Nepal: Upper Trishuli 1 Hydro Project Project Preparation Missions March 16-23 and April 19-24, 2015 AIDE-MÉMOIRE Public Disclosure Authorized I. Background 1. This Aide Memoire provides a summary of key findings from two due diligence missions that were undertaken, respectively, from March 16-23, 20151, and April 19-24, 2015. Both missions were with respect to the Upper Trishuli (UT1) Hydro Project - a run-of-river project with an installed capacity is 216 MW to produce an estimated 1,533.1 GWh per year – located on the Trishuli River in Rasuwa District of central Nepal. 2. The first mission (the WB mission2) was led by Sandeep Kohli, Task Team Leader (TTL), and Patrice Caporossi, the Co-Task Team Lead (Co-TTL), while the second mission, was led by International Finance Corporation (IFC) (the UT1 Lenders’ mission) included representatives from various commercial and developmental financial institutions, as well as WBG members, including MIGA3. From the World Bank, Pravin Karki, Arnaud Braud, and Leanne Farrell – covering respectively, technical, commercial, and Public Disclosure Authorized environmental aspects of due diligence, were part of this UT1 Lenders mission. 3. On April 25, 2015 just at the end of the UT1 Lenders’ mission, the first of two devastating earthquakes struck Nepal. This earthquake with epicenter at Barpak, Gorkha, killed over 9,000 people, and injured over 23,000. There was widespread damage in Rasuwa District, including at the UT1 site. Road access to the site was cut off, and there were casualties reported. The earthquake was followed by several aftershocks which are continuing till date. Another very significant earthquake followed on May 12, 2015, with an epicenter northeast of the Gorkha earthquake. 4. As a result of these tragic occurrences, further discussions on the project halted, as attention focused on search, rescue, and then reconstruction. An early May, 2015 planned mission by the WB Lead Social Specialist, Chaohua Zhang was cancelled. Public Disclosure Authorized 5. Following two devastating earthquakes, the government as well as the partner communities are now re-focusing on the larger hydro-power agenda, and making plans for re-engagement. In light of these developments, this Aide Memoire is being shared to document the findings from past missions, while recognizing that the post-quake picture has changed significantly. Therefore some of the discussions, observations and findings may no longer be as pertinent, but are included more for record keeping. Furthermore, there will be a need to adjust timelines, tasks, and priorities. In particular, an assessment of post- quake damage to the site, as well as a review of design from an earthquake resilience standpoint will be needed. 1 The Nepal leg of the WB mission was followed by a smaller team (Sandeep Kohli, Patrice Caporossi, and Arnaud Braud), going to Singapore (March 24-25), and Seoul, South Korea (March 26-27), to meet respectively, potential lenders and senior representatives from the sponsors. In Singapore, Andre Van Hoeck (Principal Investment Officer), Katherine Koh (Investment Officer), and John Grosebeek (Principal Syndications Officer) from IFC also joined. Andre Van Hoeck, was also present in Seoul. Public Disclosure Authorized 2 The WB team: Sandeep Kohli (TTL, Sr. Energy Specialist), Patrice Caporossi (Co-TTL, Sr. Infrastructure Finance Specialist), Pravin Karki (Sr. Hydropower Specialist),Tang Jie (Program Leader), Rabin Shrestha (Sr. Energy Specialist), Drona Raj Ghimire (Environment Specialist), Gregory Scopelitis (Energy Specialist), Arnaud Braud (Infrastructure Finance Specialist), Gunjan Gautam, (Consultant), Barsha Pandey (Consultant) from IDA and Cristina Celentano (Investment Analyst) from IFC. Alina Thapa (Team Assistant) provided the administrative and logistical support in the country office. 3 From MIGA, Jaeyoung Jin (Underwriter), Petal Jean Hackett (Economist), Dessislav Dobrev (Lawyer), Junglim Hahm (Korea Representative) and Kate Wallace (Environmental and Social Specialist) joined the mission. Aide Memoire, UT1 -2- August 19, 2015 The World Bank is going to look into these factors, and such a review is also being undertaken by the project sponsors and IFC, as a part of the planning. II. The World Bank Mission (March 16-27, 2015) 6. A World Bank (WB) preparation mission for UT1 was carried out with the following itinerary: (a) Nepal (March 16-23), (b) Singapore (March 24-25), and (c) South Korea (March 26-27). The team was led by Sandeep Kohli, Task Team Leader (TTL), and Patrice Caporossi, the Co-Task Team Lead (Co-TTL), with the objective of conducting due diligence on the Nepal Upper Trishuli 1 (UT1) hydropower project. 7. The team met with officials from the Ministry of Finance (MoF), the Ministry of Energy (MoE), the Nepal Electricity Authority (NEA), the Department of Electricity Development (DoED), the Investment Board Nepal (IBN), the Nepal Rastra Bank (NRB), and local commercial banks. The mission team also consulted with development partners including Asian Development Bank (ADB) and Department for International Development (DFID). The names of officials met during the mission are listed in Annex 1 and more details of the discussions are in Annex 2. 8. MoE as the relevant Line Ministry, and NEA as the power off-taker, are the key counterparts for UT1. The Nepal Water and Energy Development Corporation (NWEDC), is the Project Company, responsible for project development and operations. The South Korean utility, KOSEP, is the lead investor in NWEDC, alongside IFC and other partners. As per NWEDC, the construction wrap is to be provided by a joint venture between DAELIM and KYERYONG (D&K JV), two South Korean companies. The WB team met with representatives from all these organizations during this mission. 9. The WB team visited the UT1 project site, where they were briefed on the project structure. The UT1 project plan included: (i) underground tunneling works of about 10km (intake, headrace); (ii) a 10km, 220kV transmission line; (iii) an underground power house; (iv) access roads totaling 18km; and (v) environmental and social management plan. A concrete weir with radial gates (as opposed to a regular dam) is proposed to create a head of 350 m of water. A five year construction period was anticipated. 10. Key findings and conclusions from the mission were presented at a wrap up meeting at MoE, chaired by the Energy Secretary, Mr. Rajendra Kishore Kshatri, on March 22, 2015. As agreed at the wrap up meeting this AM will be classified as a public document as per the World Bank’s Access to Information Policy. III. The UT1 Lenders’ Mission (April 19-24, 2015) 11. The UT1 Lenders’ Mission was led by IFC, and included a visit by representatives from potential lenders to UT1 – International Finance Institutions, Development Finance Institutions, and commercial banks. In parallel, the Project Review Panel (PRP) consisting of experts linked to hydropower development, also visited the project site during the same period, reviewing the project details with the sponsors. The PRP members included a Geotechnical expert, a general hydropower/dams expert and an Environmental and Social expert. The Lender’s Engineer, Montgomery Watson Harza, and representatives of the KOSEP and JADE joint venture, as the Owner’s Engineer, were a part of these discussions. 12. The sponsors presented the visiting representatives with the details of the EPC structure, which includes the following seven sub-contracts or packages: PKG1: Access Road PKG2: Head-works & Curtain Grouting PKG3: Headrace Tunnel PKG4: Vertical Shaft & Power House Aide Memoire, UT1 -3- August 19, 2015 PKG5: Hydro-Mechanical Works PKG6: Electro-Mechanical Works PKG7: Transmission Line Pravin Karki as the WB representative, was present during these important PRP discussions. Initial feedback from the PRP panel, showed no substantial issues with the project. 13. The lenders’ appraisal team for the UT1 project included IFC (Mandated Lead Arranger), other Development Finance Institutions (ADB, FMO, Proparco, EIB, CDC, and OFID), commercial banks (Societe Generale, BTMU, and SMBC), and advisors (Synergy as sponsors’ Financial Advisor, Shearman and Sterling as lenders’ counsel, MWH as lenders’ Independent Engineer). The WB was represented by Arnaud Braud. 14. Meetings were held with the UT1 sponsors (KOSEP, Daelim, Kyerong, Jade). The agenda included project presentations (sponsors, technical, financial, E&S, and legal), lenders’ discussion, and meetings with MoE and MoF. IFC, MIGA, and WB also met NEA, the off-taker, separately. 15. Key outcome from commercial discussions were: DFIs and commercial lenders confirmed interest in financing the project and did not raise major issues with the current project structure. Progress of the project documents (Project Development Agreement (PDA) and Power Purchase Agreement (PPA)) were the main concern. The list of open issues were significant (including contract currency, government guarantee language, tariff level) and negotiations had remained slow. Discussions on the PPA with NEA were still at an early stage. Participants appreciated the availability of IDA guarantees. Some lenders expressed willingness for the Letter of Credit to be for six months instead of three (to be negotiated between sponsors and NEA). Following the meetings in Singapore (from the previous mission), three commercial banks participated in the mission (SocGen, BTMU, and SMBC) with a strong appetite for a first project in Nepal under the