schemes mainly from i t s own resources. K o N wi l l also benefit from the collection o f royalties on the use of water and potentially through income taxes and dividends from NEA. Further, mobilization through the project o f private capital into generation investments w i l l reduce the burden on NEA's and KoN's budget resources.

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3. Technical:

Power Development Fund

Small and medium-sized hydro schemes are an integral part o f the least-cost development plan for the power sector in Nepal, prepared by consultants (Norconsult International AS., Norway) under a Technical Assistance Project funded by ADB. The Power System Master Plan for Nepal, dated August 1998, covered mainly four tasks: (i) estimation o f fresh demand forecasts; (ii) definition of the least-cost generation expansion plan; (iii) determination o f the long-run marginal cost o f generation; and (iv) definition o f the transmission system development. A number o f different generation expansion scenarios from FY03 to FY 17 were established in the generation expansion studies. The scenarios optimized generation additions on the basis of the feasibility studies for the projects identified in the Screening and Ranking study, carried out by consultants (CIWEC, Canada) and funded under the previous IDA project. The recommended plan was the "Hydro Only" Scenario, with medium load growth and limited export capability. In addition to planned power purchases by NEA from medium-sized hydro schemes such as Kabeli and Rahughat, NEA intends to purchase power from small hydro developers.

The small hydro schemes to be developed with PDF financing generally involve the construction o f weirdintakes, de-sedimentation canals, penstocks, surface powerhouses and short tailraces to return generation flows to the river. In some projects, pipelines may be used in place o f canals or low- pressure tunnels. Weirs w i l l generally be o f low height (i.e. less than 15 m), and with negligible storage capacity. The construction o f large dams with significant volumes o f storage i s not envisaged.

The construction and operational r isks w i l l be similar to those experienced in other hydro projects constructed in Nepal. These include development cost overruns and project implementation delays due to land acquisition difficulties, inadequate geotechnical investigations, inadequate feasibility studies or design specifications, labor unrest and poor security. Operational r isks include, inter alia, damage to power station caused by severe flooding, sedimentation o f intakes, slope/tunnel instability, equipment failure, transmission inter-connection failure. The private sector approach to development o f the small hydro projects passes on most o f the development r i sks to the developer. To a significant extent investigation and design risks wi l l be mitigated where developers avail themselves o f the GTZ funded technical assistance to potential developers under the Small Hydro Promotion Project. Further, review o f projects by DOED as well as internationalllocal consultants attached to the PDF Administrator w i l l assist in ensuring that projects financed under the PDF are technically, environmentally and socially adequate. Operational r isks w i l l be borne by the developer/operator. However, operational r isks o f projects submitted for PDF financing w i l l be appraised by the PDF Administrator. While security r isks due to on-going insurgency movement can generally only be managed by KoN, the PDF Administrator w i l l nevertheless assess the security situation prevailing in the area where a proposed project i s to be sited before recommending i t s financing . Micro-Hydro Village Electrification Program

Each micro-hydro village electrification system comprises a micro hydro-electric power scheme and a low voltage (LV) distribution system. The technology for these systems i s standard and proven. The micro-hydro schemes generally comprise a natural river intake (although in some cases a low weir i s constructed), desanding (sedimentation) basin, masonry-lined canal, forebay, penstock, powerhouse and short tailrace. Developed head i s normally in the range 20 - loom, diverted flows are normally less than 200 liters / second and installed capacities normally range from less than 10 kW up to about 60 kW. Accordingly the c iv i l works structures comprising these

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schemes are small, and within the ability o f local communities to construct themselves using manual construction methods. The costs of household wiring, breaker and service drop are paid for by the consumers themselves. Micro-hydro village electrification sub-projects w i l l be located in areas where they w i l l not be 'surpassed' by grid extension (from the NEA grid, or isolated grid systems), at least within the next 5 years. Accordingly, areas currently designated for NEA grid extensions, or areas (currently not designated) that could be suitable for grid electrification w i l l be avoided.

Feasibility and design studies are undertaken in respect o f all projects. Feasibility studies include identification o f suitable locations and alignments, measurement o f flows and heads, identification o f load centers, demand estimation, distribution system layout, socio-economic aspects, end- uses/productive uses and environmental aspects. Following approval o f the feasibility studies, appropriate design drawings, specifications and quotation documents are prepared by the Program Support Unit on behalf o f the MHFG for each system. Technical standards being used for system design are appropriate. An independent Technical Review Committee established by the Program Support Unit in Katmandu reviews the technical and financial aspects o f each sub-project before construction commences.

NEA Transmission & Distribution Components

NEA's generation expansion plan was used as the basis for the transmission expansion studies. The latter included a review o f whether a transmission voltage higher than 132 kV would be required (either 220 kV or 400 kV), and concluded in the need to introduce the 220 kV level. The transmission schemes proposed under the project are needed to strengthen the system, improve the transmission capacity to deliver power purchased by NEA from newly commissioned private hydro plants to load centers, as well as to enhance the power exchange capacity with India, providing that the appropriate institutional, administrative legal and environmental and social arrangements satisfactory to IDA are in place. The proposed sub-transmission and distribution schemes w i l l extend grid supply to areas not yet electrified and to rural areas. Under the aforementioned ADB- financed Technical Assistance Project, N E A s planning capacity was further strengthened and i t s software modernized. NEA has the knowledge and capacity to design, procure and supervise the construction o f distribution and transmission facilities. NEA wi l l employ services o f consultants for quality assurance and supervision whenever deemed necessary.

4. Institutional:

4.1 Executing agencies:

Department o f Electricitv Development. DOED performs a three-fold function on behalf o f KoN: (i) licensing o f hydropower developers, (ii) private power promotion and (iii) various function for multi-purpose and bi-national project study and promotion. DOED's current organizational structure i s adequate in the short term and for immediate purposes o f the project. The structure accommodates investment promotion, licensing, facilitation and inspection functions, and provides a single window system for government interaction, with the exception o f interaction with NEA. In the medium and longer term, there w i l l be a need to separate regulatory functions from the private promotion functions, and to consider providing greater structural autonomy among the three functions. These changes are needed to reduce structural conflict o f interest now prevailing between the administration o f regulations process for public and private industry. Solicitation for the PDF Administrator i s being managed by DOED; the Administrator has been selected and this appointment w i l l be made final on effectiveness of this credit. IDA was satisfied that the pre- qualified commercial banks, in association with international banking partners, had the required

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administrative capabilities. Subsequently, after reviewing the selection process, IDA has given i t s no objection to the appointment.

Alternate Energy Promotion Centre. AEPC was established in 1996 through a Formation Order 2053 (1996) under the Development Board Act, 2013 (1956). I t i s the agency designated to promote renewable energy, including hydropower plants sized up to 1 MW. In implementing the micro-hydro component o f the project, AEPC wi l l initially rely on the services o f the UNDP- financed Program Support Unit and the Rural Energy Development Sections (REDS) under the DDCs. The REDS were earlier established for implementation o f UNDP’s REDP program, and have proved to be a dependable institutional mechanism for expansion o f community-based micro- hydro power plants.

Nepal Electricity Authority NEA i s the central, Government owned, generation, transmission and distribution utility and i s the grid operator. NEA’s technical performance, in particular with respect to preparation and construction o f projects, has generally been satisfactory, although speedier procurement i s called for. A review o f NEA’s operations shows that the large number of consultants who have worked with NEA since 1985 on various institutional development aspects, have had limited impact in areas such as bill collection, accounting and budgeting, material management and human resource development. However, improvements have been made in NEA’s financial management. Computerization o f NEA’s billing, accounting and inventory managements functions continue to be priority concerns which would be addressed with funding from this proposed project and the ADB project.

NEA currently has a staff complement o f 7544 permanent employees, out o f an approved manpower o f 10,073. Among the productivity ratios posted in FY02 are: 102 consumers per employee and 182 MWh supplied per employee. Although marked by progressive improvements, these productivity ratios are considered low and need to be enhanced. A corporate initiative toward commercialization and service-orientation has resulted in the conversion o f 18 distribution centers into profit centers starting FY02/03. These units cover 70 per cent o f N E A s revenue base and 64 percent o f i t s customers. Further, the Company has recently initiated the separation o f generation, transmission and distribution functions into distinct business units, each headed by a General Manager. This effort i s expected to result in the upgrade o f consumer services, increased revenues, and reduced expenses and losses. Accordingly, in addition to review o f financial performance as described in Section E.2 and 4.4, improvements in N E A s operational efficiency w i l l likewise be monitored in the course o f project implementation, e.g., reduction in electrical system losses from the current level o f 23.4 percent to a level o f 17 percent over the next 5 years, improved customer services, efficient control o f expenses.

4.2 Project management:

Part A: Power Development Fund: PDF Board w i l l enter into an Administration Agreement with the Power Development Fund Administrator, once their appointment i s finalized. A draft o f t h i s agreement was reviewed by IDA and incorporated in the request for proposal issued by DOED. This Agreement sets out the rights and obligations o f both parties and the lending policies o f the Fund and i s renewable by mutual agreement. The Fund Administrator w i l l establish an internal unit to carry out i t s functions headed by a person with s k i l l s in infrastructure finance. The PDF Administrator w i l l report to the PDF Board, which w i l l be formed by Kingdom o f Nepal to monitor the operations and management o f the PDF. The PDF Board w i l l be chaired by the Director General o f DOED.

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Part B: Micro-Hvdro Village Electrification: AEPC wi l l be assisted by the UNDP-financed Program Support Unit and the Project Management Committee for management o f the program. The operation o f the Program Support Unit and the REDS w i l l be directly funded by UNDP at a cost o f about US$O.8 mill ion for a period o f three years. I t i s intended that the existing REDP management unit (which has functioned satisfactorily), and its current staffing w i l l be retained and expanded to provide the program support services. IDA funds wi l l be provided to support expansion o f REDS.

Part C: NEA Transmission and distribution development and technical assistance: NEA has proposed the following project management arrangements which are deemed satisfactory: (i) Project managers w i l l be appointed for the transmission and distribution components and for each technical assistance components; (ii) a Project Coordinator w i l l coordinate the work with the project managers. He would also be responsible to gather information from the various project managers and furnish this information to NEA's management, MOWR and IDA; (iii) transmission projects and technical assistance sub-components would be managed from NEA's headquarters at Katmandu. The project manager for distribution would be located in Katmandu and w i l l be responsible for the day-to-day implementation activities prior to site construction phase; and (iv) Site construction and physical implementation o f the sub-transmission and distribution schemes w i l l be under the responsibility o f the Directors o f the Regional Offices o f Distribution and Consumer Services Directorate. During this phase, the Project Manager for the distribution projects w i l l be responsible for coordinating and monitoring works carried out in the regions. He w i l l also provide information to the Project Coordinator for reporting to "EA Management, MOWR and IDA.

4.3 Procurement:

As part o f project appraisal, the Bank carried out an assessment to determine the institutional capacity among implementing entities to carry out procurement in accordance with the World Bank guidelines. Although DOED has had limited exposure to Bank-financed projects, in the last few years i t has been carrying out satisfactorily, with the assistance o f USAID-financed consulting firms, and in accordance with World Bank guidelines, the pre-qualification and selection o f the Power Development Fund Administrator. I t also has carried out the pre-qualification o f developers for Rahughat and Kabeli hydro electric power projects under build, own, operate, and transfer (BOOT) arrangement. The USAID-financed consultancy i s continuing, and therefore, DOED's capacity i s considered satisfactory. For the small hydro schemes, procurement o f goods and works shall be undertaken by the sub-borrowers, and the PDF Administrator, as part o f its functions, shall ensure that said borrowers follow IDA guidelines on procurement. For Part B o f the project, AEPC w i l l be assisted by the UNDP-financed Program Support Uni t which has had procurement experience. With respect to Part C, NEA's procurement capacity i s considered satisfactory based on previous experience with IDA-financed projects.

4.4 Financial management:

The financial management assessments for the implementing agencies, AEPC and NEA, respectively, were carried out during appraisal. AEPC has appointed a full-time accounts officer to manage the project financial accounts and carry out several actions to mitigate financial management risks, which i s considered satisfactory. AEPC w i l l set up a financial management system as per the Government system, and w i l l also initiate the preparation of a project-specific financial management manual. NEA has already designated a full-time financial officer to manage the project accounts and i t s financial management system, which i s considered satisfactory.

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A preliminary financial assessment o f the PDF component and the PDF Administrator recently identified through a competitive process was undertaken on the basis o f discussions with DOED in the context o f their formulation o f the Borrower’s Implementation Plan, draft Administration Agreement and solicitation documents for PDF Administrator, and with the PDF Administrator in the context o f their existing system and their proposal to manage the PDF. These documents cover specific requirements in respect o f financial management systems, accounting policies and procedures, staffing, reporting, fund flow and auditing arrangements. Upon finalization o f the appointment o f the Administrator (which wi l l occur as soon as this project i s approved by the Banks Board) and prior to disbursement o f funds for the PDF component, a financial management assessment w i l l be completed by IDA to confirm that satisfactory financial management system i s in place, including appropriate internal control, internayexternal audit, and reporting arrangements, and that the Administrator has in place appropriately qualified staff for overall financial management o f the PDF.

5. Environmental:

5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis.

Environmental Category: A (Full Assessment)

Sectoral Environmental Assessment. An analysis o f alternative technology options for meeting short and medium term power demands in Nepal was completed in April 1997. A Sectoral Environmental Assessment (SEA) was performed as a major contribution to this exercise. The SEA for the power sector was used to examine the cumulative impacts o f multiple projects planned in the same sector on the medium to long term. The SEA was to be the basis for identification o f development options in the power sector o f Nepal. Accordingly, the SEA identified that a small and medium scale hydropower development strategy was identified as the preferred option. The SEA makes i t clear that there i s significant scope and potential for renewable sources to play a role in Nepal’s future power generation. The SEA emphasizes environmentally and socially sustainable development o f hydropower resources in the country and recognizes the need to optimize and prioritize the uses o f water resources while minimizing conflict. Thus, the Government has adopted a strategy o f developing small and medium hydropower projects that have minimal negative environmental and social impacts. A screening and ranking process has been developed as part o f the SEA to identify potential environmental impacts so that projects that should be studied for further development can be identified. Supported by an K o N interagency steering group, the SEA involved a two stage review o f potential hydropower projects. The techno- economic feasibility analysis was followed by a socio-environmental issues analysis o f 138 potential hydropower project sites in the 10 - 300 MW capacity range. These were subjected to a Screening and Ranking process (S&R). Environmental, social and techno-economic screening criteria were developed through stakeholder consensus, commencing in 1996. The process involved an open consultation and information-sharing process with public, government, NGOs, and professional community stakeholders and resulted in a successfully completed selection o f the most acceptable hydro-projects for meeting Nepal’s short and medium term power demands. From this l ist , fine screening identified the 24 most attractive sub-projects and the S&R was completed with fine ranking and selection o f 7 sub-projects considered most viable, for detailed feasibility studies. These sub-projects have since been considered in the least cost system expansion planning, and four have been identified as the most preferred options for initial development. Two o f these sub- projects, Rahughat Khola and Kabeli A Hydro Power projects have been identified for potential PDF funding.

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Policv Framework for Environmental Impact Assessment of sub-proiects to be financed under the Pro.iect: The E I N S I A Policy Framework agreed between KoN and IDA i s based on Nepal’s Environmental Protection Act and Environmental Protection Rules (1997), and also meets relevant World Bank requirements including those o f the safeguard policies. The Policy Framework applies to all sub-projects that fall into the categories identified below: (i) generation projects in the range o f 10 - 300 MW identified through the screening and ranking exercise under the Medium Hydropower Study or by NEA and/or private developers using screening criteria acceptable to IDA; (ii) generation projects below 10 MW identified by NEA and/or private developers using screening criteria acceptable to IDA; (iii) transmission and distribution sub- projects to be financed under the Project. Each sub-project w i l l undergo an Environmental Impact Assessment (EM) in compliance with Nepal’s licensing requirements in accordance with the prevailing Environment Protection Act 2053 (1996) and Environmental Protection Rules 2054 (1997) and if the sub-projects are to financed by IDA resources, it should also meet applicable safeguard policies o f the World Bank. EIAs conducted for all sub-projects in accordance with the Policy Framework w i l l include an assessment o f social impacts as well. The EIA wi l l contain, inter alia, an Environmental Management Plan (EMP), an Acquisition Compensation Rehabilitation Plan (ACRP), a Resettlement Action Plan (RAP) and a Vulnerable Community Development Plan (VCDP) where applicable. Annex 11 provides a summary o f the operating policies embodied in the framework.

Operations Manual : An Operations Manual has been prepared by DOED which details the steps that have to be followed by prospective developers in operationalizing the E W S I A Policy Framework as well as outlining the approval procedure for obtaining environmental clearance. The OM provides a detailed procedure to be followed for sub-projects that have a capacity between 1-5 MW, above 5 MW and a more simplified procedure for micro-hydro projects that are below 1 MW. In addition, it specifies the EWSIA procedures to be followed for transmission and distribution lines to be financed under the NEA component o f the project. In accordance with the EIA framework, the sub-projects identified through the S&R need to be subjected to a full EIA, including stakeholder consultations, as part o f feasibility and design studies required for licensing. Project specific EIAs would include alternatives analysis o f project design and project component design for given locations, adequate mitigation, fair compensation, and plans/rules o f operation for environmental management, which w i l l be embodied in an Environmental Management Plan (EMP) for the sub-project. Although feasibility planning and f i r s t stage EIAs were finalized in early, 1999 for four hydropower sub-projects selected for current power system expansion, full EIAs wi l l be conducted once the project developers have been selected. The selected developers w i l l be responsible for the preparation o f comprehensive project specific EIAs, in accordance with the EWSIA Policy Framework and the Operations Manual, for final approval from MOPE and IDA prior to financial support from the project. KoNs Environmental Protection Act and Environmental Protection Rules o f 1997 clearly define the procedure to be followed with regard to environmental assessments for hydropower development, with al l projects above 5 M W being subject to the full EIA process, while smaller projects (1 - 5 MW) are required to follow the Init ial Environmental Examination (IEE) process. If the IEE identifies significant environmental and/or social issues, the legislation states that an EIA i s required, regardless o f the capacity o f the project. These procedures and steps in processing as well the institutional requirements for obtaining environmental clearance o f sub-projects have been clearly defined in the Environmental Assessment Flow Diagram contained in the Operations Manual.

Environmental Assessment o f Projects in the PDF Pipeline: The PDF wi l l finance one medium hydropower project o f approximately 30 MW capacity. The most l ikely sub-project to be financed w i l l be either Rahughat Khola or Kabeli-A hydro power projects. Preliminary environmental assessments have been conducted as part o f the init ial feasibility studies for both sub-projects. However, while potential project developers have been pre-qualified, R F P s are yet to be

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announced. Once the developer i s selected, an EIA w i l l be conducted in accordance with the Policy Framework and Operations Manual. The EIA wi l l be reviewed and cleared by both MOPE and IDA prior to any funds being disbursed from the PDF. I t i s not anticipated that the medium hydro power project w i l l commence implementation in 2003. DOED has a l i s t o f potential small hydropower projects that have been identified through a screening process. The screening process has identified the river and the most likely site for the small hydro power plant. However, the exact location along the river and the type o f technology, and other alternative options w i l l be determined through the EIA. Although five PPA’s have been signed, i t i s uncertain at th is stage whether any o f these sub-projects would seek financing from the PDF. In the event that financing i s sought, the sub-project developer w i l l have to undertake an EIA in accordance with the Policy Framework and Operations Manual and receive MOPE and IDA clearance prior to any disbursement from PDF for that specific sub-project. I t i s not anticipated that any o f the small hydro sub-projects will. commence implementation in 2003.

Micro-hydro Village Electrification Component. KoN’s Environmental Protection Act 2053 (1996) and the Environmental Protection Rules 2054 (1997) exclude electricity generation projects below 1 MW from the IEE/EIA process. Therefore, all community based micro-hydro projects that w i l l be eligible for funding under this component are not required by law to be subjected to an environmental assessment. However, building upon the procedure already in place for community based micro-hydro village electrification projects funded under the UNDP sponsored REDP, separate scheme specific impact assessments w i l l be carried out in accordance with the guidelines for Environmental Assessment o f Micro-hydro Schemes developed by REDP for sub-projects funded under their existing program. These guidelines are based on the Init ial Environmental Examination (IEE) requirements under the Environmental Protection Rules 2054 (1997), and w i l l include information on the existing environment, identification o f environmental impacts caused by scheme implementation, analysis o f the extent o f the identified impacts and development o f appropriate preventive and mitigation measures.

The environmental impacts o f micro hydro projects are generally small, with the main impacts being (i) the partial de-watering o f a section o f riverbed from the intake until water i s returned to the river downstream o f the powerhouse, and the consequent effect on aquatic l i fe in the dewatered section; (ii) potential ground / soil erosion caused by flushing flows discharged from sedimentation basins and by overflows at the forebay; (iii) potential ground instability caused by canallpipe construction and leakage from canals; (iv) cutting o f forest cover to make way for construction works; and (v) cutting o f trees for use as power poles. Considering the capacity o f these sub- projects, i t i s not anticipated that there w i l l be any road construction as part o f developing the micro hydro projects. In the unlikely event there i s some unanticipated impacts, the environmental assessment process developed under the REDP wi l l be able to address it and the EMP prepared for each sub-project w i l l address the problems with suitable mitigatory measures that can be implemented to minimize environmental impacts.

Appropriate means o f mitigating the above impacts are available and w i l l be implemented as part o f development o f the micro hydro facilities. Such mitigation w i l l include (i) maintenance o f a residual f low in the de-watered section o f the river o f not less than 10 percent o f the dry season flow to provide for aquatic life, and to prevent the formation o f stagnant ponds; (ii) provision o f lined channels or o f pipes, wherever necessary (the choice w i l l depend on the terrain) to convey flushing flows / overflows back to the river; (iii) appropriate sitting o f canals, pipelines, etc., to avoid potential areas o f ground instability and to avoid cutting o f forest cover; (iv) careful design o f cut slopes; and (v) lining o f canals to prevent leakage, wherever necessary. Also as part o f the community mobilization program, appropriate watershed management practices w i l l be promoted amongst the community through forestation, micro-watershed management, environmental education and health and sanitation education. Details of the procedure to be followed in

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environmental analysis o f micro hydro vil lage electrification projects i s contained in the Operations Manual. Water use for each o f the micro-hydro projects w i l l be registered at the District Water Resources Committee (headed by the Chief District Officer) to avoid conflicts and to provide legal status for the water use. This registration process i s provided for under the Water Resources Rules 2050 (1993) framed as part o f the Water Resources Act 2049 (1992). The village community (via the MHFG) i s responsible for acquiring al l land for the canal, penstock, powerhouse, distribution system poles, etc. The MHFG i s required to obtain written consent from all landowners so that conflicts do not arise at a later date.

Small unsubsidized loans w i l l be provided under the micro-hydro component by the community energy fund to help finance the conversion o f some local businesses to electricity. These end use activities wi l l be restricted to agro processing ( cereal milling, rice husking and o i l processing) where electrical power w i l l replace the current use o f manual or water power as well as small scale carpentry workshops. These micro enterprises cater to local community needs. The agro processing schemes to be financed w i l l largely reduce the drudgery by replacing manual milling by machine grinding, reduce cereal losses and increase yield in the case o f o i l expellers. These plants w i l l be small with plant capacities in the range o f 8 kW. With regard to the small scale carpentry workshops, the project w i l l result in replacement o f manual implements that are being presently used in existing carpentry workshops by electrical machines or tools. The source o f timber w i l l be from community forests. The timber required for the carpentry workshops w i l l be brought by prospective clients, who are members o f community forestry user groups. These groups provide each member with a specified timber allocation based on domestic needs such as buildinghepairing houses and personal furniture requirements. The community forestry user groups closely monitor the use o f timber by i t s membership. This monitoring mechanism, which i s currently in existence, has proved to be very effective in ensuring sustainable timber use. The enforcement o f the “timber quotas” by the community forestry user group w i l l be used under this sub-component to ensure sustainable use o f forestry resources. Nevertheless, in order to ensure that excess quantities o f timber w i l l not be used, i t has been agreed with AEPC that the carpentry workshops w i l l use only the authorized allocation o f wood provided to the community by the respective community forest user group. I t has also been agreed that their project finances cannot be used for funding saw m i l l s . During sub-project approval and supervision, AEPC wi l l ensure that carpentry workshops w i l l use timber only from entitled quotas from the respective community user groups.

Transmission and Distribution Component: EIAs have commenced for the 220 kV scheme and for the 132 kV bay extension for the Dhalkebar substation and the Dhalkebar - Bhittamod 132 kV transmission lines, in accordance with the Policy Framework and Operations Manual. I t i s expected that the EIA w i l l be completed by July 2004. While the EIAs would be ready in July 2004, completion o f the detailed engineering designs and procurement o f contractors to implement the sub-project w i l l result in implementation beginning in 2005. MOPE and IDA environmental clearance i s a pre-requisite for disbursement o f funds from IDA for these works.

Institutional Capacity for Implementing the Environmental Assessment Process: With the imminent hydropower expansion plans for Nepal’s power system, the requisite institutional capacity to deal with the environmental, social and techno-economic aspects o f projects i s essential. Key authorities in the licensing process are the Department o f Electricity Development (DOED) under the Ministry o f Water Resources (MOWR), and the Ministry o f Population and Environment (MOPE). DOED i s receiving long-term technical assistance (TA) from USAID, through consultants, including in upgrading staff s k i l l s in environmental management review. The second phase o f the long-term USAID TA to DOED commenced in 2002. Under the project, several documents have been prepared to assist the developers, DOED, MOWR and MOPE in streamlining the EIA process. These documents include: (i) Manual for Preparing Scoping Document for EL4 o f Hydropower Projects; (ii) Manual for Preparing Terms o f Reference for

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EIA o f Hydropower Projects, with Notes on EIA preparation; (iii) Manual for Preparing Environmental Management Plan (EMP) for Hydropower Projects; (iv) Manual for Reviewing Scoping Document, TOR and EIA reports for Hydropower Projects; (v) Manual for Preparing Init ial Environmental Examination Report for Hydropower Projects; (vi) Manual for Public Involvement in the EIA Process for Hydropower Projects; (vii) Manual for Developing and Reviewing Water Quality Monitoring Plans and Results for Hydropower Project; and (viii) Manual for Prediction, Rating, Ranking and Determination o f Significant Impacts in EIAs o f Hydropower Projects. In addition to preparation o f the above documents, the USAID technical assistance involves training o f relevant staff in K o N agencies in preparation, review and evaluation o f environmental impact assessments as well as the placement o f a full time national and international environmental specialist at DOED for long term institutional strengthening. During the mid term review o f the project, IDA wi l l assess the impacts o f the USAID TA on DOED’s ability to address environmental issues pertaining to hydropower development. If additional TA i s needed and if the USAID TA i s coming to an end, the requisite TA wi l l be provided to DOED under the Project.

MOPE i s receiving TA through NORAD, specifically related to i t s clearing authority with regard to hydropower-licenses and environmental impact assessments, focusing on the hydropower sector. NORAD has earlier assisted K o N in developing Nepal’s power and water resources legislation. The technical assistance provided through NORAD i s coordinated with USAID and ADB, with the aim o f promoting a project licensing process that i s efficient and credible to both investors, other stakeholders, and K o N regulator-authorities. The TA package includes the placement o f an international advisor at MOPE as well as training for MOPE staff. At this point, considering the absorptive capacity at MOPE, additional TA i s not needed. However, during the mid term review o f the Project, the institutional capacity with regard to implementing the environmental assessment process, including environmental clearances w i l l be reviewed and depending on the need, additional TA wi l l be provided through the project at that time, if the NORAD TA i s not extended.

5.2 What are the main features o f the EMP and are they adequate?

EMP for the PDF comuonent: Project specific environmental assessments cannot be undertaken at this stage since developers for specific sub-projects to be financed by the PDF have not been identified as yet. However, the EWSIA Policy Framework and Operations Manual (referred to above), specifies detailed procedures to be followed in EL4 preparation, the environmental clearance process and the preparation o f EMPs. The scope o f the EMP i s detailed in the Operations Manual. All sub-projects seeking financing from the PDF wi l l undergo environmental assessments in accordance with the Framework. IDA wi l l review and concur with all EAs and EMPs prepared under the project, prior to the release o f any funds from the PDF, thus ensuring adequate attention to addressing environmental issues in project implementation.

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EMP for the Micro Hydro Village Electrification comuonent: All micro hydro village electrification sub-projects w i l l be subject to an environmental analysis through the IEE process. The main feature o f the IEE process i s the development o f a EMP to address potential adverse environmental impacts that may arise as a result o f implementing the sub-projects. The EMP’s wi l l not be confined to direct impacts from the sub-project but would address issues that w i l l ensure long term sustainability of the sub-project, such as watershed management with community participation. The procedure to be followed for environmental analysis and clearance i s described in the Operations Manual. IDA w i l l review the f i r s t 5 IEEEMP’s to ensure conformity with World Bank’s environmental and social safeguard policies are being adhered to. Based on IDA’S assessment o f REDP’s capacity to implement the environmental and social safeguard processes in the sub-projects under their jurisdiction, that additional technical assistance under the project i s not warranted at this stage.

EMP for Transmission system sub-components. Nepalese legislation and the above-mentioned EIA policy framework and the O M require EIA or an Environmental Analysis for transmission projects, dependent on whether the projects meet the criteria o f Category A or B projects as defined in OP 4.01 Environmental Assessment. Therefore, EIAs are required for the proposed construction o f transmission lines. These EIAs are under preparation by NEA and w i l l be subject to approval by M O W R M O P E and IDA, prior to disbursement o f funds for the said transmission lines. A number o f schemes funded under this sub-component involve extension o f existing substations, in which EIA are not needed in accordance with Nepalese legislation, due to negligible environmental impacts, but w i l l nevertheless undertake environmental screening and if needed, an IEE, as per the Policy Framework. The procedure to be followed by the NEA in environmental assessments o f the NEA component o f this project i s detailed in the Operations Manual. All EIAs and EMPs (which w i l l be contained as part o f the EIA report) w i l l be reviewed and cleared by IDA prior to disbursement o f funds for the sub-projects. The implementation of the EMP wi l l be monitored by MOPE and IDA during supervisions.

5.3 For Category A and B projects, timeline and status o f EA: Date o f receipt o f final draft: November 1999

5.4 How have stakeholders been consulted at the stage o f (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms o f consultation that were used and which groups were consulted?

K o N has mandatory rules for public consultation during scoping, IEE and EIA preparation processes. A 15 day period i s provided to the public through a public notice to identify their concerns about a proposed project so that these concerns can be included in the TORS for the IEE and/or EIA, during scoping o f a sub-project. I t i s mandatory that the IEE be subject to public review and consultation for a period o f 15 days, after completion o f the BE. The EIA preparation process involves a mandatory public hearing during the preparation stage as well as a mandatory public review and consultation period o f 30 days once the EIA report i s available in draft form. Since sub-projects to be financed under th is project and the prospective developers are yet to be identified, no sub-project specific IEEEIAs have been conducted as yet. However, a Policy Framework for Environmental Impact Assessment which mandates public consultations has been prepared which w i l l serve as a template for undertaking IEEEIAs for sub-projects once the prospective developers are identified. The Policy Framework was subject to public disclosure and consultations. In May 2002, DOED translated the Policy Framework into the local language and disclosed it to the public in all 75 districts in the country. The public disclosure process commenced on September 11,2002 and continued for a period o f 21 days.

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In addition, Section 6.2 identifies details o f the larger consultative process followed during the environmental screening and SEA process, which ultimately led to a participatory process o f screening and ranking o f potential hydropower projects in Nepal. The screening and ranking process involved detailed discussions on potential environmental and social impacts anticipated in the development of the sub-projects and possible mitigatory measures, with all relevant stakeholders, including the public. DOED has developed a Manual for Public Involvement in the EL4 Process for Hydropower Projects as a guide for potential developers. The manual specifies the stages at which public consultation i s mandatory and where i t i s recommended. Public discussion o f the EL4 and the EMP i s a requirement mandated by legislation.

5.5 What mechanisms have been established to monitor and evaluate the impact o f the project on the environment? D o the indicators reflect the objectives and results o f the EMP?

The E W S I A Policy Framework and Operations Manual discussed above specifies the procedure to be followed by developers and K o N agencies to monitor and evaluate the impact o f the project on the environment. The adequacy o f environmental and social mitigatory measures proposed in each sub-project specific environmental assessment w i l l be reviewed by three K o N agencies-DOED, M O W R and MOPE. Sub-project developers are responsible for preparation o f the IEEEIA based on TOR approved by MOPE. Any sub-project seeking finances from PDF w i l l prepare an IEEEIA which w i l l be submitted to the PDF Administrator and DOED. While the PDF Administrator w i l l have access to environmental expertise through the consortium of companies that comprise the PDF Administrator, the main responsibility to ensure technical quality o f the IEEEIA w i l l be with DOED. Compliance with national environmental regulations i s a pre-requisite for DOED to issue an operating license for the sub-project developer. Upon DOED ensuring the EEEIA conforms with the requirements o f the Policy Framework and Operations Manual, i t i s reviewed for technical quality by MOWR prior to submission to MOPE for formal environmental clearance. Long term institutional strengthening programs (with resident long term consultants and training programs for regular staff) are in place at both agencies that w i l l adequately address technical capacity constraints currently faced by DOED and MOPE. Regular monitoring o f implementation o f the sub-project EMP’s w i l l be undertaken by both DOED and MOPE.

6. Social:

6.1 Summarize key social issues relevant to the project objectives, and specify the project’s social development outcomes.

The project i s expected to yield positive social impacts through improvements in the quality and quantity o f power supplies and service. These positive outcomes are expected to result in increased capacity to meet growing electricity demand, encourage the expansion o f economic activity and employment opportunities and enhance rural livelihoods by supporting micro hydropower as a means o f promoting the electrification of rural communities in remote areas.

Potential negative social impacts associated with sub-projects to be financed under the Project’s PDF and NEA components, including resettlement and land acquisition, w i l l be minimized as much as possible by selecting optimal locations and exploring alternative projects. Where land acquisition i s unavoidable the project w i l l be designed to cause the least amount o f social, cultural and economic disruption. Project affected families (PAFs) losing assets, livelihood or other resources wil l be assisted in improving their standard o f living, income eaming capacity and production capacity or at least to restore them. Special measures w i l l be taken to protect socially and economically vulnerable groups such as female headed families, ethnic and tribal groups and people l iving in extreme poverty.

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Policy Framework for Environmental and Social Impact Assessment ( E W S I A Framework). Principles and modalities to mitigate social impacts are detailed in the E W S I A Policy Framework. This Framework agreed between K o N and IDA has been prepared in accordance with Nepal’s Land Acquisition Act (1977), the Environment Protection Act and Environment Protection Rules (1977), as well as the Bank’s OD 4.30 and 4.20. I t applies to all sub-projects that fall into the following categories: (i) generation projects in the range o f 10-300 MW identified through the screening and ranking (S & R) exercise under the Medium Hydropower Study or by NEA and/or private developers using screening criteria acceptable to IDA; (ii) generation projects below 10 MW identified by NEA and/or private developers using screening criteria acceptable to IDA; and (iii) transmission and distribution sub-projects to be financed under the Project. As detailed in Section 5.1, a Social Impact Assessment (SIA) and where applicable a Resettlement Action Plan (RAP) and Vulnerable Communities Development Plan (VCDP) w i l l be prepared as part o f the Environment Impact Assessment to be undertaken for all sub-projects in accordance with Policy Framework. In the context o f the discussion o f Nepal’s Legal Framework the Policy Framework refers to the RAP as an Acquisition Compensation Rehabilitation Plan (CACRP). Annex 11 provides a summary o f the operating policies embodied in the Policy Framework.

Social Assessment. Social assessments w i l l be carried out as an integral part o f the feasibility studies for each sub-project under the Project’s PDF and NEA components. Each sub-project w i l l undergo a socio-economic baseline study consisting o f the following: (i) socio-economic survey o f sample households to determine asset ownership and pre-project incomes and living standards; (ii) land use survey; (iii) community studies describing social structures and social relations in the project affected area; (iv) institutional analysis o f formal and informal community organizations; and (v) beneficiary consultations and focus group meetings. Site specific social impact studies w i l l build upon the socio-economic baseline data to quantify the type and extent o f project impacts through the following: (i) a site specific entitlement matrix prepared by applying the generic policy o f entitlements to the specific conditions of the sub-project clearly identifying expected impacts, eligibility criteria and entitlements; (ii) a detailed census o f affected persons who w i l l be eligible for compensation or rehabilitation; and (iii) an inventory o f land and other assets being acquired under eminent domain under the project.

Sub-projects that impact 25 or more families with the loss o f over 25% o f their total land holdings or whose land holding i s reduced to an uneconomic holding o f less than 5.0 katha or who face relocation w i l l require the preparation o f a Resettlement Action Plan (RAP) in accordance with the provisions o f O.D. 4.3.0. and the EWSIA Policy Framework. The project developer w i l l be responsible for the preparation o f a RAP which w i l l document implementation arrangements for resettlement including asset acquisition, compensation, relocation and rehabilitation o f persons affected by loss o f dwelling, land and other assets or livelihood. The RAP w i l l also clearly define institutional arrangements and responsibilities for the implementation o f resettlement activities, budget for resettlement expenditures and detailed monitoring and evaluation arrangements. The presence o f ethnic minorities or tribal populations in the project affected area for any sub-project w i l l require the preparation o f a separate Vulnerable Communities Development Plan (VCDP) to ensure that ethnic minorities/tribals are provided with assistance in accordance with their own priorities. The VCDP wi l l be prepared in accordance with the provisions o f O.D. 4.20 and the EWSIA Policy Framework. The VCDP replaces the Indigenous Peoples Development Plan (IPDP) typically prepared to meet the requirements o f O.D. 4.20 by extending assistance to vulnerable groups living below the poverty line in the project area.

In each sub-project resettlement schedules w i l l be coordinated with construction schedules. All resettlement activities arising out o f civi l works w i l l be completed prior to the scheduled commencement date of those works on the sub-project. MOWR wi l l create a Grievance Redress Committee at the sub-project level to address complaints and grievances pertaining to resettlement

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and social development concerns to facilitate their resolution and pre-empt disagreements being referred to the court. The Committee w i l l involve administrative officers and representatives o f the local communities.

ODerational Manual. An Operational Manual (OM) o f Environmental Impact Assessment for Sub- Projects, financed under the Power Development Project has been prepared by DOED which presents detailed guidelines for prospective project developers on the operational processes for the preparation, clearance and monitoring o f sub-project specific SIAs, RAPs, and VCDPs. I t also specifies EWSIA procedures to be followed for transmission and distribution lines to be financed under the NEA component. The selected project developers w i l l be responsible for the preparation o f comprehensive sub-project SIAs, RAPs and VCDPs. DOED staff w i l l review these reports to ensure that identified social impacts are addressed as required by the E W S I A Framework. DOED wi l l clear the S I A reports with MOPE and MOWR, prior to implementation. The project developer w i l l be responsible for the implementation o f the RAP and VCDP. During implementation, the project developer w i l l submit regular progress reports to MOPE and MOWR, who w i l l retain responsibility for supervision and period evaluation. The technical assistance capability for MOPE, which i s to be financed by NORAD, w i l l include a component to appraise the SIA, RAP and VCDP reports and monitor implementation. Approval o f MOPE and IDA o f SIAs, RAPs and VCDPs wi l l be required prior to financial support for the Project.

Micro-hvdro Village Component. Based on the UNDP financed Rural Energy Development Program (REDP), this component supports scaling up o f community based micro-hydro village electrification for about 30,000 new consumers in 150 remote rural villages. The main responsibility for implementation o f micro-hydro systems i s carried out by a community based Micro-Hydro Functional Group (MHFG) established in each beneficiary community. The social mobilization process embodies the principles o f establishing self governing organizations (MHFGs), with a specific focus on women’s empowerment, s k i l l enhancement, technology transfer and environmental management. The micro-hyrdo village component w i l l continue to support REDPs program to assist communities to access other sources o f funds for renewable energy (e.g. , solar PV, improved cook stoves, and saplings for community forestry), as well as provide training on micro-hydro systems and maintenance. The social mobilization process w i l l be facilitated by local NGOs to ensure the integral participation o f the communities in the planning, design, construction, operation and maintenance o f micro-hyrdo schemes. Local NGOs will also facilitate the links between the MHFGs with other development initiatives in the District. To enhance the poverty alleviation o f the program, a greater focus w i l l be placed on the inclusion in MHFGs of vulnerable groups, including Dalits and the most poor and disadvantaged in the communities.

Selection o f districts and potential micro-hydro sites w i l l continue to follow the selection criteria o f the REDP program where preference i s given to districts with good micro-hydro development potential, absence o f coverage by the NEA grid, and low UNDP Human Development Index (HDI) indicators. A District Energy Situation Paper w i l l be prepared for each identified district listing potential hydro-power sites through map studies and in consultation with local district authorities and community stakeholders. Selection criteria for scaling up the REDP program to cover 10 additional districts w i l l place a specific focus on selection o f districts with poor HDI indices and low national grid coverage to maximize potential for poverty reduction. Preference w i l l be given to those communities that are committed to the Project and wil l ing to provide voluntary labor for scheme construction, transportation o f equipment and materials, wil l ing to pay for consumption o f electricity, and wil l ing to voluntarily donate land for the construction o f the canal, penstock, powerhouse and distribution poles.

Sustainability o f the micro-hydro electrification components w i l l be linked to the sustainability o f the MHFGs. Key lessons learned from the REDP program indicate the need to strengthen the

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following processes to enhance the sustainability o f the micro-hydro electrification systems: (i) further strengthen the community mobilization process; (ii) improve the formalization o f micro- hydro groups; (iii) improve procurement procedures; and (iv) improve monitoring and evaluation processes. Specific emphasis w i l l be placed through technical assistance to ensure the strengthening o f these processes.

6.2 Participatory Approach: How are key stakeholders participating in the project?

The Screening & Ranking (S&R) study adopted a significant participatory approach in identifying medium-sized projects that are technically feasible, economically viable and promise minimum environment and social impacts. Schemes to be financed under the PDF funding wi l l be further subject to the E W S I A policy framework in accordance with KoN and Bank guidelines.

For the S&R study, a stakeholder analysis involved the following three main groups o f stakeholders: (i) relevant KoN Agencies; (ii) concerned public groups, as well as domestic and international NGOs; and (iii) other major power sector multilateral and bilateral donors. These stakeholder groups were notified and invited to participate in defining the project parameters. At each stage o f the study - identification, design, scoping, screening and finalization - there was a continuous process o f discussions with and participation by stakeholders. The mode o f participation varied among the groups. KoN agencies participated through meetings and by commenting on reports as work proceeded. Responses and suggestions were invited from the public and NGOs through newspaper advertisements and letters and followed up in public discussions and meetings at the end o f each phase. Donors participated through meetings at completion o f the S&R. To give the public access to material produced during the process, a Public Information Center was established at NEA from the time when the case screening started until i t was completed.

The EWSIA Framework provides guidance on the development o f a consultation strategy and public information tools to ensure community awareness and involvement in the sub-project. Participatory monitoring w i l l be undertaken by community members for those components o f the sub-project which directly affect them. In May 2002, DOED translated the Policy Framework into local the language and disclosed it in all 75 districts o f the country. Section 5.2 o f the Operational Manual on Public Consultation, also presents a detailed discussion on the participatory and consultative process to be adopted for the PDF and NEA components. The micro-hydro village electrification component i s community driven and the participation o f local NGOs and civi l society organizations to support the mobilization and formation o f community based organizations i s fully integrated into i t s design.

6.3 How does the project involve consultations or collaboration with NGOs or other c iv i l society organizations?

The E W S I A Framework details collaboration with local NGOs on data collection and analysis in developing the social baseline, as well as providing guidance on developing participatory monitoring mechanisms with the communities. Tools for direct consultation with the communities include: (i) workshops including government officials, NGO and community representatives; (ii) public meetings and hearings at which local government officials explain the objectives o f the sub- project, listen to and document community concerns; (iii) establishment o f a citizen liaison advisory committee providing a two-way link between the project developer and the community; and (iv) participatory monitoring by community members. In the micro-hydro electrification component ongoing consultations with communities w i l l be facilitated by local NGOs in two key ways: (i) assisting in the formation o f MFHGs and as community facilitators, training community

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members; and (ii) building linkages between MHFGs and local government agencies and other development initiatives including micro-credit programs.

6.4 What institutional arrangements have been provided to ensure the project achieves i t s social development outcomes?

An E I N S I A Policy Framework and an Operational Manual have been prepared by the Government and agreed with IDA. These documents present detailed guidelines for prospective project developers on the operational processes for the preparation, clearance and monitoring o f sub- project specific SIAs, RAPs, and VCDPs. DOED staff w i l l review these reports to ensure that identified social impacts are addressed as required by the EWSIA Policy Framework. These reports w i l l be submitted to MOPW through MOWR for formal clearance NEA wi l l be responsible for undertaking SIAs for all transmission lines. RAPs and VCDPs as required w i l l be prepared by NEA and reviewed and cleared by MOPE. In accordance with the Policy Framework and the Operational Manual approval of MOPE and IDA of SIAs, RAPs and VCDPs w i l l be required prior to financial support for the Project.

The Alternative Energy Promotion Center (APEC) w i l l be the responsible for oversight o f fund flows, auditing and budgets for the funding the program. A management committee w i l l be established to oversee the implementation activities, and include NGO representatives. Day -to- day management o f the program at the central level (Katmandu) and district levels (DDC-REDS) w i l l be carried out by a project support unit, working under AEPC.

6.5 How wi l l the project monitor performance in terms o f social development outcomes?

The social impact assessments to be carried out as part o f the feasibility studies for each sub- project o f the PDF component w i l l detail modalities for monitoring and evaluation as defined in the E W S I A Framework. Chapter 7 o f the Operational Manual contains a detailed discussion o f the monitoring and auditing procedures.

The social mobilization strategy adopted for the Micro-hydro Village Electrification program wi l l be strengthened to include participatory monitoring involving the community functional groups in assessing the results and impacts o f the schemes. Specific indicators and benchmarks of the achievement o f the program's social and community driven development objectives w i l l be developed including: (i) process indicators covering the formation and institutional development o f the MHFGs (e.g., selection o f community representatives, decision making within the MHFGs, their involvement in planning micro-hydro schemes, and cost contributions); (ii) output indicators, indicating results in increased household incomes, and improvements in basic l iving conditions; and (iii) impact indicators, related to the longer term effect o f the program on the people's lives. The monitoring and evaluation program established at the community level w i l l also be reflected in the monitoring and evaluation programs being established on AEPC. During project implementation the baseline monitoring and impact assessment would be further developed to clarify the division o f responsibilities in term o f reporting and monitoring, feedback mechanisms to the field level and identification o f relevant indicators.

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7. Safeguard Policies:

7.1 D o any o f the following safeguard policies apply to the project?

Forestry (OP 4.36, GP 4.36) Pest Management (OP 4.09) Cultural Property (OPN 11.03) Indigenous Peoples (OD 4.20) Involuntary Resettlement (OPBP 4.12) Safety of Dams (OP 4.37, BP 4.37) Projects in International Waters (OP 7.50, BP 7.50, GP 7.50)

Yes Yes Yes

Yes Yes Yes Yes Yes

No

No

7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies.

Environmental Assessment OP 4.01: OP 4.01 on environment assessment applies to the project (details on provisions to ensure compliance with OP 4.01 are presented in Sections 5.1 and 5.2). A Policy Framework for Environmental and Social Impact Assessment ( E W S I A Framework) has been developed and agreed to between KoN and IDA which would form part o f the operating policies for the proposed PDF as well as for the NEA investment component. An Operations Manual has been prepared outlining the procedural and technical steps that need to be followed in order to operationalize the Policy Framework. The Operational Manual also describes the procedures to be followed for environmental analysis o f sub-projects to be financed under the micro hydro village electrification component. Social Impact Assessments w i l l be undertaken as part o f the IEEEIA process to examine the potential social impacts, identify and recommend mitigation measures, and develop a RAP and/or VCDP in accordance with the Bank‘s Operational Directives 4.30 and 4.20 and Government guidelines. All subprojects to be financed under the PDF component, all micro hydro village electrification projects and all sub-components under the NEA component o f the project w i l l be subject to guidelines contained in the Policy Framework and the Operations Manual.

Natural Habitats OP 4.04 and Forestry OP 4.36: Conservation o f natural habitats and forest resources i s essential for long term sustainable development. Since hydropower projects, in particular, the medium and small hydro power schemes proposed to be funded under PDF as well as transmission lines under the NEA component have the potential o f adversely impacting natural habitats and forest resources. The IEEEIA process mandated under the Policy Framework and Operational Manual has the requisite precautionary measures to ensure that the project w i l l not finance any activities that would result in any irreversible environmental degradation to both natural habitats and forest resources. All IEEEIAs prepared for activities financed under the project w i l l be reviewed and cleared by IDA. This ensures that the above safeguard policies are adhered to during project implementation.

Safety o f Dams OP 4.37: Although al l hydropower generation components to be financed under the project involve “run-of-the-river” sub-projects, the above safeguard policy i s triggered as a precautionary measure since the medium hydro power project in particular and even some small hydro power projects may have weir’s high enough to constitute a risk. Based on experience, i t i s not anticipated that a run o f the river hydropower project o f approximately 30 MW wi l l have a weir height exceeding 15 meters. However, since the EIA for the sub-projects are yet to be completed, as a precautionary measure this safeguard policy i s triggered so that all conditions o f the policy

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could be implemented in the event a higher weir i s required. For instances o f weir heights exceeding 15 meters, the Bank requirements given in OP 4.37 w i l l be followed.

Projects in International Waters OP 7.50: All requirements, stipulated in paragraph 4 o f OP 7.50 Projects on International Waterways, have been complied with by the Bank.

Cultural Property OP 4.11: While i t i s not anticipated that any sub-projects w i l l involve sites having archeological, paleontological, historical, religious or unique natural sites since the screening criteria should eliminate such sites, the above safeguard policy has been triggered mainly as a precaution to ensure due attention i s paid to ensure that sub-projects do not result in damage to cultural property. The sub-project EL4 wi l l identify any potential damage to cultural property, which would result in that sub-project being ineligible for funding under IDA.

Involuntary Resettlement OD 4.30 (OP 4.12): O D 4.30 applies to the project (provisions to ensure compliance with OD 4.30 are presented in detail in Section 6.1). Potential negative social impacts associated with the PDF and NEA components, including resettlement and land acquisition, w i l l be minimized by selecting optimal locations and exploring alternative projects. Where land acquisition i s unavoidable the project w i l l be designed to cause the least amount o f social, cultural and economic disruption. Project affected families (PAFs) w i l l be compensated, relocated and rehabilitated, if required, so as to improve their standard o f living, income earning capacity or at least to restore them to a l iving standard they are likely to have achieved if the project had not taken place.

Principles and modalities to mitigate social impacts are detailed in the EWSIA Policy Framework. This Framework agreed between K o N and IDA has been prepared in accordance with Nepal’s Land Acquisition Act (1977), the Environment Protection Act and Environment Protection Rules (1977), as well as the Bank’s OD 4.30. Sub-projects that impact 25 or more families with the loss o f over 25% o f their total land holdings or whose land holding i s reduced to an uneconomic holding o f less than 5.0 katha or who face relocation w i l l require the preparation o f a Resettlement Action Plan (RAP) , The project developer w i l l be responsible for the preparation o f a RAP which w i l l document implementation arrangements for resettlement including asset acquisition, compensation, relocation and rehabilitation o f persons affected by loss o f dwelling, land and other assets or livelihood. The RAP w i l l also clearly define institutional arrangements and responsibilities for the implementation o f resettlement activities, budget for resettlement expenditures and detailed monitoring and evaluation arrangements. An Operational Manual o f Environmental and Social Impact Assessment (OM) has been prepared by DOED which presents detailed guidelines for prospective project developers on the operational processes for the preparation, clearance and monitoring o f sub-project specific RAPs, and VCDPs. I t also specifies similar procedures for preparation o f RAPs for transmission and distribution lines to be financed under the NEA component.

Land acquired for the construction of the micro-hydro schemes, including for canal, penstock, powerhouse, and distribution line poles, i s to be donated voluntarily by each participating community. voluntarily donated. All land required under the component w i l l be on a voluntary basis. Under the REDP, Memorandum of Agreements have been established by community functional groups as a means o f recording the location and size o f land being donated as well as the written consent and names o f local witnesses for those community members voluntarily donating land (see Annex 12). In addition to the Memorandum o f Agreements, which w i l l continue to record and verify the voluntary nature o f land donations by each community member, specific provisions w i l l be added to current Memorandum o f Agreements to record that the land being donated i s free o f squatters, encroachers or other claims or encumbrances. In addition, if any loss o f income or physical

Micro-hydro schemes w i l l be developed only in those communities where land i s

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displacement i s envisaged, MHFGs wi l l verify the voluntary acceptance o f community-devised mitigatory measures by those impacted. These w i l l also be recorded in the revised Memorandum o f Agreements. MHFGs wi l l identify the land required for the micro-hyrdo schemes, however, project authorities w i l l confirm whether land identified by MHFGs i s suitable for the scheme. The construction o f micro-hydro schemes i s not expected to result in the involuntarily relocation o f any people or structures.

Indigenous Peoples O D 4.20: OD 4.20 applies to the Project (provisions to ensure compliance with OD 4.20 are detailed in Section 6.1). The presence of ethnic minorities or indigenous groups in the project affected area w i l l require the preparation o f a Vulnerable Communities Development Plan (VCDP). The E W S I A Policy Framework presents policy guidance to ensure compliance with objectives o f O D 4.20 and ensures that indigenous and minority groups (i) benefit from the Project’s PDF and NEA components and (ii) that adverse impacts are either avoided or mitigated if unavoidable. The VCDP replaces the Indigenous Peoples Development Plan (IPDP) typically prepared to meet the requirements o f O.D. 4.20 by extending assistance to vulnerable groups l iving below the poverty line in the project area.

Indigenous and ethnic groups are present in the communities where micro-hydro schemes w i l l be constructed. Due to the late inclusion o f the micro-hydro village electrification component in the project, a Vulnerable Communities Development Plan (VCDP) for this component in accordance with the provisions o f 0.D.4.20 w i l l be prepared by the end o f December 2003 to ensure the participation o f vulnerable and indigenous peoples in decision-making throughout the planning and implementation phase. Current social mobilization practices under REDP emphasize the formation o f broad-based and self-governing community organizations that involve over 95 percent o f the households in that community. These principles o f social mobilization w i l l be strengthened drawing upon lessons learned from a review of past experiences with REDP program, to ensure the inclusion of all indigenous and ethnic groups, dalits and disadvantaged groups in the MHFG. Emphasis w i l l also be placed on ensuring the adequate inclusion o f women, dalits and disadvantaged groups in the community functional groups.

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F. Sustainability and Risks

1. Sustainability:

The Project would support development o f small hydropower generation projects which w i l l be selected based on technical, financial, economic as well as environmental and social impacts. A workable regulatory framework for private sector development already exists, and further improvements are envisaged during project implementation. Executing entities w i l l be private sector operators and/or local entrepreneurs with sound business development track record.

To sustain the overall development o f Nepal's power sector, K o N and IDA, in coordination with other donors, have begun the dialogue on sector reforms. While the project supports the reform thrust o f promoting private participation in power, a further re-definition o f roles between public and private participants i s under review, including options involving unbundling o f electricity services and privatization o f distribution functions.

Sustainability of the micro-hydro village electrification systems i s primarily linked to the sustainability o f the MHFG, the community mobilization process and transparency throughout the l i fe o f each sub-project. Previous experience under REDP shows that the community mobilization i s effective, and that system failures have been few in number. However, there are a number o f areas where processes (and therefore sustainability) would be further enhanced, e.g., (i) further strengthen the community mobilization process; (ii) improve the formalization o f micro-hydro functional groups; (iii) improve procurement practices; and (iv) improve the benefit monitoring and evaluation process. Moreover, an enhanced benefit monitoring and evaluation program w i l l be implemented as part o f the program, with the secondary aim o f providing early feedback o f system failure and malfunction. This w i l l be applied at the village level, with supervision from the district Rural Energy Development Sections that are established in each district development committee as part o f the program.

Extensive training for the O&M staff (two operators and one manager selected from the local community) assigned to each system i s provided, in both technical aspects o f system operation and in bill collection, disconnection for non-payment, record keeping, accounting, etc. O&M staff are engaged prior to commencement o f construction, are required to sign pledges that prevent them from leaving for other opportunities once training i s completed, and are required to assist with system construction, plant installation and commissioning.

The micro-hydro turbine/generator and control equipment i s manufactured in Nepal, and i s generally o f adequate reliability and durability. However, some maintenance and repairs are beyond the capacity o f the O&M staff. Accordingly, the program wi l l support the development o f micro-hydro maintenance support facilities located within the district by providing (repayable) financial support to assist an existing, local engineering workshop(s) to expand and upgrade sk i l l s in micro-hydro system maintenance and repair.

The program design recognizes that a small number o f the micro-hydro village electrification systems w i l l inevitably fail within the f i r s t few years o f operation, without adversely affecting the overall economic viability o f the program.

The project would improve operational efficiency o f Nepal's power grid and facilitate delivery o f electricity from power plant investments. IDA financing o f transmission and distribution wil l ensure an appropriate balance o f investments required for an efficient power system.

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KoNs recent adjustment o f tariffs would help ensure NEA's financial capacity to support power purchases from private generators, and to upgrade and expand service to i t s consumers.

Consulting services w i l l be provided under the respective technical assistance components, including through bilateral support to ensure the smooth implementation o f PDF, micro-hydro village electrification, and NEA activities.

2. Critical Risks (reflecting the failure o f critical assumptions found in the fourth column o f Annex 1):

The Project faces high implementation and economic risks due to the security situation in Nepal. The security r isks posed by the insurgency and economic uncertainties due to associated possible decline in the country's economic growth w i l l dampen the private sector's willingness to invest in hydroelectric schemes in the short-term. Moreover, there have been incidents o f bombing o f hydroelectric facilities in the past months. Accordingly, before extending PDF funding for a small hydro project, the security risk factor for the proposed site w i l l be reviewed together with other viability criteria. In the case o f the medium hydro investments for Kabeli-A and Rahughat, i t i s expected that the international investment community would reflect their perception of the security r isks in their responses to the bid invitation. To a limited extent, the village electrification schemes are expected to be less vulnerable to security r isks in that they are expected to gamer popular local support given the participatory approach used. To date similar schemes have been relatively safe from damage. Further, these schemes help redress inequitable access to services by the poor communities, and respond to some o f the development issues raised by the insurgents.

Risk From Outputs to Objective Public acceptance o f hydro-power development strategy. Adequate private sector interest in investing in power projects in Nepal i s elicited.

Operational sustainability o f village micro-hydro systems.

NEA i s financially sound to support T&D expansion, power purchase from Independent Power Producers (IPPs), and service improvements.

Security conditions in the country are conducive to investments.

M

H

S

M

H

Risk Mitigation Measure

Extensive public consultation has been carried out during S&R exercise. For small hydro developers, simplified rules for licensing, standard pricing and power purchase arrangements are in place. PDFA and DOED wi l l make al l efforts to reduce the administrative burden. Performance track record o f schemes financed by UNDP; project i s designed to cover a five percent to 10 percent failure rate. Two tariff adjustments effected since November 1999. Project agreement with NEA includes appropriate financial covenants to ensure N E A s creditworthiness and improvement in its financial management and cost control. Viability o f investments w i l l be individually assessed including associated security risks. The project w i l l largely finance investments including those directly beneficial to poorer communities. Community-based schemes which have popular support are expected to be less vulnerable to securitv risks.

- 40 -

Risk From Components to Outputs Timely selection and installation o f PDF Administrator . Efficient functioning o f the Administrator in terms o f the agreement, including promotion o f the Fund, accounting and reporting

Efficient functioning o f the PDF Board in meeting regularly and reaching agreement

Adequate reporting and accounting o f project resources.

Available pipeline for bankable small- sized hydro schemes. Successful development and implementation o f these schemes.

Timely implementation o f micro-hydro schemes.

Timely completion o f T&D schemes- including timely recruitment o f consultants, posting o f project managers, timely procurement actions, prompt fund release.

Overall Risk Rating

M

M

M

M

S

S

M

S

Risk Mitigation Measure

Appointment i s already in place and w i l l be finalized once the credit i s approved. There are clauses in place in the agreement which allow for the replacement o f the Administrator if they fai l to carry out their duties. However, such replacement would take time and would be likely to cause delays to the project. This PDF Board i s Government appointed and the appointments can be changed by the Government i f the PDF Board i s not effective in reaching decisions on sub-projects Qualified financial officers have been appointed. Disbursement conditions are in place to ensure and establishment o f satisfactory financial management systems. (covered above). Bilateral aid has supported a process to arrive at a list o f bankable proposals. Coordination i s ongoing by the Association o f Small Hydro developers. Monitoring arrangements through PDF Administrator and through DOED would be put in place to ensure requisite clearances are secured in a timely manner. UNDP-financed project administration unit would help monitor and ensure smooth implementation progress at local levels. NEA's project management and reporting system has proved satisfactory under previous IDA operation.

Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligib1e or Low Risk)

3. Possible Controversial Aspects:

Nil.

- 41 -

G. Main Financing Conditions

1. Effectiveness Condition

(a) (b)

(c)

(d)

Standard requirements and legal opinions for IDA Credit and Grant; Subsidiary Financing Agreement, satisfactory to IDA, has been executed between HMGN and NEA; and Administration Agreement, satisfactory to IDA, has been executed between HMGN and selected PDF Administrator. Effective establishment o f the PDF Board.

2. Other [classify according to covenant types used in the Legal Agreements.]

Disbursement Condition

With respect to Part A, disbursement can commence upon the completion o f the financial management assessment o f the PDF Administrator confirming that a satisfactory financial management system i s in place to manage the Power Development Fund component.

With respect to Part C, NEA, o f the Project, disbursements can begin when effectiveness conditions are met, except for the US$5.1 mil l ion equivalent 132 k v Dhalkebar-Bittamod transmission line and associated substation to facilitate power trade with India, where disbursement may begin when institutional, legal, and administrative and environmental and social arrangements satisfactory to IDA are in place (see Annex 6, Table A3 for a break-down o f project cost and procurement aspects).

Other Covenants:

Power Development Fund (Part A of the Project)

K o N shall:

Be responsible through the PDF Board for sending trimestral project and progress reports to IDA on technical assistance component o f Part A o f the Project, and appoint an independent Auditor in consultation with IDA.

Ensure that the PDFA: (a) shall perform i t s duties in accordance with the Administration Agreement entered into between

(b) have the f i r s t two small hydro schemes to be financed from the PDF subject to IDA'S prior

(c) shall be responsible for submitting trimestral project financial and progress reports on the PDF. (d) shall also be responsible for collecting progress reports from PCIs and sending consolidated

(e) w i l l facilitate the appropriate annual independent audit o f PDF. ( f ) shall provide IDA with a copy o f their entity's annual audit report and accounts for information. (g) shall enter into a subloan agreement with the investment enterprise availing o f PDF funding,

and that sub-loan concerned has been made in accordance with the procedures and on terms and conditions set forth in Annex 12.

PDF Board and the PDFA.

review and clearance, and al l schemes with project costs exceeding U S $ 3 million.

reports to IDA on trimestral basis.

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Conduct a mid-term review o f the project after 30 months from credivgrant effectiveness.

Micro-hydro Village Electrification (Part B of the Project)

KoN/AEPC shall:

Ensure that each investment grant for micro-hydro sub-projects financed from the Grant i s evidenced by an investment grant agreement entered into with the recipient community and that the sub-project i s implemented in accordance with terms and conditions set forth in Annex 12. Have the first two micro-hydro schemes to be financed from proceeds o f IDA subject to IDA'S prior review and clearance. Ensure timely release o f project funds to AEPC and to the District Energy Fund(s). Maintain satisfactory project accounts. Submit trimestral Project Financial Monitoring Reports and progress reports for Part B o f the project.

NEA Transmission and Distribution Expansion (Part C of the Project)

(a) K o N shall:

Ensure timely release o f project funds to NEA. Take appropriate action including supporting tariff adjustments to enable NEA to: (i) maintain a debt service coverage ratio o f at least 1.2; (ii) achieve an annual rate o f return o f at least six percent on historical net assets in operation; (iii) maintain accounts payable at no more than three months; and (iv) maintain net accounts receivable at no more than three months, sales equivalent. Not require NEA to issue dividends unless NEA has met all financial covenants for previous two fiscal years. Ensure that Government departments' arrears to NEA do not exceed 90 days o f sales equivalent.

(b) NEA shall:

Financial performance. accounting and audit

Take appropriate action, including tariff adjustments to: (i) maintain a debt service coverage ratio o f at least 1.2; (ii) achieve an annual rate o f return o f at least six percent on historical net assets in operation; and (iii) maintain i t s net accounts receivable at no more than three months o f sales equivalent, and accounts payable at no more than three months. Commission and complete an independent appraisal o f NEA's assets by December 31,2004. Comply with the agreed action plan for addressing financial management issues. Submit to IDA at least three months before the start o f each FY, updated 7-year financial projections, with an analysis o f how IDA financial covenants w i l l be met. Not issue a dividend unless audited financial statements show that i t has met al l financial covenants for the previous two fiscal years.

Have i t s accounts audited annually by independent auditors acceptable to IDA Submit audited financial accounts to IDA within six months o f close o f fiscal year.

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Monitorinn. Review and Reporting

Submit trimestrial project progress and financial monitoring reports for Part C o f the project. Conduct a mid term review o f the project after 30 months from credivgrant effectiveness.

H. Readiness for Implementation

0 1. b) Not applicable.

1, a) The engineering design documents for the f i rst year's activities are complete and ready for the start o f project implementation.

2.

3.

4.

The procurement documents for the first year's activities are complete and ready for the start of project implementation. The Project Implementation Plan has been appraised and found to be realistic and o f satisfactory quality. The following items are lacking and are discussed under loan conditions (Section G):

Note: Advance procurement activities were earlier initiated under the project for several schemes posed for IDA financing but for which alternate sources o f financing have been tapped pending effectiveness o f t h i s IDA financing. Procurement documents for schemes to be financed under the project are expected to be fully in place within the early months o f project implementation.

1. Compliance with Bank Policies

1. This project complies with all applicable Bank policies. 2. The following exceptions to Bank policies are recommended for approval. The project

complies with all other applicable Bank policies.

A

Mudassar Imran Penelope brdold;, Vincent Gouarne ' Kenichi Ohashi 1 Team Leader Country ManagedDirector

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Annexes

Annex 1: Annex 2: Annex 3: Annex 4: Annex 5: Annex 6: Annex 7: Annex 8: Annex 9: Annex 10: Annex 1 1: Annex 12:

Project Design Summary ............................................................................................ 46 Detailed Project Description ....................................................................................... 49 Estimated Project Costs .............................................................................................. 58 Cost Benefit Analysis Summary ................................................................................. 61 Financial Summary ..................................................................................................... 68

Project Processing Schedule ....................................................................................... 95 Documents in the Project File .................................................................................... -96 Statement of Loans and Credits .................................................................................. 98

Environmental Assessment and Management .......................................................... 101 Eligibil i ty Criteria for Project Components .............................................................. 109

Procurement and Disbursement Arrangements .......................................................... 75

Country at a Glance .................................................................................................... 99

. 45 .

Annex 1: Project Design Summary

NEPAL: POWER DEVELOPMENT PROJECT

Hierarchy of Objectives Key Performance Indicators

Sector-related CAS Goal: Increase in domestic power supply by facilitating private sector investments and supporting decentralization and community-based efforts.

Sector Indicators: Increase in aggregate generation capacity in Nepal and wider service coverage in terms o f village and customer connections. K o N development targets are to increase capacity from 550 MW in 2002 to 800 MW by 2008 and electricity household coverage from 45% to 55%.

Project Development Outcome I Impact Objective: In d i cat0 rs :

Improved capacity in MOPE and DOED to assess and monitor environmental and social impacts o f hydro

Develop hydropower in environmentally sustainable manner.

projects. Increase in service coverage in rural areas and number o f

Improve access o f rural consumers to electricity services. villages served.

Increased private sector participation in power sector.

The number and value o f private sector-led power projects are on the rise. A t least 12 private power projects are expected to come onstream b y 2008.

Data Collection Strategy Critical Assumptions

from Goal to Bank Mission) 'olitical and macro-economic tability.

Sector/ country reports: 3fficial five-year ievelopment plan and power ;ector reports.

(from Objective to Goal) I Project reports:

olicy and Environmental

'laming Commission, NEA ind AEPC annual reports.

tainable operation o f ro-hydro systems. K o N

entralization and ctioning DDC/VDCs.

)OED and PDFA progress eports on level o f private ,ector investments. e investment in Nepal.

ffective schemes are

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Output from each Component:

Small hydro schemes ieveloped by private sector.

Yectrification of remote (illages through micro-hydro iystems.

rransmission and distribution Ltrengthening and extension.

:inancia1 and operational ipgrading in NEA.

Output Indicators:

About 25 MW of capacity installed. Build-up of pipeline of bankable hydro projects. Adoption o f transparent and objective processes for inviting investment offers for medium sized hydro developments. Thus achieving more competitive terms and conditions for private power purchases by the grid. About 30,000 new households electrified involving 125 to 150 new systems. Sustained build-up of pipeline of schemes emerging from village development committees. Construction of transmission and subtransmission lines, expansion o f associated substations, and distribution schemes. Financial viability of NEA evidenced by a DSCR of at least 1.2,6% ROR; and 90- day levels of accounts receivables and payables. Increased operational efficiency as evidenced by reduction of losses from 23.4% to no more than 17%

Project reports:

'DFA and PDF Board eports.

Progress reports from AEPC and from UNDP-financed program support unit.

I NEA Progress on status of procurement activities, contract administration, and I.. . . . line commissioning.

NEA financial and audit reports

(from Outputs to Objective)

Investors able to mobilize required equity. PDF process i s responsive to financing needs of investors.

Active community involvement i s successfully mobilized. Timely flow of project resources to participating communities.

Timely implementation, adequate counterpart funding by NEA.

Timely implementation o f financial management actions

- 4 7 -

Project Components I Sub- Inputs: (budget for each Project reports: components: component)

F r t A l . Power Development 1 US$75.0 mil l ion /PDF and PDF Board progress /Streamlined procedures for

(from Components to Outputs)

Fund

A2 Technical assistance provided for PDF Administration fees. Part B 1. Micro-Hydro Village Electrification

Part B2. Technical assistance for Project Support Unit Part C 1. NEA Transmission and Distribution

Part C2. Technical Assistance to NEA Part C3. NEA Project Administration Total

US$2.9 mil l ion

US$ 8.1 mil l ion

US$0.8 mil l ion

US$ 33.7 mil l ion

US$ 1.8 mil l ion

US$ 2.0 mil l ion

reports. licensing, EA clearance, and financing.

PDF and PDF Board progress Close coordination among co- reports and financial accounts. financiers.

AEPC progress reports and project accounts.

AEPC and UNDP progress reports Project Support Unit. NEA progress reports.

Communities able to provide land, labor as equity and to access supplementary loans. Effective coordination b y

NEA effectively manages and monitors transmission and distribution works. NEA effectively manages

NEA effectively manages project administration.

NEA progress reports and financial statements. consulting contracts.

- 4 8 -

Annex 2: Detailed Project Description


The Project w i l l have three components, namely: (a) the establishment o f a Power Development Fund to finance about 25 MW aggregate o f small hydros and 30 MW of medium-sized hydro schemes; (b) development o f community-based micro-hydro schemes to electrify remote villages in about 25 districts; and (c) extension and upgrading o f N E A s grid transmission and distribution facilities.

By Component:

Project Component 1 - US$75.00 million PART Al : Power Development Fund (PDF) Investments (IDA Credit U S $ 3 5 million)

The PDF component o f the project w i l l provide long-term financing for private-sector hydropower developments in Nepal to overcome: (a) the lack o f sufficient debt financing for private-sector hydropower projects; (b) inadequate maturity o f available debt financing; and (c) the need to provide comfort to private investors wishing to become involved in " f i r s t time" projects.

The PDF wi l l be a financing facility to be established by K o N under t h i s project to provide long-term debt financing for private sector investments for small and medium-sized hydro schemes. Init ial financing o f sub-loans through the PDF wi l l be provided by IDA. Over time, it i s envisaged that resources from other international and domestic financial institutions w i l l be mobilized, which together with reflows o f debt service payment from the borrowers, w i l l augment the corpus o f investment funds accessible through the PDF.

The PDF wi l l be available for financing eligible projects which have fulfil led the necessary licensing requirements from DOED in MOWR, including a clearance from the MOPE. The PDF w i l l have two loan windows: the first window wi l l be for medium-scale hydropower projects which involve generating facilities greater than 10 MW; the second window wi l l be for small-scale hydropower projects sized at 10 MW or below.

Under this first credit operation, the PDF w i l l finance up to about 25 MW of small hydro schemes and one medium-sized scheme, i.e., either Rahughat hydro or Kabeli hydro. The U S $ 3 5 mil l ion from IDA credit i s expected to leverage financing from other sources, Le. developers' equity and commercial banks, o f about US$40 million.

The IDA Credit w i l l be provided to K o N on standard IDA terms, with the applicable service charge. The PDF wi l l offer senior loans as well as subordinated loans, standby facilities or take-out financing as may be required by the market and determined appropriate by the Administrator. The PDF wi l l finance up to 60 per cent o f the total project cost o f small hydro projects, and up to 40 percent o f the total project cost o f medium-sized hydro projects, and require a minimum equity contribution from the sponsors o f 20 percent. The subproject eligibility criteria and sub-project approval processes are summarized in Annex 12.

The PDF can also provide medium-and long-term financing to Participating Credit Institutions (PCIs) for on-lending to investment enterprises promoting projects involving grid-connected generating stations o f l O M W capacity or below, or isolated rural power systems licensed by DOED. The PCI w i l l have to meet certain eligibility criteria adopted by the PDF Board to be able to have access to the PDF. As a condition for having access to the PDF, the PCI w i l l need to provide loan funding in a ratio o f 3: 1 (US$3 lent by the PDF for every U S $ 1, or rupee equivalent, that the PCI places in the project from i t s own funds). This ratio w i l l be maintained for the f i rs t year and reviewed with IDA, annually thereafter. The on-lending rate from the PDF to the PCI w i l l be the average weighted deposit rate o f al l interest

- 4 9 -

bearing deposits o f commercial banks. These on-lending rates w i l l be subject to change based on prevailing market conditions, and on Administrator’s best business judgment.

Site No. Project District Installed Average Name Capacity Energy

(MW (GWyr )

Exit Strategy. I t i s envisaged that over time the PDF wi l l be able to attract other sources o f funding aside from IDA to support the growing pipeline o f private power investments until such time that local and international commercial lending institutions are able to mainstream financing o f small and medium hydros into their regular business portfolio. Even then, continued operation o f the PDF as a revolving fund to catalyze financing o f larger-sized projects with export potential i s foreseeable. Should there no longer be a need for a separate PDF, and provided outstanding agreements, if any, with participating donors on fund disposition are met, the Administration Agreement w i l l not be renewed, and collection of outstanding repayments from borrowers can be contracted to a financial institution on behalf of KoN. Alternatively, the fund operation can be formally integrated into the development lending business o f a state-financing arm.

Status of Project Unit cost cost (vS$/kW) Preparation

(us$ x106)

Project Piueline for the PDF

1

2

DOED has identified an indicative pipeline o f small hydro schemes with aggregate capacity of some 58 MW of capacity that are at mature stages o f preparation. I t i s anticipated that PDF w i l l finance an aggregate o f about 25 MW under this window.

Rahughat Myagdi 21 164.6 59.3 2,195 Seven private developers shortlisted by DOED.

Kabeli-A Panchthar 30 164.0 58.8 1,960 Seven private and developers

Taplejung shortlisted by

The PDF Administrator shall ensure that each beneficiary and project meets the eligibility criteria for hydro generation projects o f up to 10 MW stated in Annex 12.

The schemes in the pipeline have written indications of NEA’s intent to purchase power (subject to scheme’s feasibility, etc.). Additional schemes are in the feasibility or prefeasibilty study stage and their promoters are availing o f advice from the GTZ-financed Small Hydro Promotion Project.

Two medium-scale hydropower schemes emerging from the Screening and Ranking exercise have been selected for development on a BOOT basis and i s being competitively bid. Selection o f the developers i s expected in 2003 with financial closure in 2004. PDF wi l l finance one o f these schemes for which preparation i s completed earliest andor requires funding support from PDF. The salient features o f these two projects, based on feasibility studies, are as follows:

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The following chart summarizes the Power Development Fund Process:

T H E P O W E R D E V E L O P M E N T FUND PROCESS

M c d i u m S c a l c Small Scalc M i c r o & Isolated Systcms R u r a i P o w e r Systems a

i o M W up $0 about 50M W

for domestic supply, with grid and off-grid individual. rum1 forsign panicipation, with enterprise and

economies ofssnls to provide competitive tariffs

(main rivers. primarily Gandak (smailcr rivers, Khalas (small khoslas) and Koshi River ayitsms)

entrepreneurs, industry community supply

and tributaries)

1 Individual/lralated Load Isolated 1 Domestic Grid Community Load

f v Preliminary NEA Systems Analyria

1

N E A Systems Analysis (for grid-connected schemes)

1 -. .-

t imimission and distribution schemer, either in

P D F Financing Decision (by I C pcrrrc.ommsndatian o f P D F A )

Schemes with capacity above 1 M W are subject to rsvisw and licensing by D O E D and cnvironmsntal review by MOPE I .... I._ .. .......... .. .... .... .. ..

Project Component 2 - US$2.90 million Part A.2.1: TA for PDFA (IDA Grant US$2.5 million)

This component w i l l consist o f a TA package for the establishment o f the PDF including the setting up o f its administrative and implementation framework. Among the specific activities to be supported are the (a) engagement o f a PDF Administrator through a competitive process; (b) creation o f the PDF Board; (c) establishment o f loan review and approval procedures; and (d) start-up o f actual appraisal by the PDF Administrator of loan proposals from private investors.

Structure and Governance o f the PDF

The Government w i l l establish an autonomous PDF Board in the chairmanship o f the Director General of the Department o f Electricity Development (DOED). The Board w i l l have 5 members in total. In addition to the chairman o f the board, i t w i l l comprise o f two members designated by HMGN from amongst the in-service officers and remaining two members representing private sector nominated by HMGN. The Department o f Electricity Development (DOED) shall designate any officer employee at the Department to act as the Secretary o f the Board, to perform day-to-day activities, as the administrative chief o f the Board. The private sector members appointment w i l l be for staggered terms o f up to five years. Those PDF Board members w i l l be removable only for serious misconduct, failure to attend two consecutive PDF Board meetings, or for insolvency or incapacity. The functions o f the PDF Board w i l l be as follows: (a) approve proposals for loans in accordance with a recommendation of the PDF Administrator and with the concurrence o f IDA; (b) certify financial institutions as

- 5 1 -

Participating Credit Institutions (PCI); (c) provide the Government with advice, as required, concerning the management reports to be provided by the PDF Administrator; and (d) monitor the performance o f the PDF Administrator and to make recommendations to KoN concerning the termination or renewal o f the Administration Agreement. Establishment o f the PDF Board w i l l be completed shortly after the loan becomes effective.

The PDF Administrator wi l l be the administering agency for the PDF, and wil l: (a) review proposals for PDF financing and make recommendations to the PDF Board; (b) negotiate the terms o f loans approved by the PDF Board and prepare the loan documentation; (c) operate the PDF account; (d) monitor sub-borrower performance under loans from the PDF; (e) handle debt service collections; ( f ) maintain the books o f account o f the PDF, which w i l l be audited annually by auditors acceptable to IDA; and (g) provide trimestral financial monitoring reports to the Ministry o f Finance, Ministry o f Water Resources, the PDF Board and IDA on the pipeline o f pending projects and the status o f outstanding loans.

The PDF Administrator w i l l be paid by KoN an annual retainer to cover the costs o f i t s services under the Administration Agreement and variable fees related to the amount o f loans disbursed from the PDF and outstanding and to the performance of the sub-borrowers. The retainer and the fees as well as the costs o f the operation o f the PDF Board w i l l be eligible for financing from the proposed IDA Grant, but i t i s anticipated that these costs w i l l eventually be recovered through fees charged to the sub-borrowers.

Project Component 3 - US$8.1 million Part B.l. Micro Hydro Village Electrification Program (IDA Grant US$5.5 million)

The aim o f the component w i l l be to intensify electricity coverage within the 15 districts being served by the current REDP program, and to scale-up the project to extend the coverage to another ten districts. About 2,500 kW to 3,000 kW o f new micro hydropower systems (125 to 150 new schemes, with average capacity o f about 20 kW) i s expected to be developed, to serve about 30,000 new consumers and associated productive/commercial uses.

The program wi l l continue to utilize the community-based, productive end-use development and income-generating approach developed and applied under REDP. The process embodies six basic principles, including formation o f self-governing organizations (the MHFG), women’s empowerment, s k i l l enhancement, capital formation, technology promotion and environmental management. The program also assists villagers to access other sources o f funds for renewable energy (e.g., solar PV, improved cook stoves, saplings for community forestry, etc), and provides training in a wide range o f activities (system operation and maintenance, farming, productive uses, management and institutional aspects, productive uses, etc.

The average capacity of micro-hydro schemes to be developed i s expected to increase from the current average o f 18 kW under the REDP to around 20 kW. This w i l l be done by raising the lower limit o f scheme capacity to about 15 kW (instead o f about 7 kW supported under REDP), unless otherwise economically justified. Given that the costs o f community mobilization are generally constant regardless o f scheme capacity, this w i l l focus the program on larger (and more economic) schemes serving larger villages/groups o f villages, thereby increasing the development impact o f the program and reducing the Program Support Unit overhead costs per connected household.

Selection o f the new districts w i l l be made by AEPC assisted by the Program Support Unit using objective selection criteria such as: (a) available micro hydro potential within the district; (b) extent o f existing NEA grid coverage and proposed extensions o f the grid; (c) HDI classification (districts with very poor, or poor HDI classifications w i l l be favored in order to maximize potential for poverty reduction); (d) demonstrated commitment o f DDCsNDCs to provide financial support to the DDC-

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REDS; (e) located outside the Katmandu Valley; and (f) do not unduly overlap with the Energy Sector Assistance Program (ESAP) to ensure equitable spread o f opportunities (some overlaps may be acceptable since ESAP uses the entrepreneurial approach, while this project uses the community-based approach).

Moreover, micro-hydro projects w i l l be located in areas where they w i l l not be ‘surpassed’ by grid extension (from the NEA grid, or isolated grid systems), at least within the next five years. Accordingly, areas currently designated for NEA grid extensions, or areas (currently not designated) that could be suitable for grid electrification w i l l be avoided for micro-hydro system construction.

The project w i l l be guided by the decisions o f the Project Management Committee which w i l l have the following membership: AEPC’s Executive Director as Chairperson, representatives from the National Planning Commission and the Ministry o f Local Development (MOLD), a representative o f the Association o f District Development Committees o f Nepal (ADDCN), District Energy Network, Association o f Village Development Committees o f Nepal, and REDP’s Manager.

Project Component 4 - US$0.80 million Part B.2: Technical Assistance for Program Support Unit and REDS

The operation o f the Program Support Unit and the REDS wi l l be directly funded by UNDP at a cost o f about US$0.8 mil l ion for a further period o f three years. I t i s intended that the existing REDP management unit, which has functioned satisfactorily, and i t s current staffing w i l l be retained and expanded to provide the program support services.

Pipeline o f Micro-hvdro Schemes

A pipeline o f prospective schemes has been identified with an aggregate capacity o f 454 kW. O f these, several schemes are at detailed survey/design stage, and the balance i s at feasibility study stage. Identification o f further potential schemes are underway. Selection o f schemes for funding wi l l depend on the community reaching agreement on all the scheme requirements. Particularly formation o f a micro hydro fund group and compliance with the institutional arrangements set out in Annex 12.

Institutional Arrangements

Main aspects o f the institutional arrangements are summarized as follows (also see Annex 6 for funds f low with respect to use o f proceeds from IDA):

The implementing agency for the Micro-Hydro Village Electrification Program wil l be the Alternate Energy Promotion Center (AEPC) o f the Ministry o f Science and Technology (MOST). The communities benefiting from the Program w i l l be closely involved through every stage o f the development process. Accordingly, the main responsibility for project implementation w i l l be carried by the community-based MHFGs that w i l l be established in each beneficiary community. The MHFG wi l l be made up o f representatives from a number o f existing and/or newly established, village-level community organizations. As village-level community organizations are often formed along gender lines, the MHFG approach w i l l bring women’s and men’s organizations together in a co-operative approach.

Program budget from the Government w i l l be appropriated and released to AEPC. The AEPC w i l l be responsible for the management and onward release o f budget funds as grants to the District Energy Funds (DEFs). IDA funds to cover eligible grant releases would be drawn on a reimbursement basis.

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The REDS, on approval o f the District Rural Energy Management Committee w i l l release funds from the DEF as grants to the Community Energy Funds (CEFs).

The CEFs w i l l release funds to pay the turbine/generator, penstock and distribution system contractor, and for materials for c iv i l works construction on approval o f the MHFG and REDS (Le. REDS wi l l be a required signatory to the CEF bank account).

The MHFGs wi l l be entirely responsible for arranging and securing loans from local banks to part- finance the development o f the turbine/generator, penstock and distribution system. Representatives from the Ministry o f Local Development wi l l be represented on the Micro Hydro Village Electrification Program Management Committee, and on the DREMC to facilitate coordination.

The existing REDP Program Support Unit (currently funded by UNDP) wi l l be retained and scaled-up to support the increased level o f village electrification envisaged under the Micro-Hydro Village Electrification Program. Grant funding for the operation o f the Project Support Unit and for the REDS wi l l be provided, partially by UNDP.

Micro-Hvdro Sub-Proiect Construction

The MHFGs wi l l be responsible for procurement and construction o f the systems, with guidance from DDC-REDS. Construction o f the civi l works for the systems, including excavation o f power pole foundations w i l l be carried out by the community via voluntary labor. I t i s mandatory for the community to hire a c iv i l overseer to set out and supervise the construction o f the work. Construction progress records (including voluntary labor provided by each household) w i l l be maintained by the overseer, and release o f funds for payment o f suppliers w i l l be made only after DDC-REDS has verified that the quantities are correct, and construction quality i s to an acceptable standard.

Operation and Maintenance

Init ial tariff setting w i l l be carried out by the MHFG, based on consideration o f loan repayments, operation and maintenance costs, depreciation and provision o f a reserve fund for major repairs, in accordance with a standard pro-forma provided under REDP. Adjustments to the tariff w i l l be made periodically by the MHFG as operation and maintenance costs increase over time.

Selection of the manager and operator(s) w i l l be undertaken by the MHFG based on technical aptitude and commitment to the community. The selected persons w i l l make written commitments to the community, that they w i l l provide their services on a long-term basis. After training, the manager and operator(s) w i l l assist with the community mobilization effort, scheme construction and installationkommissioning o f the generating equipment. Training in equipment operation and maintenance w i l l be provided by the generating equipment manufacturer/installer. Substantial operation and maintenance training w i l l also provided to the manager and operators. The success o f the training programs i s critical to scheme sustainability.

The manager and operator(s) w i l l be responsible for the daily operation and maintenance o f the system in accordance with the operation and maintenance manuals, including maintaining the station logbook, and collecting electricity tariffs, fines and outstanding bills. Operational rules administered by the MHFG wi l l provide for connection conditions, collection o f tariffs, fines for late payment and disconnection for non-payment. The manager and operator(s) w i l l report to the MHFG monthly on the status o f operation, maintenance and bill collection. The manager w i l l be responsible for ensuring timely payment o f electricity bills by consumers and for dealing with tampering, theft, etc. Lists o f defaulting consumers w i l l be announced at the monthly MHFG meeting.

- 5 4 -

The program wi l l support the development o f micro-hydro maintenance facilities in the main district towns. In general, th is w i l l involve the provision o f training and some (repayable) financial support to assist an existing, local engineering workshop to expand and upgrade sk i l l s in micro-hydro system maintenancehepair.

Income generation schemes

Community mobilization

$0.4m

The CDD component, which i s guided by six basic principles - formation of self governing community organizations, women’s empowerment, s k i l l enhancement, capital formation, technology promotion and environmental management - i s inextricably linked with micro-hydro development. Hence, in addition to development o f micro-hydro schemes this component also support improvement o f rural livelihoods through an activities clustered around the micro-hydro. This i s essential to maximizing the development impact o f micro-hydro development for rural communities. Although under this initiative the project would support as much end use/ income generation as possible through community mobilization, the investment funds through commercial loans (from the community energy fund) would be limited to carpentry and agro-processing m i l l s (grinder, huller and o i l expeller). Further details o f these aspects are given in the table below:

Community Community mobilization and training

Investment I cost

$ l m

I

Power connections for

Grant for afforestation $0.36m

Investment for slope

Description T h i s aspect i s aimed at promoting industrial (non-lighting) end uses of electricity. Improving sustainable rural livelihood i s the aim of this component end use promotion i s aimed at stimulating rural economy. End uses being promoted by micro-hydro are agro-processing, poultry, carpentry workshops, bakeries, ice making, l i ft irrigation and water supply. The rate of support i s Rs. 10,000 per kW of installed capacity, but not exceeding Rs. 250,000 (around US$3,000) per plant. T h i s i s made available as a grant to the Community Energy Fund (same entity which implements the micro-hydro plant), which will lend i t (at market rates) to the local people wishing to invest in income generation schemedend-use. The fund covers up to 50% of the investment costs of a given end-use. Schemes also have to be financially viable. Grant for power connections for schools and health posts

Th is grant supports plantation of up to 30,000 tree saplings per micro-hydro plant in the community owned land. For every tree planted the community receives Rs. 1.50 ( 2 US Cents). T h i s i s only a token incentive as tree plantation involves growing saplings in the nursery , transplanting them and taking care of the plants. The total amount of grant per plant i s up to around US $550. Up to Rs. 15,000 (around US$200) i s provided per plant towards bio-engineering works (mainly plantation) along the headrace for the purpose of slope stabilization. Such other associated environment activities as may be agreed with IDA from time to time, withm the overall budget for this section.

The program provides training for plant operators, operators for end-use machinery, training on environmental management, income generation and enterprise development, institutional development (community organization, credit and saving, accounting, meeting conduction etc.).The program through community facilitators help the community to access grants/subsidies for literacy programs, solar photovoltaic cells, biogas plants and improved cook stoves.

- 55 -

Project Component 5 - US$33.7 million Part C.l. NEA Transmission and Distribution Investments - US$31.0 million of IDA financing. (IDA credit US$ 15.4 million; IDA grant US$ 15.6 million)

Transmission

The project w i l l finance the following transmission schemes:

a) 220 kV Khimti-Dhalkebar Scheme:

Transmission Line. A 75 km 220 kV double circuit transmission line (with one circuit strung initially), from Khimti power station switchyard to existing 132 kV Dhalkebar substation. The line w i l l operate initially at 132 kV.

Substations. Extension of two 132 kV line bays: one at Khimti power station and another at Dhalkebar substation.

b) Dhalkebar-Bhittamod 132 kV Scheme:

Transmission Line. A 45 km long 132 kV double circuit transmission line from Dhalkebar substation to Bittamod on the Nepalese side of the border. (The segment o f the line falling within the Indian territory, about 40 km in length from the border to their grid substation at Sitamadhi, w i l l be constructed by the Government o f India.) Completion o f institutional, administrative and legal arrangements satisfactory to IDA i s a condition o f disbursement for this component.

Substation. Two 132 kV line bays at Dhalkebar substation.

c) In the event that the line and substation in part b) above are not considered for investment by June 30, 2005, NEA would submit by the said date to the Bank other priority least-cost transmission and/or distribution works to be financed by IDA financing o f US$5.1 mill ion amount allocated to the 132kV Dhalkebar to Bittamod transmission line, and the associated substation (see Section G - Main Credit Conditions). Such priority transmission and/or distribution works w i l l meet the eligibility criteria presented in Annex 12 (Part C).

Subtransmission and Distribution

The credidgrant w i l l also finance substransmission and distribution works to un-electrified rural areas (referred to as "RE schemes") o f Lalitpur, Bhaktapur, Kavre, Dhading and Nuwakot districts, and the rehabilitation and reinforcement o f existing distribution grids in urban or semi-urban centers o f Lalitpur, Bhaktapur and Kavre districts to improve quality, reliability and operation efficiency of power supply (referred to as "DSR schemes"). NEA estimates that about 34,000 consumers including 17,000 new consumers w i l l be added to the grid through RE and DSR schemes.

The distribution schemes to be financed are based on the potential for commercial, industrial and agricultural development after strengthening of the distribution network. NEA, with the help o f i t s consultants, has prepared substransmission and distribution studies including a review and preparation o f a plan for the reduction of technical losses.

-56 -

Project Component 6 - US$1.80 million Part C.2. Technical Assistance to NEA (IDA Grant: US$ 1.6 million)

Institutional Strengthening o f NEA

The TA wi l l finance institutional building initiatives at NEA involving upgrading o f financial accounts and audit system, strengthening o f N E A s financial management. The overall objective o f the study i s to bring efficiency in financial management and current practice o f NEA as well as to introduce incentive based pricing mechanism to allow the increased use o f energy to utilize the surplus energy available in the system. The scope o f work w i l l include, among others:

0 review o f existing account manual and recommend improvement in relevant areas to meet international accounting standards;

0 suggest an appropriate financial management system in view o f the changed market scenario o f NEA;

0 acquisition o f and staff training in state-of-the-art financial planning and management software;

0 training to the staff o f NEA on financial management related issues.

Further, in anticipation o f industry-wide reforms in Nepal's power sector, under ADB financing, funds would be provided to underwrite the cost o f preparing strategic business and restructuring plans for NEA, development o f service quality and performance norms for use in monitoring service performance and tariff setting, and engagement o f reform and regulatory consultants.

Consulting Services for 220 kV Transmission

NEA wi l l contract an engineering consulting firm to provide services for the 220 kV scheme.

Project Component 7 - US$S.OO million Part C.3. N E A Project Administration relates to activities and expenses undertaken by NEA in managing the project and administering project funds.

- 5 7 -

Annex 3: Estimated Project Costs

I tem No.

1

2 3 4 5

6

7 8


Description Micro hydro scheme I distribution system construction 2,500 kW @ US$ 1,800 I kW on average) Support for connections. Environment Community mobilization and training External consultant for improvement o f social mobilization and monitoring and evaluation to be engaged by AEPC. Program support I management I program suppori enhancement

Subtotal Physical contingencies (5 percent) Price contingencies (5 percent)

Total

Table 1: Estimated Project Cost (in US$ Million)

* IDC i s estimated primarily for NEA component based on on-lending rate applied by KoN on IDA funds.

Table 2a: Project Cost Breakdown for Micro-Hydro Village Electrification Component

Estimated Cost (in NRs Million)

405.0

22.5 16.5 70.5 7.5

84.8

606.8 30.30 30.30

667.4

Estimated Cost (US$ Million)

5.40

0.30 0.22 0.94 0.10

1.13

8.09 0.40 0.40

8.90

- 58 -

Table 2b: Proposed Financing Arrangements Micro-Hydro Village Electrification Component

Component Transmission and Distribution Technical Assistance

Total Base Cost Physical contingencies Price contingencies Total Cost

Total NEA Component Financing Required

NEA Project Administration

Interest during construction

~tem I Description

Local Foreign 7,427 22,795

253 1,420 1,750 -- 9,430 24,215

5 15 1,323 920 1,097

10,865 26,635 9,100 --

19,965 26,635

I I IDA Grant: (a) Subsidy for micro hydro scheme construction, as per KoN policy. (@ average grant o f Rs 80,000 / k W = US$3,200,000). (b) Support for community mobilization, income generation, training I capacity building, conservation, etc. (c) Incremental operating cost. (d) Support for improvement of social mobilization and monitoring and evaluation improvement.

Total I D A Grant DDCIVDC contributions. Community contributions in cash and labor. UNDP grant funding. Loans from Agricultural Development Bank o f Nepal (or other Nepalese bank).

Estimated Financing

(with contingencies)

(US$)

(a) 3,200,000

(b) 1,440,000

(c) 760,000

(d) 100,000

5,500,000 700,000

1,100,000 800,000 800,000

8,900,000

Table 3a: Project Cost Breakdown for NEA Component (in US$ thousands)

Percentage

61.8

7.8 12.4 9.0 9.0

100

Total 30,222

1,673 1,750

33,645 1,838 2,017

37,500 9,100

46,600

- 59 -

Table 3b: Financing Arrangements for NEA Component (in US$ thousands)

Component Estimated Total Cost

Transmission and Distribution 33,666 Technical Assistance 1,840 NEA Project Administration 1,994 Total 37,500

Total N E A Component 46,600 Financing Required

Interest during Construction 9,100

N E A Proposed I D A Financing Financing

Credit Grant Total 2,666 15,400 15,600 31,000

240 --- 1,600 1,600 1,994 4,900 15,400 17,200 32,600 9,100

14,000 15,400 17,200 32,600

- 60 -

Annex 4: Cost Benefit Analysis Summary


PART A: Power Development Fund

The estimated economic returns for small hydros are attractive, with real ERRS o f over 30%. On a financial basis, small hydro projects should prove attractive to developers, with real financial rates o f return to equity (post tax) ranging from 15 percent to 19 percent, compared to post-tax cost o f debt of about 10%. The results of the economic and financial analyses for the small hydro projects for which completed feasibility studies are available (i.e., those projects considered most likely to avail themselves o f PDF financing) are summarized as follows:

I Sub-project Configuration and I Mailun Khola I Belkhu Khola I Sunkoshi I Trishuli

FRR on equity (after tax)

Minimum debt service cover rat io

minimum DSCR of 1.1

AIEC: Average Incremental Economic Cost of generation from the projects (calculated at the 12 percent discount rate, assuming an economic lifetime of 30 years).

A number o f the projects show debt-servicing difficulties or insufficient debt-servicing margins to cater for extraneous events. This can be overcome with an increase in equity investments or longer loan tenors (i.e., more than 10 years).

For the medium-scale hydro projects, Kabeli-A and Rahughat Khola, ERRS are estimated at 12 percent and 13.4 percent, respectively. However, in their present configuration and assuming power purchase tar i f fs at levels offered by NEA to the small systems, they exhibit relatively low financial returns. Accordingly, to improve viability, developers w i l l need to minimize construction costs, improve plant factors including by exploring modifications to project size, i.e., lower capacities, or secure power purchase tariffs higher than those for smaller hydros.

-61 -

Sensitivity Analyses for Small Hydro Projects

Sensitivity of Project ERR to Changes in:

Project Cost Generation Output (GWh I year)

Sensitivity analyses indicate that the ERR i s sensitive to changes in generation output, but relatively insensitive to changes in project costs. On the other hand, the financial returns to equity and debt service cover are sensitive to changes in project cost, power purchase price and generation output. Results are presented for the Mailun Khola scheme only, but the other projects show similar results:

Change Impact on

+I- 10% -I+ 0.2% +I- 10% +I- 2.6%

ERR

Sensitivity of Project FRR to Change Impact on FRR on Changes in: Equity (nominal)

after Tax Project Cost +I- 10% -3.4% I +4% Power Purchase Price or Generation +I- 10% +/- 3.7%

Impact on Debt Service Cover

(year 1) -0.11 I +O. 14

+/- 0.13

Component of Long-Run Marginal Cost of Generation

Incremental Energy Cost (US$ / kWh) Incremental Capacity Cost (US$ I kW) Average Incremental Cost (US$ / kWh)

To arrive at the economic rate o f return, a standard conversion factor o f 0.85 was applied to local cost, and taxes and duties were removed.

LRMC LRMC LRMC (Ave. of Wet and (Dry Season) (Wet Season)

D r y Seasons) 0.033 0.051 0.012 121.00 9 1 .oo 32.00 0.060 0.090 0.027

- 62 -

For the purposes o f financial analysis, the electricity production o f the projects has been valued using the power purchase price offered by NEA. The NEA offered prices (in FY98199 terms) are: (a) N R s . 4.25 I kWh during the dry season (mid-December to mid-April); and (b) NRs. 3.00 I kWh during the wet season (mid-April to mid-December). Using a price escalation of six percent per annum, the 2001 prices are estimated as NRs. 4.77lkWh during the dry season and N R s . 3.37kWh during the wet season. (The NEA power purchase agreement provides for inflation in the power purchase price at a rate to be determined for the f i r s t five years of operation, and then at the consumer price index published by Rastra Bank, Nepal.) An inflation rate of eight percent per year has been used in the financial analysis. This i s based on the average national urban price index over the period 1995-1999 as sourced from the Nepal Rastra Bank.

A summary o f the assumptions used in the economic and financial analyses are as follows:

Assumptions Used for Rahughat & Kabeli-A

Cost estimates taken from the developer’s feasibility or pre- feasibility studies, and escalated to Dec. 2001 Estimates taken from the developer’s feasibility or pre- feasibility studies NRs 75 = US$ 1 .OO

30% 15-year tax holiday then 15% corporate tax rate

7 17

12% per year 1.5%

Parameter Assumptions Used for Projects 10 M W & Less

NRs. 75 = US$l .OO 30%

2 7

12% per year 2%

Development cost

8% 8% per year

Annual generation output

8% 8% per year

Exchange rate assumed (NRs./US$) Developers equity % assumed Tax assumptions

Economic analysis - 30 years Financial analysis - 25 years

1% of generation

Dry season NRs. 4.25kWh. Wet season NRs. 3.00kWh (FY99 base year)

6% / year

Loan Details: - Grace period (years) - Loan period, after grace period (years) - Interest Rate (%) 0 & M (% of development cost) Rate of increase in O&M costs (%) Inflation Construction cost (proportion of development cost):

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

Life of plant

2% of generation Transformer & transmission losses, and station use Power purchase prices for financial analysis.

Power purchase price escalation rate

5% 15% 15% 30% 25% 10%

- 63 -

Parameter

Economic value of generation output

Assumptions Used for Rahughat & Kabeli-A NRs. 4.44kWh (US$

Assumptions Used for Projects 10 M W & Less

PART B: Community-Based Micro-Hydro Component

Royalties: 1st 15 years - Energy

Capacity

Post 1st 15 years - Energy Capacity

An economic analysis o f micro-hydro schemes shows that ERRs o f approximately 10% are achievable:

2% of electricity sales Rs 200kW per year

10% of electricity sales Rs 1,000 k W per year

2% of electricity sales Rs 200kW per year 10% of electricity sales Rs 1,OOOkW per year

Case

ERR - Base case, for individual micro hydro systems.

ERR - Total program, assuming micro hydro system

ERR - Base case for total program (about 2,500 k W over 120 sites, average system 20 kW).

failure rate o f 7.5%.

Given the numerical scale o f the program (125 to 150 systems), and the community-based approach, i t i s l ikely that a proportion of the micro hydro systems w i l l fai l over a period o f time. The failure rate cannot be predicted with confidence, but (given reasonably successful program implementation) could fall within the range five percent to 10 percent. Assuming that the system failure rate i s seven and a half percent , then the ERR for the program would fall slightly, as indicated above.

15 kW 25 kW 35 kW System System System

8.3% 10.9% 12.2% 10.9%

10.2%

Economic Sensitivity Analysis

Parameter

Total project cost kWh / HH productive uses estimate

Rate o f increase per year o f

The sensitivity analysis shows that the ERR i s sensitive to the total project cost, the estimate o f productive uses per household and petroleum prices:

Base Case Change Effect on ERRs

Depends on system size + / - 10% - / + 1% 6 kWh / month / HH + / - lkWh + / - 1.4%

/month/HH 12% + / - 1% + / - 0.4%

productive uses over first 10 years Diesel and kerosene prices Based on total economic + / - 10% + / - 1.1%

cost of approx. USc 37 / litre for both diesel and kerosene

- 64 -

Under the Micro Hydro Village Electrification Program, the preparation o f economic analyses (in a standardized format) for each micro hydro sub-project w i l l be required in order to demonstrate the net worth of the sub-projects in economic terms. The benefits of each sub-project w i l l generally be measured in terms o f (a) displacement o f kerosene for household lighting; and (b) displacement o f diesel engines/diesel generation for productive / commercial uses. The analyses w i l l include all costs associated with the development, operation and maintenance o f the project, including the pro-rata costs o f the Program Support Unit. Individual sub-projects having an Economic Internal Rate o f Retum o f less than 10.0 percent w i l l not be funded.

Other Economic Benefits Not Quantified

The calculation o f the ERRS only includes the quantifiable non-incremental benefits based on existing levels o f energy usage. Benefits not included in the analysis, but that could be considered, include:

The incremental benefits (i.e. those benefits arising from increases in energy usage due to lower energy prices). These benefits alone are estimated at US$ 8 per month per household for lighting in financial terms (compared with typical monthly expenditure on electricity o f about US$ 1.40 per month per household).

Direct increases in the communities’ education through the technical assistance part o f the project. Indirect educational benefits due to the availability o f more reading time and better quality lighting and also other electricity uses such as the media (radio and in some cases TV). The ability to engage in income generating activities during evening hours. Health benefits due to the reduction in air pollution resulting from kerosene usage. The reduction in carbon emissions from diesel and kerosene usage.

Assumptions used in Economic Analyses

The evaluations assume: (a) average connected load of 100 W / household; (b) average consumption from productive uses o f 6 kWh/month/household rising by 12 percent each year for the f i rs t 10 years o f operation o f the system; and (c) household expenditure on electricity equivalent to the current expenditure on kerosene, based on average consumption o f 3.5 liters/month/household. System administration, management, operation and maintenance costs (during the O&M stage) have been assumed as three percent o f the construction costs. The analysis was performed over a 30-year period and assumes that the generating equipment has a lifetime o f 15 years, and requires major refurbishmendreplacement after that period.

All applicable taxes (value added taxes, import duties, etc,) are excluded. Costs in constant 2001 prices are used and a standard conversion factor o f 0.85 applied to the local costs components. The benefits are based on the avoided cost o f diesel generation in the case o f supply for productive uses and the avoided cost o f kerosene usage in the case o f supply to households. The economic cost o f diesel and kerosene are based on the FOB price at Singapore of US$218/MT for diesel and US$238/MT for kerosene (approximately equivalent to a base crude o i l price o f US$25/barrel). Economic costs o f shipping, insurance, distribution to main centers in Nepal and porterage from the nearest road-head to remote villages (assuming 1.5 porter-days on average) are added to these costs.

-65 -

Financial Analysis

The results o f the financial analysis for the microhydro schemes are as follows:

Case I 15kW I 25kW I 35kW I

FIRR on Equity (community contributions, cash, labor)

The results o f the financial analysis show good financial returns when compared to the weighted cost o f project funds - approximately 2.7 percent. This weighted cost i s low due to the substantial level o f grant funding provided. The analysis also indicates that larger-capacity systems (i.e. 25 kW and 35 kW systems) are l ikely to be more financially sustainable than smaller systems.

Returns to equity, based on the communities' cash and labor contribution are high, primarily due to the high level o f project grants. The debt service coverage ratios are also high, indicating that the communities should have no trouble servicing the debt, and cash flows are high enough to allow accumulation o f funds to replace generating equipment at the end o f i t s economic service life.

Assumptions used for the Financial Analyses

The financial analysis uses tax inclusive costs, and examines the financial viability from the viewpoint o f the Micro Hydro Functional Groups (MHFGs) responsible for developing, operating and maintaining the micro hydro systems. For the purposes o f financial evaluation, the household tariff i s assumed as NRs. 1 .OO/watt (connected)/month, and average connected capacity i s assumed at 100 W/household. This gives a monthly charge o f NRs. lOO/month/household for domestic use. Tariffs for productive uses o f NRs. 10/kWh are assumed in the financial analysis. The financial analysis assumes an inflation rate o f eight percent per year.

Part C: NEA's Power Expansion Program:

Summary of Benefits and Costs: The economic assessment covers a "time slice" o f NEA's proposed expansion program (generation, transmission and distribution) from FY2002/03 to FY2006/07, but excludes capital investments for Upper Karnali project. All generation projects considered have been selected based on results o f a generation expansion master plan study. Assessing the economic viability o f the complete investment program, rather than individual sub-components, i s appropriate since the transmission and distributions schemes to be financed are in support o f the other components o f the program. The program includes power purchases by NEA from private small and medium-hydro power plants and the associated costs o f these purchases are reflected as part o f N E A s operational costs.

- 66 -

Economic Assessment of NEA's Investment Time-slice FY2002/03-FY2006/07

(at 2002 Price Levels, in NRs million)

FY ending

Total Domestic Export Total Net Investment O&M Cost Revenue Revenue Revenue Revenue

2003 I 7989

I 2005 I 6615 I 1646 I 8261 I 3197 I 679 I 387s I -4385 I

I 7989 I I -7989

2006 2007 2008 To I

2020 I I 4525 I 4525 I 841 1 I 2269 1 10680 I 6155

5203 2280 7484 5025 206 5232 -2252 4684 3822 8506 6831 338 7169 -1337

4525 4525 841 1 2269 10680 6155

*Excludes Kamali

M a i n Assumptions: Benefits o f the proposed investment program are based on expected incremental sales from new generation capacity and transmission expansion. Taxes and duties were deducted from investment costs, and local costs subject to SCF. Sales projections, investment and operating costs are based on "EA'S forecasts as reflected in their corporate plan.

Sensitivity analysis / Switching values of critical items: A 10 percent increase in the cost o f investments would yield an ERR of 12.6 per cent; while a 10 percent decrease in revenue levels would result in an ERR o f 13.7 per cent.

- 6 7 -

Annex 5: Financial Summary


NEA's Future Financial Performance

Financial Projections for N E A

Financial projections based on the proposed tariff increases and efficiency improvements show NEA wi l l achieve satisfactory financial performances as a whole from FY05 through to FY07. NEA Is financial viability i s expected to improve with reasonable and timely tariff increases in real terms. Electricity sales are estimated to increase steadily from 1,574 GWh in FY02 to 2,782 GWh in FY07. The total operating revenue i s expected to increase from NRs. 10,766 mil l ion in FY02 to NRs. 24,137 mill ion in FY07. Debt service coverage ratio during the period o f FY02 to FY07 w i l l be in the range o f 1.5 and rate o f return i s forecast at over 6%. B y FY05 i t i s expected that the currently planned physical appraisal o f fixed assets w i l l have been completed and included in the accounts. Thus, the covenanted levels o f performance agreed with NEA set at the following levels as indicators commensurate with the sustainable financial operation o f the utility:

(a) (b) (c) (d)

Debt Service Coverage Ratio o f at least 1.2 Net Accounts receivable at less than three months Accounts payable at less than three months Rate o f Return on historical net fixed assets of six percent.

The overall gradual rate o f improvement in N E A s finances i s considered appropriate given that aggressive tariff increases are not achievable. NEA's tariffs are already on a level comparable with much richer states in the region and are higher than i t s near neighbors. Thus improvements have to be achieved by gradual tariff increments and efficiency improvements and the above covenants have been agreed with this in mind.

- 68 -

"s FoREw=4sTm&Lass-

ArEdd Ma lkdted Aufted ISM& &dgt Faprast (I% dial)

Yes*EMy l!m 1999 m m m " 2 0 0 5 "

mal Ekdliatysale (GM) 1,057 1,114 1,269 1,407 1,574 1,8Q5 208 2290 2,543 2,782

El€dlilityse-Npl 4,883 $199 4528 7,765 9522 11098 14725 16516 lam 20126 -m m 198 328 3 5 574 870 1284 1730 1957 3204

malEl&idQsaig 5 , M 5,347 4856 8,161 10096 11968 16009 18246 20335 23331

ctkopaathg- 350 385 356 993 670 750 628 655 727 807

" W G W $433 $%1 7,212 8754 10766 12718 16637 18901 21E2 24137

401 3% 255 145 106 53 - a6 W 1,151 3 3 9 4692 4822 5252 5794 6650 8301 71 1 779 852 1,19 1308 1404 1544 1698 1868 2055 442 548 w 767 821 832 956 1100 1265 1454 349 423 M 53 604 704 932 960 994 989

1,541 1,% 1,m l,W 2200 2800 3294 3560 4060 4702 106 165 171 m 20 20 22 24 21 29

WRf-me) 270 237 441 427 422 321 - mA--, 4,666 5,412 5,925 8,m 10l38 10915 12001 l 3 l 3 6 14864 17530

(z"G- 767 39 1,287 20 629 1803 4637 5765 6198 6607

1,317 1,141 1,244 1,188 1165 2738 4342 4306 5680 6247

&I5 1,019 m 874 loo0 1000 1152 1320 1500 1704

29 261 571 49 103 4 143 250 163 172

(92) c79) (217) ZQ (so) (so) -

- 6 9 -

Audited Audit€tl Aurtited Auctited "de WEdget FOIlXSt ASafJulylS l!B 1999 2ooo 2001 #)(12 m m m m m

FIxedAsds Gusfixedasets 48,913 51,942 58,@31 61860 70355 105099 114488 122826 147860 165592

Ixmdepreriation 19,022 24719 22,885 24756 28206 32422 37366 42824 49049 56203 Netfixedawis 29,891 31,223 35,1% 37104 42149 72677 77122 80001 98811 109389

TCtaNEtRkdAsds 44,W 48,236 54,143 60744 68549 75488 86855 96458 103183 109282

W ~ ~ ( S t u d i g ) 443 615 1,303 979 556 235 235 235 235 235

Wdzmpnlglxs 14,143 17,013 18,947 23640 26399 2811 9733 16457 4372 -107

107 89 807 747 500 600 726 798 900 1069 915 740 982 961 880 1053 1100 1142 1267 1356

1,435 1,531 1,525 1679 2782 2493 3335 3801 4236 4861 1,710 1,634 1,932 2635 2898 3188 3507 3858 4243 4668 4,167 3,994 5,247 6021 7060 7335 8668 9599 10647 11953

I l I ~ i l l B T t l n l ~ - 1,774 1,344 1,035 810 (603) 398 1,977 3,340 4,565 - 'IWIALMSEIS 50,418 54,189 61,728 68553 75812 82455 96157 108269 117406 126036

19,932 916

2,lW 251 762

22,910 914

1,727 1,053 1,334

595 m

4,931 28.755

29,244 912

1176 784 1277

1,363 648

5,249 35.405

35797 910

1651 628 1408

1512 665

5,864 42571

40293 908

2843 564

1797 782 103

6089 47290

45948 906

2073 577

2115 804

4 5572

52426

53097 904

3104 631

2492 875 143

7244 61245

58127 902

3113 706

2940 966 250

7975 67004

60691 900

3834 790

3473 1108 163

9368 70959

62343 898

4112 885

4107 1383

172 10659 73900

-

xyr~,.4sq"m1~" 25,753 25,433 26,323 25,982 28,522 30,029 34,913 41,266 46,446 52135

12,324 13,366 14634 15360 16363 16683 17706 18921 19692 20240 159 159 189 198 208 217 228 238 250 261 159 179 180 200 220 240 260 280 300 320

1,181 1,066 1231 1160 1450 1441 2725 5234 7069 8942 RRaluationRgew 11,930 19665 10089 9064 10281 11448 13994 16593 19136 22372

' l U l A L m 25,753 25,433 26323 25982 28522 30029 34913 41266 46446 52135

- 70 -

646 105 716 2 9 525 1799 4494 5515 6034 6435

131 1,996 1879 2.9% 2200 2800 3294 3560 4060 4702 w-(stubg) 270 237 441 427 422 321 -

'IbQIirtandcd~g- 24% 2338 3036 2392 3147 4920 7788 9cn4 10095 w 3 7 Md$nt4mdkpxib (68) 529 e40 U82 271 - QPmb-9QP- I 12 9 9 10 10 11 11 12

Ing-pa Ww--@wchrp) WtY-wQ-w)

3,@1 3,440 6616 67766 4873 6053 8536 6542 4453 3849 151 194 124 61

1,372 1,w 1268 726 1003 320 873 1021 647 487 r a R a h r a t i c n I b P W M5 1,019 930 875 loo0 loo0 1152 I320 1500 1704

"(F- 8367 U862 U608 U415 12573 18509 18162 16831 172%

cqitalin\ahrat cqidm&@a 3,883 4,265 3941 7093 4873 6052 7472 5160 4154 3910 Q P t d 4 - w ) 971 1,M 2722 2404 1478 521 I950 2019 1493 U73 -w- 761 1,325 1556 2757 1685 1049 1540 2065 1095 777

wapi$l- 5,614 @3T7 8218 9U.9 8037 7623 10963 9243 6742 5860 IhahdalIpsaw %.5 1,019 930 875 loo0 loo0 1152 3320 1Mo 1704 -in" 98 79 84 0 0 982 1558 U43 1206

-+ 1,317 1,141 1244 1188 U65 2738 4342 4306 5680 6247

Aunthatiold- 201 462 282 143 378 398 U87 1v2 1888 2197

'Ib$l&& 1,521 1,605 1528 U33 1% 3U8 5731 5820 7570 8446

Ing-..o 20 20 20 20 20 20 20 20 20 20

M&dm- 2 2 2 2 2 2 2 2 2 2

446 4B 103

- 7 1 -

NEA's FORECAST CASH FLOW (NRs million)

Audited Audited Audited Audited Estimate Budget Forecast Year ending 15 July 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Electricity sales 5,083 5,397 6,856 8,161 10,096 11,968 16,009 18,246 20,335 23,331 Change in Receivable (226) (96) 5 (153) (1,103) 288 (842) (466) (435) (624) Miscellaneous Revenue 350 385 356 593 670 750 628 655 727 807 DecreaseinBondsOqosits (68) 529 840 1,382 27 1

Total Cash In: 5,138 6,215 7,218 9,441 11,045 13,277 15,795 18,435 20,626 23,513 CashOut: CashOperatingExpenses 2,749 3,015 3,428 6,014 7,495 7,774 8,685 9,552 10,777 12,799 Principle 204 464 284 145 380 400 1,389 1,514 1,891 2,199 Interest 1,317 1,141 1,244 1,188 1,165 2,738 4,342 4,306 5,680 6,247 Increase in Inventories 111 (175) 242 (21) (81) 174 47 42 125 89

Increase in Cash 18 (18) 718 (60) (247) 100 126 72 102 169 Decrease in Liabilities (1,024) (1,115) (3 18) (615) (225) 517 (1,672) (731) (1,394) (1,291) Increase in BondslDeposits 98 79 84 982 1,558 1,343 1,206

Total Cash Out: 3,852 3,316 5,981 7,353 8,750 11,993 14,217 16,665 18,910 21,841 Net Cash available for Invest" 1,286 2,899 1237 2088 2295 1284 1578 1770 1717 1672

Increase in Advances 381 (75) 298 703 263 290 319 351 386 424

KEY FINANCIAL INDICATORS Audited Audited Audited Audited lMmate Budget Forecast

Fiscal year ending 15 July 1998 1999 2Ooo 2001 2002 2003 2004 2005 2006 2007 Avg. Rev. Rate (WWh) 4.94 4.95 5.56 6.06 6.65 6.92 7.80 7.80 7.80 7.80 Increase in Avg. Rev. Rate 0.4% 12.22% 9.02% 9.74% 3.96% 12.83% 0.00% 0.00% 0.00% Rate of Return on Historical Fixe 5.3% 3.7% 4.96% 2.34% 3.85% 4.88% 7.54% 8.70% 8.43% 7.82% Achieved SFR (3 Yr. Avg) 24.1% 33.7% 22.14% 10.28% 6.44% 12.16% 27.07% 34.70% 40.70% 45.02% Debt Service Coverage Ratio 1.6 1.5 2.0 1.8 2.0 1.6 1.4 1.6 1.3 1.3 Net System Losses as a % availab 21.6% 22.9% 23.9% 23.28% 23.44% 21.38% 19.26% 18.65% 17.45% 16.76% Accounts Payable ( # of mnths) 1.5 5.5 3.8 2.5 2.4 2.3 2.2 2.2 2.3 2.3 Accounts Receivable (# of m n ~ 3.4 3.4 2.7 2.5 3.3 2.5 2.5 2.5 2.5 2.5

The main assumptions for the NEA financial projection are as follows:

(1) Escalation - Domestic inflation i s estimated at six percent annually.

(2) Energy Generation - Hydro, thermal and private generation required to meet the load demand over the period FY2004-2007 i s based on the power system simulation carried out in the Power System Master Plan. Energy generation figure for FY 2003 i s based on the annual budget recently prepared by NEA.

(3) Energy Purchases - From India: The total energy purchased from India i s based on Power exchange agreements

between the K o N and India. With the existing interconnection facilities Nepal could import up to 50 MW of power from India, i t i s anticipated that the existing capacity shall be increased to 150 MW in future.

From Nepal: At present, NEA i s purchasing electricity from Andhikhola and Jhimruk ( 38 GWh and 65 GWh) Khimti (350 GWh) and Bhotekoshi (250 GWh) . Indrawati (37 Gwh) i s already commissioned and Chilime (100 Gwh) shall be commissioned in near future. From FY 2004 there shall be additional power purchase from other small IPP amounting to 56 GWh.

(4) hydroelectric generation and five percent o f total thermal generation.

NEA's Consumption - Forecast assume self consumption would be about 1% of total

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(5) System Losses - NEA's Budget projected system losses (Excluding NEA consumption) to be reduced to 21.4 percent in FY 2003. Considering implementation o f future loss reduction programs, it i s assumed that there w i l l be a reduction o f loss by almost 2 percent in FY2004 and there after there wi l l be a steady reduction in losses and shall reach to 16.8 by FY 2007.

(6) prepared under the Power System Master Plan.( updating o f Load forecast i s underway and shall be completed for updating o f corporate development plan) I t i s assumed that additional sales to India From FY 2004 shall take place with the completion o f new power exchange links and upgrading o f existing transmission facilities.

Energy Sales - Sales within Nepal are based on preliminary updated figure o f Load Forecast

(7) into account efficiency improvements, this level o f increase i s considered achievable.

Tariff increases are assumed such as to meet the required financial performance after taking

(8) based on the demand forecast and the average revenue rate derived from calculations based on the financial covenants. India: As agreed between K o N and GO1 during Nepal-India Power Exchange Committee held on July 24, 1997, starting January 1996, the average selling price o f electricity between Nepal and India was fixed at 1.67 IRs/kWh ( @ I R s l.OO=NRs. 1.60) with annual escalation o f eight and a half percent at 33 kV. The agreement further stipulates a surcharge o f seven and a half percent over 33 kV rate and a rebate o f 7.5% over 33 kV rate for pricing at 11kV and 132kV respectively. As i t i s difficult to assess future quantum o f power sales at different and voltage levels for the purpose o f this analysis 33kV rates are used for all the electricity sold to India.

Revenue from Electricity Sales - Nepal: Forecasts o f revenue for the period FY2002-2007 are

(9) Other Operating Revenue - Other operating revenue includes miscellaneous services to consumers such as transferheplacement o f meters, application fees and fees fro re-connection o f services and i s assumed to increase at 10 percent per annum. Projected cash dividends from various power companies in which NEA has invested are also included herein.

(10) specific heat rates and existing fuel prices adjusted for inflation in future years.

Fuel Expenses - Fuel expenses are projected on the basis o f required thermal generation,

(1 1) Nepal: Electricity purchase price from Andhikhola and Jhimruk i s based on the new agreement concluded with BPC. The purchase price from Khimti I, Bhote Koshi, Chilime and Indrawati i s based on Power Purchase Agreement signed between NEA and the respective power companies.

Energy Purchases - From India: The purchase price i s the same as the sales price. From

(12) 10 percent per annum.

Salaries, Wages and Allowances - Salaries, wages and allowances are projected to increase at

(13) maintenance and general administration and overhead expenses other than salaries, wages, allowances and royalties payable to KoN. Annual increases are assumed to be 15%.

Operation and Administration - The operation and administration expenses comprise o f

(14) Depreciation - Depreciation expense i s forecast at three percent o f average gross fixed assets in service. Assets in service were valued in FY89 and since then have been revalued annually using the foreign and local inflation rates assuming that asset cost comprise o f 80 percent foreign and 20 percent local cost.

(15) Income Tax - According to Electricity Act 1992, there w i l l be a tax holiday for 15 years from the beginning o f the commercial operation date o f project. After 15 years o f commercial operation, corporate income tax would be 10% rate less than prevailing tax, i.e. 25%-10%=15%. For calculation

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o f income tax, taxable income i s multiplied by the share o f the total generation in GWh by generating units with more than 15 years o f commercial operation to the total generation and income tax rate.

(16) Royalties - Royalties are based on Electricity Act 1992 and Electricity Regulation 1993. The regulation stipulates a royalty o f NRs. 100 per kW of installed capacity and two of average sales price on electricity generation by hydroelectric plant for the first 15 years o f commercial operation. Thereafter, Rupees 1000 per kW o f installed capacity and 10 percent o f average sales price on electricity generation by the hydroelectric plant. For the calculation o f royalties, total generation from the hydroelectric plants with more than 15 years o f commercial operation i s taken as 590 GWh and the corresponding installed capacity to be 154.5 MW. When Marsyangdi Plant completes 15 years commercial operation in 2004, total generation from older plants would amount to 1108 GWh.

(17) Fixed Assets - NEA has been revaluing i t s fixed assets since FY89. Since the physical verification in FY89, annual revaluation rates are based on an agreed methodology. A physical revaluation study i s about to be commissioned but the results are unpredictable and no allowance has been made for this. This study w i l l also review the annual revaluation formula and accounting policy and recommend accordingly.

(18) Cash - Cash balances have been projected to remain at one month o f cash operating expenses.

(19) estimated to remain at previous FY level plus .5 % o f change in gross fixed assets..

Inventories - Inventories consisting o f stores, maintenance supplies and fuels have been

(20) and a half months o f yearly sales.

Accounts Receivable - Accounts receivables are projected to remain at the equivalent o f two

(21) Short-term Investments - Cash surpluses are assumed to be invested in short-term deposits.

(22) expenses.

Accounts Payable - Accounts payables are forecasted at three months o f cash operating

(23) HMGN.

Payable to HMGN - This includes royalties and 50 percent o f annual interest payable to

(24) Long-term Debt and HMGN's Equity Contribution - Long-term debt i s incurred to finance the foreign cost o f N E A s investment program. I t i s projected that long-term loans and grants from HMGN wi l l finance 100 percent of the foreign currency cost o f NEA's investment program. HMGN contributions equivalent to 25 percent o f the local cost o f the investment program i s also assumed to be invested as equity by HMGN.

(25) rate o f 10.25 percent per annum with equal annual debt service payments. All loans are assumed to be paid in 25 years, including five-year grace period. Rural electrification projects w i l l carry an interest rate of one percent to be repaid in 25 years including a grace period o f five years. Any foreign exchange risk that may arise during repayment shall be borne by HMGN.

Debt Service - Loan term for other than rural electrification are projected to include an interest

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Annex 6: Procurement and Disbursement Arrangements


Procurement

A. Institutional Capacity

As part o f project appraisal, the Bank carried out an assessment to determine the institutional capacity to carry out procurement in accordance with the World Bank guidelines for procurement and for selection of consultants o f the Department o f Electricity Development (DOED) for Part A, Power Development Fund, o f the Alternative Energy Promotion Center (AEPC) for Part B, Micro-Hydro Village Electrification, and of the National Electricity Authority (NEA) for Part C, NEA Component. These institutions w i l l manage the procurement activities o f the corresponding Part o f the Project.

PART A. Power Development Fund

Although DOED has had limited exposure to World Bank-financed projects, in the last few years i t has been carrying out satisfactorily, with the assistance o f USAID-financed consulting f irms, and in accordance with World Bank guidelines, the pre-qualification and selection o f the Power Development Fund Administrator. I t also has been carrying out the pre-qualification of developers for hydro electric power projects under build, own, operate, and transfer (BOOT) arrangement. The USAID-financed consultancy i s expected to continue, and therefore, DOED's capacity i s considered satisfactory.

PART B. Micro-Hydro Village Electrification Program

AEPC wi l l implement this program with the assistance o f a Program Support Unit. The Rural Energy Development Program (REDP) has an existing experienced Program Management Uni t that w i l l be retained to support the Program. This Unit has been handling this type o f program under UNDP procurement guidelines. The IDA-financed TA includes an amount to assist the Program Support Unit in adapting i t s procurement to World Bank guidelines.

P A R T C. N E A Component

NEA has implemented satisfactorily several IDA-financed projects such as the more recent Power Sector Efficiency Project (Credit NO. 2347-NEP) closed in June 1999. The assessment o f NEA in terms o f i t s ability to handle IDA-financed procurement i s considered satisfactory. NEA i s dealing for the f i rst time with 220 kV schemes, and, therefore, NEA wi l l contract an expatriate consulting firm to work jointly with NEA in the engineering, procurement and supervision o f said scheme.

Overall Procurement Assessment DOED: Average AEPCProgram Support Unit: Average NEA: Average

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B. Procurement Methods

All goods, works, and supply and installation o f plant and equipment financed under the IDA credit and IDA grant shall be procured under the guidelines for procurement (Guidelines: IBRD Loans and IDA Credits, January 1995, revised January and August 1996, September 1997, and January 1999). All consultant services funded by the IDA credit and IDA Grant shall be selected in accordance with the guidelines (Guidelines: Selection and Employment o f Consultants by World Bank Borrowers, January 1997, revised September 1997 and January 1999, and May 2002).

All goods, works, and supply and installation o f plant and equipment shall be procured using the World Banks Standard Bidding Documents (SBD) for Supply and Installation o f Plant and Equipment (November 1997, revised January 1999, and March 2002), for Procurement o f Goods (January 1995, revised March 2000, January 2001, and March 2002), and for Procurement o f Works, Smaller Contracts (January 1995, revised June 2002).

The invitation to bid for each contract estimated to cost US$0.2 mill ion equivalent or more shall be advertised in accordance with procedures applicable to specific contracts under paragraph 2.8 o f the World Bank procurement guidelines. The advertising inviting expressions o f interest for consulting contracts above US$ 100,000 equivalent shall also be published in the Development Business o f the United Nations.

Goods, works and services financed from proceeds o f loans and mixed credits made by another multilateral agency or a co-financing governments shall be procured in accordance with the procurement rules and procedures of said co-financiers.

P A R T A. Power Development Fund (PDF)

A. 1 Power Development Fund Administrator

The IDA Credit w i l l cover supply o f goods, works and services (consulting services and training) o f the medium size (over 10 MW) and small size (up to 10 MW) hydroelectric sub-projects to be financed by the Credit under the Power Development Fund. The DOED shall be responsible for competitive selection o f medium-hydro developers. For the small hydro schemes, procurement o f goods and works shall be undertaken by the sub-borrowers (private sector investment enterprises), and the PDF Administrator shall ensure that said borrowers follow IDA guidelines on procurement.

Services

DOED has selected the PDF Administrator in accordance with the Guidelines for consultants, specifically paragraph 3.17, which refers specifically to the hiring o f fund managers.

A.2 Medium Size Hydroelectric Sub-projects

The procurement o f supply and installation o f plant and equipment shall be governed by the Guidelines for procurement, specifically paragraph 3.13, Procurement under BOT and Similar Private Sector Arrangements. In accordance with these paragraph, either o f the following procedures shall be used:

(a) The entrepreneur under the BOO (Build, Own, 0perate)BOT (Build, Own, TransferBOOT (Build, Own Operate, Transfer) or similar types o f contract shall be selected under International Competitive Bidding (ICB) or Limited International Bidding (LIB procedures acceptable to IDA. Said procedures w i l l aim at achieving the least tanif and may include consideration o f issues, such as the cost and the magnitude o f financing to be offered, the performance specifications o f the facility offered, the cost

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charged to the purchaser by the facility, and the period o f the facility's depreciation. The said entrepreneur selected in this manner shall then be free to procure the goods, works and services required by the facility from the eligible sources, using i t s own procedures;

or

(b) If entrepreneurs o f these investment projects have not been selected under ICB in the manner set forth in subparagraph 3.13(a) o f the Guidelines, the goods, works and services required by the facility and to be financed by IDA shall be procured in accordance with ICB or LIB procedures.

DOED has already pre-qualified entrepreneurs in accordance with Bank procedures, and, therefore, the entrepreneur selected shall then be free to procure goods, works and services required for the facility from eligible sources, using i t s procedures.

A.3 Small Size Hydroelectric Sub-proiects

Except as otherwise noted below, contracts for the supply and installation o f plant and equipment, for supply o f goods and for works shall be awarded in accordance with the provisions o f International Competitive Bidding, Section I1 o f the Guidelines and paragraph 5 o f Appendix 1 thereto.

IDA wi l l finance goods and works.

Goods for a private sector investment enterprise estimated to cost the equivalent: (i) o f US$3,000,000 or above per contract shall be procured under ICB; (ii) less than US$3,000,000 per contract not to exceed US$6,000,000 in aggregate may be procured under contracts awarded on the basis o f NCB (iii) goods estimated to cost less than US$50,000 per contract up to an aggregate amount o f US 1,000,000 may be procured on the basis o f national shopping procedures in accordance with the stipulations o f paragraphs 3.5 and 3.6 o f the Guidelines.

Civ i l works for a private sector investment enterprise estimated to cost the equivalent of: (i) US$3,000,000 per contract and above shall be procured under ICB; (ii) less than US$3,000,000 per contract up to an aggregate amount not to exceed US$ 10,000,000 shall be procured under NCB; and (iii) less than US$200,000 per contract may be procured on the basis o f established commercial practices acceptable to the Bank. For the purpose o f this paragraph the term "established commercial practices" shall, inter alia, include: (i) some form o f competition, and evidence to this effect shall be presented to the Bank; and (ii) in case o f direct contracting, or when no documentary evidence i s available to demonstrate competition, the PDFA shall furnish to the Bank confirmation by independent engineers employed by the PDFA that the contract amounts are reasonable.

P A R T B. Micro Hydro Village Electrification Program

B. 1 Micro-hydro Systems

This component involves installation o f about 150 new micro-hydro systems wi th an average capacity of about 20 kW each. The supply, installation and commissioning o f the generating equipment, penstock, valves and electric distribution lines w i l l be carried out either through the procurement o f goods and works or through the supply, installation and commissioning o f the generating equipment, penstocks, valves and electric distribution lines as a complete package.

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Goods and works estimated to cost less than US$ 200,000 equivalent per contract up to an aggregate amount not to exceed US$3,000,000 equivalent may be procured under National Competitive Bidding (NCB).

Goods estimated to cost less than US$50,000 equivalent per contract, up to an aggregate amount not to exceed US$ 1,000,000 equivalent may be procured under contracts awarded on the basis o f national shopping procedures in accordance with paragraphs 3.5 and 3.6 o f the Guidelines.

Contracts costing less than US$ 5,000 for small works and promotional and training activities may be undertaken by (i) members o f the participating communities or (ii) through direct contracting or force account in accordance with paragraphs 3.7 and 3.8, respectively, o f the Guidelines..

Goods and works which should be procured as an extension o f an existing contract, or which must be purchased from the original supplier to be compatible with existing equipment, or which must be procured from a particular supplier as a condition o f a performance guarantee, and costing US$5,000 equivalent each may be procured, with IDA'S prior agreement under Direct Contracting in accordance with the provisions o f paragraph 3.7 o f the Guidelines.

Services: Community mobilization services w i l l be w i l l be provided under numerous small contracts by a number o f local NGOs and are eligible for IDA financing. Consulting services for the Program Support Unit w i l l be directly funded by UNDP (as a grant) under i t s own procedures.

PART C. NEA Component

C. 1 Transmission, Subtransmission and Distribution

All contracts for supply and installation o f plant and equipment for 220 kV and 132 kV transmission lines and substations w i l l tendered on a turnkey basis under single responsibility through ICB (International Competitive Bidding). Each transmission line and each substation w i l l be tendered under separate packages.

The supply o f equipment and materials for distribution lines and substations w i l l be carried out through separate packages through ICB or NCB (National Competitive Bidding). Each kind o f goods and o f equipment w i l l be tendered through a bidding document for all the districts. Distribution substations w i l l be tendered on a turnkey basis under single responsibility with a single bidding document including one district per lot. The bids wi l l be invited for single or multiple packages to encourage bidders to offer discount for multiple awards. The evaluation o f bids w i l l be carried out package wise. Based on such evaluation, award w i l l be made to one or more bidders.

The erection and construction o f 33 kV, 11 kV and 400/230 Volt lines w i l l be tendered through NCB. These lines w i l l be tendered with a single bidding document including one district per package. The bids wi l l be invited for single or multiple packages to encourage bidders to offer discount for multiple awards. The evaluation o f bids wi l l be carried out package wise. Based on such evaluation, award w i l l be made to one or more bidders.

All goods shall be procured through ICB except goods whose estimated value per contract i s less than US$ 100,000 not to exceed US$500,000 in aggregate which may be procured under contracts awarded in accordance with the provisions for international shopping o f paragraphs 3.5 and 3.6 o f the Guidelines.

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All works for transmission shall be procured through ICB except works whose estimated value per contract i s less than US$ 100,000 not to exceed US$ 1,500,000 in aggregate which may be procured under NCB (National Competitive Bidding).

All works for distribution to cost US$ 100,000 per contract not to exceed US$ 1,500,000 in aggregate and above shall be procured through NCB.

Works less than US$ 100,000 per contract not to exceed US$200,000 in aggregate may be procured under established commercial practices.

Services (US$ 1.36 mill ion from the CredidGrant)

Services include a consulting firm for institutional strengthening including upgrading o f financial accounts and audit system, strengthening o f NEA's financial management, and market planning studies, and another consulting engineering firm for the 220 kV transmission scheme. The QCBS (Quality and Cost-Based Selection) procedure shall be used for the selection o f the consulting firm for institutional strengthening, and the consulting firm for the 220 kV transmission system.

Procurement methods (Table A)

The expenditure categories and their respective estimated cost, the procurement method and the respective amounts in parenthesis financed by the IDA Credit and IDA Grant are summarized in Table A for the three components o f the project. Tables Al, A2, and A3 present the proposed procurement arrangements for the: Power Development Fund, Micro-Hydro Village Electrification Program, and NEA, respectively. Table A 4 consolidates the consultant arrangements for the three components.

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Annex 6, Table A: Consolidated Project Cost and Procurement Arrangement

1/ Figures in parenthesis are the amounts to be financed by the IDA Credit and Grant. PDF Subloans will be financed entirely by the IDA Credit, Micro-hydro village electrification will be financed entirely by the IDA Grant; and NEA goods and works by a combination of IDA Credit and Grant; and the services by IDA Grant.

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Expenditure Category 1. Subloans for Investment Projects 2. Services: consulting and other Total

Annex 6, Table A2: Project Cost and Procurement Arrangement (US$ million equivalent)

Part B Micro Hydro Village Electrification Program

I/ Figures in parenthesis are the amounts to be financed entirely by the IDA Grant. - 2/ Includes technical assistance, consulting services.

ICB NCB/NS Other 2/ N.N.B.F Total Cost 60.0 15.0 75.0

(28.0) (7.0) (35.0) 2.9 0.0 2.9

(2.5) (0.0) (2.5) 60.0 15.0 2.9 0.0 77.9

(28.0) (7.0) (2.5) (0.0) (37.5)

- 8 1 -

Annex 6, Table A3: Project Cost and Procurement Arrangement (US$ mil l ion equivalent)

Part C NEA

ICBDS Expenditure Category .. Goods (including those for

turn key contracts) 220k scheme & subtrans and dist.

132 k V scheme or other trans or subtrans or dist works

,. Works and erection (including those for turn key contracts)

220 k V scheme & subtrans and dist.

132kV scheme or the trans, or subtrans or dist.

8. Services: consulting and other

0 NEA Institutional strengthening

e 220 k V scheme

‘otal

20.9 (20.5)

4.7 (4.6)

3.5 (3.5)

1.1 (1.0)

30.2 (29.6)

NCB

1.5 (1.4)

1.5 (1.4)

Other 21 N.B.F

4.0 (0.0)

Total Cost

20.9 (20.5)

4.7 (4.6)

5.0 (4.9)

1.1 (1.0)

5.8 (1.6)

37.5 (32.6)

1/ Figures in parenthesis are the amounts to be financed by the IDA Credit and Grant of US$ 15.4 mil l ion and US$ 17.2 million 21 Includes technical assistance, consulting services, and training. Consulting services to be selected through QCBS method.

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Annex 6, Table A4: Consultant Selection Arrangements (US$ million equivalent)

1/ Figures in parenthesis are the amounts to be financed by the IDA Grant. Note: QCBS = Quality- and Cost-Based Selection

QBS = Quality-based Selection SFB = Selection under a Fixed Budget LCS = Least-Cost Selection C Q = Selection Based on Consultants' Qualifications Other = Selection of individual consultants (per Section V o f Consultants Guidelines), Single Source Selection of Firms or SOE for Training, etc. Selection of Individual Consultants (per Section v of Guidelines for Consultants), Commercial Practices, etc. N.B.F. = Not Bank-financed

C. Procurement Planning

NEA has prepared a draft procurement planning for all identified goods and works under Part C, NEA component. NEA wi l l submit the final procurement planning. In regard to Part A, PDF, and Part B, AEPC, they w i l l develop and submit their respective planning to the Bank.

D. Procurement Information

The Borrower and executing agencies, Power Development Fund Administrator, AEPCRrogram Support Unit, and NEA shall collect, record, and report procurement information for their respective components to IDA as follows:

(i) (ii)

prompt reporting o f contract award information comprehensive quarterly reports to the Bank by the agencies (in the case o f PDF Board assisted by PDF Administrator) indicating: (a) revised cost estimates for individual contracts and the total project, including best

estimates o f allowances for physical and price contingencies; (b) revised timing of procurement actions, including advertising, bidding, contract award,

and completion o f individual contracts; (c) compliance with aggregate l i m i t s on specified methods o f procurement; and (d) a completion report by the borrower/ executing agencies within three months o f the

credit/grant's closing dates.

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E. NCB Provisions

All NCB contracts shall be awarded in accordance with the provisions o f paragraphs 3.3 and 3.4 o f the Guidelines for Procurement under IBRD Loans and Credits issued by the Bank and revised in January 1999 (the Guidelines). In addition, all NCB contracts to be financed with the proceeds o f the Credit/Grant shall follow the following procedures:

only the model bidding documents for NCB agreed with the Bank shall be used (as amended from time to time);

invitations to bid shall be advertised in at least one national newspaper with a wide circulation, at least 30 days prior to the deadline for submission o f bids;

bid documents shall be made available, by mail or in person, to all who pay the required fee;

foreign bidders shall not be precluded from bidding and no preference o f any kind shall be given to any bidders in the bidding process when competing with the foreign bidders, state owned enterprises, or small scale enterprises;

qualification criteria shall be stated in bidding documents, and , if registration process i s required, a foreign bidder declared as the lowest evaluated responsive bidder shall be given a reasonable opportunity o f registering, without let or hindrance;

bid shall be opened in public in one location, immediately after the deadline o f the submission o f bids;

bids shall not be rejected merely on the basis o f a comparison with an official estimate without the prior concurrence o f the Association;

except with the prior concurrence o f the Association, there shall not be negotiation o f price with the lowest evaluated responsive bidder or with any other bidders;

contracts shall be awarded to the lowest evaluated responsive bidder;

rebidding shall not be carried out without the prior concurrence o f the Association;

al l bidders/contractors shall provide bid security/performance security as indicated in the bidding documents;

evaluation o f bids shall be made in strict adherence to the criteria stipulated in the bidding documents, in a format and within a specified period agreed with the Association;

a bidder's bid security shall apply only to a specific bid, and a contractor's performance security shall apply only to a specific contract under which i t was furnished;

bids shall not be invited on the basis o f percentage premium or discount over the estimated cost;

except in cases o f force majeure andor situations beyond the control o f the Project, extension o f bid validity shall not be allowed without the prior concurrence o f the Association (i) for the f i r s t request o f extension if i t i s longer than eight weeks; and (ii) for al l subsequent requests for extension irrespective o f the period, and

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(xvi) there shall not be any restriction on the means o f delivery o f the bids.

F. Prior review thresholds (Table B)

Part A, PDF:

(i) The f i rst two investment subprojects regardless o f value.

(ii)

(iii)

(iv)

Each contract for goods and for works for US$500,000 equivalent and above.

The f i r s t three contracts procured under national shopping.

All consulting services contracts with an estimated cost o f US$ 100,000 equivalent and above for firms and US$25,000 and above for individuals.

Part B. AEPC:

(i) The f i rs t two micro-hydro village electrification systems regardless o f value.

(ii) Each contract for goods and for works for US$ 50,000 equivalent and above.

(iii) Prior to the award o f any contract procured under direct contracting or shopping procedures, AEPC shall provide to IDA a copy o f the specifications, and the draft contract.

The f i rs t three contracts procured under national shopping, (iv)

(v) All consulting services contracts with an estimated cost o f US$50,000 equivalent and above for firms, and US$25,000 and above for individuals.

Part C, NEA:

(i)

(ii)

(iii)

Each contract for goods and for works for US$ 100,000 and above.

The f i r s t three contracts for goods and for works regardless o f value.

All consulting services contracts with an estimated cost o f US$ 100,000 equivalent and above for firms, and US$25,000 and above for individuals.

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Annex 6, Table B: Thresholds for Procurement Methods and Prior Review 11

Expenditure Category

Contract Value Procurement Method Contracts Subject to Prior Review (US$ million equivalent)

(i) Goods

I

(a) US$3,000,000 and above

1 (b) Less than US$3,000,000

(ii) Works

(iii) PDF Services 'art B. Micro-Hydro (i) Goods

(ii) Works

(iii) Services: includes consulting, incremental operating costs

I (c) Less than US$50,000 (a) US$ 3,000,000 and above

(b) Less than US$3,000,000

(c) Less than US$200,000

For firms US$ 100,000 and above

(a) US$200,000 and above Village Electrification Program

(b) Less than US$ 200,000


(a) Less than US$ 200,000

(b) Less than US$ 10,000


US$50,000 and above for firms and US$ 25,000 for individuals

ICB

NCBIIS

NS (National Shopping) ICB

NCB

Established commercial practices

Bank guidelines

ICB

NCB

NS (National Shopping)

NCB

Direct contracting

Force Account

3ank guidelines and paragraph B1

IS$ 3,000,000 each contract

IS$ 500,000 and above each contract

IS$ 3,000,OO and above each mtract.

rS$500,000 and above each contract

IS$ 100,000 and above.

JS$2OO,OOO and above.

IS$50,000 and above

JS$5O,OOO and above.

JS$ 200,000

JS$ 50,000 and above for firms and JS$25,000 for individual consultant!

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Expenditure Category

Part C. NEA (i) Goods (including those for tum key contracts)

Contract Value Procurement Method Contracts Subject to Prior Review (US$ million equivalent)

(ii) Works (including those for tumkey contracts)

I individuals

Services: consulting

I

(a) US$ 50,000 and above

1 (b) Less than US$50,000 I I S

ICB US$ 100,000 and above.

US$500,000 and above :transmission)

Less than US$50,000

Less than US$ 100,000

LTS$ 100,000 and above for Yrms; US$25,000 for

ICB

NCB

Established commercial practices

Bank guidelines and paragraph C1

US$ 100,000 and above.

US$ 100,000 and above.

_ _ _

US$ 100,000 for f i r m s and US$ 25,000 for individual consultants.

Total approximate value of contracts subject to prior review: US$ 82.4 mill ion

Overall Procurement Assessment Risk

Average

Frequency of Procurement Supervision Missions : Three missions every 12 months (includes post- award reviewlaudits).

Post- Award Review

Part A, PDF. A selective post review o f awarded contracts below the threshold levels w i l l be carried on one out o f ten good contracts and one out o f ten works contracts. This Part includes up to two medium size (over 10 MW) and small size (up to 10 MW) hydroelectric subprojects.

Part B, AEPC. Because o f the nature o f this operation, almost all contracts for this Part, micro hydro village electrification, would be below the prior review l i m i t s . I t i s expected that this component w i l l include about 250-300 contracts over a three-year period, with about 120 o f these being below about US$7,000, and the rest ranging from US$ 10,000 to US$30,000, with a few reaching about US$ 60,000. The micro hydro village electrification component itself provides for: (a) a UNDP-financed TA to assist the existing Program Support Unit in adapting i t s procurement to World Bank guidelines; and (b) the f i rs t two micro hydro village electrification systems w i l l be reviewed by the Bank, along with all o f these systems with development costs in excess o f US$ 100,000. On th i s basis, i t i s estimated that procurement reviews w i l l be carried out on about 10-15 o f the larger (equipment) contracts plus about 10-15 o f the smaller (community mobilization) contracts. Therefore, the Banks norm of ex-post review o f one in ten contracts for an average risk project would be achieved. The Government, through AEPC, has agreed to conduct these post-reviews at their level, and furnish quarterly report to the Bank. The Bank would review samples o f these reports as per the regional guidelines. In addition to a review o f the independent self-audit reports called for in this project, Bank staff w i l l conduct post-award reviews during supervision missions. These reviews w i l l be periodically supplemented by an appropriate allocation o f random ex-post audits to be conducted by firms engaged by the Region for post-award review coverage on the Nepal portfolio as a whole.

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Part C, NEA. A selective post review of awarded contracts below the threshold levels w i l l be carried out on about one out of ten goods contracts and one out of ten works contracts.

Disbursement

Allocation of creditlgrant proceeds (Table C)

Annex 6, Table C: Con5 Expenditure Category

lidation o f Allocation of Ci didGrant Proceeds Financing Percentage IDA F

Credit Total

33.0 Part A Power Development Fund 1. Sub Loans for Investment Projects"! 33.0 00 % of amount disbursed by PDF under

iub Loans 2.PDF Administration Feesb/ 2.5 2.5 '5% of Fees

~~

Part B Micro-Hydro Village Electrification Program 1. Investment Grant for micro-hydro subprojects 2. Goods

3.2 3.2 00% of investment grants

0.3 0.3 00% foreign expenditures and ex-factory osts, and 90% of local costs including ransportation 5% of total expenditures 00% of total expenditures 75% for FY' 04 & 05; 60% for FY" 06 t 07; 45% for the remaining years.

3. Services: Consulting and others 4. Training and promotional activities

5. Incremental Operating costs

0.6 0.1 0.6

- 0.6 0.1 0.6

Part C NEA 1 .Goods (including those for tum key contracts: 00% of foreign expenditures, 100% of

ocal expenditures (ex-factory), 90% of ocal expenditures for other items procured ocally

220 kV scheme and subtrans. and dist. 9.2

2.0

9.0

2.2 -

2.2

0.4 1.4 2.7 25.2 on. u

- - - -

18.2

4.2

4.3

0.9 1.4 6.3 75.6

be subk

132 kV scheme or other trans. or subtrans. or dist works. 2. Works and erection Goods (including those for tum key contracts)

15% of total expenditures

220 kV scheme and subtrans. and dist. 2.1

132 kV scheme or other trans. or subtrans. or i i s t works. 3. Services: Consulting Unallocated (Part A, Part B and Part C)

' Prior to disbursements. investment uroiects costing Total

0.5 0.0 5% of total expenditures

i s allocated to above categories

to IDA'S urior review to ensure comdiance

3.6 50.4

ore than $ 3 mi . _ 1

with sub-loan criteria (see' Annex 12). Depending on ivailability o f other financing, I D A contribution \;auld vary from case to case' up to a maximum o f 60% o f project cost but i t would normally be around 40% o f total project cost. The PDF Administration Fees wi l l consist of a retainer fee and an investment advisory fee as well as the expenses associated with the operation of the PDF Board. 1. Part A, PDF. Subloans for investment projects to be financed by US$ 35.0 million from the I D A Credit. Services to be financed by US$2.5 million from the I D A Grant. Part B, Micro-hydro village electrification to be financed by US$5.5 million from the I D A Grant. Part C, NEA. Goods and works to be financed by US$ 15.4 million and US$ 15.6 million from the I D A Credit and I D A Grant, respectively, and services to be financed by USS1.6 million of I D A Grant.

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Disbursement Arrangements

For all three components, disbursements from IDA wi l l initially be made in accordance with traditional disbursement procedures, which include full documentation or statement o f expenditure (SOE). To facilitate disbursements, separate Special Accounts wi l l be established for each project component. For large payments, exceeding the Special Accounts threshold, direct payments w i l l be made by IDA. For small payments, including the release o f grants by AEPC to DEF under Part B, disbursements from IDA wi l l be on a reimbursement basis.

Use of statements of expenditures (SOEs):

SOEs wi l l be used for the following expenditures:

For Part A: (a) For sub-loan not exceeding US$ 1,250,000 and (b) all PDF Administration fees as per the Administration Agreement.

For Part B: (a) for investment grants to be provided by AEPC to the District Energy Funds, (b) for goods under contracts costing less than $50,000 equivalent each, (c) for consultants' services contracts costing less than $50,000 in case o f firms, and less than $5,000 or equivalent in case o f individuals, (d) for cost o f training and promotional activities; and (e) incremental operating costs.

For Part C: (a) For c iv i l works contracts less than US$ 100,000 equivalent, (b) for goods under contracts less than US$50,000 equivalent; and (c) for consultants' services costing less than $100,000 equivalent in case o f firms, and less than US$5,000 equivalent in case o f individuals.

Special account:

A separate Special Account in U S Dollars may be established, on terms and conditions satisfactory to IDA for each component o f the IDA financing. The authorized allocations for special accounts o f Part A wi l l be initially limited to US$ 1,000,000 until the aggregate amount o f withdrawals from the financing account, plus the total amount o f all outstanding special commitments under the component entered into by IDA i s equal to, or exceed the equivalent o f $ 2,500,000. The authorized allocation may then be increased to $2,000,000. The authorized allocation for special account o f Part B wi l l be initially limited to US$250,000 until the aggregate amount o f withdrawals from the component account, plus the total amount o f all outstanding special commitments entered into by IDA i s equal to, or exceed the equivalent o f $1,000,000. The authorized allocation may then be increased to $750,000. The authorized allocation for special account o f Part C wi l l be initially limited to US$600,000 until the aggregate amount o f withdrawals from the component account, plus the total amount o f all outstanding special commitments entered into by IDA i s equal to, or exceed the equivalent o f $2,000,000. The authorized allocation may then be increased to $ 1,500,000. If the project moves to a FMR-based disbursements, the authorized allocation for each special account may go up to 20% o f the total expected expenditure for each component.

The Special Accounts w i l l be managed under the joint signatures of: (i ) for Part A - the Chairman o f the PDF Board (Director General o f DOED) and an authorized representative o f PDFA; (ii) for Part B - AEPC's Executive Director and Accounts Officer; and (iii) for Part C - NEA's Project Coordinator and Accounts Officer. Kingdom of Nepal w i l l designate the aforementioned officials as the signatories for withdrawing funds from the IDA financing for the implementation o f the respective components.

As per government requirements, all special accounts w i l l be maintained at the Katmandu Banking Office o f the Nepal Rastra Bank (Central Bank). Each implementing agency w i l l ensure that the bankkash books are reconciled with bank statements every month. Each implementing agency w i l l

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separately submit replenishment applications for the special account on a monthly basis, or when 25 percent o f the authorized allocation has been used, whichever occurs first. Replenishment applications wi l l be accompanied by reconciled statements from the bank in which the account i s maintained, showing all transactions in the special account. Supporting documentation w i l l be maintained by respective cost centers for at least one fiscal year after the year in which the last disbursement from the credidgrant took place, and w i l l be available to be reviewed by IDA staff, and independent auditors.

Project Budgeting Part A: PDF Board - PDF would provide loans to sub-borrowers in local currency and the entire foreign currency risk would be borne by Kingdom o f Nepal. PDF Board w i l l be accountable for the management o f PDF. Repayment to IDA would be made by Kingdom o f Nepal. PDF Board w i l l administer the PDF through the PDF Administrator, and an PDF Board that w i l l be established wi l l monitor the performance o f the PDFA. Through the input o f the PDFA, PDF Board w i l l prepare annual budgets providing details in respect o f funds required for counterpart Government funds, disbursements, administration fees, PDF Board expenses, receipts in terms o f repayments, income from fees and charges, etc. PDF Board w i l l coordinate with the National Planning Commission and the Ministry o f Finance for al l matters related to PDF budgeting. Allocated budget and expenditures wi l l be closely monitored by the PDFA through Financial Monitoring Reports (FMRs). Kingdom o f Nepal w i l l make sufficient budgetary arrangements for the Part A, which w i l l be reflected in Kingdom o f Nepal ‘s annual budget.

Part B: AEPC - Project programming and budgeting w i l l follow HMGN’s budgeting system. The AEPC wi l l operate within the Government’s financial management framework. AEPC prepares i t s annual program and budget which w i l l be submitted to the AEPC Board for approval. Subproject proposals are generated from the grassroots level, and once they are approved by the Technical Review Committee, are included in the annual work program and budget. A separate budget line item w i l l be defined in the Government’s Budget to reflect the expenditures to be financed under the IDA grant. I t w i l l also enable the AEPC to maintain a separate book o f accounts for projects to be financed under the grant. Allocated budget and expenditures w i l l be closely monitored by the AEPC through FMRs.

Part C: NEA - NEA w i l l prepare annual budgets for the project in line with NEA’s annual budget program. The budget w i l l include details in respect o f the investments to be financed under IDA. The budget and expenditures would be monitored by NEA and reported through the FMRs.

Fund Flow Arrangements

Part A: PDF Board (DOEDI - Kingdom o f Nepal would provide the required counterpart funding for this component directly to the operating bank account o f the PDF. For the purpose o f utilization o f IDA resources, a Special Account in U S Dollars w i l l be established in Nepal Rastra Bank, on terms and conditions satisfactory to IDA. Disbursements from IDA will be made against sub-loans released by the PDF for investment projects. The PDFA wi l l reflect the total expenditures, including counterpart financing in i t s financial statements.

Part B (AEPC): Based on budget provisions from the Government, AEPC wi l l extend grants and other project support funds to the District Energy Fund (DEF) managed by District Development Committees (DDCs) for financing o f approved micro-hydro project proposals. Funds are released from the DEF to the Community Energy Funds (CEF) only after the acquisition o f land for the power house, right o f way for the canal and distribution lines, and collection o f collateral for any required local loan, among others. Investment grantshbsidies, which are currently set at Rs 80,000 per kW capacity, are released based on output verification, while other costs such as for social mobilization, training, etc. are paid on actual cost basis. Expenditure statements on use o f CEF are submitted through the DDCs to AEPC. AEPC wi l l confirm the eligibility o f expenditures, consolidate the accounts and draw down from the

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Special Account for reimbursement o f said expenditures. In verifying the eligibility o f expenditures, AEPC w i l l use the monitoring system established with UNDP’s TA including field visits to the sites. Moreover, a mechanism i s in place for public audit as well as financial audit o f the CEF by local registered auditors, which are reviewed by the DDCs, the AEPC and AEPC’s external auditor.

Part C (NEA): NEA wi l l establish a Special Account in U S Dollars, on terms and conditions satisfactory to IDA. The NEA wi l l have direct access to the use o f the Special Account. The Special Accounts w i l l be managed under the joint signature o f NEA’s project Coordinator and the Accounts Officer. NEA wi l l make budgetary arrangements for the Project, and w i l l reflect these in NEA’s annual budget. NEA wi l l make most payments from the Special Account. For large payments exceeding the special account threshold, direct payments w i l l be made by IDA.

Financial Management Staffing

Part A: I t i s expected that the PDFA, which i s yet to be appointed, would be headed by a Project Manager and w i l l have a finance manager. The PDFA in their proposal has already identi f ied a l l core staff including the Project Manager and the Finance Manager, who wil l be invo lved in the execution of the PDF.

Part B: A qualified Finance/Accounts officer has been appointed by AEPC to handle loan accounts. A junior accountant i s already in place who w i l l assist the Finance/Accounts officer. Appropriate training with respect to IDA’S Financial Management and Disbursement policies w i l l be provided to these staff.

Part C: NEA wi l l engage professionally qualified and well-trained financial management professionals to improve the financial management in the entity. For the purpose o f the project, a qualified accounts officer has been designated by NEA to maintain the books o f accounts o f the project, and for preparing necessary reports with regard to project expenditures. Appropriate training with respect to IDA’S Financial Management and Disbursement policies w i l l be provided to the staff.

Project Financial Accounting, Reporting and Internal Controls

Part A PDF Board (DOED): PDFA, on behalf o f PDF Board, w i l l be required to maintain detailed records and accounts in respect o f the transactions o f the PDF in accordance with internationally accepted accounting principles. I t i s envisaged that the PDF’s accounting procedures would be designed in a manner to meet the (i) internationally accepted accounting principles, (ii) the reporting and accounting requirements o f the Administration agreement, (iii) management and other information requirements o f Kingdom of Nepal and IDA. As part o f the Administrative Agreement, the PDFA wi l l be required to develop a Financial Management Manual (as a part o f the operational manual), which w i l l describe the applicable accounting policies and procedures for the operating staff. I t has been stipulated under the RFP/ Administration agreement that PDFA wi l l prepare, within two months o f i t s appointment, operational policies and procedures for the Fund including policies on risk management (including Foreign Exchange, Interest Rate, Asset Liabil ity Management), accounting policies & procedures, financial management arrangements, loan pricing, appraisal and processing, project / loan monitoring, internal controls, fund flow etc. based on the outlines included in the Borrower’s Project Implementation Plan (BPIP). These policies and procedures w i l l need to be acceptable to IDA and would require approval o f the PDF Board o f the PDF. This would be prepared on the basis o f the sub- loan approval criteria as approved by IDA. The books o f accounts for the PDF wi l l be maintained separately from that o f the PDFA’s (Private Bank) own books o f accounts and records. The accounts w i l l be maintained on accrual basis and in the currencies o f the Assets and the Liabilities. The annual project financial statements w i l l be reported on a accural basis and w i l l include (i) sources and uses o f funds, (ii) Income & Expenditure Account and (iii) the Balance sheet. Any surplus arising in the income

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and expenditure statement would be transferred to the retained earnings o f the PDF pending redeployment as per instructions from the PDF Board. The main books and records o f the PDF, as a financial intermediary, would need to maintain on behalf o f the PDF are: Cash Book, Bank Book, General Ledger, General subsidiary ledger, Loan receivable ledger, Loans payable ledger and Fixed Assets register. In addition to above, the Fund Administrator wi l l need to set up and maintain various subsidiary and memorandum accounts to support the transactions recorded in the main ledgers. PDFA wi l l also need to establish adequate internal audit arrangements, which w i l l be described in the Financial Management Manual.

Part B (AEPC): Project expenditures w i l l follow the government cash-based accounting system. The AEPC wi l l supplement manual records required to be kept under government regulations with simple spreadsheet-based subsidiary records, regularly reconciled to the official accounts, to facilitate the timely compilation o f additional information required for disbursements and FMR preparation. The AEPC wi l l compile the monthly statement o f expenditures within seven days following the end o f each month. The AEPC w i l l also arrange to prepare a project specific Financial Management Manual. The AEPC w i l l produce from the outset the Financial Monitoring Reports (FMRs) on a trimester basis, in formats that were agreed upon at negotiations. AEPC wi l l adhere to the general financial intemal controls established by the Government.

Part C fNEA): NEA wi l l create a new account within i t s own accounting systems to record the expenditures associated with the project. The account code w i l l have sufficient sub-accounts to differentiate the different categories o f expenses. This system wi l l be supplemented with spreadsheet records to produce the F M R s until such time as the computerized systems are fully implemented and capable o f producing the required reports. In accounting for the transactions, NEA will adhere to i t s own internal control practices and subject this area to regular internal audit scrutiny. NEA wi l l furnish financial monitoring reports including entity reports such as, cash flows, and progress against financial monitoring indicators on a trimester basis.

Financial Monitoring Reports from all Components.

Each implementing agency w i l l produce from the outset the Financial Monitoring Reports (FMRs) showing the sources and uses o f funds, in formats to be agreed upon during negotiations. During the mid-term review o f the project, the desirability and feasibility o f switching to FMR-based disbursement w i l l be assessed. To match the government planning and reporting cycle, the FMRs w i l l be produced trimesterly and submitted within 45 days from the end o f the preceding trimester. Until that time, traditional disbursement w i l l be used for all components.

External Audit

The following are the audit requirements under various components o f the IDA financing:

Part A PDF Board (DOEDI Annual project financial statements, SOE schedule, and special account statement w i l l be audited by the Office o f the Auditor General (through qualified and certified private audit firm acceptable to IDA), which i s considered acceptable by IDA for this purpose, and submitted to IDA within six months after the end o f the fiscal year. A draft TOR prepared by PDFA, on behalf o f PDF Board, acceptable to IDA w i l l be discussed with the Auditor General.

Part B (AEPC) Annual project financial statements, SOE schedule, and special account statement w i l l be audited by the Office o f the Auditor General, which i s considered acceptable by IDA for th is purpose, and submitted to IDA within six months after the end o f the fiscal year. A draft TOR acceptable to IDA was discussed with the Auditor General.

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Part C (NEA) Annual project financial statements, SOE schedule, and special account statement w i l l be audited by the Office o f the Auditor General (through qualified and certified private audit firm acceptable to IDA), which i s considered acceptable by IDA for this purpose, and submitted to IDA within six months after the end o f the fiscal year. A draft TOR acceptable to IDA was discussed with the Auditor General. Entity financial statements for NEA wi l l also be audited by the Office o f the Auditor General (through qualified and certified private audit firm acceptable to IDA), and submitted to IDA within six months after the end o f the fiscal year.

Under the IDA-financed project with NEA (Cr. 2347-NEP) which closed in June 1999, NEA maintained satisfactory project accounts and provided timely audit reports o f said accounts to the Bank. During project implementation, NEA's entity accounts were audited by international auditors. The audits revealed various deficiencies in the accounting system and the way accounts were kept. In particular, the audit report on NEA's annual accounts in FY98 cited numerous shortfalls in financial management and resulted in a disclaimed opinion. To address these deficiencies, NEA prepared and implemented an action plan. In addition, the Government appointed a high level committee to monitor implementation o f the action plan. Subsequently, given the improvements made, the auditors were able to reach a qualified opinion on the FY99 and subsequent accounts, and the number o f audit issues has been reduced. Among the major issues remaining are: (i) ensuring future compliance with International Accounting Standards; and (ii) ensuring that N E A s annual financial statements and audit reports are duly prepared, audited and approved by the Board o f Directors in a timely manner. NEA wi l l pursue their action plan, which now relates mainly to medium term issues further in order to improve the quality o f entity financial statements and achieve unqualified audits as well as to comply with six months submission time. IDA technical assistance support for strengthening o f NEA's accounting and internal control systems w i l l also be provided to assist in the achievement o f these improvements.

In order to promote timely audits, i t has been agreed that the unaudited financial statements for each component w i l l be prepared within three months after the end o f the fiscal year for submission to the auditors, and copied to IDA. All records including contracts, orders, invoices, bills, receipts and other relevant documents evidencing all expenditures w i l l be kept properly and the Banks representative w i l l have the access to them for the purpose o f examination.

Financial Management Action Plan

Action plans to strengthen the financial management capacity o f the implementing agencies were agreed between Kingdom o f Nepal and IDA and are summarized below.

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Table D1: Financial Management Action Plans for Part A (PDFA)

Action PDFA to establish a financial management system; and FM assessment by IDA to confirm that arrangements in respect o f staffing, fund flow, reporting and auditing are satisfactory

Responsibility Completion Date PDFA Disbursement Condition

Table D2: Financial Management Action Plan for Part B (AEPC)

Action AEPC to prepare and implement project- specific Financial Management Manual

Responsibility Completion Date AEPC June 30,2003

Table D3.: Financial Management Action Plan for Part C (NEA)

Elements of Action Plan (i) Actions to improve audit compliance NEA wi l l address the financial management issues raised in its audit reports (and subsequent audit reports during the l i fe o f the project) and improve it's accounting and auditing system to meet IAS standards. (Actions under points ii to i v below wi l l also assist in this area) (ii) Upgrading Financial Management Capacity and internal audit. Authority inducts professionally qualified and well trained financial management professionals at the senior level to bring about improvement in the financial management and internal audit areas. (iii) Financial training and corporate finance. NEA wi l l recruit suitable consultants to advise on and carry out training, improve the accuracy and timeliness o f accounts and also to improve the corporate finance activities under terms o f reference acceptable to IDA. (iv) Computerized Integrated Financial Accounting Systems. Accurate and timely information i s key to managing NEA's finances. For providing this information NEA wi l l need to implement well designed computerized financial accounting systems. NEA plans to do this over the next three years, but major units w i l l be complete in 18 months.

Responsibility NEA

NEA

NEA

NEA

Completion Date Annually, depending on issues raised by the auditor

3 1 December 2004

30June2004

3 1 December 2004

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Annex 7: Project Processing Schedule


Bank staff that worked on the project

M. Imran J. Plummer T. Storm van Leeuwen M.V. Manzo R. D. Joshi A. Khawaja S. Pilapitiya R. Lopez-Rivera K. Baral B. Pradhan M. Jain I'. Ziegler S. Joshi S. Thapa A. Tait N. Sharma J. Thapa M. Whiskey I'. Rutledge F. Hassan D. Trent

Name

Project Schedule

Time taken to prepare the project (months)

First Bank mission (identification)

Appraisal mission departure

Negotiations

Planned Date of Effectiveness

included: Specialty

Sr. Energy Economist, Task Team Leader Sr. Financial Analyst Lead Financial Analyst Sr. Operations Officer Sr. Education & Microhydro Specialist Sr. Social Development Specialist Sr. Environmental Specialist Consultant, Power Engineer and Procurement Sr. Procurement Specialist Sr. Financial Management Specialist Sr. Financial Management Specialist Water Resource Specialist Infrastructure Specialist Social Development Specialist Consultant, Hydro Engineer Consultant, Procurement Team Assistant Program Assistant Team Assistant Program Assistant Program Assistant

Planned (at final PCD stage)

18

11/08/1995

02/05/1997

0313 1/2003

07/01/2003

Actual

76

11/08/1995

04/26/200 1

Prepared by: Ministry o f Water Resources, Department o f Electricity Development, Nepal Electricity Authority, Alternative Energy Promotion Centre, Ministry o f Population and Environment,

Preparation assistance: United States Agency for International Development

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Annex 8: Documents in the Project File*


A. Project Implementation Plan

NEA Borrower Implementation Plan NEA Corporate Development Plan, December 200 1 PDF Borrower Implementation Plan AEPC Borrower Implementation Plan

B. Bank Staff Assessments Project Concept Document 1996 Preparation Aide Memoires Sub-appraisal report on Microhydro Village Electrification, 2001 Sub-appraisal report on Small Hydro development Power Sector Development Strategy, 2001 Financial Management Assessments o f NEA, AEPC and DOEDPDF (preliminary), 2001

C. Other KoN's HvdroPower Development Policv 2001, approved on October 5,2001

Sectoral Environmental Assessment, June 1997, and Summary Update January 2002 Environmental and Social Impact Assessment Framework, KoN, November 1999

Operational Manual o f Environmental Impact Assessment (OM) for Sub-Projects, financed under the PDP.

Draft Agreements between the PDFA and K o N

Medium Hydropower Studv Project: Screening & Ranking Study Draft Phase I Interim Report. prepared by Canadian International Water and Energy Consultants (CIWEC) for Nepal Electricity Authority Engineering Directorate Medium Projects Development Department, May 1 1, 1996.

Medium Hydropower Studv Project Phase I: Fine Screening and Ranking Report Ma in Report (Draft). Vol. 1 o f 6. prepared by CIWEC for NEA Engineering Directorate Medium Projects Development Department, December 1996.

Medium Hydropower Study Project Screening and Ranking Study. Phase I Coarse Screening and Ranking Report. Volume 1 - Ma in Report prepared by CIWEC for NEA Engineering Directorate Medium Projects Development Department, August 1996.

Kingdom o f Nepal Ministry o f Water Resources, Water and Energy Commission Secretariat. Guidelines for Init ial Environmental Assessment o f Water Resource and Energy Projects. Report No. 6/3/161294/1/1, Seq. No. 459.

Nepalese Legal Provisions on Hydro-Power Development: Hydropower Development Policy 2049, Water Resources Act 2049, Electricity Act 2049. Kathmandu, Nepal: Kingdom o f Nepal Ministry o f Water Resources, January 1993.

- 96 -

Electricity Regulation, 2050 B.S. (19931. Kingdom o f Nepal Ministry o f Law, Justice & Parliamentary Affairs, 1993.

Rural Energy Development Program Publications: (i) Community Mobilization Guidelines, February 1998; (ii) Strategic and Operational Framework; (iii) Best Possible Examples: Partnership with the Private Sector '

NEA. Power System Master Plan for Nepal. Transmission System Master Plan. Final Report.

NEA. Distribution Network Development Project

0 NEA Final Report for Detailed Engineering Design o f Rural Electrification and Distribution SystemReinforcement o f Electrical Network in Lalitpur District. Volume I (Main Report), Part I (Rural Electrification Scheme) and Part I1 (Distribution System Reinforcement Scheme).

Final Report for Detailed Engineering Design o f Rural Electrification and Distribution SystemReinforcement o f Electrical Network in Bhaktapur District. Volume I (Main Report), Part I (Rural Electrification Scheme).

0 Feasibility Study and Preliminary Design for Rural Electrification for Dhading District. Final Report.

0 Feasibility Study and Preliminary Design for Rural Electrification for Nuwakot District. Final Report.

*Including electronic files

- 97 -

Annex 9: Statement of Loans and Credits

18.30 1 1.55

NEPAL: Nepal Power Development Project 11-Mar-2003

Project ID

PO71291 PO5067 1 PO45052 PO45053 PO40612 PO10530 PO10509 PO10516

~~

Difference between

FY Purpose

2003 Financial Sector Technical Assistance 2002 NP: Telecommunications Sector Reform 2000 Road Maintenance & Dev. 1999 Rural Infra Lil 1999 Basic & Primary Ed. Ii 1998 Irrig Sector Devt 1998 Multimodal Transit 1997 Rural Ws& Sanitation

Committed

Ori, IBRD

0.00 0.00 0.00 0.00 0.00 0.00 0.00

Disbursed

n.nn

FY Company

ia l Amount in US$ Millions

IFC IFC Loan I Equity I Quasi I Partic Loan I Equity I Quasi I Partic

0.00

79.77

Approval 1996 1994 2001

Bhote Koshi 19.26 2.95 0.00 29.45 19.26 2.95 Himal Power 25.89 0.00 4.50 0.00 25.89 0.00 ILFC - Nepal 0.00 0.30 0.00 0.00 0.00 0.30

NEPAL STATEMENT OF IFC's

Held and Disbursed Portfolio As of Jun 30 - 2002

In Millions U S Dollars

FY Company Approval

Total Pending Commitment:

Undisb.

16.67 23.25 36.03 0.78 5.10 8.95 4.33 2.14

97.25

Approvals Pending Commitment Loan Equity Quasi Partic

0.00 0.00 0.00 0.00

expected and actual disbursementsa

~ Rev'd

-0.17

4.99 I l;:;; 83.26

~1 0.00 0.00

1998 I Jomsom Resort I 4.00 I 0.00 I 0.00 I 0.00 I 4.00) 0.00 I 0.00 I 0.00

Total Portfolio: I 49.15 I 3.25 I 4.50 I 29.45 I 49.15 [ 3.25 [ 4.05 [ 29.45

- 98 -

Annex 10: Country at a Glance


POVERTY and SOCIAL

2001 Population, mid-year (millions) GNI per capita (Atlas method, US$) GNI (Atlas method, US$ bihons)

Average annual growth, 1995-01

Population (%) Labor force (%)

Most recent estimate (latest year available, 199541) Poverty (% of population below national poverty line) Urban population (% of total populafion) Life expectancy at birth (years) Infant mortality (per 1,000 live births) Child malnutrition (77 of children under 5) Access to an improved water source (“A ofpopulation) Illiteracy (7h ofpopulation age 15c) Gross primary enrollment (“A of school-age population)

Male Female

KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1981

GDP (US$ biilions) Gross domestic investmenVGDP Exports of goods and servicedGDP Gross domestic savingdGDP Gross national savings/GDP

2.3 17.6 12.9 10.9

Current account balance/GDP a/ -2 3 Interest paymentdGDP 0 1 Total debVGDP 12 2 Total debt service/exports 3 3 Present value of debVGDP Present value of debVexports

1981-91 1991-01 (average annual growth) GDP 4 7 4 9

Nepal

23 6 250 5 8

2 4 2 5

42 12 59 74 47 81 57

126 140 112

1991

3 9 20 8 11 8 9 6

-7 5 0 7

45 7 11 1

2000

6 2 3 7

South Asia

1,380 450 616

1.9 2.4

28 62 73 49 87 44

101 109 93

2000

5.5 24.2 23.3 15.0 24.7

2.1 0.5

51.5 5.6

28.4 87.3

2001

4.8

Low- income

2,511 430

1,069

1.9 2.3

31 59 76

76 37 96

103 88

2001

5.6 24.3 22.4 14.7 25.4

2.8 0.5

48.5 4.9

2001-05

4.1 2.4 1.8

Development diamond‘

Life expectancy

T GNI Gross per ’4 primary capita enrollment

I 1

Access to improved water source

Economic ratios’ 1 Trade

T Investment Domestic

savings

Indebtedness

- Nepal Low-ncome group

GDP per capita 2 4 2 4

STRUCTURE of the ECONOMY

(“h of GDP) Agriculture Industry

Services

Private consumption General government consumption Imports of goods and services

Manufacturing

1 (average annual growth) Agriculture Industry

Services Manufacturing

1981 1991

60.9 48.6 12.4 17.9 4.1 6.9

26.7 33.5

82.1 81.2 7.0 9.2

19.6 23.1

61-91 1991-01

3.8 2.8 8.7 6.4 9.2 7.4 4.5 6.0

2000

40.7 22.1

9.4 37.2

75.9 9.1

32.4

2000

4.9 8.7 7.2 5.8

2001 [Growth of Investment and GDP (%)

*GDP 10.0 32.0

2001

4.3 2.5 3.6 6.6

Note: 2001 data are preliminary estimates. ‘The diamonds show four key indicators in the country (in bold) compared with its income-group average. if data are missing, the diamond will be incomplete.

- 99 -

Nepal PRICES and GOVERNMENT FINANCE

Domestic prices ("h change) Consumer prices Implicit GDP deflator

Government finance ("7 of GDP, includes current grants) Current revenue Current budget balance Overall surpluddeficit

TRADE

(US$ millions) Total exports (fob)

Food Pulses Manufactures

Total imports (cif) Food Fuel and energy Capital goods

BALANCE of PAYMENTS

(US$ millions) Exports of goods and services Imports of goods and services Resource balance

Net income Net current transfers

Current account balance

Financing items (net) Changes in net reserves

Memo: Reserves including gold (US$ millions) Conversion rate (D€C, iocal/US$)

EXTERNAL DEBT and RESOURCE FLOWS

(US$ millions) Total debt outstanding and disbursed

IBRD IDA

Total debt service IBRD IDA

Official grants Official creditors Private creditors Foreign direct investment Portfolio equity

World Bank program Commitments Disbursements Principal repayments Net flows Interest payments Net transfers

Composition of net resource flows

1981

13.6 7.9

1981

135

371

1981

294 403

-109

10 46

-52

39 13

12.0

1981

279 0

109

12 0 1

72 65 0 0 0

32 33 0

33 1

32

1991

13.8 9.1

8.9 -2.8

-10.7

1991

228

71 5 07 70

184

1991

437 854 -417

66 60

-290

417 -1 27

451 31 .O

1991

1,776 0

71 9

66 0 0

52 139 -1 1

2 0

62 49 3

47 5

42

2000

3.4 4.4

10.7 1.1

-3.5

2000

971 61 46

230 1,713

157 273 297

2000

1,433 1,922 -489

20 582

113

101 -214

952 69.3

2000

2,823 0

1,134

100 0

24

76 97 -8 3 0

55 46 16 31 9

22

2001

2.4 3.1

11.4 0.2

-4.5

2001

942 65 56

256 1,774

61 338 31 2

2001

1,359 1,984 -625

9 774

158

-82 -76

1,027 73.8

2001

2,700 0

1,127

89 0

25

36 60 0 6 0

0 47 17 30 8

21

96 97 98 99 00

y f i I-GDP deflator " 0 " I C P I

I 1 Export and Import levels ( U S mill.)

0 I 2 000 1 500

1 000

5M)

I I 95 96 97 98 99 00 01

E3 Exports Imports

~~

Current accouit balance to GDP (%)

4 T

I Composition of 2001 debt (US$ mlil.)

F:5 G:50

B 1127

D 1,23

I A-IBRD E - Bilateral B - IDA D ~ Other multilateral F - Private C - IMF G - Short-term

fi Note: Overall Surplus/deficit includes grants.

- 100 -

NEPAL: POWER DEVELOPMENT PROJECT Annex 11: Environmental Assessment and Management

Background

A Sectoral Environmental Assessment (SEA) was conducted for the Power Sector o f Nepal in 1997, with an update in 2001. The SEA focused on KoN’s National Hydropower Development Policy and potential programs for development o f the power sector and was used as the basis for identification o f development options for the power sector in Nepal. The SEA was also used to examine the cumulative impacts o f multiple projects planned in the same sector in the medium to long term. Potential environmental issues that may arise as a result o f the envisioned developments in the power sector was a critical aspect o f the SEA. I t also formed the basis for identifying possible adverse environmental issues that may result from activities to be financed under the Power Development Project (PDP). In order to address such environmental issues that may result from PDP activities, a comprehensive Environmental Assessment and Management Policy Framework was developed and agreed with KoN. This Policy Framework w i l l form an integral part o f the operational policies o f the project, and would address the following issues:

(i) and ranking process, for possible funding through the Power Development Fund (PDF), while sub- projects o f 10 MW and below w i l l be identified through screening criteria acceptable to IDA for possible funding through the PDF;

The power sector SEA has identified potential sub-projects above 10 MW, through a screening

(ii) Policy Framework, in accordance with Nepal’s Environmental Protection Act 2053 (1996) and Environmental Protection Rules 2054 (1997), as well as the World Bank‘s safeguard policies as applicable to the respective sub-project, in order to obtain funding from the PDF and receive a license to operate; and,

Individual sub-projects are required to undertake environmental assessment as per the agreed

(iii) Institutional strengthening o f K o N institutions involved in environmental assessments, environmental management and monitoring, and licensing o f power system operators through technical assistance.

Sectoral Environmental Assessment (SEA) of the Power Sector

A SEA for Nepal’s power sector was jointly prepared by the Ministry o f Population and Environment (MOPE) and the Ministry o f Water Resources (MOWR) assisted by Nepal Electricity Authority - Medium Hydropower Study Project (NEA/MHSP) and the World Bank in 1997. The SEA i s used as one o f the main criteria to identify candidate sub-projects for support under the Power Development Project and i t s associated Power Development Fund (PDF). The approach adopted in conducting the SEA was to ensure full transparency and wide consultations with al l relevant stakeholder groups. The revised National Hydropower Development Policy emphasizes environmentally and socially sustainable development o f hydropower resources in the country and recognizes the need to optimize and prioritize the uses o f water resources while minimizing conflict.

The original Policy has the following objectives:

(i) to supply electricity as per the demands o f the people in urban and rural areas by sustainable exploitation o f the high potential o f water resources;

(ii) to enhance hydropower to meet industrial needs;

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(iv) to promote national and foreign investments in hydropower development; and

(v) to conserve the environment by providing clean hydropower.

The national policy was revised in 2001 to reflect greater emphasis on private participation in generation, transmission and distribution and paves the way for sector restructuring and improved regulation, as well emphasizing environmentally sustainable development o f the power sector. Three areas in the policy that reflect the emphasis on environmental and social safeguards are: emphasis on rural electrification, hydropower use in the transport sector to reduce dependence on petroleum; and promotion of hydro power to minimize fuel wood use and improve forest conservation.

While the Hydropower Development Policy recognizes environmental sustainability as a key principle in hydropower development, Nepal has made significant strides in recent years to create a legislative framework for effective environmental management. Environmental assessment guidelines were adopted in 1993 and the Ministry o f Population and Environment was created in 1995. The Environmental Protection Act 2053 (1996) and Environmental.Protection Rules 2054 (1997) make the preparation and approval o f an environmental impact assessments a pre-requisite to obtaining a license to operate any o f the following:

(i) (ii) (iii) (iv)

Supply o f electricity through the installation o f transmission lines o f more than 66 kV capacity; Operation o f more than 6 MVA rural electrification projects; Operation o f electricity generation projects with a capacity o f more than 5 MW; and Generation o f more than 1 MW of diesel or thermal electricity.

Init ial environmental examinations (IEE) are a pre-requisite for obtaining a license to operate the following:

(i)

(ii) (iii)

Supply o f electricity through the installation o f transmission lines in the range o f 33 kV to 66 kV capacity; Operation o f rural electrification projects o f 1-6 mva; and Operation o f electricity generation projects o f 1-5 MW capacity.

Based on the SEA recommendations, the Government has adopted a strategy o f developing small and medium hydropower projects that have minimal negative environmental and social impacts. A screening and ranking system has been developed as part o f t h i s process to identify potential environmental impacts so that projects that should be studied for further development can be identified. Supported by an K o N interagency steering group, the SEA involved a two stage review o f potential hydropower projects. The techno-economic feasibility analysis was followed by a socio-environmental issues analysis o f 138 potential hydropower project sites in the 10 - 300 MW capacity range. These were subjected to the Screening and Ranking system (S&R). Environmental, social and techno- economic screening criteria were developed through stakeholder consensus, commencing in 1996. The process involved an open consultation and information-sharing process with public, government, NGOs, and professional community stakeholders and resulted in a successfully completed selection o f the most acceptable hydro-projects for meeting Nepal’s short and medium term power demands. From this list, fine screening identified the 24 most attractive sub-projects and the S&R was completed with fine ranking and selection o f 7 sub-projectssonsidered most viable, for detailed feasibility studies. These sub-projects have since been considered in the least cost system expansion planning, and four have been identified as the most preferred options for initial development. Two o f these sub-projects, Rahughat Khola and Kabeli A Hydro Power projects have been identified for potential PDF funding. Due to funding constraints, i t i s most likely that only one o f the two projects mentioned above w i l l be financed under the PDF. PDP Policy Framework for Environmental and Social Impact Assessment

- 102 -

A policy framework for environmental and social impact assessment (EWSIA framework) has been developed and agreed between KoN and IDA, which w i l l form part of the operating policies for the proposed Power Development Fund (PDF) as well as for the NEA investment component. Accordingly, projects eligible for funding from the PDF should be either: (i) a generation project in the range o f 10 MW to 300 MW identified through the Screening and Ranking system described in the SEA; or (ii) a generation project below 10 MW identified by NEA or private promoters using screening criteria acceptable to IDA; or (iii) an isolated rural power system sub-project; or (iv) a transmission and distribution sub-project. All sub-projects and components financed under either o f the above mentioned categories o f the Power Development Project, w i l l be required to follow the agreed policy framework for environmental and social impact assessment in order to receive IDA financing. Assessments would be done to examine potential environmental and social impacts, identify and recommend mitigation measures, develop and implement environmental management plans, resettlement action plans and vulnerable communities plans as applicable, in accordance with KoN’s Environmental Protection Act 2053 (1996) and Environmental Protection Rules 2054 (1997) as well the World Bank’s safeguard policies applicable to the sub-project under consideration.

In accordance with KoN’ s environmental legislation, all individual hydropower generation sub-projects exceeding 5 MW wi l l undertake a full EM; hydropower generation sub-projects that are between 1-5 MW capacity w i l l be required to undertake an IEE (Initial Environmental Examination); and, all transmission line projects w i l l undergo an EIA while all distribution line constructions w i l l undergo an IEE based on the broad guidelines contained in the Policy Framework. The Environmental Protection Rules 2054 (1997) states that for any project where an IEE i s prepared and upon review the authorities note that the project has the potential to cause significant environmental damage, an EIA w i l l be required, regardless to the magnitude o f the project. The responsibility for preparing the IEEEIA for the candidate sub-project i s that o f the project proponent. The IEEEIA should cover environmental and social issues that are likely to arise during construction and operation o f the sub-project including, but not limited to, impacts relating to:

a.

b.

d. e. f. g* h.

C.

1.

j.

k.

1.

m. n. 0.

physical and g eological stability and geographical suitability, as well as public acceptability o f the proposed facility and associated supporting infrastructure; construction activities; design, mitigation and compensation options to be employed; management control and operational practices to be employed; potential for accidents and failures to be foreseen and mitigated; monitoring and ensuring long term sustainability o f sub-project; socio-economic status o f communities residing in the project affected area; land-use and land tenure in the project affected area, including the barrage/dam site, reservoir, power station, access roads, transmission and distribution network and associated supporting infrastructure, as applicable; the human settlements in the project affected area; the livelihoods o f persons affected by land acquisition and by the economic impact o f the project in the surrounding area; mitigation measures to be employed to minimize losses and compensate, resettle and rehabilitate affected communities and restore livelihoods; adverse effects of large influx o f labor on local communities, particularly on women and disadvantaged people; positive benefits which would accrue to the local communities from the proposed development; possible role o f the local community participating in, and contributing to, project sustainability; and decommissioning and rehabilitation activities.

- 103 -

The EIA report w i l l contain an Environmental Management Plan (EMP) which w i l l incorporate an Resettlement Action Plan (RAP) referred to in the Policy Framework as an Acquisition Compensation Rehabilitation Plan (ACRP) and/or a Vulnerable Community Development Plan (VCDP), where applicable.

Operational Manua l of Environmental & Social Impact Assessment for Sub-projects Financed Under the Power Development Project

An Operations Manual has been prepared by the Department o f Electricity Development (DOED) which details the steps that have to be followed by prospective developers in operationalizing the EWSIA Policy Framework as well as outlining the approval procedure for obtaining environmental clearance. The OM provides a detailed procedure to be followed by the project developer for obtaining environmental clearance for sub-projects. The O M outlines the steps to be followed for hydropower generation projects that have a capacity between 1-5 MW, above 5 MW and a more simplified procedure for micro-hydro projects that are below 1 MW. In addition, i t specifies the EWSIA procedures to be followed for transmission and distribution lines to be financed under the NEA component o f the project.

In accordance with the EIA framework, the sub-projects identified through the S&R system need to be subjected to a full EIA, including stakeholder consultations. Project specific EIAs would include alternatives analysis o f project design and project component design for given locations, adequate mitigation, fair compensation, and planshules o f operation for environmental management, which w i l l be embodied in an Environmental Management Plan (EMP) for the sub-project. Although feasibility planning and f i rst stage EIAs were finalized in early 1999 for four hydropower sub-projects selected for current power system expansion, full EIAs wi l l have to be conducted once the project developers have been selected. The selected developers w i l l be responsible for the preparation o f comprehensive project specific EIAs, in accordance with the E W S I A Policy Framework and the Operations Manual, for final approval from MOPE and IDA prior to financial support from the project. These procedures and steps in processing as well the institutional requirements for obtaining environmental clearance o f sub- projects have been clearly defined in the Environmental Assessment Flow Diagram contained in the Operations Manual.

KoN’s Environmental Protection Act 2053 (1996) and the Environmental Protection Rules 2054 (1997) currently exclude electricity generation projects below 1 MW from the IEEEIA process. Therefore, all community based micro-hydro projects that w i l l be eligible for funding under this component are not required by Nepalese law to be subjected to an environmental assessment. However, the K o N has demonstrated i t s commitment to environmental protection by building upon the procedure already in place for community based micro-hydro village electrification projects funded under the UNDP sponsored REDP, and has agreed to undertake separate scheme specific environmental assessments in accordance with the guidelines for Environmental Assessment o f Micro-hydro Schemes developed by REDP for sub-projects funded under their existing program. These guidelines are based on the Init ial Environmental Examination (IEE) requirements under the Environmental Protection Rules 2054 (1997), and w i l l include information on the existing environment, identification o f environmental impacts caused by scheme implementation, analysis of the extent o f the identified impacts and development o f appropriate preventive and mitigation measures.

Small unsubsidized loans w i l l be provided under the micro-hydro component by the community energy fund to help finance the conversion o f some local businesses to electricity. These end use activities w i l l be restricted to agro processing ( cereal milling, rice husking and o i l processing) where electrical power w i l l replace the current use of manual or water power as well as small scale carpentry workshops. These micro enterprises cater to local community needs. The agro processing schemes to be financed w i l l largely reduce the drudgery by replacing manual milling by machine grinding, reduce cereal losses

- 104-

and increase yield in the case o f o i l expellers. These plants w i l l be small with plant capacities in the range o f 8 kW. With regard to the small scale carpentry workshops, the project w i l l result in replacement of manual implements that are being presently used in existing carpentry workshops by electrical machines or tools. The source o f timber wi l l be from community forests. The timber required for the carpentry workshops w i l l be brought by prospective clients, who are members o f community forestry user groups. These groups provide each member with a specified timber allocation based on domestic needs such as buildinghepairing houses and personal furniture requirements. The community forestry user groups closely monitor the use o f timber by i t s membership. This monitoring mechanism, which i s currently in existence, has proved to be very effective in ensuring sustainable timber use. The enforcement o f the “timber quotas” by the community forestry user group w i l l be used under this sub-component to ensure sustainable use o f forestry resources. All individual sub projects that w i l l be applying for funding from the Community Energy Fund wi l l be required to prepare environmental assessments o f the type described for the micro hydro village electrification projects (below 1 MW) for review and clearance prior to receiving funds from the project. The environmental assessment w i l l address the issues highlighted above, if applicable.

Institutional Arrangements for Environmental Clearance for Sub-projects Financed Under the PDP

The Department o f Electricity Development (DOED) i s the licensing agency on behalf o f K o N s Ministry o f Water Resources (MOWR). The project proponent i s responsible for preparing the EIA and submitting i t to DOED. The DOED wi l l review the EIA and submit comments through M O W R to the Ministry o f Population and Environment (MOPE) who has responsibility for overseeing the EIA process and evaluating the report. MOPE wi l l provide both general and specific TOR and final clearances for the EIA reports, with IDA reviewing selected sub-projects for compliance with the Policy Framework. This i s a pre-requisite for al l sub-projects financed under the PDF. An IEE/EIA process has been developed to meet both K o N and IDA requirements, with the following five steps o f public consultation and information sharing:

The preparation o f IEE or EIA as applicable to the sub-projects financed under the NEA component w i l l be the responsibility o f NEA. Upon completion o f the environmental assessments, the MOPE wi l l review and provide environmental clearance as appropriate.

For the micro hydro village electrification component, al l individual sub-project environmental assessments w i l l be reviewed by AEPC to ensure that the REDP environmental guidelines are followed.

Social Aspects of the E I A Process

Principles and modalities to mitigate social impacts are detailed in the Policy Framework for Environmental and Social Impact Assessment ( E W S I A Framework). This Framework agreed between K o N and IDA has been prepared in accordance with Nepal’s Land Acquisition Act (1977), the Environment Protection Action and Environment Protection Rules (1977), as well as the Bank’s O D 4.30 and OD 4.20. A Social Impact Assessment (SIA) and where applicable a Resettlement Action Plan (RAP) referred to in the Policy Framework as an Acquisition Compensation Rehabilitation Plan

- 105 -

(ACRP) andor a Vulnerable Communities Development Plan (VCDP) w i l l be prepared as part o f the EIA.

Social assessments w i l l be carried out as an integral part o f the feasibility studies for each sub-project under the Project’s PDF and NEA components. Each sub-project w i l l undergo a systematic socio- economic baseline study consisting o f the following: (i) socio-economic survey o f sample households to determine asset ownership and pre-project incomes and living standards; (ii) land use survey, including formal and informal tenure systems, ownership and use-rights and management o f common property resources; (iii) community studies describing social structures and social relations in the project area, including inherent power relationships, caste and class structures, and access o f groups such as the poor, women and other vulnerable groups to resources and social services; (iv) institutional analysis o f formal and informal community organizations for resource management and o f local government institutions or local organizations established by other agencies for resource management or development activities; (v) beneficiary consultations and focus group meetings to determine local perceptions about the project and to ascertain local development needs; and (vi) rapid assessment o f project impacts to determine the extent and type o f positive and negative impacts the sub-project i s l ikely to have on the project area and provide the basis o f determining the need for the preparation o f a RAPNCDP or other social development measures. Site-specific social impact studies w i l l build upon the socio-economic baseline data to quantify the type and extent of project impacts through: (i) site specific entitlement matrix prepared by applying the generic policy o f entitlements to specific conditions o f the sub-project clearly identifying expect impacts; (ii) detailed census o f affected persons who w i l l be eligible for compensation or rehabilitation; and (iii) an inventory o f land and other assets being acquired under eminent domain under the Project.

Resettlement and Rehabilitation Policy Principles

Sub-projects that impact 25 or more families with the loss o f over 25% o f their total land holdings or whose land holding i s reduced to an uneconomic holding o f less than 5.0 katha or who face relocations w i l l require the preparation o f a RAP in accordance with the provisions o f OD 4.30 and the EWSIA Framework. The project developer w i l l be responsible for the preparation o f the RAP which w i l l document implementation arrangements for resettlement including asset acquisition and compensation, relocation and rehabilitation o f persons affected by loss of dwelling, land and other assets or livelihood.

The following principles and resettlement measures stemming from the Policy Framework w i l l apply to al l sub-projects, whether or not the scale and complexity o f resettlement issues require the preparation o f a RAP.

Resettlement and land acquisition w i l l be minimized as much as possible by selecting optimal locations and exploring alternative projects. Where land acquisition i s unavoidable, the project w i l l be designed to minimize adverse impact on the poorest (those holding less than 0.5 ha o f land) and w i l l be planned and implemented in a such a way as to cause the least amount o f social, cultural and economic disruption.

Project Affected Families (PAFs) w i l l be compensated, relocated and rehabilitated, i f required, so as to improve their standard o f living, income earning and production capacity, or at least to restore them to a l iving standard they are l ikely to have achieved if the project had not taken place.

Special measures w i l l be taken to protect socially and economically vulnerable groups such as female headed households, children and elderly without support structures, ethnically or tribally disadvantaged social groups, and people l iving in extreme poverty.

- 106 -

0

0

0

0

0

0

e

0

0

0

All PAFs residing in, or cultivating land, or having rights over resources within the Project area as o f the date o f the census survey are entitled to compensation for their losses and or income rehabilitation. Lack of legal rights or title to the assest(s) being taken for the Project does not bar PAFs from receiving compensation, rehabilitation or relocation measures.

The means o f resettlement are: compensation at full replacement value for houses and other structures; agricultural land o f equal productive capacity; replacement o f residential land at least o f equal size; dislocation allowance and transition subsidies; full compensation for crops, trees and other s i m i l a r agricultural products at market value, and other assets; and appropriate measures to compensate for loss o f livelihood.

PAFs forced to relocate due to their house being acquired w i l l be provided full assistance for transportation and re-establishment o f their homes and w i l l provided a Dislocation Allowance, in addition to the provision o f residential land and the replacement cost o f their home.

Replacement residential and agricultural land w i l l be as close as possible to the land that was lost, and acceptable to the PAF.

Where the PAF prefers to receive compensation in cash, or where replacement land i s not available, compensation may be paid in lieu o f land-for-land compensation in accordance to the entitlement provisions detailed in the Policy Framework.

PAFs w i l l not be dispossessed o f their property or displaced from their place o f residence or employment without payments o f full compensation andlor without making arrangements for relocation and rehabilitation. The construction schedules at any given site w i l l be synchronized with the land acquisition schedule and the resettlement schedules to ensure that all land acquisition activities are completed prior to commencement o f construction at that site.

The entire cost o f the resettlement and other social development programs w i l l be considered an integral part o f the sub-project cost and accordingly w i l l be budgeted in annual and overall implementation plans o f the sub-project.

Adequate institutional arrangements w i l l be made to ensure effective and timely design, planning and implementation o f all social development measures, including resettlement.

Adequate arrangements w i l l be made for effective and timely internal and external monitoring o f social development measures, including resettlement.

The Project w i l l establish effective mechanisms for resolving grievances during the implementation o f resettlement programs.

Vulnerable Communities Development Plan

The presence o f ethnic minorities or tribal populations in the project affected area for any sub-project w i l l require the preparation o f a separate Vulnerable Communities Development Plan (VCDP) to ensure that ethnic communitiedtribals are provided with assistance in accordance with their own priorities. The VCDP wi l l be prepared in accordance with the provisions o f O D 4.20 and the E W S I A Policy Framework. The VCDP replaces Indigenous Peoples Development Plan (IPDP) typically prepared to meet the requirements o f OD 4.20 by extending assistance to vulnerable groups living below the poverty line in the project area.

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Social Aspects of the Micro-hydro Village Component.

Land acquired for the construction o f the micro-hydo schemes, including for canal, penstock, powerhouse, and distribution line poles, i s to donated voluntarily by each participating community. O D 4.30 on Involuntary Resettlement does not apply since the project w i l l not involve any involuntary land acquisition. All voluntary donations wi l l meet the following criteria:

the land w i l l be free of claims or encroachments; the ownership by the donor w i l l be verified by the local authorities; and

Under the REDP, Memorandum o f Agreements have been established by community functional groups as a means o f recording the location and size o f land being donated as well as the written consent and names o f local witnesses for those community members voluntarily donating land. Specific provisions w i l l be added to current Memorandum o f Agreements to record that the land being donated in free of squatters, encroachers or other claims or encumbrances.

Since indigenous and ethnic groups are present in the communities where micro-hydro schemes w i l l be constructed, in accordance with provisions o f O D 4.20, a VCDP wi l l be prepared by December 2003 to ensure the participation o f indigenous and vulnerable groups in decision making throughout the planning and implementation phase. Current social mobilization practices under the REDP program emphasize the formation o f board-based and self-governing community organizations that involve 95 percent o f households in that community. These principles of social mobilization w i l l be strengthened to ensue the inclusion o f all indigenous and ethnic groups, dalit and disadvantaged groups in the MHFG.

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NEPAL POWER DEVELOPMENT PROJECT Annex 12: Eligibility Cri ter ia for Project Components

Part A. Power Development Fund

Sub-project Eligibility Criteria

A. 12.1. The sub-project meets the licensing requirements o f the Ministry o f Water Resources;

A. 12.2. the screening and ranking exercise under the Medium Hydro Power Study or by NEA or private promoters using screening criteria acceptable to IDA; or (ii) a generation project up to 10 MW developed by private promoters which has been scrutinized for feasibility, license conditions, and environmental clearance and reviewed by PDFA using criteria acceptable to IDA; or (iii) an isolated rural power system subproject; or (iv) a transmission and distribution project related to a qualifying generation project.

The sub-project should be either: (i) a medium-size generation project identified through

A.12.3. Environmental Protection Act and follow the procedures and policies in the agreed policy framework for environmental and social impact assessment for the PDF as well as the World Bank Group’s environmental and social assessment guidelines.

All sub-projects w i l l have to comply with the relevant provisions under the 1997

A. 12.4. use in Nepal and equipment and machinery financed by the PDF wi l l be new and not used.

The technologies proposed by the Investment Enterprise should be proven and suitable for

A.12.5. finance and operate similar infrastructure projects.

The sponsors o f the Investment Enterprise should have a proven capability to develop,

A.12.6. 20 percent o f the total project cost.

The equity contribution o f the sponsors of the Investment Enterprise w i l l represent at least

A. 12.7. Lenders should rely on the Security Package , future cash flows from the project and the value o f the assets for comfort. The PDFk exposure in any project w i l l not exceed 60 percent o f the total project cost. The minimum debt service coverage would be 1.2 times.

The Investment Enterprise and other lenders should not require direct sovereign guarantees.

A. 12.8. The rate o f return o f all proposed projects would be sufficient to encourage private investment flows to fund needed power plants so that Nepal can remain competitive with other countries that are offering equivalent or higher returns. Where applicable, the projects would form part o f NEA’s least cost expansion plan.

Eligibilitv Criteria for Hvdro Generation Proiects UP to 10 M W

Beneficiaries

General: In compliance with the PDF Policies and Procedures

Financial Criteria Projected beneficiary financial performance reflects adequate earnings capacity and debt service coverage.

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Security Package Loans must be secured by either one or a combinations o f bank guarantee, equitable mortgage hypothecation o f moveable assets, and/or other financial instruments acceptable in the Nepalese market.

Legal Aspects Private developer/investor/bonower registered under KoN laws: individual and partnership firms, companies, and societies.

Loan ceiling amount Maximum PDF exposure per borrower w i l l be US$25,000,000 based on the PDF lending capacityhet worth.

Projects

Project Nominal Capacity

Minimum Equity Contribution

Financial and Economic

Environmental and Social

Bank prior review

Private sector investment in hydro electric power projects o f up to 10 MWeach.

Twenty (20) percent o f project cost.

At least twelve (12) percent financial rate of return and twelve (12) percent economic rate o f return. Competitive return on investor equity, and project cash flow covers debt service (principal and interest) requirement.

Project should comply with K o N policies and guidelines which reflect the World Bank guidelines.

Projects involving loans o f more than US$0.5 mill ion and above as well as the f i r s t two projects regardless of the loan amount w i l l be subject to the World Bank's prior review.

Sub-Loan Approval Process

A. 12.9. procedures, then prior to such bidding, at the request o f the -pre-qualified developers or the DOED, the PDF Administrator w i l l provide information about the availability o f financing for the Investment Project and the potential terms and conditions under which i t would be available. All pre-qualified developers would be offered uniform terms, conditions and eligibility criteria.

Where the Investment Enterprise i s selected under international competitive bidding

A.12.10. Administrator shall proceed to provide information about the availability o f financing for the Investment Project and the terms and conditions under which it would be available to the unsolicited sponsor, upon request, and prior to the terms o f the project being finalized.

In a case where the Investment Enterprise i s not selected through ICB, the PDF

A. 12.11. availability o f financing for the Investment Project and the terms and conditions under which i t would be available to the project sponsor, upon request, and prior to the terms o f the project being finalized.

For schemes up to 10 MW, the PDF Administrator shall provide information about the

A. 12.12. international competitive bidding procedures, then prior to such bidding, at the request o f the -pre- qualified bidders or the DOED, the PDF Administrator w i l l provide information about the availability o f financing for the Investment Project and the potential terms and conditions under which it would be available. All pre-qualified bidders would be offered uniform terms, conditions and eligibility criteria.

For schemes above 10 MW, whereby the Investment Enterprise i s selected under

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A. 12.13. In the cases described above, prior to PDF Administrator initiating a sub-loan appraisal process, the Investment Enterprise or the PCI, as the case may be, shall submit a sub-loan application together with i ts completed feasibility study and other relevant documentation, such as information about the sponsors, the environmental and social impact assessments, license (where applicable) and proposed financing plan to the PDF Administrator together with a sub-loan application fee. This initiating document w i l l be the “Project Information Memorandum (PIM).”

A. 12.14. employed by the Investment Enterprise under terms o f reference and with qualifications and experience satisfactory to the PDF Administrator and IDA.

The PIM wi l l be prepared by the Investment Enterprise with the assistance o f consultants

A.12.15. proceed with either: (a) issuing the letter o f intent providing indicative terms and conditions to pre- qualified developers (for solicited projects); or (b) issuing a preliminary letter setting out eligibility criteria and appraisal process (for unsolicited projects).

Based on the PIM, the PDF Administrator w i l l seek the PDF Board approval in principle to

A. 12.16. PDF financing, prepares an appraisal report, and formulates a recommendation to the PDF Board.

The PDF Administrator reviews the proposal, ascertains the eligibility o f the project for

A. 12.17. After approval by the PDF Board, the PDF Administrator issues a Preliminary Acceptance Letter (PAL) to the Investment Enterprise [or the Participating Credit Institution (PCI), as the case may be] including a draft term sheet and sub-loan agreement.

A. 12.18. Security Package with the Investment Enterprise (or the PCI as the case may be).

The PDF Administrator finalizes negotiations o f the Subsidiary Loan Agreement and the

A.12.19. and substance satisfactory to the Association.

The Security Package, at a minimum wi l l consist o f the following, and w i l l be in a form

(a) An Implementation Agreement with the Borrower setting forth the obligations o f the Investment Enterprise, particularly with respect to the financing, design construction, and operation and maintenance o f the Investment Project within mutually agreed parameters and to mutually acceptable standards.

(b) A Purchase Agreement, if applicable, between an Investment Enterprise and the purchaser o f the services provided by the Investment Project, setting forth the obligations o f the Investment Enterprise, particularly with respect to the operation o f the Investment Project at mutually acceptable standards, and the obligations o f the purchaser, particularly with respect to the purchase o f a guaranteed minimum o f the services provided by the Investment Project, the purchase price o f such services, and the adjustment o f such price in accordance with agreed adjustments indices to reflect changes in prices o f inputs and exchange rate movements.

(c) A Construction Agreement between an Investment Enterprise and a contractor responsible for the supply, installation, construction and commissioning o f the plant and equipment o f the Investment Project, and the performance guarantee furnished by the contractor.

(d) An Operation and Maintenance Agreement with the operator (if other than the Investment Enterprise itself) o f the Investment Project, approved by the Borrower and setting forth the obligations o f the operator, particularly with respect to the operation o f the Investment Project to the standards specified in the Implementation Agreement referred to in (a) above and in the Purchase Agreement referred to in (b) above, and including a performance guarantee furnished by the operator.

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(e) obligations o f the supplier, particularly with respect to the quality, quantity and frequency o f supplies, and the penalties for inadequate performance o f such obligations.

A Supply Agreement, to the extent relevant, required by the Investment Project setting forth the

(f) o f the shareholders o f the Investment enterprise), a Loan Agreement or Agreements (setting forth the obligations o f the Investment Enterprise towards i t s lenderskreditors) and an Escrow Agreement (establishing and providing for a debt service escrow and other escrow accounts, if necessary, which shall at all times hold sufficient funds to meet debt service payments in respect o f the Investment Project).

there agreements, including a Shareholders’ Agreement (setting forth the rights and obligations

A. 12.20. the PCI, as the case may be).

The PDF Administrator executes the loan documentation with the Investment Enterprise (or

Part B. Micro-Hydro Village Electrification

Sub-project Eligibility Criteria

Economic

Technical

Environmental

Only sub-projects that demonstrate ERRS o f 10% or more shall be supported under the program.

Technical aspects o f all sub-projects shall be approved and signed of f by the Technical Review Committee, before construction commences.

A separate environmental assessment w i l l be prepared for each sub- project, using a simple pro-forma, and in general accordance with the REDP Guidelines. The Environmental Assessment w i l l include development o f appropriate mitigation measures to al l environmental impacts caused by the sub-projects.

Formalization o f MHFGs MHFGs for each sub-project shall be formed under a written and signed Memorandum o f Association acceptable to the Bank. All MHFGs shall be either (a) registered with the appropriate District Co- operatives Office, or (b), have conditions incorporated into the Memorandum o f Association that provides for audit o f the MHFG, by an external auditor approved by AEPC, at intervals o f not more than 1 year.

Grants for Construction

Water Use

Land Acquisition

Resettlement

All grants from AEPC for construction of sub-projects shall be in accordance with KoN’s subsidy policies.

Water use for each sub-project w i l l be registered at the District Water Resources Committee.

The village communities (via the MHFG) w i l l acquire al l land required for construction o f the sub-projects. The MHFG w i l l obtain written consent to the acquisition o f land from al l landowners.

Sub-projects shall not involve resettlement o f local people, nor relocation o f existing dwellings.

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Procurement All procurement shall be in accordance with the Banks guidelines, and as described in Annex 6 o f the PAD.

Part B. Eligibility Criteria for Micro-Hydro Village Electrification Sub-Projects

Economic

Technical

Environmental

Only sub-projects that demonstrate ERRS o f 10 percent or more shall be supported under the program.

Technical aspects o f all sub-projects shall be approved and signed of f by the Technical Review Committee, before construction commences.

A separate environmental assessment w i l l be prepared for each sub- project, using a simple pro-forma, and in general accordance with the REDP Guidelines. The Environmental Assessment wi l l include development o f appropriate mitigation measures to all environmental impacts caused by the sub-projects.

Formalization o f MHFGs MHFGs for each sub-project shall be formed under a written and signed Memorandum o f Association acceptable to the Bank. All MHFGs shall be either (a) registered with the appropriate District Co- operatives Office, or (b), have conditions incorporated into the Memorandum o f Association that provides for audit o f the MHFG, by an external auditor approved by AEPC, at intervals o f not more than 1 year.

Resettlement

Procurement

Grants for Construction

Water Use

Land Use

Sub-projects shall not involve resettlement o f local people, nor relocation o f existing dwellings.

All procurement shall be in accordance with the Banks guidelines, and as described in Annex 6 o f the PAD.

All grants from AEPC for construction o f sub-projects shall be in accordance with KoN’s subsidy policies.

Water use for each sub-project w i l l be registered at the District Water Resources Committee.

The village communities (via the MHFG) wi l l obtain al l land required for construction o f the sub-projects by donation. The MHFG wi l l obtain written consent to the acquisition o f land from all landowners. (see format below)

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Format to Document Contribution of Assets for Construction of Micro-Hydro Proiect

The following agreement has been made on.. ............ ..day o f .............. ..between Mr./Ms.. ........ .., aged.. ..., resident o f . . ......... ..zone, district.. ......... ..., ................. VDC, ward No.. ... ., the grandsoddaughter o f ......... .and soddaughter of. ........ and ........................... ..(name o f Micro- Hydro Functional Group).

1. That the land with certificate no.. ......... . is a part o f ............ , i s surrounded from eastern side by ............, western side by .................., northern side by ............., and southern side by. ...............

2. in...... ...............

That the Owner holds the transferable right o f ........... (unit o f land) o f landstructure/asset

3. subject to any other claims.

That the Owner testifies that the landstructure i s free o f squatters or encroachers and not

4. That the Owner hereby grants to the.. ..... (name o f Micro-Hydro Functional Group) ..... . th is asset for the construction and development of the Micro-Hydro Project in the .... VDC, ward no.. ... .., supported by the Micro-Hydro Village Electrification program for the benefit o f the community.

5. That the Owner w i l l not claim any compensation against the grant o f t h i s asset nor obstruct the construction process on the land in case o f which he/she would be subject to sanctions according to law and regulations.

6. mentioned.

That the Micro-Functional Group agrees to accept this grant o f asset for the purposes

7. Project and take all possible precautions to avoid damage to adjacent landstructure/other assets.

That the Micro-Hydro Functional Group of.. ...... .shall construct and develop the Micro-Hydro

8. premises.

That both the parties agree that the Micro-Hydro Project so constructed shall be community

9. That the provisions o f this agreement w i l l come into force from the date o f signing o f this deed.

.............................. Signature o f the Owner

Witnesses:

.................................................... Signature of Micro-Hydro Functional Group

1 .......................................... 2. ......................................... (Signature, name and address)

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Part C. NEA Transmission and Distribution Investments

Eligibility Criteria

C. 1 establish compliance with the following eligibility criteria for projects to be financed from the proceeds o f the crediugrant.

Project implementation reports for transmission and distribution works to be submitted shall

(a) feasibility o f the proposed transmission and distribution investment shall have been established to the satisfaction o f the Bank.

The justification (in context o f the overall transmission and distribution plan) and technical

(b) Investments should be economically and financially justified to the satisfaction o f the Bank.

(c) relevant ministries, departments, agencies or other authorities o f the Borrower and documented in the project report.

All clearanceslapprovals including environmental clearances shall have been obtained from the

(d) plan, a resettlement and rehabilitation plan, if needed, based on the environmental assessment report and a plan for the handling o f materials to be replaced in the rehabilitation program, satisfactory to the Bank, shall have been prepared.

An environmental assessment shall have been carried out, and an environmental mitigation

(e) strategy, namely supply and installation o f plan and equipment and procurement o f goods and works by qualified contractors.

A procurement plan shall have been prepared in accordance with the overall procurement

( f ) and legal arrangements satisfactory to the Bank.

Expenditure for any cross-border link would require completion o f institutional, administrative

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