Document of The World Bank

Public Disclosure Authorized FOR OFFICIAL USE ONLY

Report No: 20634

IMPLEMENTATIONCOMPLETION REPORT (23470)

Public Disclosure Authorized ON A

CREDIT

IN THE AMOUNT OF SDR 48.1 MILLION (US$65 MILLION EQUIVALENT)

TO THE

GOVERNMENT OF NEPAL

FORA

POWER SECTOR EFFICIENCY PROJECT Public Disclosure Authorized

June 27, 2000

Energy Sector Unit South Asia Sector

This documenthas a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Public Disclosure Authorized CURRENCY EQUIVALENTS

(ExchangeRate EffectiveFebruary 1999)

Currency Unit = Nepalese Rupees (NRs) NRs 62.00 = US$ 1.00 US$ 0.0161 = NRs 1.00

FISCAL YEAR July 16 - July 15

ABBREVIATIONSAND ACRONYMS ADB Asian Development Bank CIWEC Canadian International Water and Energy Consultants DCA Development Credit Agreement DHM Department of Hydrology and Meteorology DOR Department of Roads EA Environmental Assessment EdF Electricite de France EIA Environmental Impact Assessment EIRR Economic Internal Rate of Return EWS Early Warning System GLOF Glacier Lake Outburst Flood GOF Government of France GTZ The Deutsche Gesellschaft fur Technische Zusammenarbeit GWh Gigawatt - hour HEP HydroelectricProject HMGN His Majesty's Government of Nepal HV High Voltage IDA Intemational Development Association KfW Kreditanstalt fur Wiederaufbau KV Kilovolt KWh Kilowatt - hour MCMPP Marsyangdi Catchment Management Pilot Project MHDC Multipower Hydroelectric Development Corporation MHPP Marsyangdi Hydroelectric Power Project MOI Ministiy of Industry MOWR Ministry of Water Resources MW Megawatt NEA Nepal Electricity Authority NDF Nordic Development Fund OEES Office of Energy Efficiency Services O&M Operation & Maintenance PA Performance Agreement PSEP Power Sector Efficiency Project PSR Power Subsector Review ROR Rate of Return SAR Staff Appraisal Report SFR Self Financing Ratio S&R Screening & Ranking

Vice President: TMiekoNishiomizu Country Director: Hans M. Rothenbuhler Sector Director: Alastair J. McKechrnie Task Team Leader/Task Leader: Tjaarda P. Storm van Leeuwen/Argun Ceyhan FOR OFFICIAL USE ONLY

IMPLEMENTATION COMPLETION REPORT

CONTENTS

Page No. 1. ProjectData 1 2. PrincipalPerformance Ratings 1 3. Assessmentof Development Objectiveand Design, and of Quality at Entry 1 4. Achievementof Objective and Outputs 4 5. Major Factors Affecting Implementationand Outcome 10 6. Sustainability 12 7. Bank and Borrower Performance 13 8. LessonsLearned 15 9. Partner Comments 16 10. AdditionalInformation 16 Annex 1. Key PerformanceIndicators/Log Frame Matrix 21 Annex 2. Project Costs and Financing 23 Annex 3. Economic Costs and Benefits 25 Annex 4. Bank Inputs 28 Annex 5. Ratings for Achievementof Objectives/Outputsof Components 29 Annex 6. Ratings of Bank and Borrower Performance 30 Annex 7. List of SupportingDocuments 31

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

Project ID: P0 10392 Project Name: POWER EFF IMPROVEMEN TeamLeader: Argun Ceyhan TL Unit: SASEG ICR Type: Core ICR Report Date: June 27, 2000

1. Project Data Name: POWER EFF IMPROVEMEN L/C/TF Number: 23470 CountryIDepartment: NEPAL Region: South Asia Regional Office Sector/subsector: PH - Hydro

KEY DATES Original Revised/Actual PCD: 10/23/89 Effective: 10/15/92 01/15/93 Appraisal: 06/23/90 MTR: 03/01/96 Approval: 03/26/92 Closing: 12/31/97 06/30/99

Borrower/Implementing Agency: HMGNINEA Other Partners: Nordic Development Fund

STAFF Current At Appraisal Vice President: Mieko Nishimizu D. JosephWood CountryManager: Hans M. Rothenbuhler J. Kraske Sector Manager: Alastair J. Mckechnie Frederick C. Temple TeamLeader at ICR: Tjaarda P. Storm Van Leeuwen Donal O'Leary ICR Primary Author: Argun Ceyhan 2. Principal Performance Ratings (HS=HighlySatisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L-Likely, UN=-Unlikely, HUN=Highly Unlikely,HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: S Sustainability: L Institutional Development Impact: M Bank Performance: S Borrower Performance: S

QAG (if available) ICR Quality at Entry: S Project at Risk at Any Time: Yes

3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: The project's primary objectiveswere to: * Increasethe supply capacity of the Nepal Electricity Authority (NEA)by improving technical and operationalefficiency, upgrading existinggeneration capacity and improvingthe system load factor; * Restore NEA's financial viability and strengthen its institutional performance; * Enhance energy conservationmeasures, implementedby the Ministry of Industry (MOI) and NEA; and * Address the remaining environmentalconcerns arising from the Marsyangdi Hydroelectric Project (Cr. 1478-NEP)by supporting an innovativeapproach to catchmentmanagement on a pilot basis, implementedby the Ministry of Local Development,Department of Roads (DOR) and NEA.

3.2 Revised Objective: FollowingIDA's decision in August 1995 to defer considerationof the Arun III HydroelectricProject (Arun III HEP), HMGN and IDA agreed to add as an objective the developmentof a high quality pipeline of hydropower projects to be offered for development. The reasonfor this was not only the expected future scarcity of public multilateraland bilateral aid funds, but also the need to more explicitlytake into account environmental and social impacts in project selection. To define such a pipeline, a Medium HydropowerStudy, launched as part of the Project, included a comprehensiveScreening and Ranking (S&R) process for project selection.

3.3 Original Components: The project included the following components: A. ComponentsImplemented by NEA: * GenerationRehabilitation. Upgrading of the civil works of the Trishuli and Devighat hydroelectricplants and the retrofitting of the Trishuli electro-mechanicalequipment.

* High Voltage TransmissionNetwork Reinforcement. - Investmentsin the KathmanduValley to: * Increase the 66 kV circuit capacity to improve voltageregulation and reliability; * Upgrade the 66/11 kV transformercapacity at existing substationsand construct two substations near the load centers in Kathmandu(Teku and Bhaktapur); * Construct a S km 132 kV intertie between the Marsyangdiand Kulekhari system and a 12 km 132 kV line from Bhaktapurto New Chabel(initially operated at 66 kV); and * Constructa 4 km, 4-circuit 132 kV line between Teku and Suichatar. * Investmentsin other parts of Nepal to: * Provideequipment, spare parts and tools for the Western, Eastern and Bagmati transmission sections; * Constructa 132 kV interconnectionline betweenDuhabi and Kataiya (Bihar, India) to upgrade power exchange capabilitywith India; and * Install the second circuit on the existing 132 kV Kusaha-Dhalkebarline and expand the associatedsubstations.

* NEA Infrastructure/Buildings.The componentincluded: * NEA Headquarters:provision of importedequipment such as electrical/mechanicalbuilding services, communicationequipment, computers, filing and drafting systems and other appropriatefurnishings; * Workshops:provision of spare parts, tools, cranes and vehiclesfor NEA's mechanical and electrical workshops;and * Training Center: constructionof a Central Training Facility and provision of training equipment together with consultantservices to extend NEA's training programs.

* Rural Electrification.Electrification of the Besisahararea and vicinity under the Marsyangdi Catchment ManagementPlan.

* Technical Assistanceto NEA in the form of consultantservices to assist NEA in: * Implementationof the generationrehabilitation and high voltage (HV) network reinforcements; * Design of NEA infrastructureand buildings; * Preparationof feasibilityand/or detailed engineeringstudies for priority hydroelectricprojects; * Continuationof the "twinning" supportto NEA (para. 10.3); * Preparationof a TrainingMaster Plan and detailed project for a new central training facility in Kathmandu (para. 10.4); and * Efforts to improvethe system load factorby providing servicesand equipmentto upgrade NEA's load dispatch center and install low frequencyrelays, load monitoringequipment, time of day metering

-2 - and communicationsequipment to be used for the load managementprogram.

B. ComponentsImplemented by Other Agencies: * MarsvangdiCatchment ManagementPlan. The componentincluded financing of consultantservices, materialsand equipmentnecessary to implementthe pilot project which covered: * A soil conservationand sedimentreduction program, implementedby the Ministry of Local Development; * Institutionalsupport to the Local DevelopmentOffice (Lamjung District) of the Ministry of Local Developmentand to the Departmentof Soil Conservationand WatershedManagement of the Ministry of Forests and Environment; * Upgrading of the Dumre-Besisaharroad, implementedby DOR; and * Electrificationof the Besisahar area and vicinity,implemented by NEA (see above).

* Industrial Energv Audits. The componentimplemented by MOI, included: * Financing of consultant services and equipment needed for the establishmentof an Energy Audit Unit within MOI which would provide technicaladvisory servicesto assist local industries in implementingenergy conservationmeasures.

* Technical Assistance to DOR. This componentincluded consultantservices to assist DOR in upgrading of the Dumre-Besisaharroad.

3.4 Revised Components: The following componentswere added: A. Component Implementedby NEA: * Rehabilitationof NEA's Gandak HydropowerPlant throughprovision of electro-mechanical equipmentand spares (funded from NEA's own resources); and * Medium HydropowerStudy (Screening and Ranking exercise).

B. ComponentImplemented by Other Agency: * Establishmentof an Early Warning System against Glacier Lake Outburst Flood (GLOF) dangers at the Tsho Rolpa Glacier Lake (implementedby the Departmentof Hydrology andMeteorology - DHM).

3.5 Quality at Entry: The quality at entry is rated as "satisfactory". No specificQAG review was conductedfor this Project. The Project was prepared within the context of IDA's lending strategy for the power sector in Nepal. Specifically,the strategy then called for assisting HMGN to: (i) develop Nepal's hydroelectricpotential with minimal adverse environmental impacts; (ii) upgrade the corporate performanceof NEA; (iii) formulate a comprehensiveinvestment program to meet demand; and (iv) to set tariffs which reflect the economic cost of supply. The proposed investment program for FY92-97envisaged the creationof more than a billion dollarsworth of power facilities which NEA would be responsible for managing. The project was designedto reduce system and financial losses and thereby help strengthen NEA's capacity, as a relatively new entity, to carry out the proposed power investment program, and operate and maintain the system. To facilitate smoothproject start-up, the project was submittedfor board approval only after a significant(61%) increase in NEA's tariffs was effected,provisions of the Performance Agreementbetween NEA and HMGN agreed to, and procurementactions were well advanced for the principal componentsof the project.

The project was prepared, appraisedand approvedwhen there was an intensiveongoing dialogue between the Governmentand other co-financiers',particularly in the context of the preparation of the Arun III HEP. This dialogue included a discussion on possible wider sector reforms. The Project was, however, approvedbefore the Bank's new strategy in the power sector was agreed with the Government (The Bank's Role in the Electric Power Sector. Policies for EffectiveInstitutional, Regulatory and FinancialReform, June 30, 1992, R92- 193). During the appraisal of Arun III HEP (SAR dated August 29, 1994), IDA and HMGN continuedthe dialogue on sectoralissues and agreementwas reached on a wider set of sectoralreforms. As a result, in late 1992

-3 - and 1993,HMGN started to implement reforms,and as a first step adoptednew legislation,allowing private investmentinto the power sector.

Within the context of Nepal, this more gradual approach to sector reform taken in the dimensions of this project is consideredappropriate and the quality at entry was satisfactory. 4. Achievementof Objectiveand Outputs 4.1 Outcome/achievement of objective:

Objective 1: Increase the supply capacity of the Nepal Electricity Authority (NEA) by improving technical and operational efficiency, upgrading existing generation capacity, and improving the system load factor.

The project'soverall outcomeis assessed as satisfactorygiven that most of the major objectiveswere achieved, albeit after some delays and subject to occasionalshortfalls during the project implementationperiod. As stated in the Staff AppraisalReport (SAR), targets includedreducing losses from 29 percent in FY90 to 24 percent in FY93, and eventuallyto 21 percent by FY97. Improvementin operationalefficiency is demonstratedby a reduction of system losses to less than 25 percentby FY93 and to less than 22 percentby FY98, although this was accomplishedover a longer period than envisaged.Reduction of financiallosses was achievedvery early in the project as evidencedby a rapid turn-aroundin NEA's operating accountsfrom a negative incomeposition in FY91 and FY92, to progressivelyincreasing profit margins from FY93 onwards,with the exception of FY98 where profit levels fell but still remainedpositive. Moreover, in line with the target set in the SAR, accounts receivablewere reduced from the equivalent of 5.6 months averagebillings in FY90 to the current 3 to 4 months .

The rehabilitationof power stations and the expansion of the HV network were satisfactorilycompleted and their operationalefficiency substantiallyimproved as a result of the project. During the implementationof the project, power exports to India increased,and Nepal is expectedto become a net exporterof energyover the next few years. Therefore,this main objectivewas achieved.

However,NEA's overall operationalefficiency can be furtherimproved because of the continuing relatively high level of losses in the distributionsystem. Rehabilitationof the distributionsystem was not part of the scope of the project, but it was taken up by NEA with financingfrom other donors.

Objective 2: Restore NEA'sfinancial viability and strengthen its institutionalperformance Based on the discussionbelow, it is concludedthat Objective 2 was partially achieved.

A. NEA's FinancialViabilitv.

* With tariff adjustmentsof 60 percent in November 1991 (a conditionof effectivenessof Cr. 2347-NEPfor the Project),25 pecent in March 1993, 38 percent in March 1994 and 20 percent in June 1996,NEA was substantiallyin compliancewith most financial covenantsuntil FY96/97(ending Ju:ly15, 1997). In the early years of Project implementation,NEA's financialperformance improved rather dramatically comparedto the situation before approval. However,HMGN did not allow any tariff increases in FY97/98 and FY98/99,and during those years NEA was not fully in compliancewith the financial covenants. With the tariff increase of about 25 percent approvedin November 1999,it is expected that NEA's financial situationwill substantiallyimprove by the end of the current FY. Bill collection, from government agenciesin particular, remains problematic.Although at the time of closing of the Credit NEA was not fully in compliancewith its financialcovenants, given the recent actionsthe overall objective of restoring NEA's financial viability can be consideredas being substantially achieved. * NEA took various other actions to strengthen its Finance Department. These included: (i) appointment from outside NEA of a professionallyqualified Finance Directorand two professionallyqualified accountantsto assist the Director (when the Finance Directorleft NEA, his successor, appointed from the ranks of NEA, was professionallyqualified, also); (ii) establishmentof an Internal A.uditDepartment and trainingof its staff; (iii) implementationof a basic accountancytraining program; and (iv) initiationof com

- 4 - puterization in billing and accounting. * During the project implementationperiod, NEA's accounts were audited by internationalauditors. The audits revealed various deficienciesin the accountingsystem and the way the accounts were kept. NEA failed to adequatelyact on the auditors findings and its audit reports remained qualified. NEA's most recent audit report had a "disclaimed"audit opinion. Major issues include: (i) adjustmentin the treatment of the revaluation surplus in the financial statements for FY97/98 and FY98/99; (ii) ensuring future compliancewith the InternationalAccounting Standard 16 (relatesto accountingtreatment of revaluationof assets);and (iii) ensuring that NEA's annual financial statementsand audit reports are duly signed after the approval by the Board of Directorsin a timely manner. These correctivemeasures form part of the program recently agreed with ADB (and IDA) to address the issues raised by the auditors. The program is under implementation.

B. NEA's InstitutionalPerformance. * In 1992, HMGN changed the NEA Act with the objective of addressing the shortcomings in the original Act in an attempt to establish an institutional frameworkwhich would enableNEA to operatemore autonomouslyand as a commerciallyoriented entity. * The new NEA Act has a provision for the sale of NEA shares to the general public or institutional investors. When a minimum of 10 percent of NEA's share capital is sold, an Annual General Meeting will be constituted and a new Board of Directorswould have to be elected. Divestitureof NEA's shares was not anticipated to take place during the implementationof this project. TThe new NEA Act also modified the compositionof NEA's Board of Directors. It reduced the number of governmentofficials on the eight-memberBoard from six to three. The chairman is still the Minister of Water Resources, and the secretariesof the Ministriesof Finance and Water Resources are members. The remainderof the Board consists of three private sector representativesand one consumer representative nominatedby HMGN, and NEA's Managing Director. * HMGN and NEA signed a PerformanceAgreement (PA) which covered: (i) NEA's objectives;(ii) the respectiverights and obligationsof NEA and HMGN; and (iii) the agreed investment plan and its financing,performance indicators, and financial projections. The PA was to be updated annually. Conclusionof the first PA, with conditionssatisfactory to IDA, was a condition of effectivenessof Cr. 2347-NEPfor the project. The PA was signed in October 1992.In compliancewith its commitmentsunder Cr. 2347-NEP for the project, NEA establisheda Human ResourceDepartment and a Rural Electrification Directorate. However,the most significantpositive institutional developmentimpact of the project has been the on-the-jobtraining of NEA staff working with the consultants carrying out the Medium HydropowerStudy, which was a state of the art exercise completedduring project implementation. Most staff are still with NEA. * Although not part of the project scope, a new accounting system was designed and NEA started to introducethis new system. Plans to computerizethe accountingand billing systems did not materialize because fundingto finance these activitieswas not availableafter IDA's withdrawal of support for the Arun III project. * Although these measures representedimportant steps in the right direction,in practice, NEA's autonomy and functioningas a modem utility leaves a lot to be desired. Although no specific target was set for institutionalimprovements, one can concludethat the objectiveshave only been partially met.

* Objective 3: Enhance energy conservation measures. All three phases of the industrial energy audits program implementedby MOI were satisfactorilycompleted. NEA's load dispatch center is being upgraded through a credit by KfW. A Non-TechnicalLoss ReductionProject was undertakenby an ADB TechnicalAssistance Grant. A separate ADB funded pilot project for computerizedbilling demonstratedthe advantagesof such systems for, inter alia, loss reduction.Overall, this objective is consideredto have been substantiallyachieved.

* Objective 4: Address the remaining environmental concerns arisingfrom the Marsyangdi Hydroelectric Project by supporting an innovative approach to catchment management on a pilot basis. Soil conservation and sediment reduction programs were initiated and continue under GTZ funding. With the completion of the upgrading of the Dumre-Besisaharroad and rural electrificationin the Marsyangdi area, this objective has been substantially

-5- achieved.

4.2 Outputs by components: A. ComponentsImplemented by NEA. * GenerationRehabilitation. * Followingthe rehabilitation/refurbishmentworks, generationat the Trishuli liydropower Plant was increasedfrom about 12 MW to 21 MW;the generationat the Devighat HydropowerPlant was increased from 9.4 MW to 14.1 MW. * Rehabilitationof the Gandak HydropowerPlant was carried out under NEA's own resources.

* High Voltage TransmissionNetwork Reinforcement.Following reinforcement of the high voltage network in the KathmanduValley, supply capacityhas increasedfrom 160 MVA to 250 MVA.

* NEA is transferring,during the dry season,about 30MW from India via the Duhabi - Kataiya 132 kV transmissionline.

* NEA Infrastructure/Buildings.Installation of communicationequipment, computers,and filing and draftingsystems has somewhatimproved working conditionsat NEA's headquarters;provision of equipmentto NEA's transformerworkshop has substantiallyupgraded the repair capacity of this workshop.

RRural Electrification.Electrification works in the Besisahararea and vicinity have been completed.

* TechnicalAssistance to NEA. Consultantswere employedfor: * The supervisionof the rehabilitationof the Trishuli-Devighathydropower complex and high voltage transmissionnetwork reinforcement;and * Carrying out a screeningand ranking exercise of medium-sizedhydropower projects in Nepal and feasibilitystudies for the seven projects identified in the optimumhigh-quality project portfolio. The S&Rprocess has been a state of the art exercise on introducingparticipatory approaches in project selection includinga series of review meetingswith stakeholders,combined sound technical and economic analysis, and taking into accountsocial developmentand environm-ntal impact aspects (para. 10.2).The expectedoutputs of the S&R exercisewere to: a) help develop Nepal's hydroelectric potential by building up a high quality pipeline of projects which had been selectedthrough a participatoryS&R process that recognized technical,economic, financial as well as environmental and social impacts, and ensuredan appropriatebalance between investments in generation, transmission,and distribution;and b) establish proceduresfor introducingcorapetition between private power developersto constructand operate new plants.

* "Twinning"Arrangements. During the appraisaland approval of PSEP, NEA s "twinning" arrangementwith Electricitede France (EdF) was ongoing.For this reason, th.eProject included continuation of this arrangementas a component.The componentwas planned to be funded under a bilateral credit from the Governmentof France (GOF). Towards end-1992, EclFconcluded that within the environmentthen prevailing,a twinningarrangement was not a form of intervention strong enoughto be successful.EdF recommendedthat NEA sign a performancemanagement contract with an outside contractor.However, during the preparation of the Arun III HEP, HMGN and IDA did not agree with this recommendation.The NEA/EdF twinning arrangement was discontinuedin 1992, and HMGN,IDA and the potential co-financiersof Arun III HEP concentratedon strengtheningNEA's institutionalcapability and performancewith actions and conditionalitysummarized in para. 10.3.

* Central Training Facility and Programs.This componentwas also planned to be funded under the above credit from GOF. When this credit did not materialize,in late 1994 HMGN and IDA agreed to fund this componentunder the IDA credit for the project (Cr. 2347-NEP).Because of the delays in selecting consultants for the design of the trainingcenter and training programs to be implementedat this center, the constructionof the trainingcenter had not been completed by the time the Credit was

-6 - closed. Since then, NEA has been fundingthe balance of expendituresto complete the construction of the center and installation and commissioningof the equipment.At the time of this report, the training center was still under construction (para. 10.4).

* NEA's Efforts to Improve SystemLoad Factor.As mentionedabove (para. 4. 1; Objective 3), NEA's efforts continue under KfW and ADB projects.

B. ComDonentsImlnemented by the Other Agencies. * Marsvanedi Catchment ManagementPlan. Institutionalsupport was provided by GTZ of Germanyto the Local DevelopmentOffice (LamjungDistrict) of the Ministry of Local Development. Soil conservation and sedimentreduction programs were initiated and continue. Electrificationof the Besisahar area and upgrading of the Dumre-Besisaharroad have been completed.

* Industrial Energy Audits. * Within this program, an inventory of 250 industrial boilers throughout Nepal was prepared. The following audits and projects were completed:77 walk-throughaudits, 30 preliminary audits, 10 simple demonstrationprojects, and 3 minor retrofit demonstrationprojects. * Consultantsassisted MOI, industries and hotels in implementingenergy conservationmeasures; formulatingpolicies to encourageefficient use of energy; and undertaking training and outreach activities.

EEarly Warning System Againstthe GLOF Dangers from the Tsho Rolpa Glacier Lake. The system was installed in 1998, successfully tested, and was in operation during the monsoons of 1998 and 1999.

* TechnicalAssistance to DOR. Consultantswere employedand helped DOR satisfactorilycomplete the upgrading of the Dumre-Besisaharroad.

4.3 Net Present Value/Economicrate of return: At appraisal, the economic internal rate of return (EIRR) was estimated for: (a) NEA's investment program (time-slice for FY92 - FY2002,over an operationperiod of 30 years); and (b) the rehabilitationof the Trishuli-Devighatpower plants.

The EIRR for the FY92-FY2002time-slice was calculatedat appraisal as 2.4 percent without taking into account consumer surplus; and 18.1 percent after taking into account the consumer surplus. This time-slice included the constructionof the Arun III HEP. Since the decision to defer this project, NEA's investment program has been substantially changed. Thus, in the ICR, an EIRR for the revised time-slicewas calculated.The EIRR for the revised time-slice was computedas 12 percent without taking into account consumer surplus. As the EIRR was greater than 10 percent, another computationtaking into account consumer surplus was not undertaken.

The EIRR for the rehabilitationof the Trishuli-Devighatpower plants was calculated at appraisal as 23 percent for firm energyonly. On the same basis, the EIRR for this component was calculatedas 16 percent, using actual tariffs paid.

4.4 Financial rate of return: A financial rate of return has not been calculated as it is more relevant to assess NEA's financial performance through a number of financial ratios.

NEA's overall financial position showed improvementwith four successivetariff increases during FY91/92 - FY96/97. The total electricity sales increased from 737.4 GWh in FY91/92 to 1124.8 GWh in FY98/99. The average retail tariff increased steadilyfrom NR 1.99/kWhin FY91/92 to NR 4.96/kWh (about 8.1 cents/kWh)in FY96/97, and the rate of return on revalued assets (ROR) increased from -0.5 percent in FY91/92 to 4.2 percent in FY96/97. NEA's self-financingratio (SFR) increased to about 40.4 percent in FY96/97 and its debt service

- 7 - coverageratio was 2.0 (See Table I below). Thereafter,NEA's financial performance started to deteriorate and NEA was unable to complywith the main financial covenants under the project,mainly because HMGN did not allow any tariff increases. However,in November 1999, tariffs were increased with another 25 percent to about Rs. 6.2/kWh or aboutUS cents 9.9/kWh,making it one of the highest in the region. Efficiency improvementswere not sufficient to compensatefor the lack of tariff increases,and NEA resorted to using its cash r eserves built up in the early nineties to help fund its investment program. The level of accounts receivable, excluding sales to India, remains about 3 to 4 months of sales equivalent,mainly because of difficultiesin collecting from government departments and municipalities.

NEA's non compliancewith its financial covenants in FY97/98 and 98/99 was one of the miajorreasons that IDA did not agree to extend the closing date for a second time, i.e. beyondDecember 31, 1998(the Closing Date of the Credit was extendedonce in December 31, 1997),except for the road componentfor which the Credit remained open until June 30, 1999.

-8 - Table 1: NEA FinancialSummary 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/2000 Audited Audited Audited Audited Audited Audited Audited Provisional Estimated

EnergyGenerated(GWh) 901.2 851.7 901.9 929.7 1109.4 1136.4 1079.4 1162.8 1227.7 Energy Purchased (GWh) 25.0 29.8 30.7 74.0 80.6 78.2 83.5 90.0 104.0 Gross SystemLosses (% ofAvg Energy) 24.8 24.3 25.9 25.1 24.6 24.9 21.6 21.7 18.8 Energy Sales (GWh) 737.4 733.8 765.9 824.6 936.7 1010.6 1056.7 1124.8 1293.2 Average Revenue Rate(NRS/kWh) 1.99 2.54 3.38 3.98 4.15 4.96 4.94 4.94 6.2

Total Operating Revenues 1514.20 1904.5 2611.8 3463.5 4012.2 5083.6 5419.0 5809.4 8326.5 Total Operating Expenses 1618.1 1853.6 2188.7 2830.9 3234.2 3729.0 4667.0 4627.9 5545.8 Operatinglncome(NRsMil) -103.9 50.9 423.1 632.6 778.0 1354.6 752.0 1181.5 2780.7 Net Income (NRs Mil) -50.5 106.2 101.0 26.5 678.6 687.4 344.6 838.6 2264.7

Rate of Return on Revalued Assets (%) -0.5 0.2 1.6 4.4 2.4 4.2 2.1 3.6 7.9 SelfFinancingRatioofTotalCost(3YrAvg) 9.08 35.8 46.2 26.3 10.6 40.4 28.7 3.4 15.5 Debt Service Coverage Ratio (times) 6.3 1.5 1.7 1.3 2.2 2.0 1.8 1.8 2.3 Current Ratio 1.9 1.4 0.9 1.1 1.8 1.2 1.0 1.3 1.5 Operating Ratio 106.9 97.0 84.0 82.0 82.5 76.2 88.2 81.1 69.0

Source:NEA

4.5 Institutional development impact: A. HMGN Actionsin Power Sector Reform:

* Although the project itself cannot be directly credited, during the life of the project, HMGN, based on recommendationsmade in IDA's 1992 sector report, enacted new legislationwhich formed the basis of wider reforms in the Nepal power sector. These includedthe HydropowerDevelopment Policy of 1992; the Water ResourcesAct 1992; Electricity Act 1992; Electricity Regulations 1993; and Electricity Tariff Fixation Regulations 1993. This new legislationopened the power sector up for private investment. The ElectricityDevelopment Center was establishedin 1993 to serve as a one-stop window to private investors, and the Electricity Tariff Fixation Commissionwas constituted in 1994. * These policy changeshave helped attract private investment for Khimti 1 (60 MW), Upper Bhote Koshi (36 MW) and Indravati(5 MW) hydropowerprojects. Also, considerablepreparatory works for the export orientedWest Seti (750 MW) hydropowerproject have been completed. NEA is implementingChileme (20 MW) and Modi (14 MW) projects in joint ventures with private investors. Several other private investorshave obtainedsurvey licenses. * Also duringthis period, HMGN concludedbilateral agreementsfor the developmentof water resources. These include the agreement on electricitytrade between Nepal and India and the Nepal-India Treaty for the Mahakali River Integrated Development.These agreementsraise prospects for private investment in large multi-purposeprojects such as Pancheswar and Kamali-Chisapani,and for creating a basis for expandingexports of electricity to India. * While sector reforms are still in early stages of implementation,it is worth noting that HMGN in its Ninth Plan (1997-2001)articulated a long term vision for the development of the power sector which includes unbundlingof NEA and privatizationof distribution.In a recently concludeddraft Power Sector DevelopmentStrategy Report, the conclusionwas also reachedthat further changes along the lines as suggestedin the Ninth Plan are desirable to enable HMGN to mobilize the financial resources required for the planned developmentof the country.

-9- B. NEA. * Since the various actions taken by HMGN and NEA, listed in para. 4. 1, NEA's institutional capability and financial performance improved substantiallycompared to its position in March 1.992when Cr. 2347-NEPfor the project was approved. However,much remains to be done, particularlyin areas such as administrationand accounting, billing and collection and distributionsystem losses. * On the positive side, secondmentof 47 NEA staff to consultants in charge of the screening and ranking exercise and feasibility studies for three hydropowerprojects between 100MWand 300MW, and contracting out of preparation of environmentalassessments and feasibilityreports for four medium-sized (below 100MW)projects, provided an enormousamount of transfer of knowledgeto the NEA and the Nepali engineering community.

C. Other ImplementingA2encies. * The Office of Energy Efficiency Services(OEES) was establishedin MOI during the first phase of the project and operated satisfactorilyduring the life of the project. * Consultantsassisted the Ministryof Local Developmentand its Lamjung District Office in initiatingand implementingsoil conservationand sedimentreduction programs. * Consultantsassisted DOR in designing, contracting,and supervisingthe upgrading of the Dumre-Besisaharroad. * Consultantsassisted DHM in designing, contracting,supervising, and commissioningthe EWS against GLOF dangersfrom the Tsho Rolpa Glacier Lake.

5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of government or implementingagency: The two factors outside the control of HMGN were: * IDA's decision in August 1995 to defer considerationof the Arun III HEP (to withdraw from this project). IDA's decision affected, for some period of time, HMGN'srelations with the Bank and other cofinanciers. It also caused considerable delays in implementationof some of the institutional strengtheningmeasures. - Non-materializationof the bilateral aid from France, which was expected to provide funding for the design and constructionof the central training facility and training programs. The training center is still under construction and some of the training which was planned to be given in this center was given in NEA's existing smaller training centers.

5.2 Factors generally subject to government control: A. NEA. * The changes to the NEA Act enhanced NEA's autonomyon paper, but in practice, HMGN appears to be unwilling to provide NEA with the degree of autonomythat is a necessary (but noltsufficient) condition for the utility to operate on a commercialbasis. There were frequent changesin managing directors and interferenceinto day to day matters including recruitmentof staff. Also, HMGN's reluctanceto adjust tariffs harmed the relations with the principal donors.

B. Other ImplementingAgencies. * For reasons outside NEA's control HMGN revokedthe license of the contractorwho was in charge of building a portion of the Dumre-Besisaharroad. DOR had to rebid the works, and this delayed the completion of the road.

5.3 Factors generally subject to implementingagency control: A. NEA. * NEA's managerial weaknesses;difficulties in recruiting qualified accounting staff, and a lack of attention to financial managementcontinued to be main factors (closely tied to the previous:lymentioned factors) impeding a satisfactoryinstitutional developmentof the utility. * Attention to staff training was insufficientpartly because NEA could not decide onithe hiring of consulting firm to set up the new training center and programs.

- 10 - * NEA had difficulties in preparing the technical specificationsfor the softwareit purchased to enhance its engineeringcapacity. * The incidentwhich occurred in the Trishulihydropower plant in 1998 interrupted the operation of this plant and that of Devighat, which is downstream of Trishuli, for a short period of time. NEA took emergency actions to clean the power station and restore the four unaffected units to service. Repairs were completedin March 1999. More informationabout this incidentis given in para. 10.5.

B. Other ImplementingAgencies. * Delays in the completion of the componentsimplemented by MOI, DOR, and DHM occurred because the agencieshad to familiarize themselveswith the Bank's procurement guidelines.

5.4 Costsandfinancing: At appraisal, the project's total cost, including physical and price contingencies,and duties and taxes, was estimated at US$88.6million, based on mid-1990 prices. The unit costs were on recently signed contractsfor comparable civil works, transmission and distributionprojects, and recent quotations for spare parts and consultant estimates for the Trishuli-Devighatelectro-mechanical equipment. Physical contingencieswere included at the rate of 15 percent for the Trishuli-Devighatcivil works and 10 percent for the other components. Price contingencies assumed in the estimateswere based on IDA's projections.

Costs proved to be over-estimatedbecause of the slow but continuousdepreciation of the Nepali Rupee with regard to the US dollar. The exchange rates at appraisal and at closing of the Credit in end-1998, were NRs. 42.7/US$ and NRs. 62/US$,respectively. However,it should be noted that just one month after the Credit was declared effective,it was determinedthat there was going to be US$7.2million of savings.NEA/HMGN requested the savings to be used for other investmentsin line with the objectivesof the project , and to prepare a new operationafter the cancellationof Arun III HEP. The S&Rprocess was one of the sub-componentswhich was included into PSEP.

The total cost of the project is currentlyestimated at US$62.8 million, only about 71 percent of the estimates. At appraisal, financing requirements, including interest during construction at an annual rate of 10.25 percent, were estimatedat US$100.1million. The IDA Credit of US$65 million equivalent would finance about 65 percent of the project's total cost. At the time, HMGN had requestedfrom the Government of France (GOF) US$5.1 million equivalentfor the NEA training component.GOF had agreed to fund the first tranche (US$0.71 million equivalent), and it was anticipatedthat further financing would be agreed upon during future discussions between HMGN and GOF. This financing,however, never materialized,and in end-1994 IDA agreed to include funding of the training componentunder the IDA Credit 2347-NEP.

The Nordic DevelopmentFund (NDF) provided SDR 4 million (US$5.4million equivalent)to finance spares and equipmentfor the transmission and rural electrificationcomponent of the Marsyangdi Catchment ManagementPilot Project (MCMPP).The Governmentof the Federal Republic of Germanyprovided funds, through GTZ, to finance the componentsrelated to soil conservationand watershed managementof, and institutional support for, MCMPP.

HMGN onlent the proceeds of the IDA Credit to NEA at an interest rate of 10.25 percent per annum, repayable over a period of 25 years, including a grace period of 5 years. HMGNbears the foreign exchangerisk. The balance was passed to the Ministriesof Public Works (for the Dumre-Besisaharroad), Industry (for the industrial energy audits), Local Development(for MCMPP) and Scienceand Technology(for the early warning system against GLOF dangers from the Tsho Rolpa Glacier Lake).

As stated above,costs were below the estimatesand all of the IDA Credit was not utilized by HMGN. SDR 8.3 million (US$11.2 million equivalent,with the rate valid on the date of cancellation)was canceled on February 18, 2000.

- 11 - 6. Sustainability 6.1 Rationale for sustainability rating: Likely, overall.

A. ComponentsImplemented by NEA. * NEA has developedthe capability to satisfactorilyoperate and maintain the Trishuli-Devighathydropower complex; the high voltage transmissionnetwork; and equipmentrepair workshops. However,NEA will continueto need technical assistanceto improveits operationalefficiency. These needs will be taken up as part of the recently approvedADB Nepal: Rural Electrification,Distribution and Transmission Project and the proposedPower DevelopmentProject. * NEA staff considerablybenefited from the transfer of knowledgeduring the screening and ranking exercise and feasibilitystudies for medium-sizedhydropower projects, carried out under PSEP. Most staff are still with NEA. For-exercisesof this nature, it is logical that NEA continuesto rely on outside consultingservices in specific areas such as surveys,feasibilities and detailed engineeringreports for large and storage projects. a Overall,it is assessed that the sustainabilityof the benefits obtainedfrom the componentsimplemented by NEA is "likely".

B. ComponentsImplemented by the Other Agencies. * HMGN may continueto experiencefiscal difficultiesin allocating funds for the operation and maintenanceof the Dumre-Besisaharroad. * HMGN will need additionaltechnical assistance and foreign funds to maintain the benefits it obtained and capacityit built under the Industrial Energy Audits component. * HMGN will need additionalforeign funds to: * operate and maintain the Early Warning System againstthe GLOF dangers at the Tsho Rolpa Glacier Lake, and e sustain the benefits obtained under the MarsyangdiCatchment Management Plan Pilot Project and expand the catchmentmanagement beyond the scope of the pilot. * Under the current situation, sustainabilityof the benefits obtainedfrom the above componentsis assessed as "unlikely".

C. Overall Sustainabilityfor the Proiect. * As NEA componentsformed the major part of PSEP, it is assessed that overall the sustainabilityof the benefits obtained from PSEP is "likely".

6.2 Transition arrangement to regular operations: A. ComponentsImplemented by NEA. * Except for a short period of time in 1998,the Trishuli and Devighat hydropowerplants have been in operationsince August 1995. NEA's operation and maintenancestaff at the plants vere trained by the Engineerand Contractorat the site, and manuals were providedto the plant management. * The transmissionlines and substationswere transferredto NEA's Operations Directorates. NEA has the competenceto operate and maintain its distributionand transmissionnetworks.

B. ComponentsImplemented by the Other Agencies. * During the audits, the industries were willing to implementthe findings and recommendationsof the audits. However,MOI lacks the capacity and financial resourcesto follow up with the industries. * The Dumre-Besisaharroad has been taken over by DOR. DOR has the human resource capacityto operate and maintain this road but it lacks financing resources.However, HMGN has started the sustainableRoad MaintenanceScheme by introducingthe Road Fund Act 2000. DOR has informed the Bank that regular maintenanceof the Road will be properly providedfor after the Road Fund is operational.

- 12 - * The operation and maintenance of the Tsho Rolpa EWS has been taken over by DHM. The Department's human resource capacity to operate and maintain such a high-tech system needs to be complementedby technicalassistance. While agreeing in fundingthe EWS under Cr. 2347-NEP, IDA had conditionedthat DHM sign an O&M contract for at least five years with a competent firm. DHM lacks the financing resources to fund such a technical assistancecontract. HMGN (DHM) has requestedto financethe O&M contract from another ongoing IDA project.

7. Bank and BorrowerPerformance Bank 7.1 Lending: Marginally satisfactory.

* The project was designedto improve NEA corporateautonomy and to provide it with the capabilityto complete the physical construction. IDA waited a long time from appraisal in June 1990 to Board presentation in March 1992 for HMGN and NEA to take the necessary actions identified during appraisal. The most important actionswere a tariff increase and conclusionof a PerformanceAgreement (PA) between HMGN and NEA, both satisfactoryto IDA. Procurementfor the principal components(rehabilitation of the Trishuli-Devighathydropower complex and reinforcementof the high voltage network) was initiated, and bids for the high voltage network contractshad been received. - However,the institution building measureswere not well defined before Board approval. They were still being developedunder the NEA-EdF twinning arrangement. No specifictargets were formulated as part of the project although some performancetargets were set in the PA. The intention appearedto have been to incorporatemore specific institutionbuilding measuresin the next IDA project, which was expected at the time to be Arun III HEP, and was scheduled for approval relatively quickly after the PSEP. Major efforts were put into cooperationand coordinationamong HMGN,NEA, IDA and all the interested co-financierswhich led to a general agreementon the wider developmentobjectives for the sector during project implementation. * While the overall developmentobjectives agreed upon during appraisalwhere appropriate at the time, in retrospect, they should be consideredrather ambitious taking into accountthe implementationcapacity of the client. The appraisalmission had a lot of confidence in the proposed twinning arrangements and the PerformanceAgreement; in retrospect, these have not been effective instrumentsin the context of NEA.

7.2 Supervision: Satisfactory.

* Eleven supervisionmissions were fielded.Issues were identified quite in advance,and recommendationswere provided in a timely manner. The general HMGN-IDAdialogue on the power sector was affected by IDA's decisionto defer considerationof Arun III HEP, but the direct relation with NEA project staff responsible for implementingthe PSEP did not suffer. However,Bank staff should have requested that NEA make a decision on the issue of consultants for the training center and program much sooner. Furthermore,well before the closing date, more emphasisshould have been placed on the importanceto accelerate the implementationof the planned computerizationof the accounting and billing and metering systems, in particular when it became clear that alternative fundingsources were not available.

7.3 Overall Bankperformance: Satisfactory. It is recognized that the institution buildingmeasures could have been better designed at entry, but this was only one aspect of the project and on balance the overall Bankperformance is considered satisfactory

Borrower 7.4 Preparation: Satisfactory.

* The feasibilityreports for the rehabilitationof the Trishuli-Devighathydropower complex and high voltage

- 13 - network reinforcementswere well prepared. However,the EnvironmentalAssessment for HV Reinforcement was not detailed enough and failed to recognizeany difficultieswhich NEA later experiencedon compensation and access to tower sites.

7.5 Government implementation performance: Marginally satisfactory,overall.

A. ComponentsImnlemented by NEA: * HMGN'ssupport of NEA for the physical componentswas stronger than its supportfor institution-buildingactivities, in particular, for putting NEA's finances on sound footing by approving the necessary tariff adjustments in a timely manner. The tariff adjustment which was put into effect in November 1991was late. NEA needed further tariff adjustments in July 1998. It was only in the summer of 1999that NEA applied to the ElectricityTariffs Fixation Commission for an adjustment,and the Commissionapproved tariff adjustmentsof an average of 25 percent in November 1999.

B. ComponentsImplemented by the Other Aeencies: * HMGN's supportfor DOR, MOI and DHM was satisfactory.

7.6 Implementing Agency: A. NEA: Marginallysatisfactory.

* The physical components(except for the Trishuli and Devighat sub-component)were completed later than projected at appraisal. * NEA's performancein implementingthe physical componentswas better than its performance in implementing the institutional actions; however, it should be noted that several of the critical components,such as the computerizationof the accounting and billing system, were not part of the original Project scope. Most of these componentshave since been taken up with assistance from other donors, notablyADB. NEA also receives technical assitancein other areas under various donor financed programs. * It is noted that changes in the senior levels of NEA did not negatively affect the quality of PSEP project managementalthough decisionswere sometimesheld up. * The performancesof the Project Coordinatorand Project Managers in charge of each of the components were satisfactory.

B. The Other ImplementingAgencies: * The Departmentof Roads (DOR): DOR was slow in appointing the consultants, conductingthe procurement/evaluation,and finalizingthe contracts. DOR's supervisionof the contracts was more efficient. DOR's performance was marginally satisfactory. * The Ministry of Industry (MOD: MOI appointed the consultantsfor Phases I and 2 in relatively short periods and supervised, rather efficiently, the consultants' works during their audits and demonstration projects.MOI's performancewas satisfactory. * The Departmentof Hydrologyand Meteorologe(DHM): The early warning system against GLOFdangers was the first project DHM had with the Bank. They had to learn aboutthe Bank's procedures and guidelines. Thus the selection of the consultanttook longer than planned. Once the contract was signed, DHM followed the design, implementation,testing and commissioningof the system efficiently.DHM's performancewas satisfactory.

7.7 Overall Borrower performance: Marginallysatisfactory.

As NEA componentsformed the major part of PSEP, it is assessed that Overall Borrower Performancewas "marginallysatisfactory". Although, it was not directly part of the project, recognition should also be given to the adoptionby HMGN of new policies and legislation,which opened up the power sector to private investors. Nepal

- 14 - has been a front runner in that respect. Thesc :.beralizationmeasures were formulated as'jart of the continuous dialoguebetween HMGN,NEA and Bank stafi.

8. Lessons Learned * The PerformanceAgreement signed as a condition of effectiveness,and which was designed as an instrument to enhance NEA's autonomy and monitor its institutionalperformance, has proven to be difficult to enforce. While changes were made in the compositionof the Board of Directorsthe :najority of the Directorsremained ex-officiogovernment officials and this proved to be insufficientto guard NEA againstpolitical interferencein day to day matters. While the Government long run policy for the power sector includes the privatizationof NEA, possibly after unbundling,in the context of Nepal, it will take time to achieve. In the interim, furthermodifying the compositionof the Board of Directors couldbe a second best alternative. * The design of the institutionaldevelopment measures was not effective. Effective training and recruitmentof qualified staff should have been given more priority to ensure institutional development actions are sustainable. Under the project, technicalstaff benefited much more from on the job training and coachingof consultants; but training of financial staff received much less attention. Weaknessesin availableskilled human resources (particularly in the financial and administrativeareas); lack of appropriatelydesigned training programs; and practical problemsof donor coordination all contributedto the difficultiesin meeting institutional developmenttargets. The project team would have benefited from specialiststaff to ensure that such project componentswere realistic and well designed. * Setting specificperformance targets and having to rely on other donors fundingfor implementation creates risks, particularlyin a situationwhere strong corporate managementis not yet in place. A good example was the issue of the central training facility and trainingprograms that was left unresolved at Board presentation.It was expectedthat a bilateral credit from France would be forthcoming, but this did not materialize. It was almost two years later that HMGN and the Bank agreed to fund the training center sub-componentunder the Credit. Selection of the engineeringconsultant to design the center and prepare the Master Training Plan took longer than planned. When the Credit was closed, construction of the training center was not completed. Since then, NEA has been funding the training center from its own resources. TThe project has shown the advantageof addressingkey issues and procurement early in the project cycle. This approach should be continued in future projects. - Appropriateexternal audit arrangementscan be used as a tool for increasing accountabilityand institution building. Initially,the Office of the Auditor General (OAG) appointed a local audit firm to carry out the audit of NEA accounts, but the scope of that audit and the capabilitiesof the local audit were not acceptableby IDA. It was thereforeagreed to have a special auditor appointed complementingthe work of the local auditor. During project implementationit was however, agreed with NEA and OAG to have one single annual audit carried out meeting the requirementsof both the OAG and IDA. Over the last few years, in practice, the annual audit was carried out by an internationalaudit firm in association with a local firm. This arrangement has proven to be valuable both for improving audit standards and developingauditing skills in Nepal. * EnvironmentalImpact Assessmentsshould be initiated early in the project cycle. At the time of this project, procedures for assessmentswere quite differentthan in following years. With new procedures, informationgathering is more thoroughand will decrease such ambiguities that were present in this project. Althoughonly about 40 familieswere affected for just small portions of their land, court proceedingstook a long time and constructionof some of the HV transmissionlines was delayed. On these lands/ parcels, transmissiontowers were built. The land required for the construction of a tower is minimal. The owners took NEA to court to increase their compensations.In one case (the one which lasted longest), there was a two story house over which the line was to pass. The owner built two more stories (illegally - without any permission from the municipal authorities)and then wanted compensation for the additional floors too. After NEA won the case, the then-MD of NEA still did not want to use force. NEA took some more time, diverted a portion of the line, avoided the house, and paid some compensationfor the portions of the garden used. * Public consultationsbased on sound technical, economic,financial criteria and taking into accountsocial

- 15- and environmentalcriteria, as used in the screening and ranking exercise of the Medium Hydropower Study, should be made an integral part of the preparatoryprocess to create a political consensuson proposed hydropowerinvestmepts. It is an essentialtool for mitigatingsocial and environmentalimpacts as well as implementationrisks. 9. Partner Comments (a) Borrower/implementing agency: The Borrower, after reviewing the Implementation Completion Report (ICR), had minor comments. These commentsare included as part of the Borrower'sEvaluation Report which is attached to this ICR. (b) Cofinanciers: N/A (c) Other partners (NGOs/private sector): N/A 10. Additional Information 10.1 Background to Preparation/ Appraisal and Approval of PSEP.

In 1987 at the request of HMGN, ADB and IDA conducted a diagnostic study of Ne:pal's Power Subsector. As a result of the Power Subsector Review (PSR - Report No. 6879a-NEP; dated January 1988), HMGN, ADB and IDA agreed that further attention needed to be given to improving institutional performance, energy pricing and resource mobilization, investment planning and bulk electricity exports. Arun III HEP was identified as the next new generation project to be implemented. The PSR also identified that there was a need to rehabilitate two existing hydropower plants, strengthen the high voltage network in the Kathmandu Valley, and continue the institutional strengthening of NEA. IDA prepared and approved the Third Technical Assistance (Pancheswar) Project (Cr. 1902-NEP) to help NEA implement the PSR' s recommendations relating to investment preparation in generation, transmission and distribution; upgrading of existing generation facilities; electricity tariffs; and improving NEA's operational efficiency. Funded under the then ongoing Cr. 1478-NEP for the Marsyangdi Hydroelectric Power Project (MHPP) and the above mentioned Cr. 1902-NEP, the following reports were prepared, as part of preparation of the Power Sector Efficiency Project (PSEP): (a) the feasibility report for the rehabilitation of the Trishuli-Devighat Hydropower Complex; (b) the detailed project report for the urgent reinforcements in the high voltage network in the Kathmandu Valley; and (c) reports on load management options and measures for the 1992-1996 period. The recommendations of these studies were amalgamated into the PSEP, funded under IDA Credit 2347-NEP, which is the subject of this ICR.

By the time PSEP was approved, IDA, ADB and other co-financiers (OECF of Japani, KfW of Germany, and bilateral aid agencies of the Govemments of France, Sweden and Finland) had focused their assistance and dialogue with HMGN and NEA on the preparation of the Arun III HEP. HMGN took actions in line with the commitments it made during the appraisal of Arun III HEP. In 1995, IDA undertook a comprehensive re-review of the Arun III HEP, and under the circumstances prevailing in August 1995, concluded that the risks to Nepal in undertaking a large complex project such as Arun III HEP were too great to justify proceeding with the project. Thus, IDA decided to defer consideration of Arun III HEP and assured HMGN that it attached the highest priority to helping Nepal in devising and implementing an alternative strategy for meeting its needs for electric power. For someperiod of time, IDA's decision affected HMGN'srelations with the Bank and other cofinanciers.

10.2 Screening and Ranking (S&R) Exercise

In the past, HMGN's developmentand IDA's lending strategies for the power sector in Nepal were based on supportingrelatively large hydroelectricpower stations to be executed in the public sector. The Arun III HEP was the latest example for this strategy.Following IDA's decisionin August 1995 to defer the constructionof the Arun III HEP, HMGN and IDA adopted an alternativestrategy with an initial focus on an accelerated pursuit of smaller hydropowerprojects for meetingNepal's power requirements.In view of the expected future scarcityof public

- 16- multilateraland bilateral aid funds, a pipeline formed of high quality medium sized hydropowerprojects would be an appropriate instrumentto be presented for private development.

With financing from Cr.2347-NEP,a Screening and Ranking (S&R) exercise, aimed at reducing project implementationrisks by selectinghydroelectric schemes through a transparent and public process, in addition to applicationof comprehensiveevaluation criteria was carried out in 1996/97.The evaluation criteria, was based on technical, economic,financial, environmentaland social developmentimpacts of the proposed projects.Thus, the traditionalcriteria, which included only the technical, economic and financial characteristicsand impacts,was broadenedto include the expected impactsof the projects on the physical environmentand to the local society in the vicinity of each project.

The first step includedthe evaluation of 145 hydropowersites in a coarse S&R. Subsequently,24 sites were selected for more detailed evaluation(fine S&R). Seven of those 24 projects were selectedand formed the high quality project pipeline. Feasibilitystudies and preliminaryenvironmental impact assessments(EIAs) for these projects were carried out by internationaland local consultingcompanies in 1997/98.The feasibility studies and preliminary EIAs for four large projects (Upper Karnali, Dudh Koshi and Tamur 4/5) were carried out by an international consultant(CIWEC of Canada); the feasibility studies and preliminary EIAs for three medium sized projects (Rahughat Khola, Likhu-4, Kabeli A and Budhi Ganga) were conductedby local consulting firms, under the supervisionand responsibilityof CIWEC.

This creative arrangement of having the international consultantresponsible for the outputs ensuredthat the results were subject to the quality assurance of experiencedand competent experts from the international consultant, while the local consultants broadenedtheir knowledge and know-how in designinghydropower projects. Secondmentof 47 NEA staff to CIWEC and employment of local consulting firms allowed enormous transfer of knowledge to the Nepali engineeringindustry.

During the fine S&R process, seven additional sites for which licenses (survey or production licenses) had already been granted to private developersand NEA were also reviewed.They were all confirmedas fitting the S&R criteria and were among those projects chosen for implementation.(Some of them are in the process of construction).

The feasibility studies and preliminary EIAs confirmedrecommendations emerging from the S&R exercise that the developmentof small and medium-sizedprojects (IOMWto 300MW) were appropriate for meeting Nepal's domestic demand for electricity in the medium term.

During the S&R process, a stakeholderanalysis for identificationof the legitimate stakeholderswas also conducted, and systematicpublic consultationswith those stakeholderswere held. (Details of the consultation process are availablein the project files)

The S & R exercise:

* DevelopedNepal's hydroelectricpotential by building up a high quality pipeline of projects which had been selected through a participatoryS&R process that recognized technical, economic, financial as well as environmentaland social impacts and ensured an appropriatebalance between investments in generation, transmission and distribution; * Improved the regulatoryenvironiment for private investment in the power sector and established proceduresfor competitionbetween private power developers;and * Improved the efficiency of operationsand creditworthinessof NEA.

The S&R process was a state of the art exercise on participatoryapproaches with review meetingswith stakeholdersand taking into account social developmentand environmentalimpact aspects.

However,before projects are approvedby HMGN for implementation,detailed environmentaland social

- 17 - assessmentswill be carried out in accordancewith Nepalese guidelines.In the case of projects funded under possible, subsequentIDA Credits, these detailed environmentaland social assessmentswould also be carried out in accordance with IDA guidelines.The process includesan interagencyreview and full public stakeholder consultation and participation,in particular, for the preparation of the environmental managementand resettlement and rehabilitationaction plans.

10.3 NEA - Electricite de France (EdF) TwinningArrangement

During the appraisal and approval of PSEP, NEA's "twinning"arrangement with l,lectricitede France (EdF) was continuing.For this reason, the Project included continuationof this arrangement as a component.

Under Cr. 1902-NEPfor the Third TechnicalAssistance (Pancheswar)Project, NLA signed a twinning contractwith EdF. The arrangement consolidatedthe studies and technical assistancemeasures in support of NEA's institutionaldevelopment and provided for expertisein all aspects of power utility piracticeswith special emphasison assistingNEA to develop a corporateplan and improve operationsmanagement. ADB and IDA rejected the first version of the diagnosticstudy of NEA's institutionaldevelopment plan. IDA and ADB accepted a second proposal but called for further developmentof the overall implementationplan. These reviews and communicationsdelayed the start of implementationby about 18 months.

Some findings and recommendationsof the twinning,such as the establishment of separate Human Resourcesand Rural ElectrificationDepartments (each one headed by a Director reporting directly to NEA's senior management)and appointmentof accounting consultantsto separate NEA's rural electrificationaccounts (so that HMGN would reimburse NEA for annual loses incurredin rural electrification),were includedunder PSEP. NEA and EdF developeda performanceimprovement plan which was incorporatedinto a PerforrnanceAgreement (PA) between HMGNand NEA,the first of which was signed in October 1992 as a condition of effectivenessof PSEP; IDA was consultedin the process. The terms of the PA required annualreviews. In additiorn,NEA developeda preliminarythree-year rolling Corporate Plan. Diagnosticstudies were carried out and recommendationswere developedfor the other institutionbuilding issues such as loss reduction,computerization of the billing, accounting and material managementfunctions, etc.

At the end of the twinning contract, EdF concludedthat within the environmentprevailing in 1992,a twinning arrangementwas not a form of interventionstrong enoughto be successful. Its impact would take too long to effectivelyaddress the serious short-termproblems of the Nepal power sector. EdF recommendedthat the next step in the institutionaldevelopment of the Nepal power sector and NEA would be a performance contract with an outside contractorwho would be in charge of NEA's day-to-dayoperation. Its primary goals would be to take short-term and mid-termactions to improvethe personnel's productivity,lower the level of customer accounts payable and better overseeworking capital requirements.The performancemanagement contract would stipulate upfront the improvementobjectives to be achieved.The contractorwould bring in its own slaff in key management positionsand would have the required autonomyto make the decisionsneeded. Its compensationwould be tied to the performanceachieved: it would include a fixed payrnent and a variableremuneration based on actual performance.

However,during the preparation/appraisal/negotiationsof the then proposed Aran III HEP, HMGN and IDA did not agree with the above recommendationwhich could have been seen as a first step towards private sector involvement in NEA. The NEA/EdF twinning arrangementwas discontinued.Instead, HMGN, IDA and the potential co-financiersfor Arun III HEP concentratedon strengtheningNEA's institutional capability with actions and conditionalityon the following:

* Annualrevisions and reviewsof a PerformanceAgreement between HMGN and NEA; * Annual update of NEA's Corporate Plan; * Preparationand implementationof the followingplans targetingNEA's institutional strengthening: NEA CommercializationPlan, MaterialsManagement Plan, AccountingAction Plan, Receivable Action Plan, Insurance Action Plan, Loss ReductionProgram, three-year rolling Investment Plan, Annual Capital Investment Program,plan of action for NEA's computerizationof its consumer

- 18 - accounts, actuarialvaluation of NEA's liabilities for staff pensions, and financing plan for these liabilities.

Many of the above plans were prepared and their implementation,satisfactory to IDA and other prospective co-financiersof Arun III HEP, were made conditionsfor that project. However,following IDA's withdrawalfrom the Arun III HEP, it was difficult for IDA and the co-financiersto enforce and monitor the timely implementation of these plans. Progresshas been slow in part because of funding for requiredtechnical assistance was not available. Since August 1995, IDA, ADB and KfW, together with HMGN and NEA, have been working on defining and implementingmany of the institutionalmeasures and financial support has been including in other follow up projects.

10.4NEA Central Training Facilityand Training Programs

With technicalassistance provided by EdF under Cr. 1902-NEP, NEA obtained the essential elements to manage its training activities. At the time of appraisalof PSEP, trainingactivities were carried out at three centers: Bhrikuti Mandap, Panauti HydropowerStation, and Balaju. Instructors for generation and maintenance, distribution, computers,general sciences, administrationand finance were at work at these centers. However, within the NEA/EdF twinning diagnostic studies, it was determinedthat the lack of a central training complex was impeding NEA from developinga sustainabletraining program. To address this issue, technical assistance for the extension of NEA's ongoing trainingprogram and its broadening to cover training in management and finance and procurementof pedagogic training equipmentwere included in PSEP. NEA was to acquire land and construct a central training facility, using local and foreign design and civil engineeringconsultants. Later, fundingof the construction of the center was also includedin PSEP.

At first, NEA opted to continue to employ EdF as its consultantfor the preparation of a Training Master Plan and design of the center and training programs. IDA agreed to NEA's proposal to negotiate a contract with EdF. Later, IDA concludedthat the scope of the contractwas too broad and expensive and recommendedthat NEA renegotiatethe contract and restrict the scope of the services. After IDA's recommendation,EdF lost interest and communications/negotiationstook a very long time. NEA decidedto break its negotiations with EdF and proceed with the selectionof consultants in accordancewith a short-list.Upon IDA agreement on this last proposal, the joint venture of Tenega Nasional Berhad of Malaysia and SILT Consultants(P.) Ltd. of Nepal was selected in accordancewith IDA Guidelines. The Consultantsprepared the Training Master Plan and detailed project for the center. However,all these activities took much longer than planned at appraisalof PSEP, and by the time Cr. 2347-NEPwas closed,the constructionof the center was still ongoing.Most of the equipmentwas deliveredto Nepal. Sincethen, NEA has been funding the completion of the constructionand installation of the equipment. At the time of this report, the training center was still under construction.NEA continued its training activitiesin its above mentionedexisting training centers.

10.5The TrishuliIncident:

On May 21, 1998,the inlet butterfly valve of Unit 1 burst suddenly, causing extensive flooding in the power house. The valve was destroyed.Due to the flooding,all seven units of the power station were out of service for 35-50 days. The first three units (Phase 1) were commissionedin 1956, and the butterfly valves were manufactured in a then-Yugoslav,currently-Slovene, company. Their housings were made of cast iron. The other four units (Phase 2), manufacturedin Japan, were commissionedin 1969. The housings of the butterfly valves for these units were made of cast steel.

The conditionsjust prior to the incident are worth mentioning. At around 6:30pm on May 21, 1998,there was a grid failure and the units at Trishuli tripped out . After grid resumption,the machines were operated from Unit 7 onwards and all units were put into serviceon the grid. Unit I was also put on load for ten minutes. During the adjustment for load, speed and frequency variations,there was a major explosion and it was observedthat major pieces of the body of the butterflyof Unit I flung in all directions;water gushed like a fountain; and all the units were submergedunder water. Due to lack of electricity, even the top channelgates could not be operated. Only the next morning was help received from the Devighatpower plant, and the gates were closed.

- 19 - During the rehabilitationand upgrading of the Trishuli power plant (under the Project), the butterfly valves too were opened, cleaned and refurbished.The contractorwas MultipowerHydroelectric Devwlopment Corporation (MHDC)of China.The valve and its servomotorwere checked and tested. The contractorhad elected to refurbish the valves and servomotorsat site, rather than remove them to a fully equipped workshopfor overhaul. The contractors'works were supervisedby the engineeringconsultants (CIWEC of Canada).

Followingthe incident, HMGNINEAfortned a joint InvestigationCommittee. The Chairman, Mr. Laxman Prashad Upadhyay,Special Secretary at the Ministry of WaterResources (MOWR), and the memberswere appointedby MOWR.NEA went back to the Consultant'sCommissioning Report and found that the Consultant had remarkedthat handling by the Contractorof the valves of the first three units was not satisfactory.The Consultanthad noted that "there [was]no indication how successfulthe Contractor [had]been in its attempt to return the valve bodies to their originalroundness or if the bodieswill continue to remain round." NEA asked the Consultantswhy they had not stoppedthe Contractorcarrying out unsatisfactoryhandling.

The power plant remained out of service until July 10, 1998.After dewatering,cleaning ard rechecking,the four units of Phase 2 were put back into service with five days of intervalsbetween each unit. The butterflyvalves of the other two units of Phase 1, whose valves had been subjectedto the same "unsatisfactoryhandling", and those of Unit I were replaced under a turn-key contract which included manufacture,installation, testing and commissioning.The units were put back into operationin December1998 with some of the componentsin manual control. The full automatedsystem control was completed in July 1999.NEA financed the repairs from its own resources.

- 20 - Annex 1. Key Performance Indicators/Log Frame Matrix

Outcome / ImpactIndicators: IndicatorlMatrix Projeced;Q last PSR ActuallLatestEstimate Increasecapacity of Trishulito 21 MW (its Componentcompleted in 1995. Powerstation delivers 21 MW. originalcapacity).

Increasecapacity of Devighatto 14 MW (its Componentcompleted in 1995. Powerstation delivers 14 MW. originalcapacity).

Increasetransmission capacity in Componentcompleted in 1998. The transmissioncapacity has been KathmanduValley to 250 MVA. increasedto 250 MVA.

Provide30 MW transfercapacity between Componentcompleted in 1996. NEAis ableto transferabout 30 MWfrom Nepaland India,over the Duhabi-Kataiya Bihar, India. line.

Developa high-qualityhydro project portfolio Screeningand Rankingcompleted in 1996. Feasibilitystudies for the said sevenhydro througha Screeningand Rankingprocess. Feasibilitystudies for theseven hydro projectswere completedin December1998. projectsidentified to be completedby December1998.

Constructa TrainingCenter and implement TrainingCenter to be completedin 1999. Constructionof the trainingcenter continues. trainingprograms at NEA. Trainingprograms not begunyet. Implementinstitutional development actions Computerizationof the accountingfunctions Computerizationof the accounting,billing, at NEA. to start in 1999. materialsmanagement functions will be taken up underthe next IDAoperation.

Improvetransportation capability on the Roadto be completedin June 1999. The roadwas completedin June 1999. Dumre-Besisaharroad.

Build ruralelectrification networks in the Ruralelectrification completed in 1997. Ruralelectrification networks expected to be Besisahararea. transferredto localprivate operation entities by end-i 999 and 2000.

Enhanceenergy conservation by assisting Assistanceto localindustries to be Assistancewas completedin December local industries. completedin December1998. 1998.

Installan EarlyWaming System against EWSwas installedin 1998. EWS was in operationduring monsoons of GLOF dangersfrom Tsho Rolpa Lake. 1998and 1999.

- 21 - Output Indicators:

IndI@aterfM:tri:;x :1i_ I i:tPRPr*@I.d ifthat AttualLaestistiat Trishuli:21 MW. Powerstaticon delivers 21 MW.

Devighat:14 MW. Powerstaticn delivers 14 MW.

KathmanduValley HV Network:250 MVA. Thetransmission capacity has been increasedto 250MVA.

Duhabi-KataiyaLine: 30 MW. NEAis able to transferabout 30 MWfrom Bihar,India.

Completionof S& R andidentification of the Feasibilityand EA reports to becompleted by Reportsconnpleted. high-qualityproject portfolio. December1998.

Trainingcenter and programs. Constructionto continue in 1999. Constructioncontinues.

Institutionaldevelopment atNEA - To beinitiated in 1999. Willbe undertaken under the proposed ADB computerization. Nepal:Rural Electrification, Distribution and TransmissionProject and the IDA's proposedPower Development Project.

Dumre-Besisaharroad. Tobe completed in June1999. Completedin June 1999.

Ruralelectrification in Besisahar Area. Completedin 1997.

EnergyConservation -Audits. To becompleted inDecember 1998. Completedin December1998.

EarlyWaming System at TshoRolpa Lake. Completedin 1998.

End of project

- 22 - Annex 2. Project Costs and Financing

ProjectCostby Component (inUS$ million equivalent) . Appraisal Actualatest Percentageof -Estinat Estimate Appraisal ProjectCQst By Component US$ millon US$ million A. GenerationRehabilitation 23.60 26.30 111.4 B. High VoltageReinforcement 15.10 16.70 110.6 C. NEA Infiastructure/Buildings 7.60 5.10 67.1 D. MarsyangdiCatchment Pilot Project 9.00 5.60 62.2 E. IndustrialEnergy Audits and Load Management 2.60 2.10 80.8 F. TechnicalAssistance 12.50 7.00 56

TotalBaseline Cost 70.40 115.40 PhysicalContingencies 8.80 Price Contingencies 9.40 _ TotalProject Costs 88.60 115.40 Interestduring construction 11.50 TotalFinancing Required 100.10 115.40

ProjectCosts by ProcuremenArrangements (Appraisal Estimate) (US$ million equivalent) Procurenwt Method Expw m -Catwy N Oiher N.B,F. TotalCost 1. Works 14.20 8.80 0.00 1.00 24.00 (12.70) (7.80) (0.00) (0.00) (20.50) 2. Goods 33.30 0.00 0.00 9.50 42.80 (30.00) 0.00) (0.00) (0.00) (30.00) 3. Services 0.00 0.00 16.90 4.90 21.80 (0.00) (0.00) (14.50) (0.00) (14.50) 4. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00 0.00) (0.00) (0.00) 5. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) 6. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) Total 47.50 8.80 16.90 15.40 88.60 (42.70) (7.80) (14.50) (0.00) (65.00)

- 23 - ProjectCosts byPocuremnt Arrangements(Actual/Latest Estimate) (US$ million equival nt) ProcurementMethodI ExpendkureCateory I£c NCB Other N.B.F. TotalCost 1. Works 14.20 8.20 0.00 0.00 22.40 (11.50) (7.40) (0.00) (0.00) (18.90) 2. Goods 27.70 0.00 0.00 0.00 27.70 (24.90) (0.00) (0.00) _ (0.00) (24.90) 3. Services 0.00 0.00 12.70 0.00 12.70 (0.00) (0.00) (12.70) (0.00) (12.70) 4. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) 5. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) 6. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) Total 41.90 8.20 12.70 0.00 62.80 (36.40) (7.40) (12.70) (0.00) (56.50)

Figures in parenthesisare the amounts to be financedby the Bank Loan. All costs includ. contingencies. 7'Includes civil works and goods to be procuredthrough nationalshopping, consulting services, services of contracted staff of the project managementoffice, training, technicalassistance services, and incrementaloperating costs related to: (i) managingthe project, and (ii) re-lendingproject fundsto local government units.

ProjectFinancing by Co ponent(in US$million equivalent) I ~~~~~~~~~~~~~~~~PercentageOfAPPnaiSal | AppraisalLEstimate ActualLatEstimate B|n Govt COF. Bank Govt. COI Bank Govt. COF. ProjectTotal 65.00 20.40 14.70 56.50 6.30 86.9 30.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0

- 24- Annex 3: EconomicCosts and Benefits At appraisal, the economic internal rate of return (EIRR) was estimated for: (a) NEA's investment program (time-slice for FY92 - FY2002, over an operation period of 30 years); and (b) the rehabilitation of the Trishuli-Devighat power plants.

Economic Internal Rate of Return for NEA Investment Program:

* At appraisal, the EIRR for the FY92-FY2002 time-slice was calculated as 2.4 percent without taking into account consumer surplus, and 18.1 percent after taking into account the said consumer surplus. * The said time-slice included the construction of the Arun III HEP. * Since the decision to defer this project, NEA's investment program has been substantially changed. * Thus, in the ICR, an EIRR for the revised time-slice was calculated. * The EIRR for the revised time-slice was computed as 12 percent, without taking into account consumer surplus. As the EIRR is greater than 10 percent, another computation taking into account consumer surplus was not undertaken.

Economic Internal Rate of Return for the Upgrading of the Trishuli-Devighat power plants:

* At appraisal, the EIRR for the rehabilitation of the Trishuli-Devighat power plants was calculated as 23 percent for firm energy only. * On the same basis, the EIRR for this component was calculated as 16 percent using actual tariffs paid.

- 25 - EconomicInternal Rate of Return for NEA InvestmentProgram (Time-SliceAnalysis): Millions NRs FY Years Total Incremental Incremental Incremental Incremental Invest. Invest. O&M Total Cost Sales (GWh) Sales Rev. Net Benefits 199211993 1206 0 1206 0 0 -1206 199311994 1477 0 1477 0 0 -1477 199411995 1378 0 1378 0 0 -1378 1995/1996 2382 31 2413 112 554 -11359 1996/1997 2290 61 2351 186 919 -1432 1997/1998 845 401 1246 232 1147 -100 1998/1999 1432 276 1708 300 1483 -225 1999/2000 276 276 300 1855 1579 2000/2001 276 276 300 1855 1579 2001/2002 276 276 300 1855 1579 200212003 276 276 300 1855 1,579 2003/2004 276 276 300 1855 1579 2004/2005 276 276 300 1855 1579 2005/2006 276 276 300 1855 1,579 2006/2007 276 276 300 1855 1579 2007/2008 276 276 300 1855 11579 2008/2009 276 276 300 1855 1579 2009/2010 276 276 300 1855 1579 2010/2011 276 276 300 1855 1579 2011/2012 276 276 300 1855 1579 201212013 276 276 300 1855 1579 2013/2014 276 276 300 1855 1E79 2014/2015 276 276 300 1855 1579 2015/2016 276 276 300 1855 1579 2016/2017 276 276 300 1855 1579 2017/2018 276 276 300 1855 1579 2018/2019 276 276 300 1855 1579 2019/2020 276 276 300 1855 1579 2020/2021 2021/2022 202212023 2023/2024 2024/2025 202512026 2026/2027 EIRR 12% MajorAssumptions:

Analysisapproach followed Project appraisal to the extentpossible.

Economicanalysis based on incrementalcost and benefitstreams associated with the time-slice.

Financialcapital costs were converted to economiccosts by deducting transfer of payments(taxes, import duties), and localcomponent cost was adjusted by standard 0.9.

O&Mcosts were derived as 2% of capitalcosts.

Benefitswere evaluated on thebasis of incrementalsales valued at NRs4.941kWh for the years 1992-93 to 2000,and beyond that at NRs 6.18/kWh(held constant for the life of the Project) in line with the recent tariff increase announced in November, 1999.

Thetaiffs for theperiod 1992-2000 refled actualprices paid by consumers of power.

ogt and henefit treams are in constant 1995 NRs arived at bv usino GDP defatom

- 26 - Economic Enternal Rate of Retumnfor the Up2rading of the Trishuli-Devi hat power plants: US$ MillionsEquivalent

Benefits Incremen. Total Net FY Years Invest. O&M Total Cost Firm GWh Revenue Revenue

1993 7.7 7.7 -7.7 1994 11.9 11.9 -11.9 1995 10.3 10.3 -10.3 1996 6.0 0.3 6.3 81.0 6.0 -0.3 1997 1.4 0.3 1.7 81.0 7.0 5.4 1998 0.3 0.3 81.0 6.0 5.7 1999 0.3 0.3 81.0 5.9 5.6 2000 0.3 0.3 81.0 7.1 6.8 2001 0.3 0.3 81.0 7.1 6.8 2002 0.3 0.3 81.0 7.1 6.8 2003 0.3 0.3 81.0 7.1 6.8 2004 0.3 0.3 81.0 7.1 6.8 2005 0.3 0.3 81.0 7.1 6.8 2006 0.3 0.3 81.0 7.1 6.8 2007 0.3 0.3 81.0 7.1 6.8 2008 0.3 0.3 81.0 7.1 6.8 2009 0.3 0.3 81.0 7.1 6.8 2010 0.3 0.3 81.0 7.1 6.8 2011 0.3 0.3 81.0 7.1 6.8 2012 0.3 0.3 81.0 7.1 6.8 2013 0.3 0.3 81.0 7.1 6.8 2014 0.3 0.3 81.0 7.1 6.8 2015 0.3 0.3 81.0 7.1 6.8 2016 0.3 0.3 81.0 7.1 6.8 2017 0.3 0.3 81.0 7.1 6.8 2018 0.3 0.3 81.0 7.1 6.8 2019 0.3 0.3 81.0 7.1 6.8 2020 0.3 0.3 81.0 7.1 6.8 2021 0.3 0.3 81.0 7.1 6.8 2022 0.3 0.3 81.0 7.1 6.8 2023 0.3 0.3 81.0 7.1 6.8 2024 0.3 0.3 81.0 7.1 6.8 2025 0.3 0.3 81.0 7.1 6.8 2026 0.3 0.3 81.0 7.1 6.8

EIRR 16%

MajorAssumptions:

Analysis approachfollowed Project appraisalto the extent possible.

Economic analysis based on incrementalcost and benefdstreams associatedwith the Trishuli Project.

Incremental O&M coats were estimatedat 0.75%of incrementalcapital cost

Financialcapital costs were converted to economic costs by deductingtransfer of payments(taxes, import duties), and localcomponent cost was adjusted by standard 0.9.

Benefdswere calculatedas incrementalfirm energy output valued at the actual averagetariff paid prevaifng at that particular year. Beyond 2000, average tariff was kept constant in real terms.

- 27 - Annex 4. Bank Inputs (a) Missions: Stageof ProjectCycle No. of Personsand Specialty Performnce Rating (e.g. 2 Economists,I FMS,etc.) Implem,zntation Development Month/Year Count Specialty Progress Objective Identification/Preparation 10/89 E/SP, E, FA, RS 3/90 E/SP, E, FA, RS

Appraisal/Negotiation Appr.: 6/90 E/SP, RS, IDS, SCS, NRE, Post: 12/90 EE Post:12/90 ~~~~~E/SP,FA, E, RS Nego.: 5/91 E/SP, FA, E,RS Post N:7/91 E/SP, FA, RS P.N.: 11/91 FA Board:4/92 Pre-Eff: 11/92 E/SP, FA

Supervision 5/93 E/SP, E, FA, RS 10/93 E, FA 8/94 E 4/95 E (2) 11/95 E (2) U U 3/96 E (3), FA (2), Law, EnS, RS U U 6/96 E (3), EnS, FA S S 10/96 E, FA, EnS, RS S S 2/97 E, FA, EnS (2), RS S S 7/97 E, FA, EnS S S 12/97 E, FA S S 10/98 E, IS S U

ICR 2/99 E

(b) Staff:

Stageof ProjectCycle Actual/LatestEstimate No. Staffweeks US$ (,000) Identification/Preparation 50.5 111.8 Appraisal/Negotiation 117 334.1 Supervision 167.6 525.3 ICR 0.2 1.8 Total 335.3 973

- 28 - Annex 5. Ratingsfor Achievementof Objectives/Outputsof Components (H=High, SU=Substantial,M=Modest, N=Negligible, NA=Not Applicable) Rating FMacro policies O H O SU * M O N O NA FSector Policies OH O SU * M O N O NA F Physical * H OSUOM O N O NA • Financial OH OSUOM ON ONA • Institutional Development 0 H O SU *M 0 N 0 NA OEnvironmental O H OSUOM O N * NA

Social Z Poverty Reduction O H OSU*M O N O NA F Gender O H OSUOM O N * NA 0 Other (Please specify) Z Private sector development 0 H O SU O M 0 N * NA F Public sector management 0 H O SU * M 0 N 0 NA O Other (Pleasespecify)

- 29 - Annex 6. Ratings of Bank and Borrower Performance (HS=HighlySatisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory)

6.1 Bank performance Rating

FSLending OHS *S OU OHU E Supervision OHS OS OU OHU X Overall OHS OS O U O HU

6.2 Borrowerperformance Rating

F Preparation OHS IDs O u O HU X Government implementation performance O HS O S 0 U 0 HU X Implementation agency performance O HS O S 0 U 0 HU 1 Overall OHS Os O U O HU

These ratings are based on an overall assessment, in some instances they have been qualified in the text The U project development objective rating given during the last supervision mission was primarily based on the reluctance at the time of Government to increase tariffs. As explained in the text, a significant tariff increase occured in November. This is the reason that the rating in the ICR has been upgraded.

- 30 - Annex7. List of SupportingDocuments 1. Trishuli-DevighatHydropower Upgrading Project - ProjectCompletion Report, preparedby CIWECfor NEA, CIWECReport No. 005704,December 1995: Volume I - CivilWorks Contract. (Bank Archives DocumentNr. F 221522).

2. Trishuli-DevighatHydropower Upgrading Project - ProjectCompletion Report, prepared by CIWECfor NEA, CIWECReport No. 005704,December 1995: Volume II - Electricaland MechanicalEquipment Contract.(Bank ArchivesDocument Nr. F 221523).

3. Trishuli-DevighatHydropower Upgrading Project - SummaryCompletion Note, preparedby NEA, February 1999.

4. KathmanduValley High Voltage ReinforcementProject - CompletionReport, prepared by Tata ConsultingEngineers for NEA.

5.NEA CentralWorkshop - SummaryCompletion Report, prepared by NEA.

6.NEA ComputerizedBilling Project(Status as of January 1999)- StatusReport, preparedby NEA, February 1999.

7. NEA TrainingCenter Establishment Project (Status as of December1998) - Status Report,prepared by NEA.

8. NEA TrainingCenter Establishment Project - TrainingMaster Plan, preparedby TenagaNasional, Malaysia,Silt Consultants(P) Ltd., Nepal,and ArchitectsModule (P) Ltd., Nepal.

9. NEA MediumHydropower Study Project(Status as of February1999) - Status Note, preparedby NEA, February1999.

10.NEA HeadquarterFacilities Project - CompletionReport, prepared by NEA, January 1999.

11. KathmanduValley High VoltageReinforcement Project - InitialEnvironmental Examination for OverheadLines - LandAcquisition and Compensation,prepared by Electricitede Francefor NEA, no date given.(Bank Archives Document Nr. F 51053)

12. Tsho RolpaGLOF Early WarningSystem - Brief ProjectReport, prepared by the Departmentof Hydrologyand Meteorology(DHM), Ministry of Scienceand Technology,HMGN, January 1999.

13. Tsho RolpaGLOF Early WarningSystem - Final CompletionReport, prepared by BC Hydro InternationalLimited, Canada, for DHM,December 1998.

14. Reporton the Visit of an Expertfrom the Tata ConsultingEngineers to TrishuliHydro Power Station, at Nepal RegardingProblems Observed on the 1300mmButterfly Valves and Burstingof Unit I Butterfly Valve,prepared by Tata ConsultingEngineers, July 1998.

15. IndustrialEnergy Management Project - Final Report- May-December1998, prepared by the IntemationalResources Group, of USA for the Officeof EnergyEfficiency Services, Ministry of Industry, HMGN;December 1998.

- 31 - - 32 - '00 04/22 15:30 fl225112 WORLDBANK °°Z02

HIS MAJESTY'SGOVERNMENT OF NEPAL MINISTRYOF AlTERRESOURCES Tel : 228923,22R04" 226796,227654 0's fSzFay: +977.1-227536

-fteisr -'f .vy ¢. .,r,se Silngha Durbar Ref.A,,)i/4'¶6f 5 _ 4 r Kathmandu.Nepal

Dote:

jQ -D9-tate:.. 2W I S April2000 The World Bank 'Hote1Yak and Yeti Co=p2ex Kathmandu

Dear Sir/Madam,

Please find enclosed herewith the Borrower's pvaluatiotn Report qf Power Sector Efficiency Project as received from Nepat Electricity Authority. With Regards.

Sincerely Yours,

(S. K. Shamna) - -;t x _, - S. D..

'4-" '00 04/24 15:31 U'225112 WORLDBA i003

-,

POWER SECTOR EFFICIENCY PROJECT

Borrower's EvaluatiQilReuort

The evaluation report covers only the part of the Power Sector Efficiency Projecr related to the NEA activities. The evaluation is centered around two-aspect (O)whether the project has achieved the objectives and (ii) the lesson learned during the implementation of the project. It also toucheaupon its Own perforiance a.s wcll dS thC ptfuiuItIUIt of che Bank duringuthe implementation of the project. The objeLtives set were (i) increase the supply capacity; (ii) improve NEFA'sfinancial viability and strengthen its institutional performance;(ii) develop a hia;hquality pipeline of hydropower projects

With the upgrading anid refurbishing of the Trisuli and Devighat hydroelectric plants about 14 MW of generation was added and with the reinforcement oF the high voltage network in the Kathinandu valley, the supply capacity Increased from 160 MVA to 250 WlA. The Borrowcr hence believes that the objective of increasing the supply capacity 11d.Sb1Ce I1IL.

The financial perfornance has been mixed during the project In FY 1996/97 the rate of return on revealed assets increased from 0.2% in FY 1992/93 to 4.3% and self-financing ration increased to 38%. The level of account reccivable remained about 3 Tnonths of sales equivalent. Althoug these figures could not be sustained because of the ovcrdue tariff adjustment, the financial indicators have not been unsatisfactory. The situation is improving with the recent tariff adjustment.

Since the PSEP started, there has becn chancr:d in the formation of the Board with the introduction.of greater number of members from outside the government. With the creation of profit ceners in distribution. NEA has taken one step further towards autonomous functioning of its core business and commercialization of i1rsfunction will be achieved. However, the objective to train more staff by creating adequate Tn-house capability wrasnot fully met because of the failure to make the traning center operative in time caused by the termination of PSEP loan in half way through. One of the major achievement of the project has been the creation of the inventory of Nigh quality projects with due consideration not only to the technical and economical aspects but also the environment and social aspecLs. The screening and ranking study has culminaTed in the feasib ility iLudies of seven lydro power projects of different sizes.

To sum up the performance against the objective is satisfactory. '00 04/24 15:32 V225112 WORLD BANK Z1004

Lesson learnt, which could be used to improve the inmplementationof future projects are,

There had been considerable delay in the Board Presentation and Loan effective from the date of appraisal of the project. This is largely due to the acceptance of unmanageable number of conditionally without due consideration to the time and capacity to comply with the conditionalities. It would have been more prudent to clarify the issues and reach to a suisfactory solution before and during loan negotiation. The conditionaliries for the Loan Effeectiveness should be kept at minimum so as to avoid uncertainties in implementation of a project.

The commitmnentfor any component of a project should ensure that that pan is fully financed. Wfit is not possible for any reason, such project component should not be raken up. The case of computerization of accounting and billing and metering systems is a classic example of such project.

Advance procurement activities are necessary for timely completion of a projects as has been the case with Trisuli-Devighat component of the project. More ia-counuy expertise should be used in order to reflect the local condition in cosI estimate of a project. It is the considered opinion of the borrower that except for few components of the project such as Training Centre, overall the sustainability of tlhe project is sauisfactory.

Borrower had. provided competent team of Project Coordinator. and Project Managers.and their performances considered to be satisfactory. However, because of the absence of environmental regulation at the time of project implementation, in some cases, the execution of some project components had been hampered. The preparation of thc project by NEA is considered to be satisfa.ctory.

The PSEP was diversified and had too many components cranmmedtogether. At least four agencies were involved in the project, which might lhave been difficult for the Bank to coordinate. However, with the eleven supervisory missions fielded during the project lifetime, the overall performnanceof the Bank is considered to be satisfactory. 00 05/02 1:05 V2Z5112 WORLDBANRK R e'. i(]002 %~ ~~-T s t 12 .

6His Mla '% nvernment Pax 977-1-262993 Minist 199&9w%-TransportIad ~~~~~Tel.2126000(Direct)262693) Dep metrd Road!; Es r4?mc&°mnp Foreign Boeprq,tB?anBabar Mahal, Kathmandu Ref. No- -o (; ;9

Date: May 2,2000

Country Diector 02 MA1Y200 The World Bank Hotel Yak & Yeti Complex Kathmansdu

Atta: Mr. S. G. Joshi, Consultantergy and ifasttrs

Dear Sir,

Subject: mre R__i____ofs_SE__Cr-2347-__EP)_Drgl_CR !&Gc

I an please to have the opportunity to go through the draft ICR prepared by tLe Bank and have (ollowiag minor comments concerning to the component executed by DOR. (1) 6 Susoalzability HMGN has started sustinable Road Maintenance Scheme by introducinzg Road Fund Act 2000. Currently, Dumr - Besishabar Road is already under the ambrella of SMD (StraigEhened Maintenance Division) and reguIar maintenance has been started since the issue of contract .vise taldng over cerEificate. () 6 2-B Transition arrangement to regular operation Tough overall 1EMGN regular budgetary provisions made for the road maintename i3 not upto the expecation yet, DOR gives it's high priority to maintain and opente Bank financed projct. We appreciate the concern expressed by tha Banlk re.arding this matr and assure to take due care on regular mainteahnce of the Road, wthich wil be properly addressed after Road Fund being operational, 7.6 Implomenting Agendes Initially, procurement of works and services was started and completed in time. UnforrunateIy, during the process of implementation, out of five contracts two contbacts have to be tenminated due to fi-audulent evidence found on the part of rwo contractors. To discouragc these practies. togehr with the Bank DOR has terminated two contracts. It has been realized that it is good for the Institutional development of construction industries heace re-tendeing and award of contracts have been carried out of the two contracts. We appreciate tho Bank's ficxible attiudc to attai' :1be. desired objectives of the project. However, the evaluation of the Bank about DOR's performance marginally satisfactory is not justifled simce the committed works have been cormpleted 100% and accordingly the expenditure has been donc. Hence we humbly request you toreconsider the rating of DOR's performace.

Thanling you

Sincerel Yo

......

(M. G.M ). Deputy Dirctor Gcncral

YTtJIi .,,,.....,, '00 04/11 14:Z24 S2Z5112 WORLD B.ANK J002

4 11 APR29DB Gov~~~nent r ~2-29=0 f() * nzHisMajesty's ovW Nepal Z-4243 ~~~' -, ~~~~~2-2h686 MINISTJIIYOFAIfUSTRY 2>-4174 2-45246 Ref No-. 2-'24676

Singbadurbar, K mandu NEPAL. Date: April 10, 2000

The World Bank 4;atmandiaCo-antry Ofice ._ IAI Durbar Katwnandu, Nepal

Kind Attn: Mr. Suredra Govnda Jashi .

Dear Mr. Joshi,

N-EPAL: Power Sector Efflclency Prject f C: 2347 - NEM? Draft Inplemofltation C2mpletioe Report tic)

Thanks for your Implementation CompSeton Report oD the above project A3 our compneU 1l htdustrmid Ervgy Audim has been compled safsfatzily according to your ratings also, tiere is no futher comments on the above CompletiDn Report from our side. The proect is continuing to provide some services in eneg efflciency improvement to the industres with HMG Budget of fths Mavstr.

Thanling you.

Sincerly,

,Kalyan B. Pradhan) Joint Secuxetry '00 03/31 17:14 '225112 WORLD BANK 002

His Majesty's Nepal 2 zL 3rnmentof7 4 Ministry of Science & Technology 248a8

DEPMTMOfOFHYDROLOGY &MEOIUY FaxNo.: t- P.O.Box: 405 rw3525 - - SabarMahud, XaWwwavdu NEPAL

Narch 30Q2000

To, The World Bank K.atfnandu Country Ofce Lal Durbar, Ya & Yeti Hotel Complex Katb1mndu Nepal

A1u: Tjaarda P. Ston vam Lc=uwcn TeamLeader, Nepal South Asia Encrgy Sector Unit.

Sub: Evalua_ion of the Tsho Rolpa EWS svstenu

Please fnd theattached evaluaaion reporz of theproject as peryour request lettedated 29 February 2000.

Withbest ragards,

Sincerely,

Seoior DiviisionalHIydlogist Department of Hvdrology and Meteotlogy Kabamudu '00 03/31 17:14 0225112 WORLD BANK l 003

ht5S51 .

Tsho Rolpa GLOF Early Warning System Project

Evaluation of the Project

1. Borrower's Assessment

a) Proiect Obiective

The Primary objective of this system is to provide early Warning about the Glacier Lake Outburst Flood to the people residing in the potential GLOF hit area alaog Rolwaling and Tama Kosbi Valley%ax well as Khimi Hydr Project In ihis regard, Installation of Early Warning System (includig Sensor, Rclay and Warning Statios ia Rolwaling and Tarrakosi Valcy of Central Decvlopmet Region and Master Station at Dh.angadi of Par Wcstem Development Region of Nepal) has been carried out Altogether, ther are 19 Warning Stations. 3 Relay, 2 Sensor stations and 2 DMC stations of Eariy Waniing System in Roiwaling and T-rta Koshi Valley. Two DMC stations are at Kathmiando and Khimti.

b) Desion

The overall objective for the design of the GLOF warning system was to provide a safe, secure, reliable warrLing to the dowustroam villgesin as shiata tnie as possible. The inent had baen to only usc Meteor Burst to relay the wamng signal from the sensors to a Master Station and then back to the wazning stations in die flood plain It was concluded that there were many more villaps to warn that originally assuned. It was then decided to use the faster sinal tranmission capabilities to Extend Line Of Sight (ELOS) embedded within Meteor Burst A Meteor Burst Commurdnation (MBC) network provides long rangc conununications, up to 1,000 riles, by reflecting radio signals off the ionized trails left by miern matenmras they entar the earth'r. atmosphero. A4tthe shorter range (30 -50 miles) communication is by ELOS usig ground wav. These two modes of operation are scamlcss zand automatic with£n an MC network, thereby providing an additional level of redulancy for communicating a warning message to all villages within Tsho Rolpa networfk The design is broken into four types of components. GLOF sensing stations located just below Tsho Rolpa; GLOF warnig stations located at the villages; data management cenrers (DMC) to monitor system pcrformance; and a Meteor Burst master station. c) Tmnlementatiot,:

Tho Taho izolpa networL; is faily auto ±tcLIL iimwniLored amd controlled fomn Department of Hydrology and Moteorology. One of the DMC station at '00 03/31 17;:15 S225112 WORLDBANI Z 004

Khlimti is specially for Yhimti Hydroelectric ProjCCL Data mancrmen± and Contl (DMC) application software is installed on PC workstations at each of these location at which all network furctions and messages are monitored, displayed and archivcd. This provides a full playback capability at any tima for post analyses of all events that may havc occurred in tae network, including self- test results, messages, flood alerts and the status of the sesaors at the moraine dam- In addioion, commands may bc sciLt tu cach station individUa13yor collectivelv to the entirc networkc.Ihese commands includc system ARM, system DISARM, flood test messages. reporting intetvals and network cormectivity changes.

d) Opgrtion EXpe_nce:

EWS system is completely new for Nepal. Equipment used in the systzm is highly sophisticated and Iore complex in. technical parts. Shori training and basic knowledge gained from the field are not enough to maintain the system smoothly. However. we arc maintainxing the system yct.

At present DHM is moniriiiT the system formxKathrLadu DMC. When any abnor=al data is found, DHM staff are visiting the site and find out the fault and repair it. But evcry problemr in the clectonics parts sometimes caused problem to repair thIem propcrly. Only minor problem can be repairecL Sufficient spare parts ad repaLfr training of Meteor Burst equipment are necessazy for smooth operation of the system.

Warning system can be used at other potential GLOF sites. The flexibiliLyof the componcnts of the warning systemr will help to meet Nepal's needs for remote data gathering for weather, strcam flow, landslides, glaciology and for nmtessage capability to and from remote areas. Ihc system can; u uscd for remotc data gathering :messaging and vehicIe/aircrafrtrekk-ing party locatioiL Over 1000 remotc stations can be serviced by one Master Station.

2. Evaluation of Borrower's own uerformance:

Ihe EWS system is working normally at present. Without te operation and maintenance of the systen, it is difficult to sustail such highlY technical system to makc operation normal. A the tine of installation of EWS, only few spare parts were madc available which are not sufEicicnt for having timnely maintenance. Training in Rkard level exchange and repair of the Meteor BuTrt equipment is esscutial. '00 03/31 17:18 V225112 WORLDBANK Qo005

3. Evaluationof BankPerformance:

In close co-operation with the World Bank, D}IM has been able to implement the project on time. Before and dunng the period of project implementation,DI-IM had receivedfull t-,operationfrom the World Bank staff of Kathmandu,without whose supportaad valuable advisesthis projectwould not have been sucvessfuUycarried out.

The overallperformance of thGbank is satisfactory.