Nepal Biogas Support Program IV 11/10/2006 49291documents.worldbank.org/curated/pt/200671468059707315/...Nepal Biogas Support Program IV 11/10/2006 6 … have the ability to raise

Nepal Biogas Support Program IV 11/10/2006

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PROJECT APPRAISAL-COMMITMENT DOCUMENT

Project Name: Nepal Biogas Support Program IV (BSP) (P103979) Scope: Improving the access of Nepal’s rural population to clean and affordable energy for cooking and light.

Project funding in $US:Institution Total

funding Total

subsidy User

contrib. (total)

Total capital

investment

Number of plants

Average plant

subsidy

Average user

contrib.1GoN 5,600,000 5,600,000 15,317,658 20,917,658 54,902 102 279KfW 9,100,000 9,100,000 24,891,264 33,991,264 89,216 102 279CDCF 1,800,000 1,800,000 4,923,513 6,723,513 17,647 102 279GPOBA 5,000,000 5,000,000 9,776,006 14,776,006 37,313 134 262DGIS 4,900,000 0 Technical Assistance

26,400,000 21,500,000 54,908,441 76,408,441 199,078

Total GPOBA funding requested: $5,150,000

• Subsidy funding = $5,000,000 (W3)

• Independent verification agent = $50,000 (W3)

• WB Supervision = $100,000 (GPOBA Supervision budget)

GPOBA funding:

• DFID, IFC (1/2 each)2

Additional funding sources: user contributions (average US$ 2763 per unit); subsidy fund receives funding from GoN, SNV, KfW and Community Development Carbon Fund (CDCF)

Outputs: installation and operation of 37,300 household size biogas plants

Expected beneficiaries: 261,000 people

GPOBA subsidy “efficiency”: $US 19/person ($US 134 per household)

Targeting: Geographic, only plants up to 8m3 will be eligible for GPOBA subsidy funding

Grant recipient: Alternative Energy Promotion Center (AEPC).

Financial Management: Pending

Disbursement:

1 Weighted average, reflecting plant size and regional distributions. 2 DGIS may be contribution eligible because 75% of biogas plants will have a latrine connected. Hence the project indirectly has a significant sanitation component. GPOBA PMU to determine if DGIS contribution to be used. 3 Average for all user contributions in the Nepal Biogas Support Program)

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� 100% on the basis of annual verification reports on installation and constant usage

Procurement: Pending

Environmental clearance: Pending.

Government endorsement: Pending

Exchange rate: about 73 NPR per USD


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STRATEGIC CONTEXT AND RATIONALE

�&RXQWU\�DQG�VHFWRU�LVVXHV��Nepal is one of the poorest countries in the world with a per capita GDP at US$ 311. The population is around 26 million and approximately 82% live in rural areas. Almost all the people from rural areas depend on agriculture, yet agriculture only contributes 40% to Nepal’s GDP. This means that the target group is particularly poor.

The energy policy of Nepal as presented in the 10th Five-Year Plan of the National Planning Commission (NPC) outlines the need for strong expansion in renewable energy, especially in the rural areas. Therefore the energy sector is a focal point of development. The aim is to address poverty alleviation and conservation of nature, in particular the forest reserves and control of soil erosion by promoting renewable energy. Within this plan, the expansion of biogas in rural areas holds an important position. The Alternative Energy Promotion Center (AEPC), is supporting the development of renewable energy sources, coordinating subsidy mechanisms currently in place for each type of technology and application, and coordinates the implementation of ongoing external donor initiatives. The AEPC is an institution with an autonomous status under the supervision of Ministry of Environment Science and Technology (MOEST).

Households in the rural parts of Nepal have little access to affordable and environmentally sustainable energy. The domestic sector accounts for over 90 percent of Nepal's total energy use and the main energy sources for cooking and heating are traditional ones: 75 percent of demand is met through combustion of firewood and 20 percent is met from combustion of agriculture residues and dung. Electricity supply is provided to only approximately 14% of the population. The high demand for firewood has caused deterioration in the quality and quantity of forests and often resulted in problems such as deforestation, soil degradation, erosion, landslides, and flooding. Additionally it causes indoor pollution and the time used to gather wood as well as the resources spent on wood and other fuels can be put to a more productive use. Despite progress made in promotion of community forestry management, the overall heavy dependence on fuelwood and other traditional biomass sources coupled with high population growth exerts a continuous pressure on local forests: the annual deforestation rate in the country is estimated to be 1.7 percent.

5DWLRQDOH�IRU�LQYROYHPHQW��The project will allow poor households to have access to clean energy for cooking as well as lighting. Additionally, the project will contribute to poor households’ access to improved sanitation services as connecting a latrine to the biogas plant increases biogas output.4

The BSP-IV is supervised by AEPC and implemented by the Biogas Sector Partnership Nepal (BSP-Nepal), a local NGO. In the current project design the GoN, DGIS and KfW disburse their funds to AEPC up-front into a subsidy fund. AEPC passes this subsidy on to biogas companies after the installation of biogas plants is confirmed by BSP-Nepal, i.e. on an output basis. For BSP-IV the current donors are phasing out their funding and the World

4 Latrines are not subsidized by the project. A 2004 Biogas User Survey shows that 97% of biogas households have latrines (although not all connect their latrines to the biogas plants) whereas of a comparable household sample of non-biogas users only 78% had latrines.


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Bank managed Community Development Carbon Fund (CDCF) stepped in with a carbon finance operation. Yet due to a change in carbon finance regulation CDCF funding was reduced severely, leaving a funding gap of $US 5m.

For the GPOBA and the carbon finance component AEPC will use the funds already deposited by the other donors to pay the biogas companies on confirmation that the biogas plants have been installed. GPOBA (and the CDCF) will replenish AEPC’s funds after receiving conformation of plant installation and continuous use by the independent third party verifier.

The project meets the core GPOBA principles. It will provide targeted subsidies to low-income households, based on successful installation and sustainable use of biogas plants. GPOBA subsidies are to complement a significant user contribution. The operational risk of plant installation is borne by the private biogas companies as AEPC pays the subsidy to the biogas companies only after BSP-Nepal has confirmed biogas plant installation. BSP-Nepal also conducts a yearly unit costing design to set plant prices and subsidy levels. This places an incentive for efficiency on the biogas companies. Other project risks are borne by AEPC, as GPOBA disbursements to AEPC are made only after plant installation and use have been verified by an independent third party. Therefore AEPC has an incentive to provide adequate solutions (plant size, user training, etc.) to the target group.

The financial analysis based on plant size and region indicates that biogas plants have a modest internal rate of return, given that plants do not generate any additional income and have relatively high up-front investment costs (see cost-benefit analysis in section B3).

In addition to direct financial benefits there are several significant economic benefits such as time saving due to the implementation of biogas, health improvement due to latrine connection and reduction of indoor pollution and the reduction of deforestation.

This will be the first project where GPOBA funds will be used in combination with carbon finance.5 It is the intention that GPOBA uses a similar verification procedure as the CDCF. The project aims at demonstrating that Carbon Finance and OBA are complementary instruments, which can be combined to reduce carbon emissions while at the same time serving GPOBA’s objectives, in this case to overcome affordability issues and increase energy provision to a poor target group. BSP-IV also contains a KfW-funded microfinance component to help finance the user contribution. After initially working with the state-owned Agricultural Development Bank Nepal (ADBN) KfW now relies primarily on AEPC to lend money to microfinance institutions (MFIs) who lend the money on to the target group.

+LJKHU�OHYHO�REMHFWLYHV�WR�ZKLFK�WKH�SURMHFW�FRQWULEXWHV��The project is consistent with the Country Assistance Strategy for Nepal and supports the Poverty Reduction Strategy Paper, particularly through its provision of support for the development of the rural economy and by increasing access to modern energy sources. The direct financial benefits of biogas adoption for rural users coupled with the larger economic benefits are significant. The substitution of biogas for traditional fuels results in health and social benefits consistent with the development goals of the country.

5 On November 7, 2006 GPOBA and CDCF won a WB SDN VP prize of US$10,000 for this project’s innovative design, combining Carbon Finance and OBA approaches.


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PROJECT DESCRIPTION

3URMHFW�GHYHORSPHQW�REMHFWLYH�DQG�NH\�LQGLFDWRUV�The overall objective of the BSP-IV is to further develop and disseminate biogas plants as a mainstream renewable energy solution in rural Nepal, while better addressing poverty, social inclusion and regional balance issues and at the same time ensuring enhanced commercialization and sustainability of the sector.

The particular objective of the GPOBA component is to increase the number of households sustainably using biogas plants. This should result in:

� Economic savings due to a reduced expenditure on cooking and lighting fuels, particularly fuel wood and kerosene.

� Improved soil fertility caused by the use of bio-slurry as a fertilizer or reduced expenditure for commercial fertilizers.

� Time savings due to a reduced need for gathering fuel wood, decrease in cooking time and other factors.

� Improved sanitary conditions and decrease in related illnesses due to the connection of latrines to biogas plants.

� Improved indoor air quality resulting in a reduced infant mortality and reduction in respiratory diseases.

� Reduction in deforestation, resulting in a better quality of the environment, particularly the prevention of increase of soil erosion, inundations and other catastrophic events.

Success will be measured by the increase in numbers of sustainably used biogas plants meeting the project’s quality criteria. The GPOBA output report also contains indicators measuring the success of attaining the additional objectives outlined above.

To ensure value for money BSP-Nepal will conduct a yearly unit costing exercise to determine approved quotations for biogas plants. It also reviews on an annual basis whether subsidies should be adjusted in value.

3URMHFW�FRPSRQHQWV�GPOBA will subsidize the use of biogas plants with a capacity up to 8m3. Subsidies will be paid after a verification report has determined the number of installed plants continuously used by the target population. The verification mechanism is similar to that of the carbon finance component of the project in that it also pays only after receiving proof that biogas plants installed are actually used. As in the carbon finance component of the project this verification will be done on a statistical sample basis.

To be eligible for the BSP-IV, households have to meet the following criteria:

� own at least one bovine, in order to be able to operate the smallest size plant sustainably,

� own land to build the biogas plant on,

� have access to a sufficient amount of water,


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� have the ability to raise the upfront capital of between NPR 19,901 (US$ 197) and NPR 23,245 (US$ 318), according to plant size and location. This contribution may partially be raised by micro credits. The weighted average user contribution of US$2626 represents approximately 15% of the average annual household income of US$1705.

The subsidy is decreasing in absolute terms with increasing size of biogas plants so that the poorer households which own fewer bovines and cannot afford the co-payment for larger plants receive more subsidies. The BSP-IV subsidizes plants up to 10m3. In order to increase the focus on the poor target group the GPOBA component will only subsidize plants up to 8m3. Program surveys show that the average volume of biogas plants installed under the program is around 7m3. The average household income is 1,705 US$ (approx. US$250 per capita). This indicates that on the one hand subsidized 8m3 plants seem to be affordable to poor households (at least if they have access to microfinance) and on the other hand it shows that biogas households on average are poor. The same study shows that even the poor households interviewed hold on average 2.82 full grown bovines as well as 0.62 calves, which, together with latrine connections, produce sufficient raw material to operate the plants in question. Table 0-1: Demand for plants of different sizes (source: Biogas User Survey 2003/2004) Size in m3 Percentage

4 16 47 8 33

10 19

Based on the 2003/04 Biogas User Survey, GPOBA will subsidize plants up to 8m3 capacity in order to focus on the poorer target population. BSP-IV is additionally financing plants of a capacity of 10m3.

Nepal has three kinds of Terrain: the Terai which has a subtropical and tropical climate with altitudes around 500m; the Hills region with a subtropical to a temperate land climate and altitudes varying from 500 m to as high as 1800m; and the Remote Hills with altitudes over 1500-1800m. The Hills and Remote Hills areas are more difficult to access for the biogas companies so that plant costs for these regions are higher.

BSP-Nepal has calculated the biogas potential based the number of households meeting the participation criteria in a 2001 census. The GPOBA component mainly targets the more remote and less accessible areas of Nepal, the hills and remote hills, where construction costs are higher and the population is poorer. As the program follows a strictly demand driven approach it is not yet possible to predict the exact number of plants to be installed per region and size.

6 The weighted average user contribution is calculated utilizing plant size and regional distribution figures.


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Table 0-2: Biogas household potential for BSP-IV per geographical region SN Geographical Region Total

Households Potential HHs

for Biogas PlantTotal HHs

Installing Biogas as on December

2004

Percentage of HHs with Biogas Plants installed

(a) (b) (c) (d) (d/c) 1 Remote Hill 247,928 123,964 419 0.3 2 Hills 1,447,212 723,606 66,980 9.2 3 Terai 1,089,445 1,089,445 55,996 5.1

Total 2,784,585 1,937,015 123,395 6.4

GPOBA will follow the subsidy level as set by BSP-Nepal; however it will concentrate on the hills and remote hills regions, where plant construction is more expensive. Therefore the average GPOBA subsidy level will be approx. US$134, compared to US$ 102 currently. The plant costs (user contribution + subsidy) include installation of the plant and provision of after-sales service in three subsequent years after construction. The maintenance cost of US$ 4.10 incurred per year thereafter is considered affordable to the target group. Given the solid construction, the life of the plant is estimated to be 20 years. Table 0-3: Plant costs and subsidy levels approved for FY 06/07 for BSP-IV

Plant size, m3 District category

Total Price (FY 06/07 Quotation)

($US)

Subsidy ($US)

Subsidy (%)

User contribution

($US)

Terai 272.62 75.3 27.62% 197.32 4 Hill 289.94 116.37 40.14% 173.57

Remote Hill 341.42 157.44 46.11% 183.98 Terai 317.82 75.3 23.69% 242.52

6 Hill 337.27 116.37 34.50% 220.9 Remote Hill 395.39 157.44 39.82% 237.95 Terai 376.55 68.45 18.18% 308.1

8 Hill 398.02 109.52 27.52% 288.5 Remote Hill 469.02 150.59 32.11% 318.43 Terai 415.62 68.45 16.47% 347.17

10 Hill 437.47 109.52 25.03% 327.95 Remote Hill 517.1 150.59 29.12% 366.51

Please note, that this table is converted to US$ form the original table using an exchange rate of 73 NRP/USD. The original table is expressed in NRP. Plants of 10 m3 are being financed by BSP-IV, but not out of GPOBA funds.

Plant installation will be monitored by BSP-Nepal as plants are installed. Installation and use of the plants will be verified by an independent third party verification agent. BSP-Nepal will provide additional information for monitoring and evaluation purposes, based on biogas user surveys and other project documentation in a yearly output report (see Annex 6).

(FRQRPLF�DQG�ILQDQFLDO�DQDO\VLV�RI�ORZHVW�FRVW�VWUDWHJLHV�FRQVLVWHQW�ZLWK�DSSURSULDWH�VWDQGDUGV�RI�TXDOLW\��The previous phases of the Biogas Support Program included extensive technical assistance to adapt the plant design to local conditions in terms of operation and construction. The construction involves mostly inexpensive local materials. For components that are not locally produced, like valves, there is a list of approved cost-effective sources of procurement. On the basis of this data a unit costing exercise is performed by BSP-Nepal to


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determine the unit prices at which the plants can be offered. The unit costs are revised by BSP-Nepal on a yearly basis. The private biogas plant construction sector has received an extensive amount of capacity building and training over the years. The target group is free to choose among 60 certified and quality-controlled providers.

Demand, ability and willingness to pay

The Biogas Program has successfully installed 150,000 biogas plants up to now (Phases I-Phase IV). This demonstrates that there is a demand for biogas plants as well as an ability and willingness to pay. As demand continues to be high, subsidy levels have been lowered over time (see Annex 10). Regular surveys show that client satisfaction is generally high.

As stated earlier plants up to 8m3 are considered to be affordable for a poor target group. According to project reports even relatively poor households opt for an 8m3 plants due to the improved gas output of such plants.

Cost-benefit analysis

The World Bank’s carbon finance unit performed a household level financial analysis of the project. The analysis is based on the following data:

� Fuelwood: 450 kgs per m3 plant size per year at 1.5-2 NPR per kg ($US 0.020 to 0.027). Only 45% of this cost is considered in the financial model in order to reflect the relatively proportion of wood purchased on the market.7 This does not include the benefits of reduced time needed to gather fuelwood where such wood is not purchased on the market.

� Kerosene: 6 l per m3 plant size per year at 40 NPR per l ($US 0.55)8.

� Reduced need of fertilizer purchase: It is estimated that 30% of the households do use bio-slurry as fertilizer and replace commercial fertilizer with it9. Values used in the analysis are equivalent to market values for nitrogen, phosphorous and potassium fertilizers in Nepal. This analysis does not include possible fertility gains in households that use bio-slurry without replacing commercial fertilizers.

The following table gives an overview over the internal rates of return (IRR) for different plant sizes in the remote hills (the least favorable region) and the Terai (the most favorable region). Table 0-4 Model internal rates of return for different areas and plant sizes

Region Remote hills Plant Size 4 m3 6 m3 8 m3

IRR (10 years) 2.82% 8.91% 11.57%Region Terai Plant Size 4 m3 6 m3 8 m3

IRR (10 years) 7.28% 14.84% 18.71%

Estimation of additional economic benefits:

7 The use-of-fuelwood values are derived from the CDCF environmental impact assessment, the market prices stem form a recent study quoted in Bajgain, Shakia, 2005, P.41 8 Values are derived from CDCF project documents. 9 Values are derived from CDCF project documents.


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� Based on several studies it is estimated that the time savings caused by the project are three hours per day10. Assuming a 10 hour workday the reduction in workload results to 10911 person/days per household. The average daily agricultural wage in Rural Nepal is 75NRP per day, of which 13 NRP are paid in kind12. To estimate the economic benefits conservatively a shadow wage of 25NRPs is applied.

� Based on the WHO cost-benefit measurement suggestion for water and sanitation13,the annual benefits from installation of basic sanitation, is estimated at US$ 14 per household. The 2004 Biogas User Survey indicates that compared to a non-biogas user group with similar socioeconomic characteristics, the access to improved sanitation is 19 percentage points higher in the biogas user group.

� A SNV publication suggests that the health benefits due to reduced indoor pollution are US$ 5.4814 per biogas household.

Considering additional economic benefits the economic rates of return are as follows: Table 0-5 Model economic rates of return for different areas and plant sizes

Region Remote hills Plant Size 4 m3 6 m3 8 m3

ERR (10 years) 21.83% 24.23% 24.02%Region Terai Plant Size 4 m3 6 m3 8 m3

ERR (10 years) 30.68% 34.26% 34.85%

Economic benefits not reflected in the analysis

� There are no estimations available for economic benefits resulting from avoided deforestation and erosion.

� The additional benefit of improved fertility due to the use of bio-slurry as a fertilizer, where it not replaces conventional fertilizers, is not reflected in the analysis.

/HVVRQV�OHDUQHG�DQG�UHIOHFWHG�LQ�WKH�SURMHFW�GHVLJQ��Since the beginning of the Biogas Support Program BSP-Nepal has been developing technical standards to assure the quality of biogas plants and providing technical assistance, such as training for biogas users. Due to BPS-Nepal’s work the number of providers meeting the project’s quality standards has continuously grown.

Technical innovations to make the program more successful include the adaptation of plant size to the availability of biomass, which is crucial, as other projects have failed because of inadequately sized plants. Currently the program is testing the use of compost heaps on top

10 Bajgain and Shakaya, 2005, P.31 11 Based on 365 days of household labor. 12 Nepal Living Standards Survey 03/04, Statistical Volume II 13 Evaluation of the Costs and Benefits of Water and Sanitation Improvements at the Global Level, Hutton and Haller, 2004 14 The Nepal Biogas Support Program Elements for Success in Rural Household Energy Supply, Mendis and Van Ness, 1999


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of the biogas plants in higher altitudes. Aerobe organic decomposition produces heat, thus making it possible to run biogas plants in higher altitudes.

For the different phases of the project there were a series of improvements: The Government of Nepal created AEPC in 1996 to promote the use of biogas. The Nepal Biogas Promotion Group (NBPG), the branch organization of biogas companies, was established in 1995, improving the marketing of plants and importing parts not produced in Nepal, like gas valves. In 1997 KfW entered the project as a donor. It introduced a credit facility at the ADBN, which improved the project’s access to credit significantly. In 2000 KfW funded another credit facility to finance loans to biogas users from microfinance institutions (MFIs). To better target the subsidies the maximum size for subsidized plants has been reduced from 20 m3 to 10 m3 and a decreasing subsidy has been implemented in 1999.

Beginning with BSP-IV the Program includes a carbon finance component, funded by the CDCF. At the same time the other donors are gradually phasing out their commitment until the end of the program. CDCF’s and GPOBA’s payments are tied to the actual usage of plants, as opposed to installation, thus increasing the output-based character of the project.

IMPLEMENTATION

0LOHVWRQHV�IRU�SURMHFW�LPSOHPHQWDWLRQ��Milestones Expected completion

GPOBA provides subsidy commitment November 2006

Project design finalized (including fiduciary clearances) December 2006

Grant agreement signed February 2007

Signing of amended implementation agreement between AEPC and BSP-Nepal

February 2007

Implementation of GPOBA monitoring plan February 2007

Installation of first plants March 2007

Verification agent selected by AEPC and proposed to GPOBA

December 2007

First verification report received by GPOBA January 2008

Last verification report received by GPOBA January 2010

Subsidy disbursement ends January 2010

The overall installation plan is as follows: Table 0-1: Plants to be installed under the BSP IV (2004 & 05 historic, 2006-11 projection)

2004 2005 2006 2007 2008 2009 2010 2011 Total Biogas plants constructed 12,000 17,154 21,500 26,000 32,000 32,346 35,000 24,000 200,000

Plants funded by GPOBA

10,734 13,212 13,354 37,300


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3DUWQHUVKLS�DUUDQJHPHQWV�BSP-IV is a partnership between GON, Netherlands Government, KfW, CDCF and GPOBA. The funds of all institutions are paid into an escrow account held by AEPC.

GPOBA payments into the account will be triggered by the submission of the annual GPOBA output report and a withdrawal letter.

The GoN itself will contribute US$5.6 million to support the capital cost subsidy of Phase IV. This project is classified as a priority 1 activity, which translates into a high likelihood that future government funding commitments will be honored. This budgetary support along with the grants from KfW (US$ 9.1m) and the Netherlands (US$ 4.9m) are reflected in GoN annual budgetary system.

,QVWLWXWLRQDO�DQG�LPSOHPHQWDWLRQ�DUUDQJHPHQWV��The BSP Phase IV will continue to use the implementation modality of the previous phases, but will focus more on pro-poor orientation, social inclusion and regional balance. Figure 0-1: Project scheme for GPOBA component

The Alternative Energy Promotion Center (AEPC) is devoted to the development and promotion of renewable and alternative energy technologies in Nepal. AEPC acts as an intermediary institution between the operational level of the program and the policy deciding levels in relevant ministries and foreign donors. AEPC’s activities include renewable energy

Subsidy Payment

(4)

Disbursement(7)

Verification Report & Withdrawal Application

(6)

GPOBA

BSP-Nepal

AEPC Recipient

Biogas Company

User

Plant installation

(2)

Monitoring of

installations(3)

Verification Report

(5)

Confirmation of installation

(3)

Independent verification

agent

Verification of

installation and use

(5)

User contribution(1)

MFIs

Credit(1)

On-lending(1)

Technical Support

(on-going)

MonitoringReport

(5)


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policy formulation and planning, and facilitating the implementation of the policies/ plans. AEPC also lends money to MFIs, out of funds provided by KfW, for on-lending to biogas users.

AEPC will be the GPOBA grant recipient; its tasks include

� disbursing subsidies to the biogas companies after BSP-Nepal confirms that plant is installed and in good working order,

� providing GPOBA with annual estimates of connections,

� selecting an independent verifier on the basis of GPOBA no-objection,

� submitting the annual GPOBA output report containing information received by the independent verifier and BSP-Nepal,

� receive GPOBA subsidy to replenish its subsidy funds.

The local private sector biogas companies are key players – they do the promotion and construction of biogas plants. The companies are also responsible for provision of after-sales service at least for the first 3 years and guaranty of the plants and appliances. At the moment, 60 biogas companies are listed in the program and they have around 180 offices all over Nepal.

Biogas Sector Partnership (BSP) – Nepal as the implementing unit for the BSP-IV has the following tasks:

� Monitor the program’s outputs and report on the program on behalf of GPOBA, CDCF and other donors.

� Report newly installed biogas plants to AEPC.

� Forward a GPOBA specific monitoring report to the independent verifier.

BSP-Nepal also has a series of additional tasks which are crucial to the project:

� Supporting the biogas companies in promotion of biogas plants, especially in areas where the market is not yet developed. For this, BSP-Nepal works with the central or regional associations of the biogas companies, national networks of cooperatives, CBOs, etc., other rural development projects or programs, local NGOs, etc.

� Capacity building of biogas companies and other partners through technical and management training, support in system building, etc.

� Training biogas users through biogas companies, particularly the female users for proper use of biogas and for maintenance and operation of the plants.

� Quality assurance and monitoring of biogas plants and the components, including company qualification, performance evaluation, grading, reward and penalty, etc.

� Unit costing to determine the pre-approved quotation for different sized plants in different category districts as well as corresponding subsidies.

� Improve the plant design to better adapt it to the conditions in Nepal

Additionally the project contains a microfinance component which helps the target group pre-finance their investment. In 1997 KfW provided the GoN with a grant of DM 6.9m. The government lent this grant to the ADBN, which is largely government owned. ADBN


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used its extensive branch network for on-lending at interest rates of 15%15. Due to security problems caused by a Maoist insurgency and a Financial Sector Reform Program ADBN is reducing its activity in the biogas sector. Therefore the numbers of new loans for biogas plants given by ADBN is reducing. Due to the insurgency ADBN’s repayment rate for biogas loans has been relatively poor.

In 2000 KfW has made available additional DM 5m to AEPC for on-lending to microfinance institutions (MFIs). AEPC on-lends those funds to microfinance institutions. The maximum rate the MFIs are allowed to charge their clients is 16%. 58 of the 118 MFIs currently participating are specialized saving and credit cooperatives; most of the other institutions are cooperatives as well. This has three main reasons:

� Nepal has a long tradition of savings and credit cooperatives and a large number of cooperatives active in rural microfinance,

� Cooperatives are mostly not affected by the insurgency,

� There is a limit of NRP 3m for credits AEPC can give to MFIs without a bank guarantee so that individual portfolios of MFIs are limited.

The repayment rate for the MFI portfolio is constantly around 95%, which indicates that the MFIs do have good collection systems in place.

For verification purposes both ADBN and MFIs have two on-site visits in as part of their loan approval and disbursement procedures. First a loan officer visits the household to establish, that it does not already own a biogas plant and later the officer verifies that the plant is constructed and working, before the credit is fully disbursed.

MFIs receive capacity building form BSP-Nepal and an international consultant. Selection criteria for MFIs participating in the scheme are the financial situation of the MFI, repayment rate, experience, number of members and the potential biogas market in the area. Participating MFIs are regulated by the Central Bank or by the Department of Cooperatives.

The independent verification agent will develop a methodology to selects a statistically representative sample from the monitoring data provided by BSP-Nepal, based on the carbon finance modality. It selects such a sample and verifies connection and sustained use of biogas plants. Additionally the verification agent verifies if BSP-Nepal’s monitoring data submitted is correct.

0RQLWRULQJ�DQG�HYDOXDWLRQ�RI�RXWFRPHV�AEPC has the general responsibility over the implementation of the monitoring and verification process. AEPC will provide GPOBA with yearly reports, compiled by BSP-Nepal. The verification of outputs will be contracted to an independent third party verifier. Documents to be provided include:

� Annual GPOBA output report

� BSP-Nepal annual report

� Results of the annual user surveys for the whole project

15 According to the Occasional Paper No.9 published by the World Bank’s Consultative Group to Assist the Poor in 2004, the average interest rates of Nepalese MFIs are between 18 and 24 percent.


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6XVWDLQDELOLW\��The subsidies are one-off installation subsidies. Once biogas plants are installed, they have an expected lifetime of 20 years. The raw material for gas production is readily available without cost and maintenance and repair are calculated to cost 300NRP on average (about US$ 4.10) per year. This appears to be affordable even for the poor target group.

The main structure of the plant consists of solid masonry and BSP-Nepal has a quality control for all subsidized plants in place. A user survey of 2004 shows, that most of the breakdowns of plants or appliances can be fixed by the biogas users themselves. The remaining breakdowns were resolved by the extensive network of biogas companies. The plants have a guarantee of three years during which the biogas companies are responsible for maintenance.

The latest CDCF Community Benefits Report of October 31st, 2006 showed that 98.7% of a representative sample of plants has been found in working order (less than 15 days interruption per year). This indicates that the technology is well adapted to the circumstances and can be used sustainably. As the GPOBA plants aim at providing biogas to poorer target groups in more remote areas and higher altitudes, the adaptation of biogas plants will be a challenge for the project. BSP-Nepal is already working with biogas companies to improve the design of plants so the can be used in higher altitudes.

&ULWLFDO�ULVNV�DQG�SRVVLEOH�FRQWURYHUVLDO�DVSHFWV��DQG�PHDVXUHV�WR�PLWLJDWH�WKHP��The following table presents a summary of the possible risks and their mitigation form this OBA operation.

RISK MITIGATION Risk rating with mitigation

Reluctance of rural population to accept new technology

The previous stages of the project have shown good acceptance of the project. The project is successfully marketed by AEPC.

Low

Building and installation are overpriced

There are 60 different providers of biogas plants and the choice of provider is made by the target group which bears a substantial amount of investment costs, so there is a competitive pressure. Additionally there is a yearly unit costing exercise by BSP-Nepal.

Low

Service providers do not deliver the outputs in the quality agreed upon

An elaborate verification procedure is in place ensuring the quality of outputs.

Low

Lack of sustainability of plant operation

Plants have a very simple technology. Maintenance costs are estimated at $4.1 per year, which is affordable even to the poor target group. The target group has to finance a substantial amount of investment costs, so ownership is ensured. Once plant is installed biogas will be free, whereas alternative have substantial (opportunity) costs.

Low


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Households do not have access to sufficient raw material

Social marketing campaign contains information about the size of plant in relation to the necessity of raw material. Minimum requirement for the smallest size plant is that household own one bovines, which in combination with a latrine provides sufficient biomass. Target group will only be willing to invest in a plant if availability of raw material is ensured.

Low

Interference of the Maoist insurgency with the projects implementation

This risk cannot be mitigated directly through the project. Due to the fact that the project provides immediate benefits to rural communities the Maoist insurgents have not objected to the implementation of the biogas program and there is demonstrated support among rural communities for its continuation.


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TECHNICAL ANNEXES

$QQH[��3URMHFW�FRVWV�VFKHGXOH�RI�2%$�SD\PHQWV�WR�EH�UHTXLUHG�IURP�*32%$�([SHQGLWXUH�FDWHJRULHV� /RFDO�

�86��)RUHLJQ��86��

7RWDO�&RVW��86��

Projected subsidy expenditure (GPOBA W3)

0 5,000,000 5,000,000

GPOBA/Bank supervision 0 100,000 100,000 Independent verification agent (GPOBA W3)

0 50,000 50.000

Total costs 0 5,150,000 5,150,000

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$QQH[ �� 5HVXOWV IUDPHZRUN DQG PRQLWRULQJ PHFKDQLVPV ² &RPSLOHG E\ $(3& RQ WKH EDVLV RI GDWD SURYLGHG E\ %63�1HSDODQG WKH LQGHSHQGHQW YHULILHU� VXEPLWWHG WR *32%$ DV SDUW RI WKH DQQXDO GLVEXUVHPHQW UHSRUWNepal Biogas Support Program IV – GPOBA Output Report

Sheet 1Plant size Region Sales

registration16Salesmonitoring17

Performancemonitoring18

Cost per plant Usercontribution

Subsidy Averagehouseholdincome

GPOBAsubsidyrequired

Data source BSP-Nepalsales files

15% sampleverified byBSP-Nepal

Statisticallysignificantsample

Plant quotationtable

Plantquotationtable

Plantquotationtable

Biogas usersurvey

Performancemonitoringx Subsidy

Responsible BSP-Nepal BSP-Nepal Third partyverifier

BSP-Nepal BSP-Nepal BSP-Nepal BSP-Nepal

TeraiHills

4 m3

RemoteTeraiHills

6 m3

RemoteTeraiHills

8 m3

RemoteTeraiHills

10 m3

RemoteSum/average

16 As registered in BSP-N sales documentation17 Number of plants being delivered in good working order as verified by BSP-N18 Number of working plants verified by independent verifier


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Nepal Biogas Support Program IV GPOBA Output Report

Sheet 2 Average daily use of biogas (hrs.) Hrs. Biogas user

survey BSP-Nepal

Average time plant is out of service Days

Biogas user survey

BSP-Nepal

IncreasedUnchanged

Indoor air pollution

decreased%

Biogas user survey

BSP-Nepal

IncreasedUnchanged

Incident of disease among inhabitants

decreased%

Biogas user survey

BSP-Nepal

Time saving for women Hrs /day

Biogas user survey

BSP-Nepal

Reduced firewood consumption USD Biogas user survey

BSP-Nepal

Reduced kerosene consumption USD Biogas user survey

BSP-Nepal

Reduced usage of chemical fertilizers

USD Biogas user survey

BSP-Nepal

Latrines attached to biogas plants % Biogas user survey

BSP-Nepal

IncreasedUnchanged

Agricultural yield of users of bio-slurry

decreased%

Biogas user survey

BSP-Nepal

Employment creation

No. of jobs

Proxy obtained by utilizing data collected on CDCF component

BSP-Nepal


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$QQH[��3URMHFW�SUHSDUDWLRQ�DQG�VXSHUYLVLRQ��Institutions responsible for project preparation1) World Bank (GPOBA, ENVCF, SASES)

2) AEPC

Primary contact: Ram Prasad Dhital, Director Alternative Energy Promotion Center

3) BSP-Nepal

Primary contact: Saroj Rai, Executive Director Biogas Sector Partnership

World Bank teamName Title Unit Bilal Rahill Lead Environmental Specialist SASES Jeremy Levin Consultant SASES Mahua Acharya Consultant ENVCFLars Johannes Consultant GPOBAKiran Baral Procurement Specialist SARPS Bigyan Pradhan FM Specialist SARFMTBD Environmental Safeguard Specialist Hiroko Imamura Legal Staff LEGMS

Advisory Team: Name Title Role Unit

Patricia Veevers-Carter

Program Manager Peer Review/ Advisory

GPOBA/IEF

Irving Kucynski Panel of Experts Advisory GPOBA

Alejandro Jadresic Panel of Experts Advisory GPOBA

C. Project Preparation Costs Project budget is US$20,000.


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$QQH[��'RFXPHQWV�LQ�WKH�SURMHFW�ILOH��Biogas support program Phase IV, Semi-Annual Progress Report (Jan – Jun 2006)

The Nepal Biogas Support Program: A Successful Model of Public Private Partnership for Rural Household Energy Supply, Sundra Bajgain and Indira Shakaya, 2005

BSP-IV Biogas User’s Survey, Final Report, Mar 2004

BSP-IV Multi-Annual Plan for Remaining Period, Jan 06 – Jun 09

BSP-IV Community Benefit Report for Project Activity 1 and 2 of CDM Project in Biogas Support Program of Nepal, October 2006


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$QQH[��+LVWRU\�RI�WKH�%63� Figure 0-1: Chronology of biogas development in Nepal

Figure 0-2: Historical subsidy rates over the different phases of the project


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