Document of FILEC If The World Bank FOR OFFICIAL USE ONLY Public Disclosure Authorized

ReportNo. P-2385-NEP

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE Public Disclosure Authorized INTERNATIONALDEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED CREDIT

TO THE

KINGDOM OF NEPAL Public Disclosure Authorized FOR THE

NARAYANI ZONE IRRIGATIONDEVELOPMENT

STAGE II PROJECT

September 25, 1978 Public Disclosure Authorized

This documenthas a restricteddistribution and may be used by recipientsonly in the performanceof their official duties. Its contents may not otherwisebe disclosed withoutWorld Bank authorization. CURRENCY EQUIVALENTS

Currency Unit - Nepalese Rupee (NR) Until March 20, 1978

US$1.00 - NRs 12.50

Since March 20, 1978

US$1.00 NRs 12.00

WEIGHTSAND MEASURES

1 meter (m) 3.28 feet (ft) 1 kilometer (km) 0.62 miles (mi) 1 hectare (ha) 2.47 acres (ac) 3 1.50 bighas 1 million cubic meters (Mm ) 810 acre-feet (ac-ft) 1 cu ic meter per second (m /s) - 35.31 cubic feet per second (cusec) 1 metric ton 2,205 pounds

GOVERNMENTOF NEPAL

FISCAL YEAR

July 16 to July 15

PRINCIPALABBREVIATIONS AND ACRONYMS USED

ADBN - Agriculture Development Bank of Nepal AIC - Agriculture Input Corporation DA - Department of Agriculture DIHM - Department of Irrigation, Hydrology and Meteorology GM - General Manager JT - Junior Technician JTA - Junior Technician Assistant MFAI - Ministry of Food, Agricultureand Irrigation NEC - Nepal Eastern Canal NZIDB - Narayani Zone IrrigationDevelopment Board O&M - Operation and Maintenance WUG - Water Users' Group FOR OFFICIAL USE ONLY

GLOSSARY

Main Canal - supplies water to the whole irrigation system Main Secondary Canal - supplies water to 4 or more branch secondary canals Branch Secondary Canal - serves about 200-600 ha Tertiary Canal - serves about 40-50 ha Field Channel - serves about 10 ha

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

NEPAL

THE NARAYANI ZONE IRRIGATION DEVELOPMENT STAGE II PROJECT

Credit and Project Summary

Borrower: Government of Nepal

Amount: US$14.0 million

Terms: Standard

Project Description: The proposed project would upgrade and increase the capacity of the existing Nepal Eastern Canal (NEC) irri- gation system and extend the development of its command area which was begun under the ongoing Birganj Irrigation Project (Cr. 373-NEP) hereinafter called Stage I. The proposed project would include the improvement of NEC's remaining length (52 km) beyond that restored (27 km) under Stage I; protection of NEC against flood damage; further development of the NEC command's irrigation distribution system; drainage network and canal service roads in 12,700 ha, and improvement of those constructed in 16,000 ha in Stage I, thus completing irrigation infrastructure throughout 28,700 ha; pilot schemes for privately-owned community tubewells, waterlogging control, low-cost all-weather roads and micro-hydroelectric devel- opment; an expansion of the intensified agricultural ex- tension and training scheme started in two Districts under Stage I; and the provision of technical services including consultants. The project would increase agricultural production and employment opportunities for the 216,000 inhabitants in the NEC command area and improve agricul- tural practices and productivity in six Districts in the Terai.

A possible risk associated with the project would be that waterlogging could eventually occur in low-lying areas of the NEC command area. The project provides for monitoring of the watertable so that corrective action can be taken promptly. The project faces no other risks beyond those normally associated with irrigation projects. Estimated Cost Local Foreign Total of Project: 1/ -US$ millions equivalent-

Civil works and buildings 4.5 3.1 7.6 Equipment and vehicles - 2.8 2.8 Technical services 0.2 0.9 1.1 Project establishment 0.9 0.3 1.2

TOTAL BASE COST 5.6 7.1 12.7

Contingencies Physical 0.6 0.6 1.2 Price 1.1 1.5 2.6 Subtotal 1.7 2.1 3.8

Land acquisition 0.5 - 0.5

TOTAL PROJECT COST 7.8 9.2 17.0

Financing Plan: Local Foreign Total -US$ millions equivalent-

IDA 4.8 9.2 14.0 Government 2.6 - 2.6 Agriculture Development Bank - of Nepal 0.1 - 0.1 Farmers' Contribution 0.3 _ 0.3

Total 7.8 9.2 17.0

Estimated IDA US$ millions equivalent Disbursements: IDA FY 1979 1980 1981 1982 1983

Annual 1.5 3.7 4.2 3.4 1.2 Cumulative 1.5 5.2 9.4 12.8 14.0

Rate of Return: 22%

Staff Appraisal Report: No. 2067a-NEP dated September 18, 1978.

1/ Includes taxes and duties (US$0.1 million equivalent). REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IDA TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE KINGDOM OF NEPAL FOR THE NARAYANI ZONE IRRIGATION DEVELOPMENTSTAGE II PROJECT

1. I submit the following report and recommendation on a proposed development credit to the Kingdom of Nepal for the equivalent of US$14.0 million on standard IDA terms to help finance the Narayani Zone Irrigation Development Stage II Project.

PART I - THE ECONOMY 1/

2. The most recent economic report entitled "Nepal-Country Economic Memorandum" (Report No. 1873a-NEP) was distributed to the Executive Directors on March 21, 1978. The principal findings of the Memorandum are described below. Country data are shown in Annex I.

3. Nepal is one of the least developed countries in the world. Per capita income in 1977 was estimated at $120, and health and education standards are well below the average of South Asia: life expectancy at birth is less than 44 years, infant mortality exceeds 200 per thousand, and adult literacy is only 19%. Population in mid-1976 was 12.9 million, of which over 90% lived in rural areas. Both birth and death rates are high, keeping popu- lation growth at 2.1% a year.

4. The economy of Nepal centers around agriculture. It accounts for 65% of GDP and almost 75% of merchandise exports, and provides a livelihood to over 90% of the population. In addition, most of the small industrial sector, which comprises about 4% of GDP, processes agricultural raw materials. However, about 25% of total rural incomes are estimated to arise from non- agricultural activities. Cottage industries are one of the most important of these, estimated to engage over 1 million people and comprise about 7% of GDP. They provide basic consumer goods in the many small, isolated markets where such goods would otherwise not be available.

5. The landlocked, isolated location of Nepal and its extremely rugged topography have severely constrained the country's development. Nepal is far removed from sources of supply of many development goods anA access to export markets, which makes development more costly and uncertain than in most

1/ Part I of this Report is substantially identical to Part I of the Report and Recommendation of the President to the Executive Directors on a pro- posed credit to the Kingdom of Nepal for the Sunsari=-MlorangIrrigation and Drainage Development Stage I Project (Report No. P-2325-NEP of May 11, 1978). -2- countries. The inaccessability of much of the country compounds these prob- lems and limits the rate at which development activities and the expansion of social services can be undertaken.

6. When Nepal adopted economic and social development as major govern- ment objectives in the early 1950s, there was virtually no economic and administrative infrastructure. Under these circumstances, initial development efforts necessarily concentrated on establishing a foundation for future devel- opment. It was inevitable that, during these early stages, growth would remain slow and that, as a result, there would be little if any increase in per capita income. However, four successive development plans passed with little shift in emphasis or improvement in per capita incomes and living standards. The Fifth Plan (1975/76 - 1979/80) was to become the turning point; emphasis was to shift away from heavy infrastructure towards quicker-yielding investments in directly productive activities, and towards the provision of social services. Investment in primary infrastructure would be highly selective, and kept in line with the country's near-term ability to exploit it. Infrastructure directly supporting other development activities would continue to receive priority.

7. To some extent the objectives of the Fifth Plan are being achieved. Overall public investment has been close to targets, and investment is begin- ning to be reoriented. However, GDP growth is well below the 4-5% annual growth rate envisioned in the Plan, mainly because of poor agricultural per- formance. Favorable weather in 1975/76 led to a record cereals crop, and GDP was estimated to have grown by 4-5%. However, a poor monsoon resulted in a 5.5% drop in cereals production in 1976/77, and overall economic growth of only about 1% resulted. In 1977/78, it again appears that adverse weather will limit growth in GDP to no more than 2%.

8. In the external sector, overall performance continues to be good. Foreign exchange reserves in September 1977 stood at US$144 million, 16% higher than a year earlier, and at the equivalent of about 10 months of im- ports. But the rise in reserves has occurred in conjunction with a large and increasing trade deficit. Imports have been growing under the impetus of the Government's development programs, while exports, principally rice (almost 50% of total exports) and jute (about 15%), declined. However, increased tourism earnings and remittances from Gurkhas (soldiers from Nepal serving in the British or Indian army) brought about a significant improvement in the current account. Tourism earnings accounted for 22% of total convertible foreign exchange earnings in 1976/77 and have displaced Gurkha remittances as the largest single source of convertible foreign exchange.

9. Despite increasing receipts from tourism and remittances from abroad, improvement in the trade balance remains critically important. Imports, particularly development goods and raw materials, are bound to rise steadily; however, prospects for exports are not promising. Prospects for rice, the largest export, are not favorable due to declining surpluses at home and a comfortable supply situation in India.

10. The Government has recently reformed the trade and payments system by eliminating the broken cross-exchange rate vis-a-vis the U.S. dollar and Indian rupee (by revaluing the Nepalese rupee against the dollar by 4.3% and devaluing against the Indian rupee by 4.3%) and by abolishing the Export Exchange Entitlement scheme. In its place, a dual exchange rate has been established that offers premium exchange rates, and hence incentive, for trade with overseas countries. Certain development goods can be imported at sub- sidized rates.

11. The recent signing of new trade and transit treaties with India should help improve conditions for foreign trade. The transit treaty allows the transit of goods to and from Bangladesh, and the expansion of existing port facilities for Nepal in Calcutta. The new trade treaty provides for improved access of Nepalese goods to the Indian market.

12. The poor long-run performance of the economy is chiefly due to the poor growth of agricultural production which is failing to keep pace with population growth. Over the period 1967-77, cereals production grew at an average annual rate of only 1.8% against an annual increase in population of 2.1%. Increases in the area under cultivation account for almost all of this increase; average yields rose by only 0.1% annually. Malnutrition is acute in the Hills, which contain only one-third of the country's agricultural land, yet close to two-thirds of the population. Population density on agricultural land in these areas is higher than in Bangladesh, under even less favorable natural conditions. Cultivation has been pushed up steep hillsides and onto marginal land, and average yields have actually declined. Food availability for the average family has dropped to less than the equivalent of 225 days minimum subsistence needs a year. Because they have little to trade except their labor, one-third of the inhabitants of these areas migrate seasonally to the Terai plains and northern India for food and work. Since the mid- sixties, an estimated 400,000 have migrated permanently; there are signs that this exodus is accelerating. Family planning services which could help miti- gate this crisis are weak. Although they are available in most of the larger towns, they are only just beginning to be extended into outlying rural areas. These efforts are being hampered by the inaccessibility of most of the popu- lation; mounting a program on the scale needed will require much more manpower and funds.

13. While the average-sized farm in the Terai is only 1.7 ha, it is still four times as large as that in the Hills. The small surpluses produced by the Terai farmers have been the basis for Nepal's rice exports. However, these exports have been steadily declining, from about half a million tons in the early sixties to only about 100,000 tons in 1977/78. This has been the result of production lagging behind population growth and, more recently, the relative decline in export prices resulting from good crops in India in combination with poor harvests at home.

14. Agriculture thus has the highest development priority in Nepal, not only because of its central economic role, but also because of the pressing need for food in the Hills. However, only the Terai presents opportunities for establishing market-oriented farming in the near future; agricultural development in the Hills will have to concentrate on meeting subsistence needs. With the exception of the Kathmandu Valley, farmers in the Hills are extremely -4- poor; hence, low-cost means of raising production will have to predominate initially -- improved agricultural practices, better crop selection, the use of improved local varieties and, wherever possible, increased use of organic fertilizers. The focus of agricultural development efforts in the Terai has been on major surface irrigation schemes to increase cropping intensity. How- ever, lack of adequate attention in the past to bringing development down to the farm level has resulted in the full benefits not being realized. The general lack of support services -- inputs, credit, extension and research, and farm-to-market roads -- compounded this problem. However, recent major irrigation projects financed by IDA and the Asian Development Bank are addressing these problems by taking more comprehensive and integrated approaches. Nevertheless, research and extension activities need to be strengthened further. Research activities must concentrate on adapting promising crop varieties to the many different micro-climates, while orga- nization of extension activities and training of extension agents must be improved to ensure the delivery of extension advice to farmers.

15. Although agriculture must occupy a predominant position in Nepal's development strategy, important opportunities exist in other directly produc- tive sectors, including tourism and industry. Tourism is one of the most rapidly growing sectors of the economy. Tourist arrivals have risen from fewer than 50,000 in 1971 to over 125,000 in 1977. But unless tourist services, particularly air transport, are expanded apace, this growth must necessarily come to a halt. Investment opportunities in large-scale industry are limited by the extremely low purchasing power of the population, the inaccessibility of much of the country, the country's remoteness from sources of supply and markets abroad, and its poor endowment with mineral resources. Under these circumstances, most private capital is invested in small agro-industries, trade, tourism and real estate, where profits are more assured. Effective promotion of agro-industrial investments would help promote crop diversifica- tion by farmers and increase domestic value added. Similarly, improved mar- keting arrangements both within Nepal and abroad, inputs supply and credit availability could help expand production by cottage industries. There is also potential in forest-based industries, based on controlled exploitation of forest resources. At present, however, fuelwood needs are causing the rapid depletion of forest resources in the Hills, contributing to the already massive erosion arising from natural causes and forage depletion. Immediate efforts in this sector must, therefore, concentrate on reforestation and water- shed management. In the longer run, fuller exploitation of Nepal's vast water resources could provide a basis for accelerated economic growth.

16. Nepal has made significant progress in mobilizing domestic resources to undertake its development programs, considering the extreme poverty, low degree of monetization, and fragmented nature of the economy. Revenues have grown at 16% a year since 1969/70, and revenues as a percentage of GDP have increased from 5.0% in 1969/70 to about 7.5% in 1976/77. Over the same period, the Government was able to maintain savings on current account in excess of 2% of GDP, a good achievement for a country in Nepal's economic position. 1/

1/ Average government saving in the least developed countries as a whole is about -0.7%. It wili be ditficult, however, to maintain the public savings rate because current expenditures will have to start growing more rapidly than in the past to allow for proper maintenance of roads and major irrigation schemes, and the operating expenses of expanding social services.

17. The narrow tax base limits the potential for generating increased revenues through tax rate adjustments, but there is still considerable scope for increasing the contribution of agriculture, and improving tax administra- tion. Effective implementation of the recent agreement with India to improve control of unauthorized trade along the long common border would constitute an important step in this direction.

18. In view of the limited prospects for additional resource mobiliza- tion, foreign aid remains the decisive factor in Nepal's development. Foreign aid has increased rapidly during the 1970s. In the next two years, disburse- ment of aid already committed will provide about $200 million. Present pro- jections indicate, however, that there will be a residual financing gap of $75 million. This will prove difficult to fill through projects assistance. Donors need to consider financing a larger portion of the local costs of pro- jects, increasing commodity assistance, and providing sector aid.

19. As important as the need for additional financial assistance is the need to boost further absorptive capacity. Donors have responded through project-related technical assistance, and more recently, through efforts to strengthen the development administration capacity in certain key sectors. To assist in the overall coordination of financial and technical assistance efforts, the Nepal Aid Group was formed in 1976; the Group has met twice at plenary meetings to discuss overall external assistance needs as well as to discuss and coordinate strategy at the local level in Kathmandu.

20. As of December 31, 1977, official foreign debt amounted to $299 M. Although utilization has been slow in the past, disbursements are beginning to accelerate rapidly. Debt service was about $2.2 M in 1977 or equivalent to about 2% of exports of goods and services. In view of the accelerating pace of development, external public debt is expected to rise and, based on the trend in recent years, may reach about $450 million by 1980, of which approximately 50% could be in IDA credits. The total debt service ratio by 1980 is, however, projected to remain below 5%. Debt service to the Bank Group alone would be less than 2% of exports of goods and services.

PART II - BANK GROUP OPERATIONS IN NEPAL

21. Bank Group operations in Nepal began in FY70 with an IDA credit of US$1.7 million equivalent for a telecommunications project. In the fol- lowing eight years, 16 additional credits were approved, bringing total IDA assistance to Nepal, through FY78, to US$161.5 millicin equivalent, net of cancellations. In view of Nepal's many development needs, this assistance has been for projects in a wide variety of sectors. Five of these sectors account for 81% of IDA credits by amount: irrigation (28% for 3 projects); -6-

power (16% for 1 project); telecommunications (13% for 3 projects); highways (12% for 2 projects); and water supply and sewerage (12% for 2 projects). The remaining 19% of IDA assistance has been for one project in each of the areas of rural development (5%), settlement (4%), technical education (4%), tourism (2%), technical assistance (2%), and industrial development financing (2%). The proposed credit would be the first in FY79, bringing the total amount of IDA assistance to Nepal to US$175.5 million equivalent, net of cancellations. No Bank loans have been made to Nepal. IFC made its first investment in Nepal ($3.1 M) in a hotel project in Kathmandu in FY75. Annex II contains a summary statement of Bank Group operations as of August 31, 1978, and notes on the execution of ongoing IDA projects. It shows certain delays in the implementation of these projects, particularly during the initial periods. These delays have been largely due to Nepal's limited technical and managerial capabilities. In order to assist Nepal in coping with this con- straint, considerable technical assistance is being given by Bank Group staff, including our Resident Mission in Kathmandu. As a result, improvement in the rate of disbursements is being realized. During FY78, $11.3 M were disbursed compared to $12.8 M disbursed during the entire previous seven years. There is, however, substantial scope for further improvement.

22. Bank Group lending to Nepal has so far been at a modest level com- pared to the country's need for, and total receipts of, external assistance. The international community has persistently shown considerable interest in Nepal's economic development and, to date, shortage of funds has not been a bottleneck. The main constraint on the utilization of increased aid has been Nepal's limited absorptive capacity, affecting the pace of project preparation and implementation. The Bank is assisting the Government in project prepara- tion through the Technical Assistance Credit and by acting as Executing Agency for a number of technical assistance projects in the current UNDP Five-Year Program. The Bank Group has also addressed the problem of absorptive capacity through its role in organizing the Aid Group for Nepal (para 19).

23. The Bank Group's current strategy places major emphasis upon the directly-productive sectors (particularly agriculture) and the development of complementary infrastructure, including feeder roads (particularly con- necting the Hills to the Terai), communications and hydroelectric power. Preparation of projects in rural development, irrigation, forestry and power is under way.

PART III - THE AGRICULTURAL SECTOR

24. Nepal's economy is largely dependent on the agricultural sector. As mentioned in Part I above, farm production and related activities account for about 65% of GDP, 93% of employment and 80% of all exports, mostly foodgrains. Nepal has a gross area of 14.1 M ha of which only about 2.3 M ha, is cultivable. Paddy accounts for 51% of the total cropped area; maize 19%; wheat and other cereals 16%; and other crops including oilseeds, pulses, jute, potatoes, sugarcane, tobacco and horticultural crops 14%. Development of agriculture has been slow. Over the last twelve years, growth in production -7- has been barely above the rate of population growth. Moreover, it has come primarily from area expansion, the further scope for which is limited. The largest area increases are in wheat (10% p.a.) and potatoes (5.4% p.a.), mostly in the Terai. Yields of all crops have either stagnated or declined over the last 12 years, reflecting (i) extension of cultivation into areas of marginal productivity; (ii) soiL denudation; (iii) the lack of technology suitably adapted to local conditions, particularly for Hill agriculture; and (iv) institutional constraints such as lack of trained manpower. In view of the limited scope for further area expansion, future growth in agricultural production will depend essentially on yield improvement. This is attainable, particularly in the Terai, provided there are effective extension services, and reliable provision of irrigation and adequate drainage at the farm level.

25. Agricultural Institutions. Apart from the Ministry of Forest, the Government has three Ministries dealing with agriculture: the Ministry of Food, Agriculture and Irrigation (MFAI); Ministry of Land Reform; and Ministry of Water and Power. Irrigation projects are the responsibility of the MFAI which includes the Department of Irrigation, Hydrology and Meteo- rology (DIHM), the Department of Agriculture (DA), and the Department of Food and Agriculture Marketing Services. MFAI also has overall responsibility for a number of public sector corporations which include the Agriculture Input Corporation, Agriculture Development Bank of Nepal (ADBN), Nepal Food Corpo- ration, and the Groundwater Development Board. In general, like many other government agencies, agricultural institutions suffer from lack of trained staff.

26. Agricultural Extension, Research and Training. The DA's Division of Agricultural Extension and Training is responsible countrywide for operation of agricultural extension services through offices located at the regional, district and panchayat (village) levels. The extension staff's main functions are to provide farmers with advice on improved farming practices, to introduce high-yielding improved varieties, and to guide farmers in the selection of suitable cropping patterns. Their effectiveness is greatly hampered by inadequate training and the lack of communication, transportation, and housing facilities at the village level.

27. The DA carries out research, mainly in food crop production, in a large research complex near Kathmandu and in twelve smaller stations dispersed throughout Nepal. Some agricultural research stations are also national crop development headquarters 1/. The United States Agency for International Devel- opment (USAID) has supported research in cereal improvement based on high yielding varieties of wheat from India and rice from the Philippines. The United Nations Development Programme, in conjunction with the International Maize and Wheat improvement Center, is also assisting with a high protein maize program. The linkages between research and extension activities in Nepal are poor, however, and the products of research are not well dissemi- nated to the farmers.

1/ The national development programs for paddy, maize, jute and wheat have their headquarters at Parwanipur (Birganj Irrigation Project, Narayani Zone), Rampur, and TarahariaAgriculture Stations, and Bhairawa Agriculture Farm (in Bhairawa-Lumbini Groundwater Project), respectively. - 8 -

28. With technical assistance from USAID, the Institute of Agricul- ture and Animal Science of Tribhuvan University is responsible for formal agricultural training of extension workers. The Institute also provides vocational training for agricultural teachers and in-service training for leading farmers. Recently, research stations have also been involved in training activities for extension workers and farmers. This training is generally inadequate, however, due to the shortage of experienced instructors and training facilities.

29. In order to alleviate these problems of extension, research and training the Government is preparing a project which would modify the present field practices throughout the country along the lines of the Training and Visit System. The link between research and training would be strengthened through better organization, regular staff training and technical back- stopping.

30. Agricultural Inputs Supply. The Agriculture Input Corporation (AIC) is mainly responsible for the marketing of fertilizers, seed, pesti- cides, and agricultural equipment. The AIC distributes these inputs to cooperative societies, village committees or other public organizations, and private traders, fixes retail prices for all inputs, and is responsible for input stGrage. Sales have, however, been sporadic due to poor distri- bution, and the Government has recognized the need for more timely supply of basic inputs and services at the village level. The Sajha (cooperative) movement was established in 1975 to deal mainly with these deficiencies on a countrywide basis and provide for sales of agricultural and general merchan- dise as well as marketing and credit services for members. On the average, each Sajha serves about 2-3 panchayats and is assisted by a paid manager, who is trained and seconded by ADBN.

31. Agricultural Credit. The ADBN is the main source of institutional credit available to Nepalese farmers. ADBN provides short, medium and long- term loans to individual farmers, cooperatives and corporate agents engaged in agricultural production. Farmers owning 6 ha of land or more can go directly to ADBN for seasonal loans, while those owning less can obtain such loans through Sajha cooperatives. Current annual interest rates vary between 2% and 14% depending on the category of borrower and purpose. ADBN's perfor- mance has been satisfactory. Until recently, commercial banks in Nepal did not lend for agriculture. Although they were directed in 1974 to invest at least 50% of their total deposit liabilities in agriculture, their current involvement in agricultural lending is still quite small since they have yet to develop the institutional structure that would enable them to serve the needs of agriculture on a substantial scale. Lending from private sources is widespread, providing about 80% of total agricultural credit, often at much higher interest rates.

32. Marketing and Transportation. Domestic marketing services in Nepal are not well developed, due to the lack of roads, telecommunications systems, and warehouses. Since the late 1960's, several public sector organizations have been established for marketing major farm products. These include the Nepal Food Corporation, Rice Export Companies, National Trading Ltd., and Jute Development and Trade Corporation. Officially, export of farm produce -9-

is exclusively the responsibility of these organizations which also fix ex- port and domestic prices. In practice, however, since the Indian border is open, extensive free trading occurs, for which no reliable data is available.

Irrigation

33. Water Resources Utilization. Nepal has only about 1.3 M ha suitable for surfaSe irrigation while its abundant water resources (approximately 150 billion m annual average stream flow) could irrigate at least five times as much. Exploitable groundwater resources, which are largely concentrated in the Terai, could provide tubewell irrigation for about 0.4-0.6 M ha. Utiliza- tion of water resources is limited by a number of factors: (i) there are few reliable sources of perennial surface water for year-round irrigation except for the eight major rivers 1/; (ii) these large rivers are costly to develop, particularly for relatively small command areas which are typical in the Terai; (iii) heavy sedimentation in riverbeds creates considerable problems in construction, operation and maintenance of irrigation systems; and (iv) power supplies to energize tubewells are severely restricted in extent and amount. At present, only about 300,000 ha (about 23% of the potential irrigable area) are provided with some form of irrigation, of which about 150,000 ha are under public schemes.

34. Irrigation Development. Before the launching of Nepal's First Development Plan in 1957, few substantial irrigation works had been under- taken by the Government. The main reasons were limited financial resources and shortage of trained manpower. Nevertheless, with schemes such as the 11,000 ha Chandra Project (1922), farmers' stream diversions, bucket-lift, and other traditional methods, irrigation had been provided to an area of 154,000 ha, mainly in the Hills. During the First and Second Development Plans (1957-62 and 1962-65, respectively), the Government's irrigation pro- grams were concentrated on the building of large canal projects in the Kathmandu Valley and the Eastern and Mid-Western Terai. In the Third Plan, however, a program was launched for construction of minor irrigation projects, to encourage greater farmer participation and to expand irrigated areas rapidly. Due to poor investigations and construction, many of these projects fell short of expectations, which resulted in a poor response from farmers. The Government then reverted in the Fourth Plan to a policy of constructing medium-sized canal projects, mainly in the Terai. In keeping with the priority given to quick-yielding investments, the emphasis has shifted in the Fifth Plan towards the completion of on-going schemes and new investment in pro- jects with short gestation periods and high returns (para 6 above).

35. Bank Group's Participation in Irrigation Development. The Bank Group is at present involved in four on-going irrigation projects in Nepal: (i) The Birganj Irrigation Project, Narayani Zone (Cr. 373-NEP, US$6.0 M, of April 18, 1973) was designed to improve and upgrade the Nepal Eastern Canal and 28,700 ha of surface irrigation and to develop a 2,700 ha pilot tubewell scheme. Because of a 50% cost overrun during the 1974/77 period, in November

1/ The Mahakali (Sarda), Karnali, Babai, Rapti, Narayani (Gandak), Bagmati, Kosi and Kankai rivers. - 10 -

1977 IDA and the Government agreed to reduce the scope of the surface irriga- tion component to 16,000 ha. After a slow start due to procurement and staff- ing difficulties, project implementation has steadily improved. All civil works and equipment contracts have been awarded, and construction is progres- sing satisfactorily. The present number of staff is adequate to design and supervise the works. Irrigation operations were started in the tubewell area in 1976 and in 1,700 ha of the surface irrigated area in 1977. By June 1978, regular supplies of irrigation water were distributed in about 5,500 ha. As a first step, water charges of NRs 100 per ha per crop have been levied in the tubewell area where 95% of the beneficiaries have paid the charge which is higher than that levied anywhere else in Nepal. This represents about 60% of the cost of operation and maintenance (O&M). As of FY1978/79, the Government is collecting water charges in the surface water irrigation area at the same rate. The project is expected to be completed by mid 1979. (ii) The Bhairawa- Lumbini Groundwater Project (Cr. 654-NEP, US$9.0 M, of July 9, 1976), the first full-scale tubewell project in Nepal, provides for construction of 63 deep wells, detailed development of the 7,500 ha command area, and agricultural supporting services. The project had a slow start due to delays in procurement of equipment, but is now almost back to schedule. Drilling of tubewells is proceeding with existing rigs until new rigs are delivered later this year. Construction of the irrigation and drainage networks has started for seven of the twenty wells already completed. (iii) A component under the Rural Devel- opment Project (Credit 617-NEP, US$8.0 M, of April 30, 1976) is providing assistance for improvement of small-scale hill irrigation schemes and devel- opment of a high lift pump scheme on Batar plateau in Nuwakot District; progress is satisfactory. (iv) The Sunsari-Morang Irrigation and Drainage Development Stage I Project (Cr. 812-NEP, US$30.0 M, of July 7, 1978) is designed to upgrade and improve the Chatra Canal System, commanding about 66,000 ha, as well as to develop the irrigation network to the farm level in about 6,400 ha within the Chatra Canal System command area. The project is expected to become effective in October 1978. The Bank Group also acts as Executing Agency for the UNDP-financed Major Irrigation (Far West Region) Project, which seeks to prepare three irrigation projects in the Mahakali Zone (12,000 ha), Bheri Zone (Babai) (13,500 ha) and Seti Zone (Jamuar Nala) (13,500 ha). Reconnaissance reports have been produced, and feasibility studies on the first two projects are due for completion by the end of 1978.

PART IV - THE PROJECT

36. The proposed project was formulated to develop the 12,700 ha within the Nepal Eastern Canal command area which were deleted from the Birganj Irri- gation Project (hereinafter called Stage I) in November 1977 (para 35 (i)). The project consultants for Stage I assisted the Government with preparation of the engineering component of the proposed project. Other project components were identified and prepared by the Government with assistance from missions in the course of supervision of Stage I. The project was appraised in September 1977. Negotiations were held in Washington, D.C. in August 1978. The Nepalese delegation was led by Mr. C.D. Bhatt, Acting General Manager, - 11 -

Narayani Zone Irrigation Development Board. A report entitled "Nepal - Staff Appraisal Report - Narayani Zone Irrigation Development Stage II Project" (Report No. 2067a-NEP, dated September 18, 1978) is being circulated to the Executive Directors. A timetable of key events relating to the project, special implementation actions to be taken by the Association and special conditions of the credit are given in Annex III.

37. The Nepal Eastern Canal (NEC) flows eastward from the Nepalese-Indian border at Pipra to the Bagmati River (Map 13537) and has a net command area of 37,400 ha in Parsa, Bara and Rautahat Districts. The NEC and its secondary canals were built under a December 1959 agreement between Nepal and India con- cerning the use of waters from the Gandak River. Under the agreement, the Indian State of Bihar constructed the Don Branch Canal (DBC) in India to con- vey water from the Gandak at Tribeni in Bihar to Pipra, and also constructed the NEC, with part of its irrigation distribution system, in Nepal. A supple- mental agreemint was made in October 1971 which specified that India would supply 24.1 m /sec (850 cusecs) of water to the NEC at all times except when the DBC was closed for necessary repairs and maintenance. The NEC system was handed over to Nepal in June 1976. It was partially opened for trials in that year and was run at 90% of full capacity on an emergency basis in 1977 when the monsoon was late and rainfall sporadic.

38. Since its construction, the NEC system has suffered from extensive wastage and poor distribution of water and untimely closures. In 1972 the concept of the irrigation system was changed from that of supplementary irri- gation during the wet season for the paddy crop, to that of a perennial system. However, the canal lacks the regulating structures needed to control a greater range of flows throughout the year and the distribution system is incomplete, since construction of distributary canals was terminated at 0.6 m /sec capacity. Escape capacity is inadequate to prevent excessive water levels within the canal during the monsoon, and the banks have failed to withstand external flooding from streams crossing the NEC in many places. Yields of both paddy and wheat have been reduced in some areas from prolonged inundation as a result of inadequate surface drainage, and transportation has been seriously affected during the wet season due to lack of cross drainage under canal service and village roads. These defects are being rectified over 27 km of the NEC and in 16,000 ha of its command area under the Stage I project.

Project Objectives

39. The proposed project would continue the upgrading of the existing NEC and extend the development of its command area with the objectives of: (a) improving the amount and reliability of water deliveries to farms and establishing farmers' confidence in the system; and (b) accelerating agricul- tural development and increasing farm incomes and rural employment. To achieve these objectives, the project is designed to: (i) improve the oper- ational control of the NEC as well as its security against damage by floods; (ii) enhance the capability of the distribution system to deliver regulated water supplies to groups of farms each covering 7.5 to 10 ha; (iii) improve - 12 -

drainage of farmlands and roads; and (iv) intensify agricultural extension and training in Parsa, Bara and Rautahat Districts, as well as in the Rupan- dehi, and the Sunsari and Morang Districts containing two other on-going IDA assisted irrigation projects (para 35).

Project Description

40. The main components of the project are:

(a) improvement of 52 kilometers of the NEC and its service road;

(b) development of the irrigation distribution system down to the farm level in about 12,700 ha;

(c) improvement of canal service roads and drains in about 28,700 ha;

(d) a pilot, privately-owned community tubewell scheme including 25 tubewells in about 800 ha;

(e) field trials for waterlogging control, improved water manage- ment, crop diversification and a pilot microhydroelectric development scheme;

(f) intensified agricultural extension for six Districts in the Terai (including the project area);

(g) provision of operation and maintenance equipment and vehicles;.

(h) buildings for project agricultural and engineering operations and training, staff housing and agricultural storage;

(i) technical services, including project consultants, and aerial photography and mapping for further development of the NEC command area; and

(j) provision for training and training facilities for engineering, agricultural and administrative staff.

Organization and Implementation

41. In accordance with the Government's established practice, and for effective project implementation, the Narayani Zone Irrigation Development Board (NZIDB) was created in 1973 to execute the Birganj Irrigation Project (Stage I). The NZIDB has become increasingly effective in the implementation of Stage I and would carry out the proposed project. The NZIDB is a semi- autonomous government agency. It is chaired by the Secretary to the Ministry of Food, Agriculture and Irrigation, with members including representatives from the Ministries of Finance, Water and Power, and Land Reform, and from the Planning Commission. Other members are the Director-General of the Department of Agriculture (DA), the Director General of the Department of Irrigation, Hydrology and Meteorology (DIHM), the Regional Directors of the DA and DIHM -13 -

(the Central Region), and the General Manager of the NZIDB who is also its Secretary.

42. The General Manager (GM) of the NZIDB would also assume responsi- bility for Stage II. Located at Birganj, he would look after the day-to-day management of project implementation. Assurances were obtained that a GM with qualifications, experience, and terms of reference satisfactory to the Association would be in place throughout implementation of the project (Section 3.03 of the draft Development Credit Agreement (DCA)). Under the GM there are four divisions in the field: Engineering, Agriculture, Admin- istration and Finance. The Engineering Division (ED), as a whole, would be responsible for carrying out the civil works of the project and for mainte- nance of the canal network down to tertiary outlets. It would also prepare maintenance schedules of all canals, structures, and tubewells with the assistance of the project consultants (para 45) and furnish to the Associa- tion, not later than July 31 in each year, its operation and maintenance budget for the NEC system (Section 4.03(a) of the draft DCA). The ED would also prepare a comprehensive operation and maintenance (O&M) manual to be transmitted to IDA in draft by June 1, 1979, and in final form by October 1, 1980 (Section 4.03(b) of the draft DCA). The Agriculture Division would be responsible for agricultural extension and training in the three districts containing the Narayani Zone project area. The Administration and Finance Divisions would continue to be responsible for general administration, accounting, finance, procurement and inventory control of equipment and supplies. In view of the advanced stage of implementation of Stage I, NZIDB would be capable of carrying out the proposed project with minor additions to its staff. Assurances have been obtained that NZIDB would be staffed during implementation in accordance with a plan satisfactory to the Association (Section 3.04 of the draft DCA).

43. In the project area, southward flowing rivers, streams and natural drains divide the 12,700 ha of the NEC command into six self-contained dis- tribution blocks. Within each block, a secondary and tertiary canal system would be built. Within the command of each tertiary canal, serving groups of farms covering about 40 to 50 ha, a Water Users' Group (WUG) would be established as has been done successfully under Stage I. A leader and deputies, elected by the farmers for each WUG, would be responsible for working with project staff in mobilizing farmers to construct field channels and drains, and to operate and maintain the irrigation system below the tertiary outlet. As in Stage I, water distribution within the outlet command would be based on timed rotational deliveries, proportional to the size of individual holdings. In accordance with a program developed in conjunction with the District Agricultural Development Officers and WUGs concerned, the ED would release water down to the tertiary outlets. Water would be released regularly to areas commanded by each tertiary canal only when the WUG has been formed, field channels constructed, and satisfactory distribution routines formulated (Section 4.04 of the draft DCA). As a result of experience gained during implementation of Stage I, the capacity of field drainage in the surface area would be based on a run-off criterion of 3 liters/sec/ha. Drains built for the 16,000 ha of the Stage I area with about one-third of this capacity would be modified as necessary. Additional drainage controls and culverts would also be built in Stage I area to bring them up to the standards - 14 -

established for Stage II. The project would include a pilot microhydroelectric plant at Tilawe barrage in order to test the costs and benefits of such a small scale approach to rural electrification.

44. Directly north of the 2,400 ha Stage I public tubewell development area, the project would install 25 privately-owned community tubewells to irrigate an 800 ha area: 5 deep tubewells to irrigate about 120 ha each (about 40 to 80 farms), and 20 shallow tubewells to irrigate 10 to 20 ha each (4 to 8 farms). The public tubewell scheme under Stage I demonstrated the feasibility of this type of irrigation in the project area. NZIDB and ADBN staff have carried out preliminary surveys to locate communities of farmers who would be willing to take loans under the proposed pilot privately-owned community tubewell scheme. The Stage II pilot scheme would test the feasibil- ity of privately financing such an effort. For each tubewell under the proposed project, a WUG would be formed and financing would be arranged for the well through the ADBN. This would relieve the Government of a large part of the cost of tubewell construction and enable replication with little burden on public finances. During implementation of the project, the WUGs would mobilize farmers to construct field channels and drains in the tubewell distribution systems. However, the O&M responsibilities for the first two years of operation would be carried out by the NZIDB in order to familiarize farmers with the O&M of each tubewell. After that, each WUG would control its tubewell scheme with occasional supervision and O&M assistance from the project staff and the ADBN.

45. The engineering consultants employed for the Stage I project (Nippon Koei, Japan) are expected to be retained for Stage II to ensure continuity and avoid delay in starting up the project; they have agreed to renew their contract. Their input, totalling about 75 man-months over 4 years, compared to more than 300 man-months during Stage I, would be progressively reduced each year. They would provide in-service training, advice, and guidance to project engineering staff in project planning and scheduling; design of works; preparation of bidding documents and bid evaluation; modern construction techniques; construction quality control; and monitoring of progress and costs. The appointment of engineering consultants, with terms of reference satisfactory to IDA, would be a condition of credit effectiveness (Section 6.01 of the draft DCA).

46. Agricultural extension and training would be provided under the proposed project to farmers in Parsa, Bara and Rautahat Districts, as well as in Rupandehi, Sunsari and Morang Districts, which would cover all three on-going IDA-assisted irrigation projects in the Terai, besides the proposed project. In view of the promising results obtained from the pilot scheme of agricultural extension on the lines of the Training and Visit System intro- duced in Parsa and Bara Districts under Stage I, the same system would be expanded to cover these six districts. Additional staff, operating under carefully regulated schedules, would enable extension to reach about 290,000 farm families. The Regional Directors of Agriculture would be responsible for the technical content of extension programs in the six Districts, while execution of these programs and their administration would be vested in the GM and Project Managers of the project Boards. Coordination of extension activities with agricultural input and marketing needs, as well as irrigation - 15 -

development, in the six Districts would be synchronized through existing District Coordinating Committees. Extension activities, administered by each project Board, would be organized, planned and supervised by the agri- cultural officers appointed by their respective project Boards. While agricultural officers would be administratively responsible to their Project Managers, they would report on technical matters to their respective Regional Director of Agriculture. Experience gained through the application of agri- cultural extension in the pilot scheme under Stage I would be passed on to the other IDA-assisted projects through the Department of Agriculture.

47. About 15 man-months of consultants' services would be provided to assist in designing and implementing the intensified agricultural extension and training programs in the six Districts, and to provide essential instruc- tion in training and communication techniques to staff who would become trainers themselves. Agricultural consultants would be appointed by April 30, 1979, with qualifications and terms of reference satisfactory to IDA (Section 3.02(b) of the draft DCA).

48. In addition to the on-the-job training provided by the consultants, formal local and foreign training of agricultural, administrative and engi- neering staff would be provided. The Government would carry out the training program in accordance with a plan satisfactory to IDA (Section 3.05 of the draft DCA). The proposed project would be completed by June 1982.

Cost and Financing

49. The total project cost is estimated at US$17.0 million equivalent, including contingencies, about US$0.1 million in taxes and duties, and US$0.5 million in land acquisition. The foreign exchange component is estimated at US$9.2 million equivalent, about 54% of the total project cost. The proposed credit of US$14.0 million would finance the entire foreign exchange cost of the project plus US$4.8 million equivalent of local cost, amounting to about 83% of total project costs net of taxes and duties. Local cost financing is recommended in view of the country's very limited capacity to generate resources (para 18 above). The Government would contribute US$2.6 million equivalent in local costs, with the Agricultural Development Bank of Nepal (ADBN) and farmers providing approximately US$0.1 million and US$0.3 million, respectively. The total cost of consulting services is estimated at $850,000 or about $9,500 per man month, including all overheads, travel, per diem, etc.

50. Cost of the tubewell component (excluding transmission lines, main distribution channels and access tracks) is estimated at about US$200,000 equivalent and would be financed by the farmers through ADBN. The down pay- ment by the farmers (including the value of their own labor), is estimated at 10% of cost to be borne by the farmers, leaving 90% to be financed through ADBN. The Government would provide from the proceeds of the credit about 80% of the ADBN financing requirement, with the balance to be provided from ADBN's own resources. The loans would be made to individual farmers, or to the WUG responsible for each tubewell, with the amount of repayment to be made by each individual farmer in proportion to the size of his holding in the tubewell command area. The terms of these loans would be the same as ongoing - 16 - rates for such loans in Nepal: 1/ (a) 11% p.a. for a period of 20 years, including a grace period of 2 years, for a deep tubewell; and (b) 11% p.a. for 7 years, including a grace period of 18 months, for a shallow tubewell. The Government presently lends to ADBN at a minimum interest rate of 6% p.a. with a maximum repayment period of 25 years.

Procurement and Disbursement

51. In the light of the experience gained under Stage I, civil works con- tracts would be let on the basis of locally advertised competitive bidding (LCB) because they are small in size (the largest is .o.t US$200,000 equiv- alent), are scattered geographically, and can only be carried out in about six months of the year. LCB would be in accordance with government procedures which are being used under Stage I and are satisfactory to IDA. International competitive bidding for civil works was tried under Stage I but was unsuccess- ful due to lack of interest from foreign contractors under similar conditions. In the community tubewell scheme, NZIDB would arrange for the Electricity Department to extend the transmission lines to the tubewells and for the construction of the main distribution channels and access roads in time to serve the tubewell scheme; lesser channels would be constructed by farmers. All engineering buildings would be constructed by contracts, to be awarded after LCB, under the supervision of project staff. Agricultural extension buildings in the Rupandehi District and the Sunsari and Morang Districts would be built under contract under the supervision of engineering staff of the on-going Bhairawa-Lumbini Groundwater Project and the S-.,nsari-MorangIrriga- tion and Drainage Development Project, respectively. The extension buildings in the area of the proposed project (Parsa, Bara and Rautahat) would be built under contracts supervised by NZIDB engineering staff. These contracts would be awarded after LCB.

52. Equipment and vehicles would be procured through international com- petitive bidding (ICB). Items which cost less than US$25,000 equivalent each and are not suitable for ICB would be purchased in accordance with Government procurement procedures, which are satisfactory to the Association, up to US$250,000 equivalent in the aggregate. A preference of 15% or the appli- cable duty, whichever is less, would be granted to local manufacturers.

53. Disbursement would be made against: (a) 100% of foreign expendi- tures for directly imported equipment, materials, vchiclc3 and spare parts; (b) 100% of local expenditures (ex-factory) for equipment, materials, vehicles and spare parts manufactured locally; (c) 75% of total expenditures for other equipment, materials, vehicles and spare parts procured locally; (d) 100% of expenditures for consultants' and technical services and training; (e) 90% of total expenditures for civil works and buildings; and (f) 55% of expenditures for total agricultural extension staff cost for the six Districts, which would

1/ The average annual rate of inflation during the last three years was about 6.7% and there are indications that the ratio of inflation could increase slightly in the future. The historical price index in the Terai for the last twelve years shows an annual rate of about 7%. Thus, an annual rate of inflation of about 7% has been projected for the next

three years. This would result in a rl -_ate of interest of 4%. - 17 - be equivalent to 9U% of incremental extension staff costs. A condition of disbursement of the pilot community tubewell component would be that the necessary financial arrangements, satisfactory to IDA, have been made between the Government and ADBN (Schedule 1 para 4(b) to the draft DCA).

Cost Recovery

54. Under the Nepal Irrigation Act of 1967, the Government has the legal authority to levy water charges on users of publicly constructed sur- face and groundwater irrigation works. In the parts of the Stage I area where irrigation has been delivered to fa r , the prevailing water charge is NRs 100 per ha per crop, equivalent to an annual charge of NRs 180 per ha at the present cropping intensity.

55. Surface Irrigation: The capital cost of surface irrigation works provided by the project on 12,700 ha would amount to NRs 8,000 (US$667) per ha, and annual O&M costs after project completion would be about NRs 90 (US$7.5) per ha. Therefore, an annual water charge of approximately NRs 900 (US$75) per ha (in 1977 prices) would cover O&M costs and recover 100% of capital costs over 50 years at a 10% interest rate. With an average annual incremental farm income of NRs 2,200 per ha and project rent of NRs 2,000 per ha at full development of the project, an annual water charge of NRs 900 per ha would account for 41% and 45% of the incremental income and rent, respec- tively. The prevailing level of water charges (equivalent to NRs 180 per ha per year at full development based on projected cropping patterns) would cover the O&M cost of the works and contribute NRs 90 towards capital costs. An immediate increase to NRs 900, which would insure full recovery of capital costs, would impose a heavy burden, because about 65% of farm households in the project area are projected to have incomes below the national average even after the project. Furthermore, a fivefold increase in water changes could only be practically introduced over time. The Government has indicated that it aims at recovering as much as possible of the capital costs of the irrigation systems with a view to increasing its resources available for investment in development projects. Consequently, assurances have been obtained that, starting one year after completion of the surface irrigation distribution works in each block, the Government will establish and collect from beneficiary farmers water charges sufficient to (i) cover operation and maintenance costs as they are incurred, and (ii) recover in progressive steps, over a reasonable period of time, the capital expenditures for these works to the fullest extent possible, taking into account farmers' ability to pay, incentives for their participation in the project, and the need for public revenues to finance other development activities (Section 4.02(a) of the draft DCA). For this purpose, the Government would review water charges at intervals not exceeding three years, in consultation with the Association with a view to adjusting said charges as necessary (Section 4.02(b) of the draft DCA).

56. Tubewell Irrigation: Under the community tubewell scheme, the farmers would finance the capital costs of the tubewells, with the exception of transmission lines, main distribution channels and access tracks which would be funded by the Government as an incentive to the farmers to invest (Section 3.06 (a) of the draft DCA). The total cost of each tubewell is estimated to be about NRs 988,000 (US$82,300) for a deep tubewell and - 18 -

NRs 105,200 (US$8,800)for a shallow tubewell. With capital cost to the farmers of NRs 326,000 (US$27,200) for a deep tubewell irrigating about 120 ha, the annual capital and interest payment by the farmers at the interest rates described above (para 50) would be about NRs 350 per ha (US$29). The annual capital and interest payment for a shallow tubewell irrigating 10 ha would be about NRs 400 (US$33), against a capital cost to the farmers of NRs 16,100 (US$1,340). Including an annual O&M cost of NRs 300 per ha for a deep tubewell and NRs 380 per ha for a shallow tubewell, annual cost to the farmers of deep and shallow tubewells would be about NRs 650 (US$54) and NRs 780 (US$65) per ha, respectively. For both the deep and shallow tubewells, projected annual net incremental income per ha would be NRs 2,700 and project rent would be NRs 2,500. Annual cost to the farmers of a deep tubewell would represent 24% of net incremental income. The corresponding percentage for a shallow tubewell would be 29%. These costs would be within the farmers' ability to pay. Although the annual cost to the farmer would be much higher than in the case of surface water irrigation, tubewell development may still be sufficiently attractive since the farmer in the proposed tubewell area has no access to surface water supply and his only alternative would be to con- tinue rainfed farming. The farmer would also be assured of reliable water supply because its source, in contrast to surface water irrigation, would be completely under his or the WUG's control. There are thus reasons to believe that, despite the high annual payments in relation to net incremental income, farmers will find the participation attractive. There is also the possibility that they may not. For that reason, the groundwater component has been kept small, as a pilot program.

Project Benefits and Risks

57. The proposed project would accelerate agricultural development in the project area through provision of a reliable irrigation water supply to farmers now heavily dependent on rainfall, and through improved drainage as well as intensified agricultural supporting services. The benefits of upgrading the works in the Stage I area to the standards of those to be con- structed under Stage II have not been quantified due to their interdependence with the other works under Stage I. In the Stage II area, agricultural pro- duction is expected to improve substantially with an annual increase at full development of 20,200 tons of foodgrains, 14,800 tons of sugarcane, 300 tons of oilseeds and 4,300 tons of vegetables. About 2,000 additional full-time agricultural jobs would be created under the project, mostly to the benefit of the landless laborers and smallholders (less than 1 ha) which account for about two-thirds of the approximately 70,000 farm population in the Stage II area. Non-farm employment is expected to increase by about 1,000 man-years per annum at full development, and the project would also generate about 1.7 million man-days of construction employment over the four-year implementation period. The project would alleviate poverty in the project area; average per capita income of the farmers within the project area would increase from NRs 940 (US$75) to NRs 1,500 (US$120), equivalent to the national average. At present, 80% of farm households in the project area have incomes less than the minimum subsistence level of about NRs 780 (US$65); this proportion would be reduced to 30% under the project. - 19 -

58. The project would also help to alleviate the shortage of trained staff, a major constraint on agricultural development in Nepal, through the provision of technical assistance and training programs in various agricultural disciplines. The experimental community tubewell scheme, if successful, would pave the way for more intensive development of groundwater through private investment in the Terai, thus reducing the cost of such wotks to the Government. An environmental benefit of the project, resulting from the improved drainage, would be the reduction of ponding of waste water in the locations in the project area that are malaria-prone.

59. The economic rate of return of the proposed project is estimated at 22%. Within this, the economic rates of return for the deep and shallow tubewells, which account for about 4% of the total project cost, are estimated at 33% and 21%, respectively. Sensitivity analysis shows that even with the extreme case of an increase in construction cost of 50%, in conjunction with a decrease in projected crop yields by 10% and a decrease in output prices of 20%, the rate of return would still be 10%.

60. A possible risk associated with the project would be that the watertable in low-lying areas of NEC command might eventually rise to such high levels as to reduce dry season crop yields. To counter this, the pro- ject includes monitoring of the watertable to provide early warning of such a problem so that counter measures can be taken promptly. In the event that temporary waterlogging occurs on a significant scale, the introduction of cash crops with a lower water requirement than paddy may have to be encouraged. A feasibility study of processing and marketing of such crops, such as ground- nuts and soybeans, is to be carried out under the on-going Sunsari-Morang Irrigation and Drainage Project.

PART V - LEGAL INSTRUMENTS AND AUTHORITY

61. The draft Development Credit Agreement between the Kingdom of Nepal and the Association, and the Recommendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement, are being distributed to the Executive Directors separately.

62. Special conditions of the project are listed in Section III of Annex III. A special condition of effectiveness would be that engineering consultants with terms of reference satisfactory to the Association have been appointed (para 45). A condition of disbursement for the community tubewell component would be that financial arrangements, satisfactory to the Association, have been made between the Government and the Agriculture Development Bank of Nepal (para 53).

63. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. - 20 -

PART VI - RECOMMENDATION

64. I recommend that the Executive Directors approve the proposed credit.

Robert S. McNamara President

Attachments September 25, 1978 - 21 -

ANEX I TABLE 3A NEPAL - SOCIAL INDICATORS DATA SHEET LAND AREA (THOU KM2) ------NEPAL REFERENCE COUNTRIES (1970) TOTAL 140.8 MOST RECENT AGRIC. 40.0 1960 1970 ESTIMATE AFGHANISTAN BOLIVIA TURKEY** GNP PER CAPITA (USS) 50.0 70.0 110.0 110.0 290.0 510.0

POPULATION AND VITAL STATISTICS

POPULATION (MID-YR, MILLION) 9.3 11.3 13.1 12.3/a 4.9 35.6

POPULATION DENSITY PER SQUARE KM. 86.0 80.0 93.0 19.0 4.0 46.0 PER SQ. KM. AGRICULTURAL LAND 243.0 284.0 328.0 87.0 16.0 65.0

VITAL STATISTICS CRUDE BIRTH RATE (/THOU, AV) 46.3 44.7 42.9 48.7 44.4 40.6 CRUDE DEATH RATE (/THOU,AV) 27.8 24.6 20.3 27.6 19.7 14.4 2 0 0 3 0 0 INFANT MORTALITY RATE (/THOU) .. ,0- *- 154.0 153.0 /a LIFE EXPECTANCY AT BIRTH (YRS) 35.6 40.6 43.6 37.8 45.3 54.4 GROSS REPRODUCTION RATE 3.0 3.0 2.9 3.4 2.8 2.6/b.c

POPULATION GROWTH RATE (X) TOTAL 1.5 2.1 2.1 2.2/b 2.6 2.5 URBAN 6.5 3.9 5.4 5.2 4.2 4.9/d

URBAN POPULATION (X OF TOTAL) 3.4 4.1 4.8 10.7 32.3 38.7

AGE STRUCTURE (PERCENT) 0 TO 14 YEARS 39.9 .. 40.5 43.2 41.9 41.7 15 TO 64 YEARS 57.0 .. 54.2 54.6 54.0 65 YEARS AND OVER 3.1 .. 2.6 3.5 4.3

AGE DEPENDENCY RATIO 0.8 .. 0.8 0.8 0.8 0.9 ECONOMIC DEPENDENCY RATIO 1.0 .. o .. 1.0/a 1.1 /e FAMILY PLANNING ACCEPTORS (CUMULATIVE, THOU) .. 86.5 378.6 USERS (X OF MARRIED WOMEN) .. .. 17.0 .. , 8.2

EMPLOYMENT

TOTAL LABOR FORCE (THOJSAND) 4300.0 4900.0 . .. 2300 0 14000.0 /f LABOR FORCE IN AGRICULTURE (X) 94.6 94.4 , .. 65.o/b 63.4 UNEMPLOYED (% OF LABOR FORCE) ...... 16.0 11.9 a

INCOME DISTRIBUTION

X OF PRIVATE INCOME RECOD BY- HIGHEST 5X OF HOUSEHOLDS ...... 36.oc 32.8 . HIGHEST 20% OF HOUSEHOLDS ...... 59. 0/c 60.6 LOWEST 20% OF HOUSEHOLDS ...... 4.0 2.9 LOWEST 40% OF HOUSEHOLDS ...... 13.0CE 9.4

DISTRIBUTION OF LAND OWNERSHIP ______% OWNED BY TOP 10% OF OWNERS ...... 53.0 % OWNED BY SMALLEST 10% OWNERS ...... 0.9

HEALTH AND NUTRITION

POPULATION PER PHYSICIAN 72000.0 49770.0o 36550.0 14680.0 2300.0 2250.0 POPULATION PER NURSING PERSON .. 35600.0 b 17430.00/a 21080.0 2730.0 1770.0. POPULATION PER HOSPITAL BED 7000.0.L 6750.0 6630.0 .. 490.0 500.0

PER CAPITA SUPPLY OF - CALORIES (% OF REQUIREMENTS) 92.0 94.0 95.0 . 78.0 76.0 112.0 PROTEIN (GRAMS PER DAY) 51.0 52.0 50.0U/9 2 58.0 46.0 78. ,0 -OF WHICH ANIMAL AND PULSE 9.0lb 11.0 _4b 11.0 14.0/d 22.OL/

DEATH RATE (/THOU) AGES 1-4 ...... 7.4 14.7Lk

EDUCATION

ADJUSTED ENROLLMENT RATIO PRIMARY SCHOOL 10.0 26.0 59.0/c 21.0/c 68.0 109.0 SECONDARY SCHOOL 6.0 9.0 14.0-/cd 6.0 21.0 28,0 YEARS OF SCHOOLING PROVIDED - (FIRST AND SECOND LEVEL) 10.0 10.0 10.0 12.0 10.0 11.0 VOCATIONAL ENROLLMENT (X OF SECONDARY) 0.2 6.0 22.0/c.e 4.2 11.0Qe 14 0 ADULT LITERACY RATE (X) 10.0 14.0 19.2 10.0 40.0 55.D0a HOUSING

PERSONS PER ROOM (URBAN) 2.0/C ...... 1.9 OCCUPIED DWELLINGS WITHOUT PIPED WATER (X) 52.0/4 .. 14.0Lf 97.0/d .. 66.0 ACCESS TO ELECTRICITY (% OF ALL DWELLINGS) 30.0/c ...... 40.0 RURAL DWELLINGS CONNECTED TO ELECTRICITY (X) ...... 18.0

CONSUMPTION

RADIO RECEIVERS (PER T-OU POP) 1.0 5.0 6.0 6.0 ,8 89.0 PASSENGER CARS (PER THOU OOP) 0.2/d 0.4 -- 3.0 4.0 4.0 ELECTRICITY (KWH/YR PER CAl.) 1.0 6.0 £0.0 32.0 160.0 247.0 NEWSPRINT (KG/YR PER CAP) ...... 0.1 1.0 0.7

SEE NOTES AND DEFINITIONS ON REVERSE - 22 -

ANNEX I

unlas otherwise noeCd, (e.g. iNP per capita ond population), d.ra for 1960 refer to cy year bertwen 1959 and 1961, for 197D hatwse 1969 and 1971, and for Most Recent Estimate between 1973 ond 1976.

* Over the past forty years, Turkey's ecomooy ha. growu at a respectable pace, strting from a very a11 ba. In sn doing the country haa formulated objective. cnd faced problems cnd constraints which, to considerable degre, are quite similar to those Nepal is now facing. Among others, these include incre.sing output froe the productive ectors, agriculture cnd industry, accelerating ieport substitutions, diversifying and increasing exports., boilizing resources, improving education, health, training and employment opportunities, lend reform and improving inco.e distribution.

NEPAL 1960 /. 1965; /b 1964-66; /c Capital and nain cities only; /d 1963.

1970 Ia Personnel in government services; /b Including nidwiven.

HOST RECENT ESTIMATE / Including nidwives and assistant nurses; lb 1974 data; Ic 1976-77; /d Lower s-condary (Grade 4-7) only; /! Upper secondary (Grade 8-10) only; /f Urban only.

AFGhANISTAN 1970 Ia Population dots for Afghaifston relore to tho fis-l yarw hich startc on 21 March; /b Diffe-rn-e between UN notucal rate of Increase nd Bank population growth rate due to different population entimates; /c Public education only; Id Percentage of pouulation without safe with supply.

BOLIVIA 1970 /a Ratio of population under 15 and 65 and over to total labor force; /b As percentage of labor force in employ.ent; /c Populotion; /d 1964-66; /. Beginning 1969 tho duration of goneral -econdary education was reduced from 6 to 4 Years.

TURKSEY 1970 /a 1967; /b tocludes 17 eastern provinces; /c 1965-67; /d 1965-70; /c Ratio of population under 15 and 65 and over to total civilian labor force; /f Civili-n labor force; /A Including peak season agriculture underemployment; /h Diposable income (1969); /i Including assistant nurses and midives; /I 1964-66; /k 1967-68; /1 Persons sin years and over who tell the census takers that they can read and write.

913 September 11, 1976

Db'FITNITIONS OF SOCIAL TNDIICATORS 7 Lond Arcs (thou I-' ) Po2nclation per nursing person - Population diridec by Total - Total surface ores coroprising land area nd inland waters. number of practicing male sod feIale graduate nu.ocs, "trained" or "certified` nurse, and Agric - Most recent esctinte of agric-lturrl area need temporarily or perm-- a.miliary personnel with training or eaperiorte. nently for crops, pastores, narket & kitnhen gardens or to lie follow. Popelation peo hospital bed - Population divided by nesober of hospit.] beds available in public and pri-tei general snd specialoe.d houpitl and GNP per caoito (US$) - GNP per capita estimates at current market prices, rehabilitation centers; e cludes nursing calculated by boa conoorsioe homes and sotsbli.hlente for method a- World Bank Atlas (1975-77 basis); ouatodial and preventive care 1960; 1970 sod 1977 data. Per capita supply of calories (% of r,ogiremoncf) - Computed from energy equivalent of n t food supplies available in country per capita per day; Population and vital statistics avsilsble supplies comprise domestic production, imports less emporte, and Population (fid-Yeer million) - AS of July first: if not vJilable, -verege chnges in stock; net eupplies exclude snimal feed, seeds. quantities need of two end-year eetbmate; 1960, 1970 and 1977deta. in food procesaing and looses in distribution; requirements were estimated by FAo based on physiological needs for normal activity and health consid- P.p.lotlon density - per Iok,usre - Mid-ysear popultion par square kilometer *rinSg eironmental temperature, body seightes, agoeand sex distributions of floo hoccares) of totl are, population, and allowing 10 for wasro at household level poenlotion density-per nquare In of soric. land - Computed so above for Per os,it ouppnly of protein (grae per day) - Protein contest ropitc egriculcora1 land only. of per net supply of food per day; net supply of food is defined ashore; eqaice- ments for all countrieu established by USDA Economic Research Sorvices Vital statintics provide for a mioimua ellowance of 60 graes of total protein per d,y, and Crode birth rtte per thousand average - Annual live births per thousand of 20 grase of animal and pulse protein, of which 10 grmo. should be animal .fd-yrer population; ten-year ar-1thtetir averages ending in 1960 and 1970, protein; these standards are lever than those of 75 grems of total protein otd fion-ys average ending in 1975 for most recent estimate. 1 and 23 green- of soles protein as an average for the world, proposed boade by FAO death rate per thousand av rsee - Annuol deaths psr tho.ssod of mid-yesr in the Third World rood Survey. opulation; t n-year sritebti averaged ending in 1960 and 1970 end five- Per canita protein supply from animal and pulse - Protein year everage ending in 1975 for supply of food most recent eatimtte. derived frm anImal and ples in gres_ per dsy. Inraut sortolity rate f/thou) - Annusl deothe of infants under one year of oge Death rats (/thou) sRe. 1-4 - Annual deaths per thous.nd in age group Per thousand live birtha. 1-6 years, to children in this ag group; suggested as an indicator of lAif enpettancy at birth (yrs) - Avorege number of yeare of life remaining at malnutrition. birth; unu11y five-year -vergen ending in 1960, 1970 and 1975 for develop- ing countrie- Education Gronn reproductlon rate-uverage numb r of live deaghtere a woman will hear Adlusted enrollment ratio - pri: ry ho,l - ofonenllment all ages per- tn her nurmal reproductie period if she experiences present ge-specific as cenege of pditry populstion;;ehol-ege inludes children aged 6-11 years fertility rotes; usully five-year everages ending in 1960, 1970 and 1975 but adjuted for different lengths of primry eduestion; for with f-r deoeloping ountrzie. countries vniivr-al education, sroltnt my exeed 100% since some pupils Popution grywt are below rate (I) - totl - Compound -nnoel growth rates of mid-year or shove the official school age population for 1950-60, 1960-70 and 1970-75. Adjuated anroll=mr r1tio - oneondary school - Computed as abov; secondary Population growth rate (7 - urban - Computed like growth rate of total education requires at least four years of spprnved primary popolation; different fetructien; definitions of urban areas may affect comparability of provides general, v .ation.l or tea her dota among cuntries, rf training intrructioo- for pupils 12 to 17 years of ag; correspond nce courses are ge excluded.-ersl' Urban populatlon (7 of total) - Ratio of urban to total population; different Year- of schooling provided (first end necond lo-eis)- Total 'cas- defInitir-a of urban areas m-y affect comparability of dsto F anong countries. schooling; at -eondsry level instructionio-ationol cay be partially or completely ocluded. Axe structure f(ep ent) - Childrin (0-14 ars) working-age (15-64 years) Vocational enrollment (I of secondary) - Iccatioal instftotion include and reTri-d (45 years and orer) as percentages of mid-year population. technical, inducrial or ocher progracs which oproae indeprndeutly or s Abedependency ratic - Ratio of population under 19 and 65 and over to those departmenct of uecondary institutions. of ogen 15 ibroogh 64. Adult iiteracv race (7) - Lit-rat adults (nble to tred aod rcite) as per- flcuoomitdependency ratoo - Ratio of popul-tion under 15 and 65 end oer co u ge of total edlt populatio- oled 15 y,oru or- ccnt the bloc force in age groop Of 15-64 years LLmily ylaolna-utceptots (cumulative, thou) - Camulative number of acceptors Hou-inB of birth-cortrol devcas under auspices of notional f1 illy planning program Persons cer room (urban) - Average somber of poc-Iln per room in occupied =in-c icceplon. conventional dwellings in urban ores.; dwellings r-olde non-p-rmenenc Fanily elonnin.. - ns (7% of mried Percetogen of married women of structures and unoccupid child-bearing ago (15-44 years) who use birth-control parts. devices to a11 marrid Occupied dwellings without piped water fl) - Occupied coventiona1 dwsilingn _oen in uan ag goroup. in urban end rural areas without inside or outnide piped water fociliti.s as pereentoge of o11 occupied Employment dwellings. Access to electricitY (7, of all dwellinge) - Cone ntonal dwellings with locl lube force (,hou.and) - Economically attive persons, including armed electricity in living quartets as petren of total dwellings to urban and frccs and unemployed but eocluding houu-wi-re, students, etc; definition- rurol areas. i_ caritf_ countri.. are not cosparable. Rural dwelling s coneted to electricity (7) - Conpuctd as sbo for rural l,huc forc. So agriculture (2) - Agrl-icutr-l lebor force (in forming, forestry, dwellings only. hunting end fishing) as prcentage of total labor forc. tUcefpol-d (7 of labor force) - Unemployed or cooslly defined so persons who Conhumption aroo ,lreand willing co toke o job, out of a job on a given day, remained out Radioreceivers foot thou cop) - All types of receivera for radio brosdcasts of r job, and aeeking work for apecIfied minimum period not t ce ding .e. to general public per thousand of population; _cluds unlicensed receivers ccck; moy not be comparable between countries due to different definitions in countries and in years when regletrotion of radio asts was In erfect of -- ccplo..d cnd source of dto, eg. , e_ploy_ent offcce staititcs, sampie detc for recent yesrs may not be comparoble since noset ountris abolished socooyu, c-p.polory uneploymnt inn-r-cc. liensing. Pessenger te-e (per thou pop) - Passenger cars Siccoordfntrfl,utinn - Percentage of private compri.e moter cars seating income (both in cash and kind) len thsn eight persons; eocludes ambulancee, hearss and ailtnary eccrivd by nlthont 5R,, richent 20%, poorest 20f, and pooreet 40% of house- vehicle. [o, ir Electrictry fkwbEyr per top) - Annual consmpction of industrial, comercisl, public and pri-ae elertricily in kilowatt hours nIt crrb. I c of fund ownerhhlp- Percetage- of land per capita, generally owned by wealthiest 107, based on production data, with ur allovance for lonoes in grids but sllow- ,.od pv res lOT/ of land owners. in for bmports end export- of eectricity. N wh-rioc (be-/yr cer cue) llera 4h aol trlft -prn - Per r-pita annual nonsumption in kilgragsm nayti-ted from domeutic prodrction pls net imports of newsprint. Populoi,oc per pby1ifdan - Population divided by number of practicing pbvslcfoue quaiified trom a cedlcul nefrool oatunivr ricy level. 23 -

ANNEX I

ECONOMIC INDICATORS

GNP PER CAPITA IN 1977 US$120 /a

GROSS NATIONAL PRODUCT IN 1974-75 ANNUAL RATE OF GROWTH (%, constant prives) US$ Mln. % 1965-75 (,NP at Market Prices 1,424 100.0 2.0 Gross Domestic Investment 150 10.5 Gross National Saving 100 7.0 Current Account Balance - 25 - 1.8 Exports of Goods, NFS 104 7.3 Imports of Goods, NFS 154 10.8

OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1971-72 Value Added

Value Added Labor Force /b Per Worker US$ Mln. % Mln. % Us %

Agriculture 698 68.0 4.6 95.8 152 71 Industry 92 9.0 0.1 2.1 920 430 Services 237 23.0 0.1 2.1 2.370 1,107 Total/Average 1,027 100.0 4.8 100.0 214 100

GOVERNMENT FINANCE

CENTRAL GOVERNMENT

Rs. Mln. Rs. Mln. Rs. Mln. Rs. Man-- 1974/75 % of GDP 1975/76 1976/77 197778- Current Receipts 1,008.2 (6.8) 1,115.7 1,322.9 1,724.6 Current Expenditure 513.0 (3.5) 626.9 832.1 938.5 Current Surplus 495.2 3_3 488.8 490.8 786.1 Capital Expenditure 967.3 6.5 1,238.8 1,498,3 2,148.9 External Assistance (net) 415.0 2.8 457.5 540.8 1,103.3

MONEY, CREDIT AND PRICES

1973 1974 1975 1976 1977 (Million Rs outstanding mid-July)

Money and Quasi Money 1,493 1,850 2,027 2,458 3,144 Bank Credit to Public Sector 319 416 532 480 711 Bank Credit to Private Sector 459 702 810 783 863

(Percentages or Index Numbers)

Money and Quasi Money as % of GDP 12.4 11.1 11.1 General Price Index (1973 = 100) 187.9 218.4 255.4 261.7 264.2 Annual Percentage changes in: General Price Index 11.2 16.2 17.0 3.7 0.9 Bank Credit to Public Sector (net) 28.1 31.3 27.9 - 9.8 48.1 Bank Credit to Private Sector 14.7 52.9 15.4 - 3.3 10.2

Note: All conversions to US dollars in this table are at the average exchange rate prevailing during the period covered.

/a GNP per capita data based on World Bank Atlas Methodology (1974-76 basis). /b Total labor force; unemployed are allocated to sector of their normal occupation. 77 Provisional not available - 24 -

ANNEX I

TRADEI PAYMENTSAND CAPITAL FLOWS

BALANCEOF PAYMENTS MERCHANDISE EXPORTS (AVERAGE 1974/75-1976/77) a/ 1974/75 1975/76 1976/77 USL MI'1. 7. (Millions us$) [.pirL.s, K.o.b. b/ 80.1 98.3 93.9 Foodstuff & raw materials 69.7 82.6 Imports, .i.f. bj 189.0 156.3 166.9 Manufactures 10.3 12.2 All other commodities 4.4 5.2 Trade Balance -108.9 -58.0 -73.0 Total 84.4 100.0 Sdr,ices, nec 26.1 23.2 39.4 of which: Tourism 15.7 17.1 23.0 EXTERNAL DEBT, DECEMBER 31,1977 act Tra-secrs, 28.5 27.7 30.8 USC Mln. oL which: Private Remictasees 14.8 18.5 21.6 Indian Excise Refund 7.9 8.8 9.4 Public Debt, incl. guaranteed 298.5 Non-Guaranteed Private Debt CGrrenL A.coane Balance -54.3 - 7.1 - 2.8 Total outstanding & Disbursed 298.5

Official Grants 19.3 70.0 18.5 Official Capital, seL 8.3 12.1 16.3 DEBT SERVICE RATIO for 1977 less than 2.5°/ c/ PritaLe Capital, net -14.6 9.6 -10.3 Public Debt, inc. guaranteed Change in Reserves (- Increase) 41.3 -34.6 -21.7 Non-Guaranteed Private Debt

Gross Reserves (mid July) 112.5 120.3 143.0 Total outstanding & Disbursed Nut Reserves 109.8 114.9 137.8

sTcl and Related Materials IBRD/IDA LENDING, (July 1978) (Million USL): Imports of which: Petroleum 14.6 16.9 18.8 IBRD IDA Exports of which: Petroleum ------Outstanding & Disbursed 27.0 Undisbursed ---- 90.2 RATE OF EXChANGE Outstanding incl. Ondisburse17 From October 1975 tL;roughO 117.3 Through October 1975 March 20, 1978 Since March 20, 1978 US$ 1.00 = NRs 10.56 us$ 1.00 = NRs 12.5 us$ 1.00 = NRs 12.00 NR 1.00 US$L 0.095 NR 1.00 = US$ 0.08 NR 1.00 = Us$ 0.083

a/ Customs basis. b/ Payments bas)i s/ Ratio of Debt Service to Emports of Goods and Non-Factor Services.

not available .ot applicable South Asia Programs Department Sept. 12, 1978 - 25 - ANNEX II

STATUS OF BANK GROUP OPERATIONS IN NEPAL

A. STATEMENT OF IDA CREDITS (as of August 31, 1978) /a

US$ Millions Amount (less cancellations) Credit Undis- No. Year Borrower Purpose IDA bursed

Three credits fully disbursed 7.0 373 1973 Kingdom of Nepal Irrigation 6.0 1.4 397 1973 Kingdom of Nepal Telecommunications II 5.5 4.3 470 1974 Kingdom of Nepal Water Supply and Sewerage 11.8 6.5 505 1975 Kingdom of Nepal Settlement 6.0 5.3 600 1976 Kingdom of Nepal Kulekhani Hydroelectric 26.0 19.2 617 1976 Kingdom of Nepal Rural Development 8.0 7.5 654 1976 Kingdom of Nepal Groundwater 9.0 7.7 659 1976 Kingdom of Nepal Technical Assistance 3.0 2.9 704 1977 Kingdom of Nepal Second Water Supply and Sewerage 8.0 7.9 705 1977 Kingdom of Nepal Industrial Development Corporation 4.0 4.0 730 1977 Kingdom of Nepal Second Highway 17.0 16.6 772 1978 Kingdom of Nepal Technical Education 5.7 5.7 799 1978 Kingdom of Nepal Telecommunications III 14.5 14.5 /c 812 1978 Kingdom of Nepal Irrigation 30.0 30.0 /d

Total Outstanding 161.5 /b Total Undisbursed 133.5

B. STATEMENT OF IFG INVESTMENT (as of August 31, 1978)

Amount of US$ Millions Year Obligor Type of Business Loan Equity Total

1975 Soaltee Hotel Hotel 2.70 0.40 3.10 (Pvt) Ltd. Total commitments now held by IFC 2.70 0.40 3.10

Total Undisbursed - 0.40 0.40

/a No Bank loans have been made to Nepal. /b Prior to exchange adjustments. /c Signed on August 22, 1978, but not yet effective. vd Signed on July 7, 1978, but not yet effective. - 26 - ANNEX II

C. Projects in Execution 1/

Credit No. 373 - Birganj Irrigation Project US$6.0 million Credit of April 18, 1973; Effective Date: July 9, 1973; Closing Date: December 31, 1979

Implementation of the project is progressing satisfactorily after initial delays in appointing engineering consultants, in field surveys and in procurement. Civil works are being completed in three irrigation blocks and contracts have been awarded for another three. Construction of tubewells is almost completed in the groundwater areas. Irrigation operations started in 1976 from nine tubewells, and in 1977, in the first surface irrigation block. Due to a 50% cost overrun, a reduction in the project area to include only six blocks (out of the original total of twelve) has been agreed. The project should be completed by mid-1979.

Credit No. 397 - Telecommunications Project II US$5.5 million Credit of June 20, 1973; Effective Date: September 11, 1973; Closing Date: June 30, 1980

Due to organizational problems, lack of continuity in senior manage- ment, and delay in obtaining expert assistance, there have been delays in procurement and the project is about two years behind schedule. Good progress is now being made with the assistance of experts and consultants provided by the United Kingdom and a new General Manager has been appointed. The project is now proceeding satisfactorily and present estimates are for completion by early 1980, some twelve months behind schedule.

Credit No. 470 - Water Supply and Sewerage Project US$11.8 million Credit of May 8, 1974; Effective Date: June 26, 1974; Closing Date: June 30, 1978; Revised Closing Date: June 30, 1979

Design work is complete and all but one of the major contracts have been let. Project implementation is about two years behind the original schedule, primarily due to delays in letting the contracts. A management team of two experts provided by the United Kingdom has been assisting the Water Supply and Sewerage Board and three other specialists are being re- cruited. Work is now progressing satisfactorily.

1/ These notes are designed to inform the Executive Directors regarding the projects in execution and, in particular, to report any problems which are being encountered and the action being taken. They should be used in this sense on the understanding that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution. - 27 - ANNEX II

Credit No. 505 - Settlement Project US$6.0 million Credit of August 14, 1974; Effective Date: February 20, 1975; Closing Date: July 15, 1982

Project implementation is two years behind schedule. While equip- ment has been procured and land clearing has started, overall progress remains slow. This is partly due to lack of management and planning capacity by project agencies and partly to change of Government priorities and land use policies. The latter are expected to lead to a request to reduce project size by about 40%. The Government and IDA have agreed upon land clearing targets for the 1977/78 season. Some progress has since been made. However, if these targets are not attained and if progress proves unsatisfactory, restructuring or discontinuation of this project may have to be considered both by the Government and the Association.

Credit No. 600 - Kulekhani Hydroelectric Project US$26.0 million Credit of January 9, 1976; Effective Date: May 18, 1976; Closing Date: December 31, 1981

The main civil works contract has been awarded and construction work started in December 1977. The contract for hydromechanical equipment is being negotiated, while contracts for all other major plant and equipment have been awarded. The revised estimate of project costs, excluding taxes and duties, is now US$109 million which is some 60% higher than the estimate of US$68 million at the time of appraisal. The increases in costs are due to a number of factors, principally design changes as a result of further geological investigations, the poor response for the civil works contract and the risk factors inherent in a major project which is remotely located. These are reflected in higher bid prices and implementation delays which are adding to costs. In addition, the recent appreciation of the Japanese yen, in which substantial part of the costs of equipment and engineering services are being paid, has increased the US dollar cost of the project. During a cofinancier's meeting in Tokyo in September 1978, pledges were made covering the most part of the foreign exchange cost overrun. Discussions are continuing with a view to bridge the remaining financing gap.

Credit No. 617 - Rural Development Project US$8.0 million Credit of April 30, 1976; Effective Date: July 16, 1976; Closing Date: December 31, 1981

Progress continues to be satisfactory, with almost all planned pro- ject actions being implemented ahead of schedule. Disbursements are lagging due to delay of project authority in submitting disbursement applications. Interministerial cooperation is good, and at the district level, sound and practical development plans have been produced which are fully supported and understood by project farmers. Adequate financing to carry out project pro- posals has been made available in the budget by the Government and sites and plans for most district construction projects have been completed and con- struction started. Training of weavers and issuance of improved looms under a credit scheme is proceeding well. Shortage of middle-level staff in the project area for construction supervision and agricultural extension may - 28 - ANNEX II

hinder project implementation. However, arrangements have been made for more efficient deployment of existing staff and for special training of farmers as part-time agricultural assistants. Under the associated Bank-executed UNDP technical assistance project, the assistant to the Project Coordinator, the Irrigation Advisor, and the advisor to the Project Evaluation Unit have taken up their posts.

Credit No. 654 - Bhairawa - Lumbini Groundwater Project US$9.0 million Credit of July 9, 1976; Effective Date: November 9, 1976; Closing Date: December 31, 1980

The project authorities have been established, the main consulting firm has been appointed and has started work, and equipment procurement has been started. Drilling of tubewells is in progress, using two rigs loaned by the Department of Groundwater Development. Twenty production wells have been completed out of the 63 to be provided under the project. Construction of the irrigation and drainage networks has started for seven of the twenty completed wells.

Credit No. 659 - Technical Assistance Project US$3.0 million Credit of September 16, 1976; Effective Date: November 16, 1976; Closing Date: December 31, 1980

Terms of reference and draft consultants' contracts for some priority projects to be financed under the Credit have been made and others are being discussed with the Government. Studies have been initiated for river control for the Sunsari-Morang Irrigation Project, national agricultural extension, and cottage industries. Arrangements for initiating additional studies are being made, while the selection of other priority projects is underway.

Credit No. 704 - Second Water Supply and Sewerage Project US$8.0 million Credit of May 27, 1977; Effective Date: February 28, 1978; Closing Date: June 30, 1982

Engineering consultants have begun work, and master plan updating and final designs have been completed and feasibility studies are well under way. A tariff specialist is being recruited, and the first tender, for water meters, has been issued.

Credit No. 705 - Nepal Industrial Development Corporation Project US$4.0 million Credit of May 27, 1977; Effective Date: February 17, 1978; Closing Date: December 31, 1981

The UNDP-financed policy advisor took up his post in February and the ODM-financed accounting and information systems advisor is being selected. To date, subprojects for about $0.2 M have been approved by IDA. Project approvals are proceeding slower than anticipated but are expected to increase as a result of operational improvements introduced by the advisors. - 29 - ANNEX II

Credit No. 730 - Second Highway Project US$17.0 million Credit of October 19, 1977; Effective Date: December 23, 1977; Closing Date: December 31, 1982

Project implementation is about 10-12 months behind schedule due to delays in the award of contracts and the appointment of consultants. Consultants (financed by CIDA) arrived in March to provide maintenance technical assistance. The pre-feasibility study for the Bombasa-Kohalpur Road was completed in July and a proposal for the Mechanics' Training Program is under review by the Government and ,..e ss1,ciu. Seven of ten con- tracts have been awarded for the construction of the Tulsipur Road and three contracts have been awarded for the earthworks on the Thankot-Naubise Road. Arrangements for consulting services for supervision of construction are expected to be finalized shortly.

Credit No. 772 - Technical Education Project US$5.7 million Credit of April 14, 1978; Effective Date: July 11, 1978; Closing Date: September 30, 1983

This Credit become effective only recently. However, good progress towards implementation has already been made - a project implementation unit has been established, and sketch plans for civil works, a physical implemen- tation plan and equipment lists have been prepared. A team of educational experts, financed by ODM, have begrn work i--.thc field and a program of cooperation with Paisley College of Technology, Scotland, has been started.

Credit No. 799 - Third Telecommunications Project US$14.0 million Credit of August 22, 1978; Effective Date: November 20, 1978 Closing Date: June 30, 1984.

ODM has formally approved the financing of the telex equipment and the satelite earth station; arrangements for signing the agreement between the two Governments are being made.

Credit No. 812 - Sunsari-Morang Irrigation and Drainage Development Project US$30.0 million Credit of July 7, 1978; Effective Date: October 10, 1978; Closing Date: June 30, 1984

This Credit is not yet effective. Studies for major canal struc- tural repairs, sediment control and river training are under way. Selection of consultants for detailed engineering and supervision has been initiated. - 30 - ANNEX III

NEPAL

NARAYANI ZONE IRRIGATION DEVELOPMENT STAGE II PROJECT

SUPPLEMENTARY PROJECT DATA SHEET

Section I Timetable of Key Events

(a) Time taken by the country to prepare the project

5 months

(b) The agency which has prepared the project

NZIDB and ADBN

(c) Date of first presentation to the Bank and date of the first mission to consider the project

March 1976 - June 1976

(d) Date of departure of appraisal mission

August 24, 1977

(e) Date of completion of negotiations

August 29, 1978

(f) Planned date of effectiveness

January 15, 1979

Section II Special Bank Implementation Actions

Supervision mission would visit Nepal shortly after signing of Development Credit Agreement to advise on implementation activities. - 31 - ANNEX III

Section III Special Conditions

During negotiations assurances were obtained that:

(a) the position of General Manager of NZIDB would continue to be filled by a person with qualifi- cations, experience and terms of reference satis- factory to IDA throughout project implementation (para 42);

(b) the Engineering Department of NZIDB would furnish to the Association, not later than July 31 in each year, its operation and maintenance budget for the NEC system (para 42);

(c) the Engineering Department of NZIDB would prepare a comprehensive Operation and Maintenance Manual, which would be transmitted in draft to IDA by June 1, 1979, and in final form by October 1, 1980 (para 42);

(d) the project would be staffed approximately accord- ing to the agreed schedule which would be revised; as necessary, during implementation (para 42);

(e) water would be made available on a regular basis to areas beyond tertiary outlets only when water users groups have been formed, field channels con- structed, and satisfactory distribution routines formulated (para 43);

(f) engineering consultants would be appointed on terms and conditions satisfactory to IDA (condition of effectiveness, para 45);

(g) agricultural consultants with qualifications and experience in extension and training satisfactory to the Association would be appointed by April 30, 1979 (para 47);

(h) formal local and overseas training would be carried out in accordance with a program satisfactory to the Association (para 48);

(i) financial arrangements satisfactory to the Associa- tion would be made between the Government and ADBN for providing loans for the tubewell component (condition of disbursement on the tubewell component, para 53); - 32 - ANNEX III

(j) not later than one year after completion of the irri- gation distribution works in each Block, the Government would establish and collect from beneficiary farmers water charges sufficient to cover operation and mainte- nance costs as they are incurred and recover in progres- sive steps, over a reasonable period of time, the capital expenditures for these works to the fullest extent pos- sible, taking into account farmers' ability to pay, incentives for their particination in the project, and the need for public revenues to finance other development activities (para 55);

(k) the Government would review water charges, at regular intervals, not exceeding three years, in consultation with the Association (para 55); and

(1) transmission lines, main distribution channels and access tracks would be constructed in time to serve the community tubewell scheme at no cost to the bene- ficiary farmers (paras 51 and 56). IBRD 13527

NEPALL E h ,5 0 z i-; 0 r4ArC"0N Pro err areas f A," *.t-anO Map i R Rers&-strems I PROJECT : I- 7 _ Barrage NARAYANIZONE IRRIGATIONDEVELOPMENT STAGE Project Location2 - Controlgso I A Railways XA Ge X3 Z-+,u_ nternationallho nd ~ N E P A L

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