Air Transport Capacity Enhancement Project

Report and Recommendation of the President to the Board of Directors

Project Number: 34349 October 2009

Proposed Loan and Asian Development Fund Grant Nepal: Air Transport Capacity Enhancement Project

CURRENCY EQUIVALENTS (As of 26 October 2009)

Currency Unit – Nepalese rupee/s (NRe/NRs) NRe1.00 = $0.0134 $1.00 = NRs74.706

ABBREVIATIONS

ADB – Asian Development Bank CAAN – Civil Aviation Authority of Nepal CNS – communication navigation surveillance EIRR – economic internal rate of return EMP – environmental management plan FIRR – financial internal rate of return GDP – gross domestic product ICAO – International Civil Aviation Organization ICB – international competitive bidding IEE – initial environmental examination MOTCA – Ministry of Tourism and Civil Aviation NVC – National Vigilance Centre PCU – project coordination unit PIU – project implementation unit PPMO – Public Procurement Monitoring Office TIA – Tribhuvan International Airport

NOTES

(i) The fiscal year (FY) of the Government and its agencies ends on 15 July. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2009 ends on 15 July 2009.

(ii) In this report, "$" refers to US dollars.

Vice-President X. Zhao, Operations 1 Director General K. Senga, South Asia Department (SARD) Director K. Higuchi, Transport and Communications Division, SARD

Team leader D. K. Lee, Transport Specialist, SARD Team members N. Chand, Procurement Officer, SARD K. Karki, Project Implementation Officer, SARD L. M. Tai, Social Development Specialist, SARD J. Versantvoort, Counsel, Office of the General Counsel

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

LOAN AND PROJECT SUMMARY i MAP I. THE PROPOSAL 1 II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 1 A. Performance Indicators and Analysis 1 B. Analysis of Key Problems and Opportunities 2 III. THE PROPOSED PROJECT 5 A. Impact and Outcome 5 B. Outputs 5 C. Special Features 6 D. Project Investment Plan 7 E. Financing Plan 7 F. Implementation Arrangements 8 IV. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS 13 A. Technical Benefit 13 B. Institutional Benefit 13 C. Economic and Financial Aspect 13 D. Financial Sustainability 14 E. Social Impacts 14 F. Environmental Impacts 15 G. Project Risks 16 V. ASSURANCES AND CONDITIONS 16 A. Specific Assurances 16 B. Conditions for Loan and Grant Effectiveness 17 VI. RECOMMENDATION 17

APPENDIXES 1. Design and Monitoring Framework 19 2. Sector Analysis 22 3. External Assistance 31 4. Summary of Design Standards and List of Priority Improvements 32 5. Detailed Cost Estimates and Financing Plan 36 6. Implementation Schedule 37 7. Procurement Plan 38 8. Project Organization Structure 43 9. Financial Management and Sustainability 44 10. Economic and Financial Assessment 46 11. Summary Poverty Reduction and Social Strategy 54

SUPPLEMENTARY APPENDIXES (available on request) A. Summary Initial Environmental Examination B. Initial Environmental Examination C. Outline Terms of Reference for Project Management Advisory Service D. Outline Terms of Reference for Design and Supervision Consultant E. Outline Terms of Reference for Capacity Strengthening Consultant F. Consultant Recruitment Schedule – Advance Action

LOAN AND PROJECT SUMMARY

Borrower Nepal

Classification Targeting classification: General intervention Sector (subsector): Transport, and information and communication technology (air transport) Themes (subthemes): Economic growth (promoting economic efficiency and enabling business environment, widening access to markets and economic opportunities), regional cooperation and integration, private sector development (public–private partnerships), capacity development (institutional development, organizational development) Location impact: national (high), rural (medium), regional (medium), urban (low)

Environment Category B Assessment An initial environmental examination was undertaken. (Supplementary Appendix A)

Project Description The Air Transport Capacity Enhancement Project will enhance safety and capacity at Tribhuvan International Airport (TIA) in Kathmandu and three remote domestic airports—Lukla, Rara, and Simikot. TIA's airfield side infrastructure will be reconfigured and upgraded to international safety standards, including provision or construction of (i) about 1,400 meters (m) of new main taxiways and link taxiways, (ii) runway end safety area and extension, (iii) runway approach lights, (iv) an instrument landing system localizer, (v) an uninterrupted power supply system for essential airfield and security area lights, (vi) air traffic communication equipment,(vii) additional international and domestic aircraft parking apron area, and (viii) upgrading of rescue and fire fighting system. TIA's terminal infrastructure will be rehabilitated with the existing international terminal refurnished and upgraded, and a new temporary domestic terminal of about 10,000 square meters (m2) constructed. Basic safety improvements at the three remote domestic airports include a visual approach guidance system and abbreviated precision approach path indicator at Lukla airport, and runway threshold identifiers and runway end lights, air traffic control equipment, and meteorological equipment at Simikot and Rara airports.

The Project will also improve overall sector management by implementing a 3-year capacity development program for the Civil Aviation Authority of Nepal (CAAN). CAAN's organizational and management capacity will be strengthened by updating the existing regulations, developing a strategy to adapt the regulatory framework based on international standards, improving human resources development, upgrading the financial and management information system, implementing a systematic maintenance ii

program, and identifying viable opportunities for private sector participation for future airport infrastructure development and maintenance.

Rationale Due to the challenging terrain in Nepal, air transport is an important part of the country’s overall transport system, providing access to many remote towns and villages in the mountainous areas. Nepal's natural landscape and cultural heritage offer tourism development potential. A safe and reliable air transport system is vital to achieving the Government's tourism development targets, and therefore receiving the economic benefits. TIA is the country's only international airport and safety concerns urgently need to be addressed. TIA's airside facilities, runways, taxiways, apron, and communication navigation surveillance equipment are not fully compliant with international safety standards and recommended practices. The Project will provide improvements to address the current safety issues and capacity constraints.

The domestic airports in Lukla, Rara, and Simikot serve remote areas that are otherwise inaccessible by road, and air transport is an essential mode of communications for both the local communities and tourists. These airports will support tourism development and need urgent rehabilitation and upgrading. The Project will upgrade and improve communication equipment, visual approach aids, and weather equipment.

CAAN is responsible for the administration of civil aviation in Nepal and is essentially functioning well. However, further institutional enhancement, especially in its operational efficiency and management capacity, is necessary to effectively handle the expected demand of greater air transport traffic in the medium term. Overall, the Project is to address major factors hindering the future growth of the air transport subsector by improving safety to international standards, easing capacity constraints, and enhancing CAAN's organizational effectiveness.

Impact and Outcome The impact will be improved transport connectivity, promoting broad-based economic growth. The Project's immediate outcome will be improved safety and capacity at TIA and at remote domestic airports in Lukla, Rara and Simikot, and improved institutional capacity of CAAN.

Project Investment Plan The investment cost of the project is estimated at $92.0 million, including taxes and duties of about $11.5 million.

Financing Plan The proposed financing consists of (i) a grant not exceeding $10 million; and (ii) a loan in various currencies equivalent to Special Drawings Rights 44,388,000, $70 million equivalent, from the Special Funds resources of the Asian Development Bank (ADB). The loan will have a term of 32 years, including an 8-year grace

iii

period, an interest charge at the rate of 1.0% per year during the grace period and 1.5% per year thereafter, and such other terms and conditions as set forth in the financing and project agreements. ADB will finance 87% of the total project investment cost, and the Government will finance 13% of the total project investment cost. The Government's financing includes taxes, duties, and in-kind contributions for project management and office operations.

Period of Utilization Until 30 June 2015

Estimated Project 31 December 2014 Completion Date

Executing Agency Civil Aviation Authority of Nepal

Implementation CAAN is responsible for carrying out the Project and has Arrangements established a project coordination unit (PCU), led by CAAN's deputy director general of the Air Transport Planning and Development Directorate. The PCU will be responsible for overall project management, including (i) consultant selection, (ii) procurement, (iii) withdrawal applications, (iv) environmental and social monitoring, and (v) maintenance of project accounts and completion of loan financial records for auditing purposes. Under the project coordination unit, two project implementation units (PIUs) will be responsible for the day-to-day monitoring and execution of the infrastructure and capacity development project components.

Procurement All procurement to be financed under the Project will be carried out in accordance with ADB’s Procurement Guidelines (2007, as amended from time to time). International competitive bidding (ICB) will be used for procurement of works estimated to cost more than $1.0 million and for goods estimated to cost more than $500,000. Shopping will be used for works and goods estimated to cost less than $100,000. National competitive bidding will be used for works and goods estimated to cost less than those stated for ICB, in accordance with Nepal's national competitive bidding procedures acceptable to ADB. Indicative contract packages, to be procured using ICB, include two works packages and one goods package ranging in cost from $5 million to $39 million.

Consulting Services All consultants under the Project will be recruited in accordance with ADB’s Guidelines on the Use of Consultants (2007, as amended from time to time). For project management advisory services, one international and one national individual consultant will be recruited, using individual selection procedure. For detail design and supervision, a firm of international consultants will be recruited using quality- and cost-based selection procedures, with full technical proposal and a 90:10 proportion of quality to cost.

The services will be implemented over about 48 calendar months and will require about 116 international person-months and 531 national person-months of services. For the development and implementation of the capacity development program, a firm of international consultants will be recruited using quality- and cost- based selection procedures, with full technical proposal and a 90:10 proportion of quality to cost. The services will be implemented over about 36 calendar months and will require about 118 international person-months and 82 national person- months of services.

Project Benefits and The Project will contribute to improving the performance of the air Beneficiaries transport subsector by addressing major factors hindering its effectiveness—improving safety to international standards, easing capacity constraints, and enhancing institutional capacity. The Project will align air transport services and facilities in Nepal with international safety standards and recommended practices, thereby increasing regional and international air connectivity for Nepal and promoting regional tourism. The beneficiaries will be the people, companies, and government and nongovernment agencies that use the air transport service directly and indirectly. International and domestic passengers will experience enhanced quality of service. TIA is the only international airport in Nepal and the improved safety and capacity will also help sustain and support tourism development throughout the country. The communities living in the areas served by the three remote domestic airports will directly benefit from the improved accessibility, including the opportunity to promote tourism. The incremental growth in tourism revenue will support small business and local employment opportunities.

Risks and Assumptions The risk of delayed implementation will be mitigated by taking advance action for recruitment of the detail design and supervision consultant, and engaging an international and a national individual consultant to provide project management support.

CAAN generates sufficient revenue to cover routine maintenance requirements. Its maintenance management and planning capabilities will be strengthened under the Project's capacity development component. CAAN will implement the maintenance program and allocate sufficient budget to meet requirements.

There are general risks associated with the internal security situation in certain parts of the country, which can hinder construction activities. However, potential risk to the Project is minor as the main component of the Project is situated in the capital area of Kathmandu, and the works are within the confined and secured area of the respective airports.

The Procurement risks will be mitigated by adapting (i) ADB's prior

review process, and (ii) the Government's technical audits conducted under the supervision of the National Vigilance Centre. All works and goods packages are procured using ICB procedures. The potential risk is further reduced due to the nature of the improvement works and goods being procured, which are mainly superstructure works and specialized equipment. This facilitates easier verification of quantity and quality.

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NEPAL AIR TRANSPORT CAPACITY 30 o 00'N HUMLA ENHANCEMENT PROJECT 30 o 00'N FAR-WESTERN Simikot Airport DEVELOPMENT MID-WESTERN REGION DEVELOPMENT Simikot REGION DARCHULA Darchula PEOPLE'S REPUBLIC N MAHAKALI OF CHINA BAJHANG Gamgadhi MUGU Chainpur BAJURA BAITADI Rara Airport 0 20 40 60 80 100 Patan SETI Martadi Dadeldhura KARNALI Jumla Silgarhi WESTERN Kilometers Mangalsen JUMLA DOLPA DADELDHURA KALIKOT DEVELOPMENT ACHHAM DOTI Manma MUSTANG REGION Dunai Mahendranagar DAILEKH JAJARKOT Jomson KANCHANPUR MANANG Dailekh Jajarkot CENTRAL Masuliya BHERI RUKUM DHAWALAGIRI Chame DEVELOPMENT Kol MYAGDI KAILALI Birendranagar Beni REGION SALYAN KASKI EASTERN SURKHET RAPTI PARBAT LAMJUNG Salyan ROLPA BAGLUNG Pokhara GANDAKI DEVELOPMENT BARDIYA GORKHA Dhunche RASUWA Liwang Baglung REGION Besisahar BAGMATI Gulariya PYUTHAN Kushma BANKE Tulsipur Pyuthan GULMI Gorkha SINDHUPALCHOK SYANJA TANAHU Bidur NUWAKOT Chautara Tamghas Tribhuvan International Airport Nepalganj Sandikharka Syanja DHADING Lukla Airport ARGHAKHANCHI PALPA Kathmandu DOLAKHA Tansen KATHMANDU SANKHUWASABHA DANG LUMBINI Naubise TAPLEJUNG Butwal Narayangarh BHAKTAPUR Charikot SOLUKHUMBU KAPILBASTU NAWALPARASI LALITPUR Bhaktapur Phungling NARAYANI Salleri Taulihawa RUPANDEHI KABHRE RAMECHHAP Khandbari MECHI CHITWAN PALANCHOK OKHALDHUNGA Bhojpur Parasi Hetauda Ramecchap Diktel TERHATHUM Okhaldhunga BHOJPUR Phidim PARSA Sindhulimadi KHOTANG Terhanthum MAKWANPUR SINDHULI National Capital SAGARMATHA PANCHTAR Ilam 27 o 00'N BARA JANAKPUR Dhankuta 27 o 00'N District Headquarters Birganj Kalaiya DHANKUTA SARLAHI UDAYAPUR ILAM Project International Airport RAUTAHAT Malangawa Gaighat Dharan KOSHI DHANUSHA SIRAHA Project Remote Domestic Airport Gaur SUNSARI I N D I A MAHOTTARI Janakpur MORANG JHAPA National Highway Siraha SAPTARI Chandragadhi Jaleswar Rajbiraj Rangeli Feeder/District Road River District Boundary Zonal Boundary Regional Boundary International Boundary 0

9 Boundaries are not necessarily authoritative. - 3 0 9 3

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I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on (i) a proposed loan, and (ii) a proposed grant, both to Nepal for the Air Transport Capacity Enhancement Project.

II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES

2. Transport connectivity is vital to Nepal's priority development goals. Connectivity provides accessibility, bringing excluded regions and social groups into the economic mainstream and promoting broad-based economic growth. Due to the challenging terrain in Nepal, air transport is an important part of the country’s overall transport system, providing access to many remote towns and villages in the mountainous areas. International travelers, mostly arriving and departing by air, sustain the development of tourism, trade, and commerce. The Government's objective is to develop and expand the country's civil aviation system and to ensure safe and effective operation of flights, communication, and air navigation and air transportation services. The Project1 will support the Government's objective by improving safety to comply with international standards, easing capacity constraints, and enhancing institutional capacity. The design and monitoring framework is in Appendix 1. Details of the sector analysis are in Appendix 2.

A. Performance Indicators and Analysis

3. Air transport in Nepal has a significant role in the administrative, economic, and social development of the country. In the absence of adequate surface transport it has provided essential links between Kathmandu (the capital city) and the various administrative and commercial centers of the country, as well as with the outside world. For many mountainous and remote rural districts of the country, air transport provides the only means of mechanized transport. It also provides vital support to the development of tourism as well as trade, manufacturing, and commerce.

4. Nepal has 47 airports, comprising one international airport—Tribhuvan International Airport (TIA) in Kathmandu—four regional airports, and 42 other domestic airport facilities comprising airports, and short-take off and landing strips. Of the 42 domestic airports, only 27 are operational. International air services are provided at TIA by the national airline, Nepal Airlines Corporation, and 20 other international airlines, which serve 21 foreign destinations in 14 countries. Domestic commercial air services are provided by seven domestic air carriers, offering both fixed and rotary wing scheduled and charter services. Twenty one main domestic destinations are served by regular scheduled domestic services, including the four regional airports of Bhairawa, Biratnagar, Nepalgung and Pokhara. The principal domestic airlines are Yeti Airlines and Buddha Air.

5. The volume of air traffic, expressed in terms of air passengers, has increased considerably over the past 20 years, with annual growth rates varying from 7% to more than 17% per annum. In 2007 and 2008, strong growth in excess of 12% per year was recorded for passenger traffic and 7% in aircraft movements. For TIA, international and domestic passenger traffic is forecast to increase from 2.8 million in 2008 to 4.6 million passengers annually by 2013 and to 9.3 million passengers by 2028.

1 Asian Development Bank (ADB). 2007. Technical Assistance to Nepal for Preparing the Civil Aviation Airport Project. Manila (approved on 14 December). 2

6. The Civil Aviation Authority of Nepal (CAAN), an autonomous organization established in 1998, is responsible for the administration of civil aviation in Nepal. CAAN fulfills its functions of regulating civil aviation and operating the national airports and air traffic and air navigation systems. CAAN's performance in regulating civil aviation has ensured that a good safety record has been achieved for air transport operations in Nepal’s uniquely hazardous aviation environment, while the operation of the airport and air navigation system has generated a profit for CAAN since 2004. CAAN’s performance has been hampered by a shortage of qualified and trained staff in both the regulatory and operational functions, which has placed the organization under pressure. A lack of management systems, such as computerization and information management, has also limited the capability and efficiency with which the organization operates.

7. CAAN’s financial performance has improved considerably since its establishment in 1998. The early years of operation resulted in operating losses. However, this was turned around by FY2004, when a positive net operating profit was first recorded. From FY2004 onwards, CAAN has been in a profitable position in every year to FY2008, the latest year for which data is currently available. In FY2008, CAAN’s revenues were NRs1.93 billion (approximately $25 million). These were generated from airport aeronautical charges (72% of revenues derived from the passenger service charge, aircraft landing fees, aircraft parking and hangar charges, and aviation fuel surcharge), non-aeronautical charges generated from commercial activities (21%), air traffic services charges (6%), and regulation (1%). Operating expenses in the same year were NRs550 million ($7.1 million), comprising payroll costs and benefits (53%), direct operating expenses (31%), and administrative and general expenses (16%). CAAN’s overall expenditure on maintenance is an estimated NRs44.7 million, or 25% of direct operating costs, which is lower than would normally be expected, suggesting a lower than desirable level of maintenance effort.

8. The profitability of CAAN is mainly attributable to the operation of TIA, which generates almost 91% of CAAN’s total revenue. The four regional airports account for only 5% of total revenues, but taken together return a profit to CAAN of just over NRs31.5 million. Only three of the four regional airports are profitable. Of the other 27 operating domestic airports, only four of these are profitable on operations. However, many of these domestic airports serve remote areas and are operated largely for social and administrative reasons. In aggregate, operation of the 27 domestic airports comes close to breaking even, returning only a very small loss. It is clear that the financial performance of CAAN is very much determined by the financial performance of TIA and its ability to accommodate increasing air traffic and passenger levels. In turn, this is partly dependent upon TIA's ability to continue operating satisfactorily, retain and increase traffic, and maintain its equipment and facilities.

B. Analysis of Key Problems and Opportunities

1. Main Sector Issues and Government Initiatives

9. As air traffic is forecasted to double by 2019, Nepal's air transport system needs to improve safety and capacity, and enhance institutional effectiveness in terms of regulatory function, airport operation, and air navigation and air traffic services. Under the Government's Three Year Interim Plan (FY2008–FY2010), upgrading TIA and other domestic airports, and strengthening institutional capabilities, are among the main strategies for the civil aviation sector.

a. Safety at Tribhuvan International Airport and Other Domestic Airports

10. Safety concerns at TIA urgently need to be addressed. Its airside facilities, runways, taxiways, and apron are not fully compliant with the International Civil Aviation Organization’s (ICAO's) safety and security standards and recommended practices. A large portion of the essential communication navigation surveillance (CNS) equipment is outdated, and suffers from technical problems and a scarcity of spare parts. To minimize risks, flights, especially international ones, are concentrated in the day time, leading to inefficiency in airport operations. The use of the existing international terminal area is not optimized for passenger processing. The quality of passenger services in both the international and domestic terminals is poor and inadequate.

11. While TIA is the main focus of improvement needs, the Government has identified three domestic airports—Lukla, Rara, and Simikot—which serve remote areas that are otherwise inaccessible by road and where air transport is essential for both the local communities and tourists. These airports will support tourism development and need urgent rehabilitation and upgrading. Upgrading communication equipment, improving visual approach guidance and weather equipment, and surfacing the runways are among the required improvements.

b. Civil Aviation Authority of Nepal Capacity Building

12. Human Resources Development. One of CAAN's main capacity constraints is a shortage of qualified and trained staff. The current staff complement is 774, against an authorized staffing level of 1,065. Consequently, CAAN is understaffed by 27% and is short of staff in areas that are critical to its functions as a regulator of civil aviation and as the operator of the airports and air traffic and air navigation system. In terms of capacity building for human resources development, there is a need to address both the salary levels and the position and staff grading system, and to revise the personnel rules to support the development of the organization, not hinder it. At the same time, assistance to CAAN is needed to establish appropriate budgets for CAAN departments, through developing a business plan for the organization, and to assist CAAN in recruiting staff. There is a need to develop a training program for the entire organization for implementation by international and domestic training experts to provide specific training to CAAN staff.

13. Financial Management and Information Systems. CAAN operates within an environment where computerization has not been applied, except in a very few offices. In this environment, information cannot generally be shared among staff, or stored electronically. The organization therefore relies upon manual systems, and the storage of information is principally in hard-copy form. As a result, it is difficult and time consuming for staff to obtain information, retrieve information and documents, and to carry out appropriate analysis. The manual nature of the present information management system is also prone to inefficiency in performing job functions, and potential loss of critical documents and information. Similarly, financial information collected from the regional and domestic airports is collected in manual form, and manually entered in spreadsheets when received at headquarters. A proprietary accounting system is needed within CAAN, as is a better system of collecting financial information from the airports and ensuring its accurate representation in the accounts held at headquarters. A computerized management information system is needed to transform the present manual information management approach into a system in which information entry, storage, and retrieval of all information necessary to support CAAN’s operations can be carried out electronically on a networked computer system. This will enable greater management efficiency,

easier and quicker access to information, and the ability to carry out analysis of CAAN’s operations and performance. The details of the financial management assessment are provided in Appendix 9.

14. Private Sector Participation. Outside the operations of the airline services, the private sector plays only a limited role in the operation of air transport infrastructure in Nepal, such as retailing in the passenger terminals. To enhance the quality and efficiency of services, there is a need to assess the opportunities for a greater private sector role in the operation and development of air transport infrastructure, such as construction and operation of the entire airport, or portions such as passenger and cargo terminals, ground handling services, and air traffic services. CAAN has not developed its own framework for becoming involved with the private sector in build-operate-transfer projects, nor have the implications for CAAN and its revenues been studied. CAAN is interested in developing a new international terminal at TIA either entirely, or though cofinancing, with the private sector. However, the financial feasibility of this project is unknown, and it is therefore unclear whether the project could attract a private sector developer. To assess the possibility, the proposed Project will include a due diligence study needed to explore the feasibility of developing the proposed new international terminal building to establish whether this project is financially feasible, and under what terms of recovery, and to identify the implications for CAAN’s revenues that might arise from private sector participation in this development project.

15. Institutional Enhancement. CAAN is responsible for both the regulatory functions and operation of airports and air navigation services. Considering the current size of operations and traffic levels, separating the regulatory and service function is not critical or required at this stage. Some countries with much higher traffic levels do operate with arrangements similar to CAAN. An assessment indicates that the current traffic levels are not sufficient to ensure financial viability of the separated entity. However, the Government recognizes the need to start preparatory steps. To assist, the Project will prepare the legal framework and transition and implementation plans, analyze the projected traffic and revenue growth and financial viability of separated entities, and propose an implementation schedule.

2. External Assistance

16. The civil aviation subsector receives a substantial portion of external assistance through bilateral sources such as Australia, France, and Japan. This assistance is usually targeted for specific safety improvement equipment such as radar, air traffic communication equipment, institutional advisory services, and formal training in air traffic management. The Asian Development Bank (ADB) has been the main funding agency in the subsector since 1969, focusing on infrastructure improvement with respect to safety and capacity. The combined external assistance has played a key role in maintaining and improving the safety standards at TIA and various other domestic airports. In the long term, however, it can be reasonably expected that the heavy reliance on external assistance, especially bilateral sources, could be reduced as CAAN is showing signs of financial viability due to sustained traffic growth. The list of external assistance to the civil aviation sector is in Appendix 3.

17. Donor coordination was carried out through participation in the stakeholder consultation workshops. A consultation was held with the Japan International Cooperation Agency who is currently funding installation of radar equipment at various locations in the country. The proposed project scope was discussed to ensure coordination where appropriate and to avoid any potential scope duplication.

3. Lessons Learned

18. ADB's operations in the subsector have generally been successful, although the projects have often been delayed by various issues such as weak institutional capacity, lengthy government approval procedures, underestimated cost, and overoptimistic schedule. Lessons learned have been incorporated into this Project.

19. CAAN's institutional capacity, although weak at the time of its inception in 1998, has improved steadily. The Project will integrate a major capacity strengthening component to further enhance CAAN's effectiveness in terms of operational efficiency and management capacity. CAAN, as an autonomous organization, will execute the Project with streamlined internal approval procedures. The Government has also increased the ceiling amounts for contract variations requiring cabinet approval. The cost estimate will reflect current prices with adequate price contingencies for potential exchange fluctuation. The implementation schedule will be based on realistic assessment of local conditions and contractor capacity.

4. ADB's Air Transport Subsector Strategy

20. ADB's past involvement in the subsector focused mainly on the phased development of TIA, which included lengthening of main runways and taxiways, construction of an international terminal building, and expansion of the domestic terminal building. These improvements helped to alleviate congestion, sustain traffic growth, and promote tourism, playing a significant role in supporting the country's economic and social development.

21. ADB's overall strategy in the subsector is to improve domestic and international connectivity in order to support the country's development goal of promoting broad-based economic growth.

22. The Project is in line with continuing ADB assistance with strategic objectives as set out in the country strategy and program2: (i) continue assistance in the improvement of TIA and strategic domestic airports, (ii) continue to support the restructuring and reform of CAAN, and (iii) assist the Government with improving the regulatory framework for private sector participation in the subsector.

III. THE PROPOSED PROJECT

A. Impact and Outcome

23. The impact, in support of the country strategy and program, will be improved transport connectivity promoting broad-based economic growth. The Project's immediate outcome will be improved safety and capacity at TIA in Kathmandu; enhanced safety at remote domestic airports in Lukla, Rara, and Simikot; and improved institutional capacity of CAAN.

B. Outputs

24. The Project outputs are as follows:

2 ADB. 2004.Country Strategy and Program (2005–2009): Nepal.Manila.

(i) for TIA: airside infrastructure reconfigured to meet international safety standards, landside infrastructure rehabilitated and improved for larger capacity, and the CNS/air traffic management equipment upgraded;

(ii) for remote domestic airports at Lukla, Rara, and Simikot: basic safety infrastructure improved; and

(iii) for CAAN: organizational and management capabilities enhanced.

25. Investment Component: Tribhuvan International Airport and Three Remote Domestic Airports. TIA's airside will be reconfigured and upgraded with (i) construction of approximately 700 meters (m) of new taxiways and 700 m of link taxiways; (ii) construction of runway end safety area and 300 m extension for runway 02; (iii) installation of category 1 approach lights for runway 20 and simple approach lighting for runway 02; (iv) installation of an instrument landing system/localizer; (v) installation of a generator and secondary power supply for essential airfield and security area lights; (vi) installation of new air traffic communication equipment; (vii) relocation of Nepal army and domestic airlines hangars to eastern side of runway in accordance with airport master plan; and (viii) construction of approximately 80,000 square meters (m2) of new international and domestic apron. TIA's landside infrastructure will be rehabilitated and improved with the refurbishing and upgrade of the existing international terminal, and construction of a new temporary domestic terminal of 10,000 m2. Basic safety features will be improved at the three remote domestic airports, including a visual guidance system at Lukla airport; runway lights, visual aids, and meteorological equipment at Simikot and Rara airports; and runway pavement at Rara airport.

26. Capacity Development Component. The Project will implement a 3-year capacity development program enhancing CAAN's organizational and management capabilities. This includes (i) completing the ongoing preparation of the civil aviation regulations based on international standards; (ii) preparing a strategy for separating regulatory and service functions with a legal framework and implementation plan; (iii) developing a national air transport development plan and corporate business plan; (iv) devising and implementing a human resources development plan with a staff training policy and program; (v) improving the financial management system, including installation of accounting software and training to integrate physical and financial planning and management systems; (vi) implementing a computerized management information system with training; and (vii) conducting due diligence studies for private sector participation in the development and operation of airport infrastructure. Prior to implementation, assessments made during project preparation will be reviewed and needs and requirements will be confirmed and adjusted as appropriate.

C. Special Features

27. The Project will help align Nepal's air transport services and facilities with established international safety standards and recommended practices. This will improve regional and international connectivity, and promote regional tourism. The Project will assess the role and potential of public–private partnerships in the development, operation, and maintenance of Nepal's air transport infrastructure. It will help identify possible options and a way forward. The Project will help the Government prepare to implement timely reforms in terms of separating its regulatory function from service provisions.

D. Project Investment Plan

28. The project investment cost is estimated at $92.00 million, including taxes and duties of $11.45 million. The detailed cost estimates by expenditure category and by financier are in Appendix 5.

Table 1: Project Investment Plan ($ million) Item Amounta A. Base Costb 1. Works and Equipment 64.81 2. Capacity Development Component 6.05 3. Project Management Advisory, Design, and Supervision 6.96 4. Recurrent Costs for Project Management 0.72 Subtotal (A) 78.54

B. Contingenciesc 11.72

C. Financing Charges During Implementationd 1.74

Total (A+B+C) 92.00 a Includes taxes and duties of about $11.48 million. b In mid-2009 prices. c Physical contingencies computed at 10.0% for civil works and equipment, and consulting services. Price contingencies computed at 2.5% on foreign exchange costs and 10.0% on local currency costs; includes provision for potential exchange rate fluctuation under the assumption of a purchasing power parity exchange rate. d Includes interest charges. Interest during construction has been computed at 1.0% per annum during the grace period of 8 years. Source: Asian Development Bank estimates.

E. Financing Plan

29. To help finance the Project, the Government has requested a grant3 of $10 million and a loan of SDR 44,388,000 ($70 million equivalent) from ADB’s Special Funds resources. The loan will have a term of 32 years, including a grace period of 8 years, with interest charge at the rate of 1.0% per annum during the grace period and 1.5% per annum thereafter.

30. ADB will finance 87% of the total project investment cost and the Government will finance 13% of the total project investment cost. The Government's financing consists of taxes and duties, and in-kind contributions for project office accommodation, renovations, maintenance, utilities, and other miscellaneous project management costs. A detailed cost estimate and financing plan is provided in Appendix 5, including the magnitudes of physical contingencies as a percentage of the base costs and of the inflation factors used in estimating price contingencies.

3 A country's eligibility for Asian Development Fund grants under the revised grant framework is determined by its risk of debt distress. The latest debt sustainability analysis determined that Nepal had a moderate risk of debt distress and was therefore eligible to receive 50% of its Asian Development Fund allocation as grants.

Table 2: Financing Plan Amount Share of Source ($ million) Total (%) Asian Development Bank, ADF Loan 70.00 76 Asian Development Bank, ADF Grant 10.00 11 Government 12.00 13 Total 92.00 100 ADF = Asian Development Fund. Source: Asian Development Bank estimates.

31. The Government will relend the proceeds of the loan portion to CAAN, the beneficiary, with a term of 32 years, including a grace period of 8 years, and an interest charge of 5.0%4 per annum.

F. Implementation Arrangements

1. Project Management

32. The project organization structure is illustrated in Appendix 8. The implementation arrangements have been agreed to by the Government.

33. The executing agency for the Project is CAAN, responsible for carrying out the Project, including provision of policy, technical guidance, and interagency coordination.

34. A project coordination unit (PCU), established within CAAN, will implement the Project. The PCU is led by CAAN's deputy director general of the Air Transport Planning and Development Directorate as the project coordinating director, who is assisted by a procurement officer, environmental and social officer, chief project accountant, and assistant project accountant. The PCU, as single point of contact, will be responsible for overall project management, including (i) consultant selection, (ii) procurement, (iii) withdrawal applications, (iv) environmental and social monitoring, and (v) maintenance of project accounts and completion of loan financial records for auditing purposes.

35. The two project implementation units (PIUs)—one each for the infrastructure and capacity development components—are responsible for the day-to-day monitoring and execution of the respective project component, including (i) managing the activities of consultants, (ii) monitoring contractors' progress, and (iii) preparing progress reports. The PIU for infrastructure will be led by the project director of the TIA Improvement Project Directorate as the full-time project manager, assisted by a senior civil engineer, two civil engineers, an electrical/mechanical engineer, and a CNS/air traffic management engineer. The PIU for capacity development will be led by a full-time project manager, assisted by an assistant project manager and four focal persons for the main capacity development aspects of (i) financial management and accounting, (ii) human resources, (iii) law, policy and institutional reform, and (iv) airport development planning and private sector coordination. The PCU director and PIU project managers will conduct weekly progress meetings to assess progress, identify potential issues, and formulate action plans.

4 CAAN functions not only as a regulator but also as a commercially operated public corporation managing the country's airport assets. Accordingly, the relending terms are harder than those of the Asian Development Fund loan.

36. Financial management assessment was carried out; the details are in Appendix 9. CAAN operates with an adequate system of financial and management accounting, reporting, auditing, and internal controls. However, efficiency is weak due to staff resources and lack of a computerized information system. The Project's capacity strengthening component will help address this by introducing a financial management information system consisting of accounting software, networked computers, and training. For project implementation, the PCU will establish and maintain separate project records and accounts to identify the financing resources received and expenditures made for the Project, ensuring an adequate audit trail. CAAN will assign suitably qualified accountants (a chief project accountant and an assistant accountant) to the PCU for project accounting and financial management. The Government's Office of Auditor General will annually audit the project accounts and related financial statements in accordance with international auditing standards. ADB's direct payment procedure will be utilized for substantial disbursement of payments for works, goods, and consulting services.

2. Implementation Period

37. The Project will be implemented over 5 years inclusive of preconstruction activities, including detail design, bidding documents, and procurement. It is expected that the financing agreement will be declared effective in January 2010, and the Project will be completed by 31 December 2014. A detailed project implementation schedule is in Appendix 6.

3. Procurement

38. All procurement to be financed under the Project will be carried out in accordance with ADB’s Procurement Guidelines (2007, as amended from time to time). International competitive bidding (ICB) will be used for procurement of works estimated to cost more than $1.0 million and goods estimated to cost more than $500,000. Shopping will be used for works and goods estimated to cost less than $100,000. National competitive bidding will be used for works and goods estimated to cost less than that stated for ICB, in accordance with Nepal's national competitive bidding procedures acceptable to ADB as indicated in the procurement plan.

39. The works and equipment have been packaged to optimize construction management efficiency and to encourage both international and local contractors to participate in the bidding. A detailed procurement plan is in Appendix 7.

4. Consulting Services

40. All consultants under the Project will be recruited in accordance with ADB’s Guidelines on the Use of Consultants (2007, as amended from time to time) using the quality- and cost- based selection method and individual consultant selection.

41. To enhance project implementation readiness and to strengthen the capacity of CAAN, one international and one national individual consultant will be recruited to provide project management advisory services, including (i) pre-implementation activities, (ii) familiarization with ADB's project administration procedures, (iii) setting up project accounts, (iv) setting up a project reporting system and master schedule, and (v) recruiting consultant firms. At the request of CAAN, ADB will recruit the individuals using ADB's individual consultant selection method. CAAN, after confirming and accepting the selected individuals, will negotiate and sign contracts with prior review by ADB.

42. For detailed design and supervision, a firm of international consultants in association with a national firm and/or individuals will be recruited using quality- and cost-based selection procedures, with full technical proposal and a 90:10 proportion of quality to cost, emphasizing quality due to the technical nature of the assignment. It is estimated that the design and supervision services will be implemented over about 48 calendar months and will require about 116 international person-months and 531 national person-months of services. The outline terms of reference are in Supplementary Appendix D.

43. To implement the capacity development program, a firm of international consultants in association with a national firm and/or individuals will be recruited using quality- and cost-based selection procedures, with a full technical proposal and a 90:10 proportion of quality to cost, emphasizing quality due to the high impact of the assignment deliverables. It is estimated that the capacity development program will be implemented over about 36 calendar months and will require about 118 international person-months and 82 national person-months of services. A single firm or association will be recruited to carry out all the required services to optimize coordination among various departments in CAAN and minimize resources required for contract administration.

5. Advance Contracting and Retroactive Financing

44. To enhance the project implementation readiness, the Government has requested advance contracting and retroactive financing for the engagement of consulting services, starting with the individual consultants for the project management advisory service. ADB supports the Government's initiative to take advance contracting. The advance contracting and retroactive financing were approved in-principle during ADB's Management Review Meeting on 25 August 2009. Retroactive financing is for expenditures incurred on consulting services during the 12 months before the signing of the loan and grant agreement, subject to a cap of 20% of the loan and grant amount. Advance contracting or retroactive financing is not required for procurement of works and goods. The Government has been informed that ADB's support of advance contracting and retroactive financing does not commit ADB to approve the project or to finance the recruitment costs. The advance action schedule for consultant recruitment is in Supplementary Appendix F.

6. Anticorruption Policy

45. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the Government and CAAN. Consistent with its commitment to good governance, accountability, and transparency, ADB reserves the right to investigate, directly or through its agents, any alleged corrupt, fraudulent, collusive, or coercive practices relating to the Project. To support these efforts, relevant provisions of ADB’s Anticorruption Policy are included in the loan and grant regulations and the bidding documents for the Project. In particular, all contracts financed by ADB in connection with the Project shall include provisions specifying the right of ADB to audit and examine the records and accounts of CAAN and all contractors, suppliers, consultants, and other service providers as they relate to the Project.

46. The Government is strengthening its effort to fight corruption and has enacted legislation with anticorruption provisions, including the Promoting Market Competition Act, 2006; Right to Information Act, 2007; Special Court Act, 2002 (amended in 2007); and Anti-Money Laundering Act, 2008.

47. The Government has promulgated the Public Procurement Act (2007) and Public Procurement Regulations (2007), both generally acceptable to ADB and encompassing best international procurement practices. The act and regulations will be followed for national procurement of goods and works, subject to any clarification or modifications required by ADB to ensure consistency with ADB's Procurement Guidelines. As mandated by the act, the Public Procurement Monitoring Office (PPMO) has been assigned as an oversight agency for overall public procurement in Nepal. The PPMO5 under the Office of the Prime Minister and Council of Ministers is the national procurement oversight agency and is mandated to, among other things, make a recommendation to the Government for reform of the procurement policy or laws, issue technical guidelines and manuals on procurement, prepare standard bidding documents, and conduct regular training programs for stakeholders. The PPMO will conduct trainings for CAAN staff, including technical guidelines and manuals.

48. The Government and CAAN will announce the Project and business opportunities associated with the Project on their websites and disclose pertinent information in relation to goods, works, and consulting services.

49. The National Vigilance Centre (NVC) was established in August 2002, under the direct supervision and control of the prime minister of Nepal, to create awareness of corruption and activities to prevent corruption. The NVC uses preventive and promotional measures, and acts against corrupt activities with effective good governance. The NVC was established pursuant to Chapter 4 of the Anti-corruption Act, 2002. Under NVC guidelines, CAAN will appoint certified auditors, acceptable to NVC, to conduct a technical audit of the Project to examine how well the planned or design criteria are met by the Project within the allocated time frame and budget. Separate technical audits will be conducted during the following stages: (i) at the planning and design stage (focusing on preliminary planning and designing related with quality and adequacy) (ii) at the procurement stage (focusing on purchase of service and equipment mainly related with transparency and requirements of funding agencies), and (iii) at the implementation stage (focusing on accomplishment or construction that is mainly related with quality schedule and budget). The time frame for technical audits and their report format will be discussed during the ADB project inception mission.

7. Disbursement Arrangements

50. Loan disbursements will be made in accordance with ADB’s Loan Disbursement Handbook (2007, as amended from time to time) and the agreed detail arrangements. Direct payment procedure will be used for progress payments on civil works, consultants' fees, and procurement of goods. Separate imprest accounts will be established for the loan and grant portions. To expedite disbursement during implementation, as approved by ADB per specific case, statements of expenditure will be used to reimburse, liquidate, or replenish the imprest account for any individual payments not exceeding the equivalent of $100,000 from the loan and $80,000 from the grant. CAAN will establish separate imprest accounts for the loan and for the grant at the Nepal Rastra Bank (Central Bank). For the loan and grant portions, initial advances and maximum amount to be deposited to the imprest accounts will, in total, be equivalent to the estimated eligible expenditures for the next 6 months or 10% of the loan or grant amount, whichever is lower.

5 ADB is providing a technical assistance to strengthen the PPMO to implement requirements of the newly enacted act and regulations.

51. CAAN will be responsible for monitoring the project accounts, including monthly reconciliation of the accounts and provision of supportive documents for withdrawal applications for liquidation or replenishment of the account.

8. Accounting, Auditing, and Reporting

52. CAAN will maintain separate project records and accounts to identify the financing resources received and expenditures made on the Project. The project accounts and related financial statements will be audited annually in accordance with sound auditing standards set by the auditor general or independent auditors appointed by the auditor general acceptable to ADB. The audited reports and financial statements will be submitted to ADB not later than 9 months after the end of each fiscal year. To reach the target, the unaudited reports and financial statements will be submitted to the auditor general within 2 months after the end of each fiscal year. The imprest accounts and statements of expenditure will be audited as part of the regular annual audit. The auditor’s opinion of the examination of the imprest account and statements of expenditure will be set out in the auditor’s report. CAAN is aware of ADB's policy on delayed submission and also of the importance of satisfactory and acceptable audited reports. ADB reserves the right to verify the financial accounts of CAAN to confirm that the share of ADB's financing is used in accordance with ADB's policies and procedures

53. CAAN will separately prepare and submit to ADB monthly progress reports in electronic form, containing basic data, implementation progress, major issues and proposed remedial measures, and work to be undertaken in the following period. The monthly reports should be received by ADB within 15 days of the end of the month. Every quarter, CAAN will submit a consolidated progress report to ADB. In addition to the basic information provided in the monthly reports, the quarterly reports will include any changes to the implementation schedule, report on performance monitoring (including achievement of outputs and outcome), compliance with loan covenants, summary financial account for the Project, expenditures to date, and the results of monitoring of the social and environmental impacts. The format and content of both monthly and quarterly reports will be attached to the project administration memorandum to be agreed upon at the project inception mission.

54. Within 3 months of project completion, CAAN will submit to ADB a project completion report with a detailed evaluation of the project design, costs, contractors' and consultants' performance, social and economic impact, economic rate of return, and other details as requested by ADB.

9. Project Performance Monitoring and Evaluation

55. CAAN will, within 3 months of the effectiveness date of the legal agreements, develop a systematic project performance monitoring system, in a form and substance acceptable to ADB, for use throughout the life of the Project. CAAN will establish a baseline for performance indicators to be used for monitoring implementation, and thereafter conduct annual evaluation surveys, in accordance with the project performance monitoring system to evaluate the scope, implementation arrangements, progress, and achievements of the Project's objectives.

10. Project Review

56. A project inception mission will be fielded soon after the legal agreements for the Project are signed; thereafter, regular reviews will follow at least annually. As necessary, special loan administration missions and a midterm review mission will be fielded, under which any changes

in scope or implementation arrangement may be required to ensure achievement of project objectives. CAAN will monitor project implementation in accordance with the schedule and time- bound milestones, and keep ADB informed of any significant deviations that may result in the milestones not being met.

IV. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS

A. Technical Benefit

57. The main technical benefit will be enhanced compliance with international safety standards and recommended practices, and improved aircraft and passenger handling capacity. The Project will bring TIA's airside infrastructure into compliance with Annex 14 of the International Civil Aviation Organization (ICAO) with respect to airside safety standards. It will (i) improve the safety of air traffic services, air navigation, and communications; (ii) increase the runway capacity to accommodate aircraft movements more efficiently; (iii) increase the capacity of the passenger terminal buildings and car parks to accommodate forecast passenger traffic; and (iv) provide significant improvement in the water supply and sewage waste disposal. The impact at TIA is a safer operating environment for international and domestic airlines and improved passenger experience and confidence. While TIA will be the main focus of the improvements, the Project will also enhance safety and basic facilities at three remote domestic airports—Lukla, Rara, and Simikot—including, among other improvements, upgraded communication equipment, improved visual approach guidance and weather equipment, and runway surfacing. The three airports serve remote areas that are otherwise inaccessible by road. The improved safety at the remote domestic airports will help ensure accessibility for local communities and support tourism development.

B. Institutional Benefit

58. The Project will improve the organization effectiveness of CAAN in terms of operational efficiency, management capacity, long- and short-term planning, staffing, and training. This will enhance the quality of Nepal's air transport services, as well as the manner in which they are administered and managed.

C. Economic and Financial Aspect

59. The economic assessment was carried out in accordance with ADB's Guidelines for the Economic Analysis of Projects.6 By improving safety and easing capacity constraints, the Project will help ensure continued passenger traffic growth. The economic benefits are derived from the additional air traffic that will be generated and/or retained as a result of the Project. The Project will generate several types of economic benefits, including an increase in tourist spending derived from additional tourist arrivals, and additional aeronautical and commercial revenues received by the airport from this induced new traffic. The economic internal rate of return for the project investment is estimated at 23.6%. A sensitivity analysis tested the effects of possible unfavorable scenarios resulting from changes in the key parameters that determine the Project’s costs and benefits. This analysis indicates that the Project’s economic viability would remain satisfactory even under adverse scenarios, and that it would require a cost increase of 78% or a decrease in benefits of 39% to reach a cut-off economic internal rate of return of 12%. The details of the economic assessment are in Appendix 10.

6 ADB. 1997. Guidelines for the Economic Analysis of Projects. Manila.

60. The financial assessment for the project investment was undertaken using constant 2009 prices. Incremental costs and benefits were derived by evaluating the financial position of the airport under with-project and without-project scenarios. The financial internal rate of return (FIRR) for the three traffic scenarios, computed on an after-tax basis, ranges from 14.5% to 14.9%, with the most likely traffic scenario having an FIRR of 14.7%. This is well above the average cost of capital for the project funds (8.25%) or even commercial lending rates in the country. Sensitivity and risk analyses indicate that the Project's FIRR is robust under adverse conditions when compared with the average cost of capital. Based on the financial projections and financial evaluation, the Project is considered both financially viable and sustainable. The details of the financial assessment are in Appendix 10.

D. Financial Sustainability

61. Assessment of the financial sustainability of the project investments has been carried out considering the incremental financial benefits. Estimates of incremental revenue and financial projections associated with the incremental investment for the project have been prepared to assess the Project’s financial viability and sustainability as a whole. The incremental financial revenues will be sufficient to cover debt service as well as meet the additional operating and maintenance costs. Therefore, the Project's investment is fully viable financially. The details of the financial sustainability assessment are in Appendix 9.

E. Social Impacts

62. Livelihood and Poverty Reduction. Most of the impact zones (Humla, Mugu, and Solukhumbu) are located among the poorest districts in the country in terms of Human Development Index and other development indicators. Nepal's national poverty rate is about 31%; poverty rates in these districts are 42% in Humla, 51% in Mugu, and 46% in Solukhumbu. The conditions in the immediate impact zone, the district headquarters, are marginally better. In Kathmandu, although the poverty rate near the TIA is low (4.4%), the immediate impact zone is much poorer, and field study reveals that poverty here could be as high as 15%.

63. A socioeconomic survey covering 17% of the 300 households in the project-influenced area, and four public consultations and two focus group discussions, were conducted to gather feedback from the local communities on the proposed development and perceived socioeconomic impacts. The survey suggests that the primary beneficiaries of the airports in remote areas are the people who are geographically excluded and who have no access to road transport. The primary beneficiaries are the people in remote areas who will benefit from reduced prices in transportation and through reduced prices of goods and commodities. Women, the sick, and the elderly will also benefit with access to air transport service in case of emergency. The other benefits will be derived indirectly through promotion of tourism and opportunities to expand business. Employment opportunities in tourism will be enhanced. The summary poverty reduction and social strategy is in Appendix 11.

64. Gender. The Project will have no interference with the community because it is confined within the airport boundary. However, gender participation was ensured during the course of the social study by undertaking a process of gender analysis to assess the possible gender impacts. Two focus group discussions were undertaken with women belonging to different socioeconomic groups such as high-income groups, the poor, and households headed by women. The majority of the women felt positively about the possible benefits, including employment opportunities from construction and extra income from peripheral business opportunities such as tea shops and restaurants. The socioeconomic survey also revealed that

women in the project-influenced area were mainly involved in household chores, wage work at home (such as woolen threadmaking for the nearby factories), small business, shops, and farming. There are few women engaged as teachers, government officials, and nongovernment organizations. There are women’s groups operating adult literacy classes in the ward office in the community. CAAN will ensure that the local communities are given priority for possible employment related to the Project, and the contractors will not differentiate wages between men and women for work of equal value. Civil works contracts will include specific clauses on the undertakings, and compliance will be strictly monitored by CAAN assisted by the supervision consultant.

65. Involuntary Resettlement and Indigenous People. The civil works improvements at TIA and remote domestic airports are within the present airport boundaries, and there is no acquisition of private land or property. No physical displacement is envisaged, and no indigenous people will be affected by the Project.

66. HIV/AIDS. The social assessments undertaken have not indicated any significant risks with regard to HIV/AIDS. Of the households surveyed, 85% know about HIV/AIDS and its precautionary measures; about 90% are aware of the disease and know about the causes of infection. Consultations with government officials, nongovernment organization personnel, and community leaders revealed that the public health offices regularly support small activities such as celebrating AIDS Day and conducting HIV/AIDS awareness classes with school teachers. CAAN will ensure that all civil works contractors, by contractual requirement, disseminate information at worksites on the risks of sexually transmitted diseases and HIV/AIDS for those employed during construction. CAAN, assisted by the supervision consultant, will monitor compliance during project implementation.

F. Environmental Impacts

67. The Project is classified B in accordance with ADB's Environmental Assessment Guidelines, and requires initial environmental examinations (IEEs). According to the Nepalese Environment Protection Act 1997, expansion of airports requires environmental clearance by the ministry concerned—the Ministry of Tourism and Civil Aviation (MOTCA). The Project is not expected to have any significant adverse environmental impacts due to the proposed improvement program at all four airports. Improvement works are within the existing airport boundaries with no encroachment on sensitive ecological areas. All four airports, except for Rara, are away from any of the protected or sensitive areas. The potential impacts from improvement works are primarily confined to the construction stage and are temporary in nature. No impact is anticipated on flora and fauna except loss of some trees, which has been assessed to be minor. Nevertheless, for each tree lost, CAAN will plant four new trees. The impacts during the operation stage are also minimal and are primarily related to the operation and maintenance of aircraft, and the operation of incineration and sewage treatment plants. For Simikot and Rara airports, the improvements could lead to induced development near the airport. Therefore, CAAN and the local village development committees will jointly assess and adapt appropriate strategies to regulate development near the respective airports. All of the identified impacts could be mitigated with minor or negligible residual impacts and can be reduced to acceptable levels by implementing the proposed environmental management plan (EMP). CAAN will be responsible for implementing and monitoring mitigation measures defined in the EMP. In case of a change to a project component, CAAN will update the IEE and revise the EMP as required, and submit it to ADB for review. The summary IEE including the EMP is in Supplementary Appendix A. The full IEE is in Supplementary Appendix B.

G. Project Risks

68. Implementation Capacity. CAAN has prior experience with implementing ADB-funded projects, although it does not have recent experience. The PCU and PIU staff are being trained on up-to-date implementation procedures through ADB-sponsored seminars and workshops. The risk of procurement delay is being mitigated through CAAN’s advance action of project management advisory services, consisting of an international and a national individual consultant who will provide advice during consultant recruitment and procurement processes. ADB prior review will facilitate the approval process of bid evaluation. Support will be provided by the detail design and supervision consultant throughout the Project. Training on safeguard requirements will be provided to CAAN officials by environment and resettlement specialists under the design and construction supervision consultants to mitigate delays due to procedural clearance.

69. Maintenance. CAAN generates sufficient revenue to cover the routine maintenance requirements. CAAN's maintenance management and planning capabilities will be strengthened under the Project's capacity development component. CAAN will implement the maintenance program and allocate sufficient budget to meet requirements.

70. Implementation Environment. There are general risks associated with the internal security situation in certain parts of the country, which can hinder construction activities. However, potential risk to the Project is minor as the main component of the Project is situated in the capital area of Kathmandu, and the works are within the confined and secured area of the respective airports.

71. Procurement. The Procurement risks will be mitigated by adapting (i) ADB's prior review process, and (ii) the Government's technical audits conducted under the supervision of the National Vigilance Centre (NVC). All works and goods packages are procured using ICB procedures. The potential risk is further reduced due to the nature of the improvement works and goods being procured, which are mainly superstructure works and specialized equipment, which facilitates easier verification of quantity and quality.

V. ASSURANCES AND CONDITIONS

A. Specific Assurances

72. In addition to the standard assurances, the Government and CAAN have provided the following assurances, which are incorporated in the legal documents.

73. Project Management. CAAN will provide the PCU and PIUs with adequate and suitably qualified staff, resources, and facilities to implement the Project, including a chief project accountant and assistant accountant.

74. Maintenance. CAAN will develop an annual maintenance program and provide sufficient budget for undertaking the preventive and routine maintenance throughout the project implementation.

75. Counterpart Funds. The Government and CAAN will ensure the timely and adequate provision of all counterpart funds for the Project.

76. Labor. CAAN will ensure that civil works contractors comply with all applicable labor laws and regulations, do not employ child labor for construction and maintenance activities, and provide appropriate facilities for women and children in construction campsites. Local communities will be given priority to be employed by the Project. Contractors will not differentiate wages between men and women for work of equal value. A specific clause ensuring this will be included in bidding documents. CAAN will cooperate with the Department of Labor to monitor the implementation of this clause.

77. Environment. The Government will ensure that CAAN will

(i) ensure effective implementation of mitigation measures defined under the EMP; (ii) ensure that EMP requirements are included as bill of quantity in the bidding documents and operating contracts, and that the bidding document and contractor’s budget include a line item for review and upgrade of the EMP; (iii) designate one environment and social officer to closely monitor the implementation of the EMP as well as statutory requirements; (iv) submit the monitoring outcome to ADB and relevant agencies as part of progress reports on project implementation; (v) undertake an institutional environmental capacity building program as suggested by, but not limited to, the EMP to enhance the capacity of CAAN officials; and (vi) review and update the EMP, in case of any changes to project components, and send the revised EMP to ADB for review and decision on the need to undertake additional environmental assessment studies.

78. From the end of FY2010 onwards, CAAN shall maintain a debt service coverage ratio of at least 1.3.

79. The Government and CAAN shall ensure that any change in the organizational structure of CAAN does not affect its ability to perform its obligations under the Project Agreement.

B. Conditions for Loan and Grant Effectiveness

80. In addition to the standard conditions for effectiveness, the Government and CAAN must have executed a subsidiary financing agreement satisfactory to ADB, under which the Government relends the proceeds of the loan and grant to the CAAN.

VI. RECOMMENDATION

81. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve

(i) the loan in various currencies equivalent to Special Drawing Rights 44,388,000 to Nepal for the Air Transport Capacity Enhancement Project from ADB’s Special Funds resources with an interest charge at the rate of 1.0% per annum during the grace period and 1.5% per annum thereafter; a term of 32 years, including a grace period of 8 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft Financing and Project Agreements presented to the Board; and (ii) the grant not exceeding $10,000,000 to Nepal, from ADB’s Special Funds resources, for the Air Transport Capacity Enhancement Project, on terms and

conditions that are substantially in accordance with those set forth in the draft Financing and Project Agreements presented to the Board.

Haruhiko Kuroda President

Appendix 1 19

DESIGN AND MONITORING FRAMEWORK

Data Design Sources/Reporting Assumptions Summary Performance Targets/Indicators Mechanisms and Risks Impact Risk Improved transport By 2017, annual number of passengers increase by Civil Aviation Traffic volume connectivity in 75% for international and 55% for domestic Authority of Nepal affected by Nepal passengers from 2008 figures. global economy or domestic security situation

Outcome Assumption Improved safety By project completion, safety standard is enhanced ICAO's safety audit Timely delivery and capacity at TIA in accordance with the best international practices, and assessment of the Project including: (i) RWY-parallel TWY meet safety separation distance of 182.5 meters; (ii) RWY strip is clear of obstacles; (iii) international apron meets safety separation requirements; (iv) category 1 precision approach lights are operational for RWY 02 and simple approach lights are operational for RWY 20, and airport emergency service improves from ICAO's Rescue Fire Fighting Category 8 to 9.

TIA's annual passenger handling capacity is Civil Aviation increased from 1.8 mppa to 2.9 mppa (international), Authority of Nepal and from 1.0 mppa to 1.5 mppa (domestic).

Level of service for domestic terminal improves from Civil Aviation IATA's grade D to B standard. Authority of Nepal

Enhanced safety at Visual alignment guidance system and abbreviated- Civil Aviation the remote precision approach path indicator are operational at Authority of Nepal domestic airports Lukla airport; and RTIL, REL, and ATC and MET at Lukla, Rara, and equipment are operational at Simikot and Rara Simikot airports.

Improved CAAN is reorganized and staffed, and staff policy Capacity institutional and training program are implemented. development capacity performance report

Outputs By project completion: 1. TIA's airside Targeted airside improvements are completed, Project monitoring Assumption reconfigured for including (i) approximately 700 m of new taxiways and progress reports Civil works and safety, landside and 700 m of link taxiways, (ii) RESA for runway 02 equipment infrastructure and 300 m extension, (iii) CAT 1 approach lights for installation improved, and the RWY 02 and simple approach lighting for RWY 20, progress on CNS/ATM (iv) ILS/localizer, (v) 800 kVA generator and schedule equipment uninterrupted power supply system as secondary upgraded power supply for all essential airfield and security area lights, (vi) new air traffic communication equipment, (vii) Nepal army and domestic airlines

Appendix 1 20

Data Design Sources/Reporting Assumptions Summary Performance Targets/Indicators Mechanisms and Risks hangars relocated to eastern side of runway in accordance with airport master plan, and (viii) approximately 80,000 m2 of new international and domestic apron constructed. Project monitoring Targeted landside improvements are completed, and progress reports including (i) refurbishing existing international terminal, and (ii) constructing new temporary domestic terminal of 10,000 m2. Project monitoring and progress reports 2. Basic safety Targeted safety features are completed, including (i) infrastructure VAGS and A-PAPI at Lukla airport; (ii) RTIL, REL, improved at the and ATC/MET equipment at Simikot and Rara remote domestic airports; and (iii) paved runway at Rara. airports in Lukla, Rara and Simikot Capacity development performance report 3. CAAN's Targeted capacity enhancements are achieved, Assumption organizational and including; (i) civil aviation regulations based on CAAN is management ICAO's standards, (ii) strategy for separation of committed to capabilities regulatory and service functions with legal framework capacity enhanced and implementation plan, (iii) national air transport development development plan and corporate business plan, (iv) human resources development plan with staff training policy and program, (v) accounting software system, (vi) financial and management information system, and (vii) due diligence studies for private sector participation.

Activities with Milestones Inputs

1. Civil Works, Supply, and Installation of Equipment ADB: $80 million 1.1 Procurement for airside works/equipment (TIA, Simikot, and Rara) by July 2011 Government: $12 million 1.2 Procurement for landside works/equipment (TIA) by August 2011 1.3 Procurement for CNS/ATM (TIA/Lukla) by September 2011 1.4 All civil works/installation of equipment completed by March 2014 2. Project Management 2.1 Engagement of project management adviser by November 2009 2.2 Engagement of detail design/supervision consultant by April 2010 3. Capacity Development 3.1 Engagement of capacity development consultant by August 2010 3.2 Prepare human resources training program by Oct 2010 and commence staff training by April 2011 3.3 Complete civil aviation regulations and prepare necessary legal instruments for restructuring CAAN by April 2011 3.4 Review available software packages, procure and install financial management system for accounting by April 2011 3.5 Prepare strategy for separation of regulatory and service functions, transition, and implementation plan by July 2011

Appendix 1 21

Activities with Milestones Inputs 3.6 Prepare national air transport development plan, corporate business plans, and private sector participation due diligence by Dec 2011 3.7 Complete installation of computerization of CAAN by July 2012 3.8 Prepare concept plan and specification for MIS by Sept 2011 and complete installation by July 2012 A-PAPI = abbreviated precision approach path indicator, ATC = air traffic control, ATM = air traffic management, CAAN = Civil Aviation Authority of Nepal, CNS = communications navigation surveillance, ICAO = International Civil Aviation Organization, ILS = instrument landing system, m = meter, m2 = square meter, MET = meteorological equipment, MIS = management information system, mppa = million passengers per annum, REL = runway end lights, RESA = runway end safety area, RTIL = runway threshold identifier lights, RWY = runway, TIA = Tribhuvan International Airport, TWY = taxiway, VAGS = visual alignment guidance system.

______Sri Widowati Takashi Matsuo Officer-in-Charge, SATC Officer-in-Charge, SARD

Appendix 2 22

SECTOR ANALYSIS

A. Introduction

1. Air transport has played a significant role in the administrative, economic, and social development of Nepal. In the absence of adequate surface transport it has provided essential links between Kathmandu (the capital city) and the various administrative and commercial centers of the country, as well as with the outside world. For many mountainous and remote rural districts of the country, air transport services provided by seven scheduled domestic airlines operating small and medium aircraft, and six other airlines operating rotary wing aircraft on a chartered basis, also provide the only means of mechanized transport to connect them to other areas. Further, civil aviation is of critical importance to the country because most tourists arrive by air. The sector provides vital support to the development of tourism as well as to trade, manufacturing, and commerce. In light of the vital role played by civil aviation, and the uniquely hazardous aviation environment, it is of utmost importance that the primary objective of the Project is to ensure and improve safety.

B. Air Transport Operations (International/Domestic Airlines) and Traffic Growth

2. Nepal has 47 airports, comprising one international airport (Tribhuvan International Airport [TIA] in Kathmandu), four regional airports, and 42 other domestic airport facilities comprising airports, airstrips, and short take-off and landing aerodromes. Of the 42 domestic airports, only 27 are operational. International air services are provided at TIA by the national airline (Nepal Airlines Corporation) and 20 other international airlines, which serve 21 foreign destinations in 14 countries. Domestic commercial air services are provided by seven domestic air carriers, offering both fixed and rotary wing scheduled and charter services. Twenty one main domestic destinations are served by regular scheduled domestic services, including the four regional airports of Bhairawa, Biratnagar, Nepalgung, and Pokhara. The principal domestic airlines are Yeti Airlines and Buddha Air.

3. International air traffic (1.83 million passengers in 2008) is dominated by tourism, the labor market traffic for the Middle East and Asia, and business visitors. Aside from Nepal Airlines, the principal international airlines serving Kathmandu are Gulf Air, Indian Airlines, Jet Airways, Qatar Airways, and Thai Airways, which account for more than 70% of the international passenger traffic. Domestic traffic (1.04 million passengers in 2008), comprises tourism for those airports serving the tourist regions (especially Lukla and Pokhara), religious visitors (Bhairawa and other destinations of religious significance), and local Nepalese passengers traveling between Kathmandu and other regional and remote destinations. The domestic air services carry a considerable amount of freight due to the limited road system and ground transportation services.

4. The volume of air traffic, expressed in terms of air passengers, has increased considerably over the past 20 years, with annual growth rates varying from 7% to more than 17% per annum. Declines in passenger traffic have also been recorded for some years, notably in 1997 (Asian financial crisis), 2000–2002 (the 9/11 terrorist attacks in the United States in 2001 and outbreak of Severe Acute Respiratory Syndrome) and 2006 (political instability in Nepal). In 2007 and 2008, strong growth in excess of 12% per year was recorded for passenger traffic and 7%–8% in aircraft movements.

5. Most of the air traffic activity in Nepal takes place at TIA, as this is the only airport serving the international airlines and is also the base for all of the domestic airlines. Air transport

Appendix 2 23 operations at TIA are shaped by the type of market served: principally inbound tourists and outbound workers on the international services, and tourists and local Nepalese traffic on the domestic services. The tourist traffic arriving in Nepal is largely focused on the trekking districts, followed by the Kathmandu valley. However, inbound tourists do not connect directly from international flights to the domestic services, but rather travel to the interior of Nepal after a few days in Kathmandu. The international and domestic terminals at TIA operate independently.

6. Most international operations take place during day time. Although there are several international operations after dark, some airlines choose not to operate at night citing inadequacies in air navigation and lighting equipment. Demand for international facilities is therefore heavy at times during the day time, with peaks experienced on the international apron and in the international terminal building. Domestic services, which are characterized by being short haul and operated by small and medium turboprop aircraft, operate throughout the day, but not at night. However, as many of these services operate into the higher regions of the Himalayan mountain chain, domestic schedules are heavy in the mornings due to the difficulties posed by strong winds later in the day. The relatively concentrated nature of the schedules of the international airlines, and especially those of the domestic services, is such that there is heavy demand for aircraft parking on both the international and domestic aprons at TIA.

7. Air traffic levels in Nepal, and especially at TIA, are forecast to continue to grow. For TIA, passenger traffic (international and domestic) is forecast to increase from 2.8 million annual passengers in 2008 to 4.6 million annual passengers by 2013, and to 9.3 million annual passengers by 2028. This assumes that appropriate additional capacity is added at TIA to accommodate this growth.

C. Civil Aviation Infrastructure—Safety and Capacity

8. TIA is the main gateway to Nepal; around 80% of all tourists arrive by air through TIA on their way to the domestic destinations within the country. Thus, TIA is a major contributor to the socioeconomic development of the country and needs to be upgraded to meet the growth of traffic.

9. While TIA has evolved with the traffic growth, it has not been subjected to systematic planning of its development, and this has led to some nonconformance with international standards and recommended practices promulgated by the International Civil Aviation Organization (ICAO). As the air traffic increases, it is imperative that the airport develops in a systematic way to improve the safety of aircraft operations.

10. An evaluation of the existing facilities and services at the country’s main airport reveals many areas of concern from a safety perspective. These cover (i) the inadequacy of the runway end safety areas, (ii) non-availability of a simple landing visual aids system for aircraft landing from the north, (iii) the parallel taxiway being within the runway strip, (iv) the international apron being too close to the runway, (v) a severely congested domestic terminal building, (vi) the existing international terminal building fast approaching capacity, (vii) existing navigational aids being outdated and needing urgent replacement, (viii) aircraft operations and air traffic management requiring a review and updating, (ix) inadequate water supply and power supply, and (x) the lack of a sewage treatment and waste disposal system. Therefore, implementation of the airport master plan is necessary to address the safety concerns of aircraft operations at TIA.

Appendix 2 24

D. Civil Aviation Administration

11. Responsibility for the regulation of civil aviation and operation of the nation’s airports and the air traffic control and navigation system was originally vested in the Department of Civil Aviation, which was established within the Ministry of Works, Communications and Transport in 1957. This arrangement persisted until 1998, when the Civil Aviation Authority of Nepal (CAAN) was established. Enabled by the CAAN Act, CAAN is an autonomous state authority, supervised by the Ministry of Tourism and Civil Aviation. On formation, CAAN took over the regulatory and operational responsibilities of the Department of Civil Aviation, as well as most of the Department of Civil Aviation staff.

12. Legal authority for the government to regulate civil aviation was established in 1960 through the Civil Aviation Act which, although amended periodically, remains the fundamental enabling legislation for regulation of civil aviation in Nepal. The legislation requires review and amendment to reflect current conditions and the responsibilities of CAAN. Regulations have been made under the Civil Aviation Act, as well as under the CAAN Act, to enforce regulation, however there is now duplication of regulations under these acts and a rationalization is required. Civil aviation regulations made under the CAAN Act have been prepared to cover some but not all of the ICAO annexes, and these need to be completed to bring all civil aviation regulation into line with current requirements and best practice.

13. CAAN is organized into two basic components—a management group comprising four directorates and two departments, and a specialist group comprising five divisions. The total staff complement is 774, which is below the approved staffing level of 1,065 and represents a vacancy rate of 27% of approved positions. The management group is responsible for managing and operating the national airports, the air traffic and air navigation systems, and for implementing major airport projects, managing the development and training of human resources (including operation of the Civil Aviation Training Academy), assessing and certificating air transport operators, and managing CAAN’s corporate plan. The specialist group is responsible for aviation safety regulation, security, facility inspections, and standardization, and serves as a technical advisory service to the director general of CAAN.

14. CAAN fulfills its functions of regulating civil aviation and operating the national airports and air traffic and air navigation systems. Its performance in regulating civil aviation has ensured that a good safety record has been achieved for air transport operations in Nepal’s uniquely hazardous aviation environment, while the operation of the airport and air navigation system has generated a profit for CAAN since 2004. CAAN’s performance has been hampered by a shortage of qualified and trained staff in both the regulatory and operational functions, which has placed the organization under pressure. A lack of management systems, such as computerization and information management, has also limited the capability and efficiency with which the organization operates.

E. Financial Performance and Sustainability

15. CAAN’s financial performance has improved considerably since its establishment in 1998. The early years of operation resulted in operating losses; however, this was turned around by FY2004, when a positive net operating profit was first recorded. From FY2004 onwards, CAAN has been in a profitable position in every year to 2007/08 (the latest year for which data is currently available). CAAN does not pay an annual dividend to its shareholder (the Government of Nepal) but is subjected to company tax at 26.5% and to a 13% value-added tax

Appendix 2 25 on its operations. In addition, CAAN is repaying external loans, such as provided by the Asian Development Bank (ADB), through the Government at 8%. Together with its obligation to pay taxes (despite its status as a state authority), this reduces its retained earnings.

16. In FY2008, CAAN’s revenues were NRs1.93 billion (approximately $25 million). These were generated from airport aeronautical charges (71% of revenues derived from the passenger service charge, aircraft landing fees, aircraft parking and hangarage charges, and an aviation fuel surcharge), non-aeronautical charges generated from commercial activities (21%), air traffic services charges (6%), and regulation (1%). Operating expenses in the same year were NRs550 million ($7.1 million), comprising payroll costs and benefits (53%), direct operating expenses (31%), and administrative and general expenses (16%).

17. The profitability of CAAN is, in the main, attributable to the operation of TIA, which generates almost 91% of CAAN’s total revenue. The four regional airports account for only 5% of total revenues, but taken together return a profit to CAAN of just over NRs31.5 million; only three of the four regional airports are profitable. Of a further 27 operating domestic airports, only four are profitable on operations; however, many of these domestic airports serve remote areas and are operated largely for social and administrative reasons. In aggregate, operation of the 27 domestic airports comes close to breaking even, returning only a very small loss.

18. It is clear that the financial performance of CAAN is very much determined by the financial performance of TIA, and its ability to accommodate increasing air traffic and passenger levels. In turn, this is partly dependent upon the ability of the airport to continue to operate satisfactorily, retain and increase traffic, and maintain its equipment and facilities. In this last respect, CAAN’s overall level of expenditure on maintenance is an estimated NRs44.7 million, or 25% of direct operating costs, which is lower than would normally be expected, suggesting a lower than desirable level of maintenance effort.

F. Main Sector Issues

1. Safety Issues at Tribhuvan International Airport, Lukla, Rara, and Simikot

19. The main issues affecting TIA are summarized as follows:

(i) As the larger code 4E aircraft are operating regularly at the airport, in the interest of safety the airport infrastructure must be brought into compliance with the relevant standards. (ii) The current layout of the taxiways has resulted in inefficient operations, and it is especially noticeable during departures by large aircraft on runway 02 as the runway is also used as a taxiway. Aircraft backtracking on the runway closes the facility for other aircraft operations, and is a safety and capacity constraint. (iii) The existing parallel taxiway is too close to the runway and is within the runway strip. Similarly, the international apron is also not in conformity with ICAO specifications due to its proximity to the runway leading to a code E aircraft tail penetrating the transitional surface. (iv) Both the domestic and international aprons need to be relocated and capacities increased to cater to future demand. (v) As a result of the higher-than-standard departure gradient required for instrument-only operations, some international aircraft operations may be restricted in terms of take-off weight due to the requirement to maintain a high rate of climb on departure from TIA.

Appendix 2 26

(vi) While the domestic terminal building is operating beyond its capacity, the international building is nearing its rated peak capacity. In addition, the existing domestic terminal building and the military and Nepal Airlines hangars obstruct the line of sight from the air traffic control tower. The domestic terminal building should be demolished and the hangars should be relocated to the east of the runway. Construction of a new international terminal building and refurbishment of the existing one into a domestic terminal building are proposed. (vii) Inadequate electrical power supply and prolonged power failures leave essential components of the airport without electricity, thereby impacting airport operational safety and efficiency. Future electrical loads must be assessed and adequate provisions made to meet the requirements. Use of solar energy to augment the municipal electrical supply has been proposed. (viii) The inadequate water supply situation must be addressed by developing additional bore wells, installing a water treatment and purification plant, and having a distribution system. Rainwater harvesting has been recommended. (ix) All sewage and waste water from the airport is not being treated before discharging into the nearby Bagmati River. A new sewage treatment plant and waste disposal system must be installed to ensure that the river is not polluted. (x) TIA’s emergency services need upgraded equipment and staff training programs to be able to provide ICAO rescue and firefighting category 9 level of protection.

20. Lukla Airport. The airport has extreme longitudinal slope on the runway due to the terrain. It does not have any navigational aid to assist in the approach and landing of aircraft, especially needed when the visibility is not optimum. This has a serious impact on the safety of operations. The ground infrastructure is reported to be otherwise satisfactory considering the current traffic pattern.

21. Simikot Airport. The airport does not have a paved runway, taxiway, or apron, although CAAN is undertaking this paving project. The runway length is just adequate for aircraft carrying limited payload, and the landing approach is difficult. The air traffic control tower is old and needs refurbishing, and the communication and meteorological equipment needs upgrading. As and when the traffic increases, the existing terminal building will need either expansion or replacement. The airport needs snow removal equipment as, during some parts of winter, the airport is forced to close. There are no visual aids other than a single wind direction indicator at one end of the runway strip.

22. Rara Airport. This airport does not have any paved surfaces. The landing strip (or the runway) has a steep longitudinal slope, although it is deemed useful in the deceleration of a landing aircraft, and the approach is difficult. There is no terminal building or clearly marked apron and taxiway (unlike at Simikot airport). There are no navigational aids, air traffic control tower, or meteorological equipment other than a sole wind direction indicator. The runway ends are hazardous with very steep land falls.

2. Civil Aviation Authority of Nepal Capacity Building

a. Human Resources Development

23. CAAN suffers from a shortage of qualified and trained staff. The current staff complement is 774, as against an authorized staffing level of 1,065. Consequently, CAAN is understaffed by 27%. The greatest issues arising from this present understaffing are that CAAN is short of staff in areas that are critical to its functions as a regulator of civil aviation and as the

Appendix 2 27 operator of the airports and air traffic and air navigation system. Of greatest concern as far as regulation is concerned is the lack of qualified and trained staff to fulfill the safety regulation functions, particularly in the areas of airworthiness inspection and certification, flight operations, and personnel licensing.

24. CAAN’s civil aviation academy trains air traffic controllers, including subjects on security, fire fighting, aeronautical information publishing, and ramp safety. The civil aviation academy can only produce 13–15 qualified controllers each year. for aerodrome control functions. This does not keep up with the need for staff replacements due to retirement, migration into management, or loss to the private sector.

25. Staff shortages that affect the ability of CAAN to operate the airports safely and efficiently are reported to exist in the areas of airport maintenance and operations, and maintenance of electrical and electronic equipment necessary for safe flight operations. TIA, particularly, is critically short of maintenance engineers, which has resulted in maintenance work not being performed and facilities and equipment becoming rundown and unusable. Qualified maintenance engineers are reported to be in short supply due to low salaries, competing opportunities, and the effect of CAAN’s own personnel rules for recruitment and training.

26. While the level of staff salaries is a concern that needs to be addressed, this arises as a result of failure to keep salaries in line with the marketplace and thereby being affected by the competing effects of the private sector to attract new recruits. The CAAN’s own personnel rules exacerbate the situation, especially with regard to training—training cannot be given to new recruits until they have served within CAAN for 4 years. This is acknowledged by CAAN’s Personnel Department as creating disillusionment among new recruits, and accounts for a higher than desirable turnover rate among new staff. This situation (which is solvable) is exacerbating the staffing problems since, at the top of the organization, CAAN also faces loss of senior staff through retirement at a relatively young age of 58.

27. A further issue that has prevented some of the vacant positions within the CAAN from being filled arises from the position and staff grading system that is in place within the organization. All positions are assigned a grade level, as are the staff. However, staff cannot be transferred laterally within the same grade level, and can only be promoted up into a vacant position at a higher grade level. This system has the effect of preventing mobility of staff on the one hand, and ensuring that some positions remain unfilled on the other. This, too, is solvable, although regrading will be required and a fresh approach taken to the manner in which staff can be transferred within the organization, to ensure that critical vacancies can be filled.

28. In terms of capacity building for human resources development, there is a need to (i) address both the salary levels and the position and staff grading system, and (ii) revise the personnel rules to support the development of the organization. At the same time, assistance to CAAN is needed to (i) establish appropriate budgets for departments through development of a business plan for the organization, and (ii) assist in recruiting staff. There is also a need to develop a training program for the entire organization, and to put that into effect. In the capacity building program under the loan project, it is proposed to provide specific training to CAAN staff where deficiencies are found to exist.

Appendix 2 28

b. Financial Management and Information System

29. CAAN operates within an environment where computerization has not been applied, except in very few offices. In general, the top management have access to computers, mainly for email and internet access, but these are not networked and do not share information. Only the Civil Engineering Division uses computers to any significant degree, and then principally for computer drafting. A small local area network is in place within this division to link these computers and enable staff to share files, and to store files electronically.

30. In this environment, information cannot generally be shared among staff, or stored electronically. The organization therefore relies upon manual systems, and the storage of information is principally in hard-copy form. As a result, it is difficult and time-consuming for staff to obtain or retrieve information and documents, and to carry out any form of analysis. Due to its manual nature, the present information management system is also prone to inefficiency in performing job functions, and potential loss of critical documents and information.

31. While the problems and issues arising from lack of computerization and lack of management systems within CAAN are of concern generally, of particular concern is the lack of any form of accounting system within the Finance Department, or at the airports where financial information is collected. Currently, the Finance Department operates with all of its financial information held in spreadsheets. TIA’s financial staff prepare spreadsheets to enable data to be sent to headquarters for manual entry into the accounts. Similarly, financial information collected from the regional and domestic airports is collected in manual form, and manually entered into spreadsheets when received at headquarters. The result of this process is that not only are errors made in data entry from manual records, but also the use of spreadsheets does not allow a high level of financial detail to be retained in the accounts. This, and the use of spreadsheets for retaining all of CAAN’s financial records, also prevents any detailed and sophisticated analysis of CAAN’s financial performance, or any in-depth analysis of particular sub-elements of CAAN’s organization. It has been concluded that an urgent and vital requirement of capacity building is to procure and install a proprietary accounting system within CAAN, and to set up a better system of collecting financial information from the airports and ensuring its accurate representation in the accounts held at headquarters.

32. The proposed capacity building program has been designed to address both the lack of financial accounting systems (through procuring and installing such systems), and the need to put in place a computerized management information system that would transform the present manual information management approach into a system in which information entry, storage, and retrieval of all information necessary to support CAAN’s operations can be carried out electronically within a networked computer system. This would enable greater management efficiency, easier and quicker access to information, and the ability to carry out analysis of CAAN’s operations and performance.

c. Private Sector Participation

33. Apart from operating the air transport services, the private sector plays only a limited role in the operation of civil aviation in Nepal. The main area of involvement is in the provision of retail services in the passenger terminal buildings at the airports. It has been recognized that a greater involvement of the private sector in this and other areas of civil aviation operations and development may be possible, and that benefits could also be derived from an expanded role.

Appendix 2 29

34. Opportunities for expanding the private sector activity and scope in the passenger terminal buildings appear to be available. At TIA, this will require some improvement, expansion, and refurbishment of the international terminal building. Similarly, provision of a new (larger) temporary domestic terminal building will open up greater opportunities for private sector involvement. A proposal to both develop the temporary domestic terminal and to refurbish the international terminal is included in the development program proposed for implementation under the ADB loan project. This will not only enhance the level of private sector business at TIA and at other airports but will also benefit the traveling passengers by offering a greater range of products and services for sale. This will in turn benefit CAAN by generating more revenue from retail concessions.

35. Other potential private sector opportunities exist in the air cargo terminal, where little or no revenue is generated by CAAN.

36. In addition to provision of additional services and retailing in the passenger and cargo terminals, the private sector could also be involved in providing services to CAAN and to the airports and air navigation services authority, through an outsourcing program. This could be applied in some of the areas where critical staff shortages are noted, such as airport and equipment maintenance, thus providing a partial means of addressing the staff shortage issue. Similarly, CAAN has a considerable number of airport development projects under way across the country, all of which are managed by the Civil Engineering Division, with little of the work assigned to the private sector. Since all of the engineering disciplines, as well as architecture, are available locally in the private sector, there is an opportunity for CAAN to outsource a large part of this work to the private sector, thereby enabling its own scarce staff resources to be concentrated on managing and controlling the domestic airport development projects.

37. The involvement of the private sector in airport development is also under serious consideration by CAAN and the Ministry of Tourism and Civil Aviation (MOTCA). This concerns the role of the private sector in financing, developing, and operating some of the airports of Nepal. In particular, interest has been shown by the private sector in the development of a new international airport near Simara, a new international airport at Pokhara, and upgrade of the airport at Bhairawa. Thus far, the MOTCA and CAAN have not developed their own framework for becoming involved with the private sector in such build-operate-transfer projects, nor have the implications for CAAN and its revenues been studied.

38. One possible near-term project that has also been suggested for possible private sector development, either entirely or though cofinancing with the private sector, is the development of a new international terminal building for TIA. This project has been proposed in the new airport master plan, and a site designated. However, the financing of the new terminal is beyond the capability of the Government, and will require financing through direct commercial loans, multilateral agency loans, private sector participation, or a combination of these mechanisms. At the present time, however, the financial feasibility of this project is unknown, and it is therefore unclear whether the project could attract a private sector developer. Nor are the implications for CAAN of adopting a private sector partner yet understood, especially in view of the dominance of the passenger terminal in generating CAAN’s revenues.

39. The capacity building program proposed for implementation under the ADB loan aims to address the issue of private sector participation in terms of assessing the opportunities for a greater private sector role in the airport businesses (passenger terminals and cargo terminal), and for outsourcing to the private sector those functions that could be performed by the private sector to the benefit of CAAN. In addition, the program has included study of the feasibility of

Appendix 2 30 developing the proposed new international terminal building to establish whether this project is financially feasible, and under what terms of recovery, and to identify the implications for CAAN’s revenues that might arise from private sector participation in this development project.

3. Institutional and Legal Enhancement

40. CAAN is currently responsible for both the regulatory functions and operation of airports and air navigation services. With the current volume of air traffic in Nepal, CAAN has been functioning without major problems. However, in anticipation of greater traffic, the Government considers it necessary to start preparing for the appropriate separation of functions. To facilitate this, there is a need to develop a strategy, including a legal framework and implementation plan.

Appendix 3 31

EXTERNAL ASSISTANCE

Table A 3.1: Asian Development Bank Loan Projects Loan/Grant Amount Approval Completion Project (currency) (million) Date Date Tribhuvan International Airport Improvement Project Loan ($) 27.0 Jan/1997 Oct/2002 Second Tribhuvan International Airport Project (Second Loan ($) 8.0 Dec/1988 Apr/1997 Supplementary) Second Tribhuvan International Airport Project Loan ($) 10.25 Jul/1986 Aug/1993 (Supplementary) Second Tribhuvan International Airport Project Loan ($) 11.0 Dec/1978 Apr/1991 Tribhuvan International Airport Loan ($) 10.0 Oct/1975 Apr/1986 Air Transport Development Loan ($) 6.01 Dec/1969 Jun/1977 Source: Civil Aviation Authority of Nepal

Table A3.2: Assistance from Other Sources Source of Loan/Grant Amount Approval Funds Project (currency) (million) Year JICA Project for the Modernization of the Tribhuvan Grant 1.23 1999 International Airport (Phase 1.5) (¥) French French Seventh Protocal: Rehabilitation of Airport Grant/Loan 2.5/13.0 1996 Aid Equipment for Hub and STOL Airports (₣) (15.5) Australian Air Navigation Aids Project (DVOR/DME) at Loan 2.06 1994 Aid Bhattedanda, Lalitpur (A$) JICA Project for the Modernization of the Tribhuvan Grant 3.56 1993-1996 International Airport (Phase 1) (¥) Australian Air Navigation Aids Project on Various Airports Loan 8.91 1992 Aid (A$) French French Fifth Protocal: Runway, Taxiway and DRF 3.90 1992 Aid Approach Lighting System of Biratnagar Airport (₣) French French Forth Protocal: Rehabilitation of Control Grant Aid 15.00 1990 Aid Tower, DVOR/DME and Generator Installation of (₣) Biratnagar Airport. French French Third Protocal: Airfield lighting, FIDS, Nav- Loan 63.00 1989 Aid aids Facilities, HF Communications at TIA, Lighting (₣) Protection, and Generator Installation at Phulchowki. French French Second Protocal: Airfield Lighting at Loan 13.00 1984 Aid Nepalgunj Airport and VDF, VHF, HF Navigation (₣) and Met. Equipment Facilities at STOL Airports. Australian Transfer of Airways Facilities Project, TIA Grant 4.55 1983 Aid (A$) French French First Protocal: New Tower Cabinet Loan 15.00 1982 Aid Associated with HF, VHF, Communication and Met (₣) Equipment Facilities at STOL Airports. Australian Establishment of VHF Repeater Station for FIS at Grant Aid 0.32 1980 Aid Mt. Chamire Danda at Western Region (A$) Australian VHF Repeater Station, HF Communications, NDB, Grant Aid 1.42 1972 Aid Medium Foam Tenders and Airport Lightings, etc. (A$) DME = distance measuring equipment, DVOR = doppler VHF omni range, FIDS = flight information display system, HF = high frequency , JICA = Japan International Cooperation Agency, NDB = Non Directional Beacon, STOL = short take off and landing, TIA = Tribhuvan International Airport, VHF = very high frequency. Source: Civil Aviation Authority of Nepal.

Appendix 4 32

SUMMARY OF DESIGN STANDARDS AND LIST OF PRIORITY IMPROVEMENTS

A. Design Approach

1. The Asian Development Bank technical assistance for Preparing the Civil Aviation Airport Project1 includes upgrading the master plan for meeting the demands of revised air traffic to serve the needs up to 2028. Also included is the upgrading of the essential communication, navigation, and surveillance equipment at Tribhuvan International Airport (TIA). Additionally, the project includes broad proposals for improving the safety of operations at three domestic airports—Lukla, Rara, and Simikot. The design approach in all these components is improved safety.

2. As TIA at Kathmandu is the main gateway into and out of Nepal, the master plan has been based on compliance with the safety standards and recommended practices promulgated by the International Civil Aviation Organization (ICAO) in the various annexes to the Convention on International Civil Aviation. As big aircraft, such as the Airbus A340-300 and Boeing B777- 200, are regularly operating, the facility improvements are all related to the safety specifications for ICAO aerodrome reference code 4E.

B. Safety Enhancement

3. At TIA there is nonconformance with international safety standards and recommended practices in ICAO Annex 14, Volume I. The proposed project/revised master plan addresses these shortcomings and will significantly improve the safety of aircraft operations at TIA.

4. The major safety enhancement features are (i) the relocation of existing military and civilian aircraft hangars; (ii) provision of runway end safety areas at both ends of the runway; (iii) a runway extension; (iv) provision of approach light systems (Category I Precision Approach Light System for runway 02 and Abbreviated Simple Approach Light System for runway 20); (iv) provision of an instrument landing system localizer for better runway center-line acquisition; (v) separation of the parallel taxiway from the runway by developing a new facility 182.5 meters (m) from the runway center line; (vi) construction of a new international apron with all necessary safety clearances; (vii) relocation of the existing international apron closer to the existing international terminal building for the parked aircraft to be clear of the transition surface of the runway; (viii) upgrading the old communication navigation surveillance equipment with recommendations for further action to be taken by the Civil Aviation Authority of Nepal; (ix) enhancing the capacity and level of rescue and firefighting protection; and (x) relocation of some parts of the perimeter road, security fencing, and drains.

4. To improve the safety of aircraft operations at three domestic airports—Lukla, Rara, and Simikot—visual aids to assist in approach and landing is the common item. Additionally, it is considered necessary that the provision of other equipment such as some essential air traffic control and meteorological equipment, and for snow removal at Simikot and Rara airports, be given priority, followed by the provision of fire extinguishers at Rara airport. While the Civil Aviation Authority of Nepal has undertaken paving of runway pavements at Simikot, for Rara it is recommended in this report that basic surface dressing and chip-seal treatment is carried out to ensure adequate surface friction for deceleration of a landing aircraft, as the runway is very

1 Asian Development Bank. 2007. Technical Assistance to Nepal for Preparing the Civil Aviation Airport Project. Manila (TA 7031-NEP for $750,000 approved on 14 December).

Appendix 4 33 short and the land falls away severely at the farther end. There are serious soil erosion problems at Rara airport and this needs attention while undertaking the improvement project.

C. Design Standards and Criteria

5. The design standards and criteria for the proposed improvements are summarized in Table A4.1.

Table A4.1: Design Standards and Criteria Improvements Features Design Standard and Criteria A. Tribhuvan International Airport 1. Design Aircraft ICAO Aerodrome Reference Code E (A340, B777, and other equivalent types). 2. Obstacles in Transitional Relocation of military, domestic, and Nepal Airlines hangars Surfaces to be clear of 1 in 7 transitional surface for the runway code number 4. 3. Runway Extension to South 45 m wide, 300 m long with an aircraft turn pad. 4. Runway End Safety Areas 300 m long, 90 m wide at both runway ends. 5. New Parallel Taxiway 23 m wide, 182.5 m from the runway center line from the northern end of the runway up to the disused cross runway, with link taxiways complete including taxiway edge lights, markings, etc. 6. New International Apron 152.5 m deep, 515 m long, to accommodate extra long code E aircraft (A340-500/-600, B777/300 type aircraft) in future, plus A330s, A320 family, B737s in a mixed configuration, including stand markings, floodlighting, etc. 7. Relocated Domestic Apron To handle codes B and C type aircraft (ATR 42, ATR 72, Twin Otters, and equivalent types). 8. All Runway Holding Positions 90 m from the runway center line. 9. Link Taxiways Code C aircraft, 18 m wide; codes D and E aircraft, 23 m wide. 10. Communication Navigation Upgrade to full/functional operation. Surveillance/Air Traffic Management Systems 11. Power Supply Augmentation of power supply, provision of larger capacity standby generator, uninterrupted power supply unit for essential airfield ground lighting. 12. Runway Lighting Runway center-line lights, including extension portion, edge lights for the extension portion, new threshold lights for Runway 02. 13. Approach Lighting Runway 02: Precision approach category 1 lights (900 m long). Runway 20: Abbreviated simple approach lighting system (300 m long). 14. Instrument Approach System ILS/Localizer for Runway 02 including flight calibration. 15. Rescue and Fire Fighting Upgrade TIA’s RFFS ICAO's rescue category from 8 to 9 – Services (RFFS) procuring a new RFF vehicle with all spares and training.

Appendix 4 34

Improvements Features Design Standard and Criteria B. Lukla Airport (Domestic) 1. Visual Approach Abbreviated precision approach path indicator and visual approach guidance system providing accurate landing guidance. C. Simikot Airport (Domestic) 1. General Safety Facilities Visual aids for landing (runway threshold identifier lights, edge markers and markings for runway and link taxiway), upgraded ATC tower equipment, portable fire extinguisher(s), and snow removal equipment. D. Rara Airport (Domestic) 1. General Safety Facilities Runway paving, link taxiway and apron, a small terminal building and ATC tower with full equipment, landing visual aids, portable fire extinguisher(s) and snow removal equipment. ATC = air traffic control, ICAO = International Civil Aviation Organization, m = meter, RFF = rescue fire fighting, RFFS = rescue fire fighting system, TIA = Tribhuvan International Airport. Source: Asian Development Bank.

Table A4.2: Proposed Priority Improvements

S.No. Description ICB-1: Airside Infrastructure Improvements at TIA, Simikot, and Rara Airports Tribhuvan International Airport S1-1 Relocation of Nepal Army hangars and associated buildings to the eastern side of runway. Earthwork, apron, taxiway, visual aids, and apron floodlighting (area = 11,300 m2). S1-2 Relocation of Nepal Airlines hangars to the eastern side of runway. Earthwork, apron, taxiways, visual aids, and apron floodlighting etc. complete (area= 21,200 m2). S1-3 Develop domestic airline hangars area on the eastern side of runway. Earthwork, apron, taxiways, reconstruction of disused cross runway as a taxiway, visual aids. Apron floodlighting etc. complete (area = 10,000 m2). S1-4 Runway extension to south. The development includes (a) extension of runway end (south end) by 300 m; (b) improvements to existing visual aids—runway edge lights for the extension portion, threshold lights, runway center line lights, markings etc.; (c) precision approach CAT I approach lights for runway 02 and runway center lights; (d) civil works for ILS/localizer support; and (e) diversion of perimeter road at the northern and southern ends. S1-5 Construct new parallel taxiway (Ph. I) from Runway 20 threshold to link taxiway no. 4 (old abandoned cross runway) along with the associated link taxiways including all earthwork, shoulders and visual aids, i.e., markings, edge lights, and signs (length of taxiway = 750 m and width = 23 m, three link taxiways length = 797 m and width = 23 m). S1-6 Construction of new international apron phase I, including earthwork, shoulders, visual aids, aircraft stand markings, signs, and illumination. S1-7 Relocation of substation no.1 and rerouting of cables and provision of floodlights for the new international apron complete. S1-8 Construction of drainage in between the edge of international apron and parallel taxiway. S1-9 Procurement of an 800 kVA generator for augmenting existing secondary power supply to ATC and navaids; runway, taxiways, and aprons; essential facilities at domestic terminal building; and TIA’ s rescue and firefighting services.

Appendix 4 35

S.No. Description S1-10 Purchase of major foam tender for upgrading of RFFS from category 8 to category 9 and spare parts for existing foam tender. S1-11 Installation of a sewage treatment and disposal system complete including an incinerator. S1-12 Installation of a water treatment and distribution system. Simikot Airport (Domestic) S1-13 RTIL, REL, snow plough, ATC and meteorological equipment, ATC tower, and a small terminal. Rara Airport (Domestic) S1-14 RTIL, REL, runway, taxiway and apron paving, drainage and earth retaining works, snow plough, portable fire extinguishers, and ATC and meteorological equipment, chain-link fencing, ATC tower, and a small terminal. ICB-2: Landside Terminal Works at TIA S2-1 Reconfigure and refurbish existing international terminal building. S2-2 Develop and construct temporary domestic terminal building (10,000 m2). ICB-3: Communication Navigation Surveillance/Air Traffic Management Equipment at TIA and Lukla Airport Tribhuvan International Airport S3-1 Communication navigation surveillance/air traffic management equipment including voice communication switching system, very high frequency communication and meteorological equipment; and new emergency operations center equipment including security equipment. S3-2 Procurement and installation of ILS/Localizer equipment for RWY 02. Lukla Airport (Domestic) S3-3 At Lukla airport, provision of visual alignment guidance system and abbreviated precision approach path indicator system. ATC = air traffic control, ICB = international competitive bidding, ILS = instrument landing system, kVA = kilovolt- ampere, m = meter, m2 = square meter, REL = runway end lights, RFFS = rescue fire fighting system, RTIL = runway threshold identifier lights, RWY = runway, TIA = Tribhuvan International Airport. Source: Asian Development Bank.

Appendix 5 36

DETA ILED COST ESTI

Base Cost Base MAT ES AND FINA NCIN G PLAN n consultant remuneration. n consultant g (%) (%) ment, and 25% for forei and 25% for ment, p ui q ($ million) rest accounts. rest p taxes. g costs. y services contract values. contract services g es related to to im es related g ears. y services excludin services 0.72 0.107.07 0.104.65 7.07 0.20 4.651.74 0.00 0.52 0.00 1.74 7.07 4.65 0.00 28 0.00 1.74 0.00 72 100 100 0.00 100 0.8 0 0 0 7.7 5.1 1.9 g Total ADB ADB ADB Government ADB Government of Total % bank char bank g eriod of of 5 eriod p n. g DETAILED COST ESTIMATES AND FINANCING PLAN PLAN FINANCING AND COSTESTIMATES DETAILED ment, and consultin ment, p desi uted at 13% for civil works contract values, consultant services, and e and services, consultant values, contract works civil 13% for at uted ui y costs, and 10% for local currenc local for 10% and costs, f p q

100% of consultin of 100% y y a lementation lementation p p enditures, includin enditures, reliminar p p c

n currenc d g y the im g e

Subtotal (A) 77.82 56.44 9.90 66.34 11.48 85 15 84.6 Subtotal (B)Subtotal (C)Subtotal 0.72 (D)Subtotal 0.10 11.72 0.10 11.72 1.74 0.20 0.00 1.74 11.72 0.52 0.00 0.00 28 1.74 100 0.00 72 100 0 0.8 12.7 0 1.9 y enc a, b a, g

Implementation ment Bank will Bank will ment ment Bank. ment g enc p p g rices based on based rices p er annum durin er p sical Contin sical Total Project Cost (A+B+C+D)Total Cost Project 92.00 70.00 10.00 80.00 12.00 87 13 100.0 y uted at 10% for civil works and e and works civil 10% for at uted forei for 2.5% at uted p p a. OfficeOperations and Maintenance Managementb. Project 0.52Ph Price Contin 0.00 Durin Interest 0.00 0.20 0.10 0.00 0.10 0.52 0.20 0 0.00 100 100 0.6 0 0.2 a. CNS/ATM Equipment Equipment Development b. Capacity Management Advisera. Project Supervision and Design b. Detail 0.24c. Capacity Development 0.00 5.59 Management Project 0.31 6.65 0.21 4.85 0.23 0.00 5.81 0.21 0.00 0.00 5.19 0.00 4.85 0.03 0.23 5.19 4.50 0.74 87 0.08 1.46 4.50 87 74 78 1.31 13 13 77 26 22 0.3 6.1 23 0.3 7.2 6.3 Investment Costs Investment 1. 1. 2. 1. 1. Civil Works2. Equipment3. Consultants 59.22 5.83 51.36 12.77 4.85 0.00 0.23 0.21 51.36 9.69 5.06 7.86 9.92 0.77 87 2.85 87 13 78 13 64.4 22 6.3 13.9 In mid-2009 mid-2009 In com duties and taxes local of Inclusive ex administrative Incremental Com Com 1.0% At The Asian Develo A. Item Cost Loan Grant Total Total C. Contingencies D. Implementation During Charges Financing B. Costs Recurrent Source: Asian Develo Asian Source: a b c d e f

Appendix 6 37

ND O

S IMPLEMENTATION SCHE A

JJ 2015 M A M NDJ F O S A JJ 2014 M A M NDJ F O S A JJ 2013 M A M NDJ F O S A JJ 2012 M mpetitive bidding, TIA = Tribhuvan International Airport. International = Tribhuvan TIA bidding, mpetitive A M NDJ F O S A JJ 2011 M A M NDJ F O S A JJ 2010 M A M NDJ F O S IMPLEMENTATION SCHEDULE Defects Period and Liability A JJ 2009 M A M JF ICB-1: Airside Infrastructure at TIA/Simikot/Rara ICB-2: Terminal Works at TIA ICB-3:at CNS/ATM TIA and Lukla ICB-1: Airside Infrastructure at TIA/Simikot/Rara ICB-2: Terminal Works at TIA ICB-3:at CNS/ATM TIA and Lukla Loan Processing ADB by and Approval Loan Signing and Effectiveness 1. Project Management Service Advisory 2. Consultant Recruitment 3. Detail Engineering Design 4. Construction Supervision 1. Procurement 2. Works, Supply, and Installation 1. Consultant Recruitment 2. Consulting Services A. Project Preparation Project A. Management B. Project Works Civil C. Development D. Capacity Item Source: Asian Development Bank. Development Asian Source: ADB = Asian Development Bank, ATM = air traffic management, CNS = communication navigation surveillance, ICB = international co international = ICB surveillance, navigation communication = management, CNS traffic air = ATM Bank, Development Asian = ADB

Appendix 7 38

PROCUREMENT PLAN

Basic Data Project Name Air Transport Capacity Enhancement Project Country Nepal Executing Agency Civil Aviation Authority of Nepal Loan/Grant Amount $70 million loan and $10 million grant Loan/Grant Number Date of First Procurement Plan 10 October 2009 Date of This Procurement Plan 10 October 2009

A. Process Thresholds, Review, and 18-Month Procurement Plan

1. Project Procurement Thresholds

1. Except as the Asian Development Bank (ADB) may otherwise agree, the following process thresholds shall apply to procurement of goods and works.

Procurement of Goods and Works Method Threshold International Competitive Bidding (ICB) for Works Above $1,000,000 International Competitive Bidding (ICB) for Goods Above $500,000 National Competitive Bidding (NCB) for Works Beneath that stated for ICB, Works National Competitive Bidding (NCB) for Goods Beneath that stated for ICB, Goods Shopping for Works Below $100,000 Shopping for Goods Below $100,000

2. ADB Prior or Post Review

2. Except as ADB may otherwise agree, the following prior or post review requirements apply to the various procurement and consultant recruitment methods used for the Project.

Procurement Method Prior or Post Comments Procurement of Goods and Works ICB Works Prior ICB Goods Prior NCB Works Post Prior review for first NCB document NCB Goods Post Prior review for first NCB document Shopping for Works Post Shopping for Goods Post Recruitment of Consulting Firms Quality- and Cost-Based Selection (QCBS) Prior Quality-Based Selection (QBS) Prior Recruitment of Individual Consultants Individual Consultant Selection Prior

Appendix 7 39

3. Goods and Works Contracts Estimated to Cost More Than $ 1 Million

3. The following table lists goods and works contracts for which procurement activity is either ongoing or expected to commence within the next 18 months.

Prequalification Advertisement General Contract Procurement of Bidders Date Descriptiona Value Method (Yes/No) (quarter/year) Comments ICB-1: Airside approximately ICB Yes Q1/2011 Infrastructure $38.29 million Improvements at TIA, Simikot, and Rara ICB-2: Landside approximately ICB No Q1/2011 Terminal Works $13.06 million at TIA ICB-3: approximately ICB No Q2/2011 Communication $4.85 million navigation surveillance/air traffic management at TIA and Lukla ICB = international competitive bidding, TIA = Tribhuvan International Airport. a Detailed description is provided in Appendix 4 under list of priority improvements

4. Consulting Services Contracts Estimated to Cost More Than $100,000

4. The following table lists consulting services contracts for which procurement activity is either ongoing or expected to commence within the next 18 months.

Advertisement International or General Contract Recruitment Date National Description Value Method (quarter/year) Assignment Comments Project about Individual Q3/2009 International and Management $0.24 million Consultant National Individual Advisers Selection Detail Design about QCBS Q4/2009 International firm and Supervision $5.19 million (90:10) Consultant Capacity about QCBS Q1/2010 International firm Development $4.50 million (90:10) Consultant QCBS = quality and cost based selection.

5. Goods and Works Contracts Estimated to Cost Less than $ 1 Million and Consulting Services Contracts Less than $100,000

5. The following table groups smaller-value goods, works, and consulting services contracts for which procurement activity is either ongoing or expected to commence within the next 18 months.

Appendix 7 40

Value of Procurement / Contracts Number of Recruitment General Description (cumulative) Contracts Method Comments Project Management Adviser About $36,000 1 Individual Selection Equipment (detailed specification and About $0.21 tbd NCB or Shopping contract packaging will be finalized million during project implementation by the capacity development consultant) NCB = national competitive bidding.

B. National Competitive Bidding

6. As a result of the Nepal's Public Procurement Act, January 2007, and Procurement Regulations, August 2007, the NCB section is currently under review, expecting update by September 2009.

1. General

7. The procedures to be followed for national competitive bidding shall be those set forth in Financial Administration Rules, 1999 with the clarifications and modifications described in the following paragraphs required for compliance with the provisions of ADB’s Procurement Guidelines (2007, as amended from time to time).

2. Prequalification

(i) Normally, post-qualification shall be used unless prequalification is explicitly provided for in the loan agreement/procurement plan. Irrespective of whether post qualification or prequalification is used, eligible bidders (both national and foreign) shall be allowed to participate. (ii) Qualification criteria (in case pre-qualifications were not carried out) shall be stated in the bidding documents, and if a registration process is required, a foreign firm declared as the lowest evaluated bidder shall be given a reasonable opportunity of registering, without let or hindrance.

3. Bidding Period

8. The minimum bidding period is 28 days prior to the deadline for the submission of bids.

4. Bidding Documents

(i) The bidding documents provided with the Government’s Procurement Manual shall be used to the extent possible. The first draft English language version of the procurement documents shall be submitted for ADB review and approval, regardless of the estimated contract amount, in accordance with agreed review procedures (post and prior review). The ADB-approved procurement documents will then be used as a model for all procurement financed by ADB for the project, and need not be subjected to further review unless specified in the procurement plan. (ii) Bid documents shall be made available, by mail, in person or, electronically, to all who are willing to pay the required fee.

Appendix 7 41

5. Preference

9. No domestic preference shall be given for domestic bidders and for domestically manufactured goods.

6. Advertising

10. Invitations to bid shall be advertised in at least one widely circulated national daily newspaper or freely accessible, nationally-known website allowing a minimum of twenty-eight (28) days for the preparation and submission of bids. Bidding of NCB contracts estimated at $500,000 or more for goods and related services or $1,000,000 or more for civil works shall be advertised on ADB’s website via the posting of the procurement plan.

7. Performance Security and Bid Security

(i) If required, bidders/contractors shall provide bid/performance security as indicated in the bidding/contract documents. (ii) A bidder’s bid security shall apply only to a specific bid, and a contractor’s performance security shall apply only to the specific contract under which it was furnished

8. Bid Submission

11. There shall not be any restrictions on the means of delivery of the bids.

9. Bid Opening and Bid Evaluation

(i) Bids shall be opened in public in one place, immediately after the deadline for submission of bids. (ii) Evaluation of bids shall be made in strict adherence to the criteria disclosed in the bidding documents, in a format and specified period agreed with ADB. (iii) Foreign bidders shall not be precluded from bidding. (iv) No firm, regardless of its class of registration, shall be denied the participation in bidding for reasons unrelated to its capability and resources to successfully perform the contract, nor shall it be disqualified for such reasons. (v) Contracts shall be awarded to the lowest evaluated bidder whose offer has been determined to be the lowest evaluated bid and is substantially responsive to the bidding document, and who meets the qualifying criteria set out in the bidding documents. (vi) Post-bidding negotiations shall not be allowed with the lowest evaluated bidders or any other bidders. (vii) Bids shall not be rejected merely on the basis of a comparison with an official estimate without the prior concurrence of ADB. (viii) Split award or lottery in award of contracts shall not be carried out. When two or more bidders quote the same lowest price, an investigation shall be made to determine any evidence of collusion, following which: (a) if collusion is determined, the parties involved shall be disqualified and the award shall then be made to the next lowest evaluated and qualified bidder; and (b) if no evidence of collusion can be confirmed, then fresh bids shall be invited after receiving the concurrence of ADB.

Appendix 7 42

(ix) Extension of bid validity shall not be allowed without the prior concurrence of ADB. (x) Bids shall not be invited on the basis of percentage premium or discount over the estimated cost.

10. Rejection of All Bids and Rebidding

(i) Contracts shall not be awarded on the basis of nationally negotiated rates. (ii) Bids shall not be rejected and re-bidding shall not be carried out without the prior concurrence of ADB.

11. Participation of Government-Owned Enterprises

12. Government-owned enterprises in Nepal shall be eligible to participate only if they can establish that they are legally and financially autonomous, operate under commercial law, and are not a dependent agency of the procuring entity, or the Project Executing Agency or the Project Implementing Agency.

12. ADB Member Country Restrictions

13. Bidders must be nationals of member countries of ADB, and offered goods, works, and services must be produced in and supplied from member countries of ADB.

Appendix 8 43

PROJECT ORGANIZATION STRUCTURE

Civil Aviation Authority of Asian Nepal Development

Executing Agency Bank

Director General

Project Coordinating Unit

Air Transport Planning and Development Directorate

Key positions: Project Coordinating Director Procurement Officer Environment and Social Officer Chief Project Accountant Assistant Accountant

PIU - Infrastructure Project PIU - Capacity Development Management TIA Improvement Project Adviser Directorate

Key positions: Individual Key position: Project Director Consultants Project Manager Senior Civil Engineer Assistant Project Manager Civil Engineer 1 Key focal persons: Civil Engineer 2 Corporate Financial and Electrical/Mechanical Engineer Account Communication Navigation Human Resources Surveillance/Air Traffic Legal/Institutional Management Engineer Airport Development Planning and Private Sector Coordination

Detail Design and Supervision Capacity Development Consultant Consultant

Contractors and Suppliers Contractors and Suppliers

PIU = project implementation unit, TIA = Tribhuvan International Airport. Source: Asian Development Bank.

Appendix 9 44

FINANCIAL MANAGEMENT AND SUSTAINABILITY

A. Financial Management

1. The Civil Aviation Authority of Nepal (CAAN) was established in 1998 as an autonomous civil aviation authority, enabled by the CAAN Act with the mandate to develop and manage national civil aviation. CAAN is responsible for providing regulatory oversight of all aspects of civil aviation operations in Nepal, managing the national airspace, and operating the air traffic control service. CAAN is operating and maintaining the nation’s international airport in Kathmandu, and all of the other regional and remote domestic airports and short take-off and landing strips.

2. CAAN’s financial requirements are planned by its finance department and submitted to the CAAN board for approval on an annual basis. CAAN’s internal budget preparation requires each department to submit its annual financial requirements covering all aspects of its planned activities and development for the fiscal year. A budget committee, established within CAAN’s Corporate Planning Directorate, initially reviews and approves departmental budgets and consolidates these for submission to the director general. Subsequently, the consolidated budget requirement is submitted to the CAAN board and, ultimately, to the Ministry of Finance for approval as part of the parliamentary budget approval process. CAAN’s finance department currently does not operate with any specific accounting system and prepares its accounts using Microsoft Excel. Its financial statements are prepared with the same software and in a format prescribed by the Government's Office of Auditor General which audits CAAN’s financial statements annually.

3. CAAN operates with an adequate system of financial and management accounting, reporting, auditing, and internal controls. However, efficiency is weak due to lack of staff resources and a computerized information system. There is a need to implement an accounting software system to integrate physical and financial planning and management systems and integrated accounting and financial reporting systems to support the provision of timely information to management and the efficient management of resources and cash flow. The Project's capacity strengthening component will help address this by introducing a financial management information system, consisting of accounting software, networked computers, and training. This will help CAAN effectively manage its financial performance and resources.

4. For project implementation, the project coordination unit (PCU) will establish and maintain separate project records and accounts to identify the financing resources received and expenditures made for the Project, thus ensuring an adequate audit trail. CAAN will assign suitably qualified accountants, consisting of a chief project accountant and an assistant accountant, to the PCU for project accounting and financial management. The Government's Office of Auditor General will annually audit the project accounts and related financial statements in accordance with international auditing standards. The direct payment procedure of the Asian Development Bank (ADB) will be utilized for substantial disbursement of payments for works, goods, and consulting services. The PCU will monitor the projects, certify consultants' and contractors' invoices and claims, and submit to ADB for direct payment. Financial management of ADB projects does not pass through CAAN Finance Department.

Appendix 9 45

B. Financial Sustainability

5. The proposed investment in upgrading and expanding the Tribhuvan International Airport will increase CAAN's revenues. A profit and loss statement has been prepared to reflect the effect of the proposed investment project based on an analysis of the revenue sources for CAAN, and taking into account the operating, administrative, and staff expenses incurred for the revenue generation resulting from implementation of the Project. The bottom-line figure derived from this represents the earnings before interest, tax, depreciation, and amortization resulting from the financial effect of implementing the Project as proposed. This measure reflects the financial sustainability of CAAN. Table A9 provides the projected profit and loss statement for CAAN from calendar year 2010 to 2013, based on the updated air traffic forecast and adjusted to take into account inflation and to include the revenue as well as cost estimated to incur due to the investment program, while all other factors remain the same. From this, CAAN will have healthy earnings before interest, tax, depreciation, and amortization, ensuring its ability to service repayments for the proposed project loan.

Table A9: Projected Profit and Loss Statement, Most Likely Traffic Scenario (NRs) Description 2010 2011 2012 2013 2014 2015 A. Revenue Regulatory Income 31,196,327 32,600,162 33,982,409 35,341,705 36,755,373 38,225,588 Airport Related Income (includes 1,953,793,762 1,969,812,389 1,998,266,172 2,036,050,236 2,050,525,114 2,065,484,920 ANS) Subtotal (A) 2,489,484,899 2,544,284,820 2,613,340,755 2,774,656,232 2,969,508,605 3,018,786,651 B. Expenses Payroll and Benefits 329,348,930 344,169,632 358,762,424 373,112,921 388,037,438 403,558,935 Operating and Administrative 269,741,071 290,057,105 306,650,057 366,815,432 374,059,197 376,627,903 Expenses Subtotal (B) 599,090,001 634,226,737 665,412,481 739,928,353 762,096,635 780,186,838

EBITDA (NRs) 1,890,394,898 1,910,058,083 1,947,928,275 2,034,727,879 2,207,411,971 2,238,599,812 EBITDA ($) 24,063,072 24,313,367 24,795,421 25,900,304 28,098,421 28,495,415 $1 = NRs78.56 ANS = Air Navigation Service; EBITDA = earnings before interest, tax, depreciation, and amortization. Source: Asian Development Bank's estimate

Appendix 10 46

ECONOMIC AND FINANCIAL ASSESSMENT

A. Economic Assessment

1. Introduction

1. The Tribhuvan International Airport (TIA) is the main gateway to Nepal. Around 80% of tourists arrive by air through TIA on their way to other destinations within the country. Thus, TIA is a major contributor to the socioeconomic development of the country and needs large-scale investment to be upgraded to meet the growth of traffic. The proposed investment project has been planned to significantly improve airport capacity and boost tourist traffic. TIA is not compliant with many International Civil Aviation Organization (ICAO) safety and security standards and recommended practices, which may affect the continued operation of larger aircraft. Also, due to the limitations of navigational equipment and lighting, the airport operates with some restrictions on night flights, which deters some foreign airlines from serving the airport after dark, thus limiting the possibility of developing new markets. Another constraint is the presence of obstacles around the airport, which has prevented better runway utilization for greater efficiency and improved capacity.

2. The sustained growth of passenger traffic requires major capacity improvements, the most immediate being the operation of the airport without time restriction, and complying with ICAO safety and security standards to ensure continued service by larger aircraft. This will significantly contribute to the development of the tourism sector and facilitate travel by Nepalese citizens employed abroad, both of which are major contributors to foreign exchange earnings. The tourism sector plays a large role in the economy of Nepal by contributing over 25% of the foreign exchange earnings from export of goods, and in terms of percentage of total foreign exchange earnings, the tourism sector contributes 6.6%. The tourism sector also provides direct or indirect employment to over 300,000 people and is a major employment provider. Nepal is a major destination for recreation, trekking, and mountaineering. Investments in the tourism sector have been given high importance in successive 5-year plans with the aims of establishing Nepal as a premium world tourism destination, developing tourism as an important part of overall economic development, and expanding tourism benefits down to the village level in the long term.

3. The improvement and expansion of TIA has been the subject of numerous studies undertaken over the last 15 years by various agencies including the Asian Development Bank (ADB). The ADB studies, under ADB’s technical assistance for the Preparation of Civil Aviation Sector Strategy,1 have focused on possible future ADB assistance for financing Nepal’s civil aviation sector and improvements to the airport at Kathmandu, and the report contains a civil aviation strategy, sector management plan, and TIA infrastructure development plan, as well as proposals for improving some domestic airports. The current project under ADB’s technical assistance for the Civil Aviation Airport Project2 aims to study the feasibility and viability of the investments recommended for further ADB assistance. The TIA is currently handling more than 2.5 million passengers annually, and this is expected to grow to more than 9.0 million in 30 years. The long-term development options involve a large investment which was found not feasible in the short or medium term. The without-project option anticipates the likelihood of withdrawal of operation of larger aircraft and this may seriously affect the air traffic in and out of

1 ADB. 2006. Technical Assistance to Nepal for Preparing the Civil Aviation Sector Strategy. Manila (TA 4772-NEP, for $150,000, approved on 20 March). 2 ADB. 2007. Technical Assistance to Nepal for Preparing the Civil Aviation Airport Project. Manila (TA 7031-NEP, for $750,000, approved on 14 December).

Appendix 10 47

Nepal. An investment plan that will avoid this situation and will also remove the operational constraints for night operation have been developed under this project as a possible viable option (with-project option) with an investment of $70 million, and includes the minimum essential requirements to sustain the traffic growth in the short and medium term.

4. The proposed investment plan in the with-project option consists of major improvements to the runway and taxiway system and significant upgrade of navigational aids equipment. The airport improvement program will include the installation of equipment that will enable operations around the clock, lifting restrictions for foreign carriers that would prefer to operate at night. These airlines would rather schedule flights in a way that they can depart or arrive at their own hubs during the day when most flights converge to allow the interconnection of passengers.

5. In addition, the capital expenditure program will include several works that are required to meet international standards and recommended practices with respect to airport facilities. The investment plan will assure full compliance with the ICAO's Annex 14 requirements. This will improve air safety and ensure continued operation of lager aircraft essential to retaining and sustaining tourist traffic growth.

6. The effect of this improvement will be an increase in total passenger traffic as well as significant increase in tourist traffic, and easier access for foreign visitors.

2. Traffic Forecast

7. The air traffic forecast for TIA prepared in this project has been based on a forecast of the gross domestic product (GDP) of the countries of nationality of visitors to Nepal. Nepal is mainly a tourism destination for international travelers, and the underlying assumption is that increases of GDP in the countries where traffic originates (which are not necessarily the same countries from which people arrive) will result in higher disposable income, and this will ultimately lead to a rise in demand for leisure travel. Business traffic is also driven by GDP, but in this case, the increased economic activity is responsible for stimulating demand.

8. Passenger traffic and aircraft movement projections are complemented with a busy day forecast. This analysis is used to determine peak traffic volumes (passengers, aircraft movements, and stand requirements for aircraft parking), and is of paramount value for planning purposes.

9. Considering the base scenario, without the implementation of improvement projects at TIA, passenger traffic is projected to grow from the current 2.5 million passengers (2007) to 5.5 million in 2018 and up to 8.9 million in 2028, while aircraft movements will rise from 77,342 in 2007 to 133,116 in 2018, and to 181,944 in 2028. If an investment project is carried out to upgrade the airport at TIA, and is implemented by 2012, passenger traffic is expected to increase to 5.8 million by 2018 and to 9.3 million in 2028, while aircraft movements would reach 141,996 in 2018 and 189,595 in 2028. A summary table of the forecasts in 5-year incremental periods for both international and domestic passengers and aircraft movements is given in Table A10.1. The table includes the forecasts developed for the two scenarios reflecting the effect on traffic growth of making improvements to TIA (with-project) and of not improving TIA (without-project).

Appendix 10 48

Table A10.1: Summary Traffic Forecast Results Comparing With and Without Improvement

Forecast summary: Total passengers and total aircraft movement (by international/domestic, most likely scenario)

Item 2008 2013 2018 2023 2028 A. With Project Passengers (arriving and departing) International 1,761,249 3,034,382 3,912,362 4,993,639 6,329,751 Domestic 1,083,136 1,563,344 1,941,065 2,405,678 2,980,461 Total 2,844,385 4,597,726 5,853,427 7,399,318 9,310,212

Aircraft movements International 12,691 20,296 24,292 28,781 33,865 Domestic 76,224 102,126 117,704 135,412 155,731 Total 88,916 122,422 141,996 164,193 189,595 B. Without Project Passengers (arriving and departing) International 1,761,249 2,769,764 3,647,744 4,729,022 6,065,133 Domestic 1,083,136 1,444,002 1,821,723 2,286,336 2,861,118 Total 2,844,385 4,213,766 5,469,467 7,015,358 8,926,252

Aircraft movements International 12,691 18,526 22,649 27,256 32,449 Domestic 76,224 94,330 110,467 128,695 149,495 Total 88,916 112,856 133,116 155,951 181,944 Source: Asian Development Banks's estimates.

10. Further to the overall air traffic forecast given above for TIA, an incremental traffic estimate that is associated with the proposed project investment was prepared to analyze the economic impact and feasibility of the Project. A traffic forecast developed as part of the study demonstrated that, if the existing operational restrictions during night hours were removed, TIA would be able to attract airlines from countries in east Asia. The convenience of direct flights from countries in east Asia will then enhance the attractiveness of Nepal as a tourist destination. This is a major contributor to the additional traffic in the with-project scenario.

11. In addition to the new traffic expected to visit Nepal as a result of the installation of new navigation equipment, the investments are also expected to avoid the loss of existing traffic if compliance with ICAO's Annex 14 is not met. It is assumed that, without carrying out the necessary works according to the safety standards and recommended practices, code E aircraft would not operate at TIA. The analysis then considers that a significant portion of that traffic will be lost, consisting of tourists arriving on medium- and long-haul flights who will be dissuaded from taking intermediate connecting flights to reach Kathmandu.

12. The passenger traffic (arriving and departing) that is likely to be lost if code E category aircrafts cannot be operated is estimated at 730,290 in 2013, which will increase to 1.25 million by 2023. The additional tourist arrivals, in addition to normal growth, with night operation are estimated at 132,300 passengers.

Appendix 10 49

3. Costs

13. The financial costs of the Project consist of all incremental capital expenditure. The incremental operation and maintenance costs of the project facilities were estimated on the basis of cost parameters developed by the consultant. The Project’s economic costs include the resource costs for traded and nontraded costs, materials, and labor. All imported cost elements are valued at border prices. Locally sourced inputs are valued with all taxes and duties excluded to calculate economic prices. A shadow wage rate factor of 0.7 was used for unskilled labor, to account for the opportunity cost of the unskilled labor cost component.

4. Benefits

14. Economic benefits are derived from the additional air traffic generated/retained as a result of the Project. The airport improvement program will include the installation of equipment that will enable operations around the clock, lifting restrictions for foreign carriers that would prefer to operate at night. The resulting effect of this improvement will be increased total passenger traffic, improving the access for foreign visitors.

15. In addition, the capital expenditure program will include several works that are required by the international standards and recommended practices with respect to airport facilities. The investment plan will assure full compliance with ICAO's Annex 14 requirements. The analysis assumes that, without compliance with ICAO standards, the airport would no longer be operational for code E aircraft, leading to a significant traffic reduction. Consequently, the implementation of the safety-related works will imply a substantial benefit derived from the Project by preventing the loss of traffic that is now retained.

16. The economic analysis considers that the results in the with-project scenario achieve both benefits. The new investments will bring additional traffic from night operations and will allow the airport to retain traffic by preventing the withdrawal of operators on safety grounds. The new stimulated air traffic will be mostly comprised of foreign visitors, representing a benefit to the economy through the additional export of tourist services, consisting of spending on goods and services such as lodging, food, arts and crafts, and related tourist services. From these new passengers, there will be an increase in airport revenues, associated with the fees and charges levied on additional flights and passengers, as well as from additional commercial revenues at the airport outlets.

17. The Project is expected to generate several types of economic benefits: an increase in tourist spending derived from additional tourist arrivals (gained from both night operations and those retained with improvements in the safety conditions) and additional aeronautical and commercial revenues received by the airport from this induced new traffic. For the economic evaluation, the benefits of the Project have been calculated from airport operations, such as landing charges, passenger facility charges, and other fees and charges for airport services for the net additional passenger traffic and net revenue/profit from additional tourists. Gross tourist spending (estimated at $63 per person per day in 2008) was netted for the production cost of goods and services sold to tourists, estimated to be 71%, and the remaining constitutes an economic benefit. The net tourist benefit was estimated for the additional tourists for the average duration of stay (estimated to be 10 days) and included in the benefit stream and accounting for 52.8% of the total benefits estimated.

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5. Economic Internal Rate of Return and Sensitivity Analysis

18. The cost and benefit streams have been estimated for a 20-year period including the 3- year implementation period. The residual value after 20 years is assumed to be zero. All costs and benefits used for the analysis are in nominal 2009 values. The economic internal rate of return (EIRR) for the proposed project investment is estimated at 21.1%. The cost–benefit stream for the most likely scenario is given in Table A10.2.

Table A10.2: Economic Internal Rate of Return ($ ‘000) Capital Aeronautical Tourist Net Year O&M Total cost Total benefits costs charges spending benefits 2011 (21,770) (143) (21,914) 3,075 3,309 6,384 (15,530) 2012 (21,770) (405) (22,176) 3,300 3,569 6,869 (15,307) 2013 (21,770) (599) (22,369) 3,530 3,836 7,366 (15,003) 2014 0 (1,377) (1,377) 3,719 4,059 7,778 6,401 2015 0 (1,412) (1,412) 4,896 5,380 10,276 8,864 2016 0 (1,516) (1,516) 6,846 7,577 14,423 12,907 2017 0 (1,556) (1,556) 7,045 7,830 14,875 13,318 2018 0 (1,590) (1,590) 7,252 8,093 15,345 13,756 2019 0 (1,598) (1,598) 7,468 8,368 15,836 14,238 2020 0 (1,611) (1,611) 7,692 8,654 16,346 14,735 2021 0 (1,643) (1,643) 7,926 8,952 16,878 15,235 2022 0 (1,689) (1,689) 8,170 9,263 17,433 15,744 2023 0 (1,729) (1,729) 8,423 9,588 18,011 16,282 2024 0 (1,758) (1,758) 8,687 9,926 18,613 16,856 2025 0 (1,778) (1,778) 8,962 10,280 19,242 17,464 2026 0 (1,807) (1,807) 9,249 10,648 19,897 18,090 2027 0 (1,844) (1,844) 9,547 11,033 20,580 18,736 2028 0 (1,880) (1,880) 9,858 11,435 21,293 19,413 2029 0 (1,941) (1,941) 10,184 11,856 22,040 20,099 2030 0 (1,957) (1,957) 10,524 12,299 22,824 20,866 EIRR = 21.1% ENPV (12%) = 35,662 ( ) = negative, EIRR = economic internal rate of return, ENPV = economic net present value, O&M = operation and maintenance. Sources: Asian Development Bank analysis.

19. A sensitivity analysis tested the effects of possible unfavorable scenarios resulting from changes in the key parameters that determine the Project’s costs and benefits. This analysis indicates that the Project’s economic viability would remain satisfactory even under adverse scenarios. A risk analysis was also undertaken to estimate the limits under which the project EIRR would fall below the opportunity cost of capital. Based on the analysis, it was estimated that it would require a cost increase of 61% or a decrease in benefits of 34% to reach a cut-off EIRR of 12%, giving high confidence in the economic viability of the Project. Table A10.3 summarizes the EIRRs for the base case and sensitivity cases.

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Table A10.3: Sensitivity Analysis EIRR ENPV Switching Item Change (%) ($ million) Value Base Case 21.1 35.7 Implementation Delay 1 year later 20.1 32.3 Generated Traffic (20%) 18.4 24.9 (66%) Total Benefits (20%) 15.9 14.8 (34%) Share of traffic pursuing alternative 20% 4 17.4 21.2 50% ways (if project is not implemented) Capital Costs 20% 17.2 23.9 61% Generated Traffic variance and Capital (20%);20% 14.9 13.2 (30%); Costs Overrun 33% Maintenance 50% 19.9 30.6 354% ( ) = negative, EIRR = economic internal rate of return, ENPV = economic net present value. 4 20% of traffic that could be lost without safety improvements reaches Tribhuvan International Airport through alternative ways. Sources: Asian Development Bank analysis and estimates.

B. Financial Assessment

20. Financial analysis has been carried out to assess the viability of the proposed project investment based on the capacity of TIA to generate sufficient incremental revenues with project implementation to cover the capital costs of the Project. The analysis was carried out on an incremental basis using the discounted cash flow methodology, and measuring the internal rate of return of the project. The analysis is based on the following assumptions:

(i) Capital costs are based on the proposed capital expenditure plan for FY2011 through FY2013 for the proposed investment program and are estimated at $70 million.

(ii) The revenue stream considered for the analysis was derived by calculating the difference between the revenues collected by the airport in the with-project and without-project scenarios. The additional revenue due to the project is derived from the following:

(a) Additional traffic gained from new markets, through the ability to operate night flights (with the implementation of new equipment).

(b) The retention of traffic (i.e., traffic not lost) due to compliance with safety standards. The implementation of improvements will avoid losing traffic from aircraft that would not be able to operate without the airport being in compliance with ICAO’s Annex 14. For this purpose, it has been assumed that the airport would not be able to operate ICAO code E aircraft any longer if standards are not met.

(iii) The financial projections of revenue and operating expenditures are based on actual revenues and operating expenditures for the airport for FY2007 and FY2008.

(iv) Capital costs are based on the proposed capital expenditure plan for 2011 through 2013.

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(v) Financial projections are based on the air traffic forecasts.

(vi) Future staff requirements are based on the current organizational structure with adjustments to meet the requirements of the new development.

(vii) All financial projections are shown in 2008 nominal dollars with no adjustment for inflation.

(viii) The revenue and cost streams are compared for a 20-year period.

21. A discount rate of 12% was used as a benchmark rate to compare the return. The average cost of capital to the CAAN for the project investment is estimated at 8.25%, which is the minimum requirement as set out in ADB’s Guidelines on the Financial Governance and Management of Investment Projects Financed by ADB.3 The FIRR estimated for the proposed project investment for the most likely traffic scenario is 14.0%, which is above the benchmark rates and thus indicates that the proposed investment is financially viable. The incremental income statement and cash flow are shown in Tables A10.3 and A10.4.

Table A10.3: Incremental Profit and Loss, Most Likely Scenario ($) Non- Aeronautical Commercial Personnel Personnel Year Revenues Revenues Costs Costs EBITDA Net Income 2011 6,529,906 465,665 106,878 36,326 6,852,367 5,036,490 2012 7,009,433 492,460 126,919 278,574 7,096,400 4,266,663 2013 7,499,356 519,718 126,919 472,090 7,420,065 3,555,366 2014 7,900,158 541,929 503,778 873,466 7,064,844 2,345,087 2015 9,286,644 643,490 526,166 885,916 8,518,052 3,413,195 2016 11,449,869 804,545 608,993 907,092 10,738,329 5,045,099 2017 11,885,610 826,424 645,725 910,497 11,155,812 5,351,949 2018 12,339,026 849,303 675,786 913,730 11,598,813 5,677,555 2019 12,810,127 873,214 681,798 916,171 12,085,371 6,035,175 2020 13,298,834 898,175 691,818 918,877 12,586,314 6,403,368 2021 13,808,420 924,267 720,877 922,215 13,089,594 6,773,279 2022 14,337,416 951,498 762,539 926,111 13,600,264 7,332,003 2023 14,887,373 979,924 799,271 929,816 14,138,210 7,910,775 2024 15,460,183 1,009,607 824,665 933,270 14,711,854 8,515,786 2025 16,055,994 1,040,586 841,356 936,477 15,318,746 8,961,851 2026 16,675,896 1,072,914 866,949 940,084 15,941,777 9,419,779 2027 17,320,952 1,106,650 900,016 943,984 16,583,601 9,891,520 2028 17,993,097 1,141,865 932,082 947,900 17,254,979 10,384,983 2029 18,695,782 1,178,801 988,196 952,659 17,933,727 10,883,863 2030 19,430,391 1,217,532 1,001,222 956,093 18,690,609 11,440,171 EBITDA = earnings before interest, tax, depreciation, and amortization. Sources: Asian Development Bank analysis and estimates.

3 ADB. 2002. Guidelines for the Financial Governance and Management of Investment Projects Financed by ADB. Manila.

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Table A10.4: Incremental Cash Flow Statement, Most Likely Scenario ($)

Cash Flow from Cash Flow from Year Operations Investing Activities Net Cash Flow 2011 5,036,490 (23,333,333) (18,296,843) 2012 5,558,079 (23,333,333) (17,775,254) 2013 6,138,198 (23,333,333) (17,195,135) 2014 6,219,336 0 6,219,336 2015 7,287,444 0 7,287,444 2016 8,919,348 0 8,919,348 2017 9,226,198 0 9,226,198 2018 9,551,803 0 9,551,803 2019 9,909,424 0 9,909,424 2020 10,277,617 0 10,277,617 2021 10,647,528 0 10,647,528 2022 10,956,753 0 10,956,753 2023 11,286,025 0 11,286,025 2024 11,641,537 0 11,641,537 2025 12,087,602 0 12,087,602 2026 12,545,530 0 12,545,530 2027 13,017,271 0 13,017,271 2028 13,510,734 0 13,510,734 2029 14,009,614 0 14,009,614 2030 14,565,922 0 14,565,922 FIRR = 14.0% ENPV (12%) = 7,459,567 ( ) = negative, EIRR = economic internal rate of return, ENPV = economic net present value. Sources: Asian Development Bank analysis and estimates.

22. Sensitivity analysis was carried out to test the effects of possible adverse changes in key parameters that determine the Project’s costs and revenues. The results are shown in Table A10.5.

Table 10.5: Sensitivity Analysis

FIRR FNPV Switching Item Change (%) ($ million) Value Base case 14.0 7.5 Implementation delay 1 year later 13.6 6.2 Incremental traffic (20%) 10.1 (7.0) (10%) Share of traffic pursuing alternative 20%4 11.0 (3.6) 13.6 ways (if project is not implemented) Capital costs 20% 11.1 (3.8) 13% Incremental maintenance costs 50% 13.0 3.7 97% ( ) = negative, FIRR = financial internal rate of return, FNPV = financial net present value. 4 20% of traffic that could be lost without safety improvements reaches TIA through alternative ways. Sources: Asian Development Bank analysis and estimates.

Appendix 11 54 SUMMARY POVERTY REDUCTION AND SOCIAL STRATEGY

Country/Project Title: Nepal/Air Transport Capacity Enhancement Project

Lending/Financing Department/ South Asian Department/ Project Loan Modality: Division: Transport and Communications Division

I. POVERTY ANALYSIS AND STRATEGY A. Link to the National Poverty Reduction Strategy and Country Partnership Strategy

One of the priority areas of Nepal is poverty reduction. Nepal’s 11th Interim Plan (2007–2010)a has been formulated according the Millennium Development Goal targets. Removal of various exclusionary factors, whether social or physical, is also considered important by the Government. The Asian Development Bank (ADB) has also emphasized poverty reduction in Nepal through development of basic infrastructure such as roads, airports, and irrigation. The country partnership strategy results framework in the ADB Nepal country operations business plan (2008–2010)b includes enhanced air transport services through additional domestic airports among the indicators of improved connectivity of different parts of the country, particularly of rural areas.

Civil aviation is essential for Nepal, especially in remote areas that are otherwise inaccessible by road. Through safe and reliable air transport services, rural people will have better access to basic services, such as health care. This in turn could promote inclusive social development by providing access to various rural and poor communities who are currently geographically excluded. Improved air transport services could also contribute to economic development in the less- developed regions of the country, and help improve the country's business environment. Potential tourism activities may flourish in these remote areas through this Project, and this could promote the development of local businesses and employment opportunities. Through ADB's assistance, the institutional capacity of the civil aviation sector will be improved alongside the improvement of air transport facilities. B. Poverty Analysis Targeting Classification: General intervention

1. Key Issues This project will aid poverty reduction by improving transportation facilities and thus (i) reduce exclusions based on remoteness or geography, (ii) reduce transportation costs and increase reliability, (iii) reduce the prices of goods and commodities, and (iv) increase income opportunities for local people. As the airports in the mountain areas are made safe and reliable through the project, the cost of operation for the airlines is expected to fall. It is expected that even the price of food will be reduced because of this. At present, food is very expensive in Mugu, Humla, and Solukhumbu districts, where project work is located, and Mugu and Humla districts face food shortages from time to time. Reliable air service will also enhance tourism, as these districts have potential for tourism. The trekking tourism that is promoted because of the Project will help in developing small business opportunities and other employment opportunities for poor people such as porters. Local farmers can also sell their products such as milk, vegetables, and fruits. The improvement of Tribhuvan International Airport (TIA) will increase tourism and the benefits will trickle down to poor people through creation of business and employment opportunities.

2. Design Features. Not Applicable. C. Poverty Impact Analysis for Policy-Based Lending

1. Discuss the impact channels of the policy reform(s) (direct and indirect, short and medium term) to the country and major groups affected. Not Applicable.

2. Discuss the impact of the policy reform(s) on vulnerable groups and ways to address it/them (refer to social analysis). Not Applicable.

3. Discuss how the policy reform(s) contribute(s) to poverty reduction, pro-poor growth, and the MDGs. Not Applicable. II. SOCIAL ANALYSIS AND STRATEGY A. Findings of Social Analysis

A socioeconomic survey covering 17% of the 300 households in the project-influenced area and four public consultations and two focus group discussions were conducted to gather feedback from the local communities on the proposed development and perceived socioeconomic impacts. The survey revealed that the primary beneficiaries of the airports in remote areas are the people who are geographically excluded and who have no access to road transport. The air services are also not regular in these places because of the low standard of the airports, which brings many risks in traveling. Therefore, primary beneficiaries are the people in remote areas. They will benefit from reduced prices in transportation and through reduced prices of goods and commodities. Women, the sick, and the elderly will also benefit as they can avail themselves of air transport in case of emergency.

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The other benefits will come indirectly through promotion of tourism and opportunities to expand business, however small they may be, because of tourism. Employment opportunities in tourism will be enhanced. People’s income will increase as they can sell their products to tourists. The impact zone in TIA is also relatively poor compared to other parts of Kathmandu. The opportunities to expand business will enhance the incomes of people in this zone.

Most of the impact zones (such as Humla, Mugu, and Solukhumbu) are located in the poorest and most remote areas of the country, which occasionally face food deficits and food deprivation. These are also the poorest districts in the country in terms of Human Development Index and other development indicators. Poverty rates in these districts are 42% in Humla, 51% in Mugu, and 46% in Solukhumbu; the national poverty rate is about 31%. Conditions in the immediate impact zones are slightly better, because they are located in district headquarters where people have greater opportunities. Despite this, the poverty rate in the immediate impact zone could be as high as 15%, compared with 4.4% in Kathmandu overall. B. Consultation and Participation 1. Provide a summary of the consultation and participation process during the project preparation.

A socioeconomic survey covering 17% of the 300 households in the project-influenced area, and four public consultations and two focus group discussions were conducted in June 2009 to gather feedback from the local communities on the proposed development and perceived socioeconomic impacts. These discussions were held with men, women, farmers, high-income groups, poor people, community leaders, teachers, and government officials to ensure a comprehensive perspective was gained on the Project as well as its impacts.

2. What level of consultation and participation (C&P) is envisaged during the project implementation and monitoring? Information sharing Consultation Collaborative decision making Empowerment

3. Was a C&P plan prepared? Yes No If a C&P plan was prepared, describe key features and resources provided to implement the plan (including budget, consultant input, etc.). If no, explain why.

All the activities of the Project will be confined within the airport boundary and there will be no interference at the community level. The C&P plan was prepared to inform and collate public views on the proposed development project. C. Gender and Development 1. Key Issues The Project will have no interference at the community level because it is confined within the airport boundary. The construction of buildings, hangars, parking space, and taxiways will be done within the present airport boundary without encroaching upon private land and property. However, gender participation was ensured during the course of the social study by undertaking a process of gender analysis so as to assess the possible impact of the proposed Project on Women. Two focus group discussions were undertaken with women belonging to different socioeconomic groups, such as high-income, the poor, and households headed by women. These discussions revealed that the majority of the women felt the Project will benefit them as there will be employment opportunities for the civil work, and opportunities for business such as establishing tea shops and restaurants to cater to the construction workers. The study also revealed that women in the project-influenced area were mainly involved in household chores, wage work at home (like woolen threadmaking for the nearby factories), in business and shops (like working in these enterprises), and in vegetable and dairy farming. There are few women engaged as teachers, Government officials, and nongovernment organization employees. Women’s groups were also formed and these groups ran adult literacy classes in the ward office in the community.

2. Key Actions

Measures included in the design to promote gender equality and women’s empowerment—access to and use of relevant services, resources, assets, or opportunities and participation in decision-making process: Gender plan Other actions/measures No action/measure

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III. SOCIAL SAFEGUARD ISSUES AND OTHER SOCIAL RISKS Issue Significant/Limited/ Strategy to Address Plan or Other Measures No Impact Issue Included in Design No land acquisition and Involuntary No Impact resettlement is envisaged. Full Plan Resettlement Short Plan Resettlement Framework No Action No indigenous people were Indigenous Peoples No Impact identified therefore no Plan specific action was Other Action foreseen. Indigenous Peoples Framework No Action The Project construction is Labor Limited expected to generate Employment employment opportunities Plan opportunities for local communities Other Action Labor retrenchment during the construction No Action Core labor standards phase. Men and women will be paid equally for equal jobs. The executing agency will ensure that all civil works will comply with all applicable labor laws, do not employ child labor for construction and maintenance activities.

Affordability No Impact Action No Action Other Risks and/or Limited The social assessments Vulnerabilities undertaken have not Plan HIV/AIDS shown any significant risks Other Action Human trafficking on social aspects such as No Action Others(conflict, political gender, HIV/AIDS, and instability, etc), please human trafficking. specify However, the executing agency will ensure that all civil works contractors disseminate information at worksites on the risks of sexually transmitted diseases and HIV/AIDS for those employed during construction. Contracts for all subprojects will include specific clauses on these undertakings, and compliance will be strictly monitored by the executing agency, with the support from the supervision consultant during project implementation.

IV. MONITORING AND EVALUATION

Are social indicators included in the design and monitoring framework to facilitate monitoring of social development activities and/or social impacts during project implementation? Yes No a National Planning Commission. 2007. Three Year Interim Plan, Approach Paper. Nepal. b ADB. 2007. Country Operations Business Plan: Nepal 2008–2010. Manila