World Bank Document...The Project consists of three parts: (1) Development of Kabeli A Hydro Electric Project (KAHEP), (2) Technical Assistance and Capacity Building for Ministry of

The World BankKabeli-A Hydro Electric Project (P122406)

REPORT NO.: RES32467

RESTRUCTURING PAPER

ON A

PROPOSED PROJECT RESTRUCTURING

OF

KABELI-A HYDRO ELECTRIC PROJECT

APPROVED ON JULY 1, 2014

TO

NEPAL

ENERGY & EXTRACTIVES

SOUTH ASIA

Regional Vice President: Hartwig SchaferCountry Director: Qimiao Fan

Country Manager: Faris H. Hadad-ZervosSenior Global Practice Director: Riccardo Puliti

Practice Manager/Manager: Demetrios Papathanasiou Task Team Leader: Pravin Karki, Subodh Adhikari

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ABBREVIATIONS AND ACRONYMS

CIA Cumulative Impact Assessment KAHEP Kabeli-A Hydroelectric Project

DOED Department of Electricity Development KEL Kabeli Energy Limited

EA Environmental Assessment MOEWI Ministry of Energy, Water Resources and Irrigation

EMP Environmental Management Plan MOF Ministry of Finance

HIDCL Hydroelectricity Investment and Development Company Limited

NEA Nepal Electricity Authority

IBN Investment Board of Nepal PDA Project Development Agreement

IDA International Development Association SAP Social Action Plan

IFC International Finance Corporation


BASIC DATA

Product Information

Project ID Financing Instrument

P122406 Investment Project Financing

Original EA Category Current EA Category

Full Assessment (A) Full Assessment (A)

Approval Date Current Closing Date

01-Jul-2014 30-Dec-2019

Organizations

Borrower Responsible Agency

Nepal Kabeli Energy Limited,Investment Board of Nepal,Ministry of Energy, Water Resources and Irrigation

Project Development Objective (PDO)

Original PDOThe project development objective is to increase hydropower generation capacity to supply NEA grid through public private investment.OPS_TABLE_PDO_CURRENTPDOSummary Status of Financing

Ln/Cr/Tf Approval Signing Effectiveness ClosingNet

Commitment Disbursed Undisbursed

IDA-53380 01-Jul-2014 24-Nov-2014 20-Jun-2016 30-Dec-2019 40.00 7.06 30.39

IDA-H9000 01-Jul-2014 24-Nov-2014 20-Jun-2016 30-Dec-2019 6.00 .60 5.11

Policy Waiver(s)

Does this restructuring trigger the need for any policy waiver(s)?No


I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING

A. Project summary1. The Kabeli-A Hydroelectric Project was approved by the Board on July 1, 2014 and became effective on June 20,

2016. The Project Development Objective (PDO) is to “increase hydropower generation capacity to supply NEA grid through public private investment”. The Project consists of three parts: (1) Development of Kabeli A Hydro Electric Project (KAHEP), (2) Technical Assistance and Capacity Building for Ministry of Energy (MOE), and (3) Technical Assistance and Capacity Building for Investment Board of Nepal (IBN).

2. Part 1 (KAHEP component) is implemented by Kabeli Energy Limited (KEL). This component is financed by IDA credit of USD 40 million through Hydropower Investment and Development Company Limited (HIDCL) – a GoN owned entity established to finance the hydropower projects in Nepal – which acts as the financial intermediary in channeling the credit to the KEL for the construction of 37.5 Mega-Watt (MW) hydropower project in eastern Nepal. In addition to the IDA credit, KEL also has signed USD 28.5 million and USD 1 million loan agreement with International Finance Corporation (IFC) and NIC- ASIA, a local commercial bank, respectively. The proceeds of IDA credit from the Ministry of Finance (MOF) to KEL are subordinated to those of IFC and NIC-ASIA.

3. Part 2 (MOE component) supports the Ministry of Energy, which has changed its name to Ministry of Energy, Water Resources and Irrigation (MOEWI) in providing: (a) technical assistance to enable it to perform supervision and technical due diligence for Part 1 of the Project to ensure compliance with the agreements and plans such as Project Development Agreement (PDA), Environment Management Plan (EMP) and Social Action Plan (SAP); (b) technical, environmental and social safeguards capacity building on integrated river basin management and cumulative impacts management for sustainable hydropower development, and (c) incremental operating costs for the Project implementation. This Part is implemented by Department of Electricity Development (DOED) – an MOEWI department. This component is financed by IDA credit of USD 2 million.


4. Part 3 (IBN component) provides technical assistance to Investment Board of Nepal (IBN) to provide for (a) technical assistance to IBN to enable it to: (i) conduct appropriate due diligence to assess readiness of large-sized hydropower projects proposed by private investors and to carry out negotiations with selected private investors for signing project development agreements, (ii) supervise the construction of the above-mentioned projects to ensure compliance with the terms and conditions of the project development agreements and sustainability of such projects, and (iii) build up its procurement, financial management, environmental and social safeguards and technical capacities; and (b) incremental operating costs for the Project implementation. This Part is implemented by IBN and financed by IDA credit of USD 4 million.

B. Current project status5. Overall, the project implementation has remained slow for all three parts. Under Part 1, the Project was initially

delayed due to delay in signing the loan agreement with IFC and NIC-ASIA. In addition, the project was also delayed due to the delay in receiving necessary clearance from the GoN for the land acquisition to initiate the project construction. Notice to Proceed (NTP) to the contractor was issued by KEL only effective from January 1, 2018.

6. For Part 2, DOED is currently under negotiation with the consultant to enter into the contract for the Cumulative Impact Assessment (CIA) for the Tamor-Kabeli basin. The DOED has also initiated the supervision of the Kabeli-A project.

7. For Part 3, IBN has signed the Project Development Agreement (PDA) with project developers for two hydropower projects (900 MW Arun 3 and 900 MW Upper Karnali). In addition, IBN is currently under negotiation for the development of 600MW Upper Marsyangdi and 750 MW West Seti project in the central and western part of Nepal. As the IBN is mandated by the GoN to facilitate the development of hydropower projects of 500MW or more, it is also exploring the options of conducting the feasibility studies and expanding its pipeline.

C. Rationale for Restructuring8. This restructuring is based on the GoN requests received on March 05, 2018 (for Part 3), and on May 15, 2018 (for

Part 2). In summary, for both Parts 2 and 3, the requests have been made to include the provisions of the procurement of goods, non-consulting services, trainings, workshops, and study tours in the Financing Agreement. For Part 3, the requests have been made to: (i) remove the provision for supervision of construction activities; and (ii) add provision for feasibility studies of hydropower projects in the Financing Agreement.

9. The eligible expenditure under Parts 2 and 3, as per the Financing Agreement, only included expenditure categories “consultant’s services” and “Incremental Operating Costs”. Consequently, financing could not be withdrawn under Parts 2 and 3 for non-consulting services, trainings and workshops, study tours, and goods.

a. Relevant training are important for both DOED and IBN and their staff to perform the activities/duties as envisaged under the Financing Agreement. Thus, as per the request made by GoN, the expenses for participation of relevant IBN/DOED/MOEWI staffs in training – in concurrence with the World Bank – is being made eligible.

b. Goods such as relevant office equipment including laptops etc. are necessary for both DOED and IBN. Besides, due to increasing hydropower project pipeline, it is essential for both DOED and IBN to develop their institutional capacity to perform administration and monitoring of the projects as mandated by the GoN regulations. One of such capacities is to be able to travel to the site. Currently these institutions are planning to rent the vehicles for such visits. However, as the site visits become more frequent and often at


short notice, due to long GoN procurement process, renting of vehicles for such visits will not be practical. Expenditure on goods under Parts 2 and 3 is being made eligible.

10. Under the Part 3, due to the possible safeguards and fiduciary implications, it will be risky to utilize the World Bank’s funding for the construction supervision, through consultants, of hydropower projects in which the World Bank is not involved in financing. Thus, it was agreed with the both IBN and MOF, that Bank will recuse itself from providing funding under this Project for the project supervision activities, omitting the requirement of the Schedule 1, Part 3.a.ii of the Financing Agreement.

11. Under the Part 3, MOF has requested funds for the feasibility studies of hydropower projects. MOF requested inclusion of this provision in the Schedule 1, Part 3 (a) of the Financing Agreement. IBN intends to conduct feasibility studies of large hydropower projects to prepare a pipeline of projects. Such projects will then be offered by IBN for development on a competitive basis.

12. In order to affect the above changes, a restructuring including the amendment to the Financing Agreement is needed. Based on the project status and outcome of the Mid Term Implementation Support and Review (MTR) conducted on October 8-16 and October 22-27, 2017, as well as the requests received from MOF, the restructuring of both Parts 2 and 3 of the Project is proposed as describe in section II below.

II. DESCRIPTION OF PROPOSED CHANGES

13. The Financing Agreement will be modified as follows:

A. Part 2: Technical Assistance and Capacity Building for MOEWI

14. Schedule 1, Part 2 Technical Assistance and Capacity Building for MOEWI, (c) of the Financing Agreement will be modified as follows:

Current Provisions Proposed Provisions

Part 2 Technical Assistance and Capacity Building for MOE

(c) Provision of incremental operation costs for Project implementation.

Part 2 Technical Assistance and Capacity Building for MOEWI

(c) To be replaced with following: “Provision of technical and operational assistance to support Project implementation, including coordination, technical matters, procurement, financial management, social and environmental safeguards, monitoring and evaluation, and reporting.”


15. Schedule 2, Section IV. Withdrawal of the Proceeds of the Financing, A. 2. Category (3) of the Table of the Financing Agreement will be modified as follows:


(2) Part 2 of the Project: consultants’ services and Incremental Operating Costs.

(2) Part 2 of the Project: consultants’ services, goods, non-consulting services, Training and Workshops and Incremental Operating Costs. -- Underlined parts to be added

B. Part 3: Technical Assistance and Capacity Building for IBN

16. Schedule 1, Part 3 Technical Assistance and Capacity Building for IBN, (a) and (b) of the Financing Agreement will be modified as follows:


Part 3 Technical Assistance and Capacity Building for IBN

(a) Provision of technical assistance to MOE to enable it, following applicable international performance, technical, environmental and social standards equivalent to relevant World Bank’s Safeguard Policies, to (i) conduct appropriate due diligence to assess readiness of large-sized hydropower projects proposed by private investors, carry out negotiations with selected private investors for signing project development agreements, (ii) supervise the construction of the above-mentioned projects to ensure compliance with the terms and conditions of the project development agreements and sustainability of such projects, and (iii) build up its procurement, financial management, environmental and social safeguards and technical capacities.

(b) Provision of incremental operation costs for Project implementation.

Part 3 Technical Assistance and Capacity Building for IBN

(a) Retained

(i) Retained

(ii) To be replaced with following: “conduct appropriate assessment, investigation, and feasibility studies, on designs of hydropower projects for further development, and”

(iii) Retained

(b) To be replaced with following: “Provision of technical and operational assistance to support Project implementation, including coordination, technical matters, procurement, financial management, social and environmental safeguards, monitoring and evaluation, and reporting.”


17. Schedule 2, Section IV. Withdrawal of the Proceeds of the Financing, A. 2. Category (3) of the Table of the Financing Agreement will be modified as follows:


(3) Part 3 of the Project: consultants’ services and Incremental Operating Costs

(3) Part 3 of the Project: consultants’ services, goods, non-consulting services, Training and Workshops and Incremental Operating Costs -- Underlined parts to be added

C. Appendix: Definition of “Training and Workshops”18. A new Paragraph 37 in the Appendix of the Financing Agreement will be added as follows:

“37. ‘Training and Workshops’ means the reasonable costs of training required for the participation of personnel involved in training, workshops and study tours under Parts 2 and 3 of the Project, including travel and subsistence costs for training, workshop and study tour participants, costs associated with securing the services of trainers, rental of training and workshop facilities, preparation and reproduction of training and workshop materials, and other costs directly related to training, workshop or study tour preparation and implementation, but excluding fees of consultants.”

D. Change in name of the implementing agency 19. Paragraph 22 in the Appendix of the Financing Agreement will be modified as follows:


22. “MOE” means the Recipient’s Ministry of Energy and any successor thereto.

22. “MOEWI” means the Recipient’s Ministry of Energy, Water Resources and Irrigation and any successor thereto.

20. Any “MOE” acronyms used in the Financing Agreement will be modified as “MOEWI.”


III. SUMMARY OF CHANGES

Changed Not Changed

Change in Institutional Arrangements ✔

Other Change(s) ✔

Change in Implementing Agency ✔

Change in DDO Status ✔

Change in Project's Development Objectives ✔

Change in Results Framework ✔

Change in Components and Cost ✔

Change in Loan Closing Date(s) ✔

Cancellations Proposed ✔

Reallocation between Disbursement Categories ✔

Change in Disbursements Arrangements ✔

Change in Disbursement Estimates ✔

Change in Overall Risk Rating ✔

Change in Safeguard Policies Triggered ✔

Change of EA category ✔

Change in Legal Covenants ✔

Change in Financial Management ✔

Change in Procurement ✔

Change in Implementation Schedule ✔

Change in Economic and Financial Analysis ✔

Change in Technical Analysis ✔

Change in Social Analysis ✔

Change in Environmental Analysis ✔

IV. DETAILED CHANGE(S)


Documents

World Bank Document...The Project consists of three parts: (1) Development of Kabeli A Hydro Electric Project (KAHEP), (2) Technical Assistance and Capacity Building for Ministry of