South Asia Subregional Economic Cooperation Power Transmission and Distribution System Strengthening Project
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Report and Recommendation of the President to the Board of Directors Project Number: 50059-003 June 2020 Proposed Loan, Administration of Grant, and Administration of Technical Assistance Grant Nepal: South Asia Subregional Economic Cooperation Power Transmission and Distribution System Strengthening Project Distribution of this document is restricted until it has been approved by the Board of Directors. Following such approval, ADB will disclose the document to the public in accordance with ADB's Access to Information Policy. CURRENCY EQUIVALENTS (as of 20 May 2020) Currency unit – Nepalese rupee/s (NRe/NRs) NRe1.00 = $0.00823 $1.00 = NRs121.46 ABBREVIATIONS ADB – Asian Development Bank ERC – Electricity Regulatory Commission GAP – gender action plan IEE – initial environmental examination MW – megawatt NEA – Nepal Electricity Authority PAM – project administration manual PMD – Project Management Directorate SASEC – South Asia Subregional Economic Cooperation TA – technical assistance NOTES (i) The fiscal year (FY) of the Government of Nepal and its agencies ends on 15 July. “FY” before a calendar year denotes the year in which the fiscal year ends, e.g., FY2020 ends on 15 July 2020. (ii) In this report, "$" refers to United States dollars. Vice-President Shixin Chen, Operations 1 Director General Kenichi Yokoyama, South Asia Department (SARD) Director Priyantha Wijayatunga, Energy Division (SAEN), SARD Team leader Jiwan Acharya, Principal Energy Specialist, SAEN, SARD Team members Aaron Dennis, Social Development Specialist, SAEN, SARD Len George, Senior Energy Specialist, SAEN, SARD Sajid Raza Zaffar Khan, Financial Management Specialist, Portfolio, Results, and Quality Control Unit, Office of the Director General, SARD Rosanna Mae Labitag, Operations Assistant, SAEN, SARD Pushkar Manandhar, Senior Project Officer (Energy), Nepal Resident Mission (NRM), SARD Emma Marsden, Senior Environment Specialist, SAEN, SARD Lyailya Nazarbekova, Principal Counsel, Office of the General Counsel Karen Grace Ochavo, Associate Environment Officer, SAEN, SARD Arun Rana, Senior Project Officer, NRM, SARD Grishma Shah, Project Officer (Energy), NRM, SARD Deepak Singh, Senior Environment Officer, NRM, SARD Suman Subba, Senior Social Development Officer (Gender), NRM, SARD Laxmi Subedi, Senior Social Development Officer (Safeguards), NRM, SARD Peer reviewer Dae Kyeong Kim, Senior Energy Specialist (Smart Grids), Energy Sector Group, Sustainable Development and Climate Change Department In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area. CONTENTS Page PROJECT AT A GLANCE I. THE PROPOSAL 1 II. THE PROJECT 1 A. Rationale 1 B. Project Description 4 C. Value Added by ADB 5 D. Summary Cost Estimates and Financing Plan 6 E. Implementation Arrangements 7 III. ATTACHED TECHNICAL ASSISTANCE 8 IV. DUE DILIGENCE 8 A. Technical 8 B. Economic and Financial Viability 9 C. Sustainability 9 D. Governance 9 E. Poverty, Social, and Gender 10 F. Safeguards 11 G. Summary of Risk Assessment and Risk Management Plan 12 V. ASSURANCES 12 VI. RECOMMENDATION 12 APPENDIXES 1. Design and Monitoring Framework 13 2. List of Linked Documents 16 Project Classification Information Status: Complete PROJECT AT A GLANCE 1. Basic Data Project Number: 50059-003 Project Name South Asia Subregional Economic Department/Division SARD/SAEN Cooperation Power Transmission and Distribution System Strengthening Project Country Nepal Executing Agency Nepal Electricity Authority Borrower Government of Nepal (NEA) Country Economic https://www.adb.org/Documents/LinkedDocs/ Indicators ?id=50059-003-CEI Portfolio at a Glance https://www.adb.org/Documents/LinkedDocs/ ?id=50059-003-PortAtaGlance 2. Sector Subsector(s) ADB Financing ($ million) Energy Electricity transmission and distribution 200.00 Total 200.00 3. Operational Priorities Climate Change Information Addressing remaining poverty and reducing inequalities GHG reductions (tons per annum) 78,724 Accelerating progress in gender equality Climate Change impact on the Low Tackling climate change, building climate and disaster resilience, and Project enhancing environmental sustainability Making cities more livable ADB Financing Strengthening governance and institutional capacity Adaptation ($ million) 1.00 Fostering regional cooperation and integration Mitigation ($ million) 118.90 Cofinancing Adaptation ($ million) 0.00 Mitigation ($ million) 18.20 Sustainable Development Goals Gender Equity and Mainstreaming SDG 5.b Effective gender mainstreaming (EGM) SDG 7.a SDG 13.a Poverty Targeting General Intervention on Poverty 4. Risk Categorization: Low . 5. Safeguard Categorization Environment: B Involuntary Resettlement: B Indigenous Peoples: C . 6. Financing Modality and Sources Amount ($ million) ADB 200.00 Sovereign Project (Concessional Loan): Ordinary capital resources 200.00 Cofinancing 35.00 Government of Norway - Project grant (Full ADB Administration) 35.00 Counterpart 87.00 Government 87.00 Total 322.00 Note: An attached technical assistance will be financed on a grant basis by the ATF - Norway TA Grant in the amount of $5,000,000. Currency of ADB Financing: US Dollar Source: Asian Development Bank This document must only be generated in eOps. 17022020082540472556 Generated Date: 05-Jun-2020 14:02:40 PM I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on a proposed loan to Nepal for the South Asia Subregional Economic Cooperation Power Transmission and Distribution System Strengthening Project. The report also describes the proposed (i) administration of a grant, and (ii) administration of technical assistance (TA), both to be provided by the Government of Norway, for the South Asia Subregional Economic Cooperation Power Transmission and Distribution System Strengthening Project, and if the Board approves the proposed loan, I, acting under the authority delegated to me by the Board, approve the administration of the grant and the administration of the TA. 2. The proposed project will complete the reinforcement and modernization of the power supply system in Kathmandu in Bagmati Province.1 This project will also begin strengthening distribution systems outside of Kathmandu in a systematic and phased manner starting with the Bharatpur metropolitan area of Chitwan district in Bagmati Province and Pokhara of Kaski district in Gandaki Province, where supply interruptions are frequent and prolonged. The project will also support Province 2, where the quality of electricity supply is poor and about 20% of households are still without access to the national grid. Further, the project will strengthen transmission lines for evacuation of hydropower to the main load center in Kathmandu and other load centers, while excess power is traded with neighboring countries. II. THE PROJECT A. Rationale 3. Nepal is a landlocked, mountainous country located between the large and fast-growing economies of the People’s Republic of China to the north and India to the east, west, and south. Nepal’s gross domestic product (GDP) growth averaged 7.3% during fiscal year (FY) 2017– FY2019. With deepening economic uncertainties due to the coronavirus disease (COVID-19) pandemic, compounded by social and health emergencies, the preliminary estimates from the Central Bureau of Statistics in Nepal show that GDP growth will significantly decline to 2.3% in FY2020.2 The need to stimulate post-COVID-19 economic recovery by developing Nepal’s infrastructure has become more relevant. 4. Sector challenges. Following years of facing chronic electricity shortages, especially during dry winter months (October to March), Nepal made significant improvements in electricity supply during FY2017 and FY2018. These improvements were achieved through a combination of (i) increased electricity imports from India of about 400 megawatts (MW); (ii) improved transmission capacity and operational flexibility by commissioning new transmission facilities; and (iii) better load management involving major industrial customers. While there is currently no significant gap between electricity demand and supply, the power transmission and distribution systems need further strengthening to increase network capacity and redundancy and eliminate bottlenecks between generation hubs and load centers. Also, although 78% of Nepal’s population has access to grid-supplied electricity, the distribution systems require immediate upgrading and expansion to improve the reliability and quality of supply, and to facilitate expected future demand growth. The poor financial position of Nepal Electricity Authority (NEA), due to poor billing and collection practices, and inadequate tariffs, impinge on its capacity to invest in distribution system 1 Nepal is composed of seven provinces as defined by Schedule 4 of the Constitution of Nepal. Some of the provinces have names in place while others are recognized by numbers. 2 GDP estimates for FY2020 of the Central Bureau of Statistics, Government of Nepal, published on 29 April 2020. 2 expansion, and address high technical and commercial losses arising from deteriorated and under-capacity assets and electricity theft. These investment requirements over the next 10 years until 2030 are beyond the budgetary resources of the government. At the same time, the investment environment in the