Dmme f The World Bank FOR omcwL. USE ONLY Public Disclosure Authorized Report No. P-4332-NEP REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE Public Disclosure Authorized INTERNATIONALDEVELOPMENT ASSOCIATION TO TRE EXECUTIVEDIRECTORS ON A PROPOSEDCREDIT OF SDR 21.6 MILLION TO THE KINGDOMOF NEPAL Public Disclosure Authorized FOR A NARAYANIIII IRRIGATION PROJECT June 2, 1986 Public Disclosure Authorized This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Is contents may not otherwise be disclosed without World Bank authorization. CURRENCYEQUIVALENTS US$1.0 = KRs 20.5 ABBREVIATIONS AND ACRONYMS AG - Auditor General AIC - Agricultural Inputs Corporation BSC - Branch Secondary Canal CCA - Cultivated Commanded Area DG - Director General (DIHM and DOA) DIHM - Department on Irrigation, Hydrology and Meteorology DOA - Department of Agriculture FAO - Food and Agriculture Organization GM - General Manager cOI - Government of India HMGN - His Majesty's Government of Nepal ICB - International Competitive Bidding IDA - International Development Association LCB - Local Competitive Bidding M&E - Monitoring and Evaluation MOA - Ministry of Agriculture MSC - Main Secondary Canal MWR - Ministry of Water Resources NEC - Nepal Eastern Canal NZIDB - Narayani Zone Irrigation Development Board NZIDP - Narayani Zone Irrigation Development Project (Stages I, II and III areas) O&M - Operation and Maintenance SA - Special Account SDC - Swiss Development Cooperation Stage I Area - Narayani Zone-Blocks I-VI--15,900 ha Stage II Area - Narayani Zone-Blocks VII-XII--12,800 ha Stage III Area - Narayani Zone--Blocks XIII-XV--8,700 ha TC - Tertiary Canal T&V - Training and Visit System (of Agricultural Extension) USAID - United States Agency for International Development WUG - Water Users' Group FISCAL YEAR July 16 - July 15 FOR OFFICIALUSE ONLY NEPAL NARAYANI III IRRIGATIONPROJECT Credit and Project Summary Borrower: Kingdom of Nepal Amount: SDR 21.6 million (US$24.5 million equivalent) Terms: Standard Project Objective The main objectives of the Project are to increase and Description: dry-season agricultural production and reduce the risks to monsoon crop production by introducingan equitable, predictableand reliable irrigation system in the Narayani irrigation scheme. The proposed project is the third phase of an IDA-supportedprogram and would complete the developmentof irrigation and drainage infrastructureover about 37,400 ha served by the Nepal Eastern Canal in the Narayani Zone of the Central Region of Nepal. The project would also provide for: flood protection and river training works; improvementsto village roads and canal service roads; support to agriculturalextension and research; a regional workshop; training of project staff; consulting services; funding for project establishmentand O&M; a small component for groundwaterdevelopment; and monitoring and evaluation. In view of the experiencewith the implementationof the first and second projects,no major risks are anticipatedregarding the physical implementationof the project. Possible risks that could affect project objectives include: HMG's failure to make adequate provisions for OEM financingafter contributions from the credit phase out at the end of implementation;a major flood damage to the main canal and other essential irrigation infrastructure;and inadequatewater management. With respect to these risks, the cost of project establishmentand ObM would be financed under the credit on a declining basis; special training would be provided to project staff in water management and water users' groups would be strengthened; and project planning and design would enable the introductionof a water management system that would enable the irrigation service to be timely, reliable and equitable. This document has a rstricted distribution and may be used by recipients only in the performance | of their offiil duties Its contents may not otherwie be disclsed without World Dank authoriation. Estimated Costs: a1 US$ Millions- Project Component Local Foreign Total NEC Improvementand Repairs to the Tilawe Barrage 1.2 1.0 2.2 Irrigationand Drainage (Stage III Areas) 1.5 3.0 4.5 Irrigation and Drainage (Stage I and II Areas) 1.2 2.2 3.4 Flood Control and River Training 0.5 1.1 1.6 Upgrading of Road Network 0.5 1.1 1.6 Equipment and Radio-Communication System 0.1 1.3 1.4 Regional Workshop 0.1 0.9 1.0 Technical Support 1.6 2.5 4.1 Establishmentand O&N 3.6 1.8 5.4 Land Acquisition and Crop Compensation 0.6 - 0.6 TOTAL BASE COSTS 10.9 14.9 25.8 Contingencies Physical Contingencies 1.1 1.8 2.9 Price Contingencies 3.0 3.8 6.8 TOTAL PROJECT COSTS 15.0 20.5 35.5 Financing Plan: b/ -- US$ Millions-- Local Foreign Total IDA 9.2 15.3 24.5 SDC 2.3 5.2 7.5 HMGN 3.5 5.2 3.5 TOTAL 15.0 20.5 35.5 a/ Not including taxes and duties estimated at about US$0.5 million. b/ SDC grant is denominated in Swiss Francs and is fixed at 15 million Swiss Francs: the US$ equivalent of 7.5 million (using exchange rate of April 22, 1986) may vary with exchange rate movements. Cofinancing is on a joint basis following Bank Group's procurementand consultants guidelines. -iii- Estimated Disburseuents: IDA FY FY87 FY88 FY89 FY90 FY91 FY92 FY93 FY94 a/ (a) For IDA Credit Annual 0.8 2.3 3.4 5.0 6.5 3.7 2.3 0.5 Cumulative - 3.1 6.5 11.5 18.0 21.7 24.0 24.5 (b) For SDC Grant Annual 0.2 0.7 1.1 1.5 1.6 1.3 0.9 0.2 Cumulative - 0.9 2.0 3.5 5.1 6.4 7.3 7.5 Rate of Return: 21 percent Appraisal Report: NEPAL: Narayani III IrrigationProject, Report No. 6067-NEP,dated June 2, 1986 Map: IBRD 19549 a/ One semester. INTERNATIONALDEVELOPMENT ASSOCIATION REPORTAND RECOMMENDATIONOF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSEDCREDIT TO THE KINGDOMOF NEPAL FOR A NARAYANI III IRRIGATION PROJECT 1. I submit the following report and recommendationon a proposed development credit to the Kingdom of Nepal in an amount of SDR 21.6 million (US$24.5 million equivalent)on standard IDA terms to help finance the Narayani III Irrigation Project. Cofinancing has been arranged with the Swiss Development Cooperation (SDC) for a grant of Sw F 15.0 million (about US$7.5 million equivalent). PART I - THE ECONOMY 1/ 2. The most recent economic report, Nepal: Prospects for Eccnomic Adjustment and Growth (Report No. 5867-NEP), was distributedto the Executive Directors on December 17, 1985. The principal features and recent performance of the economy are described below. Country data are shown in Annex I. 3. Nepal is one of the least-developedcountries in the world. Per capita income is estimated at US$170 (1983) and health and education standardsare well below the average for South Asia. Life expectancy at birth is about 46 years, infant mortality is about 145 per 1,000 and adult literacy is only 19 percent. The population,estimated to be 16.3 million (mid-1984),grew at a rate of about 2.7 percent per year between 1971 and 1984. About 95 percent of the population lives in rural areas. 4. Population density with respect to arable land (394 persons per sq km) has reached very high levels, and cultivationhas been extended to marginal lands and forests. Forests have been denuded further to meet the growing demand for fuelwood, on which Nepal depends for more than 90 percent of its energy consumption,mostly for household cooking and heating. Because of deforestationand excessive grazing on hills and mountains, when rainfall is abundant, accelerated soil erosion occurs causing rivers to silt and flood with consequent loss of agricultural productivity. 5. Agriculture, largely rainfed, accounts for nearly 60 percent of Nepal's GDP and merchandise exports and provides the main source of livelihood to more than 90 percent of the population. Crop production 1/ Substantiallyunchanged from Cottage and Small Industries II Project (Report No. P-4295, dated April 24, 1986). -2- accounts for about 60 percent of agriculturaloutput, livestock for 30 percent, and forestry for 10 percent. Apart from agricultural land, Nepal's only other important exploitable resources are hydropower and tourism. Exploitationof its vast hydropower resources will depend upon the Government'sability to enter into complex agreements with neighboring countries regarding the use and development of water resources and the exchange of water-related benefits. The tourism sector, based primarily on Nepal's Himalayan environment provides about 20 percent of the country's foreign exchange earnings, but accounts for only about 1 percent of GDP. 6. Following centuries of self-imposedisviation, efforts to develop the economy of Nepal began in the mid-1950s--a time when the country had virtuallyno physical infrastructure,an ancient administrativesystem, and very limited educational and health services. Between 1955 and 1975, the country's primary development goal was to build basic infrastructureand provide a basis for future economic growth. Reasonably good progress has been made. A basic road network now exists. Schools accommodating almost half of the children of primary school age have been built, as have a number of secondary schools and a national university. A rudimentary hospital system, including rural health posts, has also been established. Then, in the Fifth Five-Year Plan the Government shifted its development objectives to stress acceleratingeconomic growth and creating employment,as well as raising living standards. These objectives were reiterated in the Sixth Plan (FY81-FY85)and in the Seventh Plan (FY86-FY90),which also appropriately assigned high priority to developing agriculture, small-scale industries and Nepal's abundant water resources. Additionally, both Sixth and Seventh Plans stressed the need to conserve soil, control population growth, make better use of existing infrastructure,expand absorptive capacity and develop human resources.