Document ofe o The World Bank FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No. P-3437-NEP REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION Public Disclosure Authorized TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT IN AN AMOUNT EQUIVALENT TO US$16.0 MILLION (SDRs 15.1 MILLION) TO THE KINGDOM OF NEPAL Public Disclosure Authorized FOR A BHAIRAWA-LUMBINI GROUNDWATER STAGE II PROJECT December 29, 1982 Public Disclosure Authorized This document has a restricted distribution and may be used by recipients only un their official duties. Its contents may not otherwise be disclosed without World Bank aou_ CURRENCY EQUIVALENTS Currency Unit - Nepalese Rupee (NR) Since December 17, 1982 US$1.00 = NRs 14.3 WEIGHTS AND MEASURES 1 cm = centimeter 0.39 inches 1 m = meter = 3.28 feet 1 m3 = cubic meter 264 US gallons 1 1 = liter = 0.26 US gallons 1 bbl = barrel = 42 US gallons 1 kg = kilogram = 2.2 pounds 1 km = kilometer = 0.62 miles 2 1 km = square kilometer = 0.39 square miles 1 t = ton = 2,205 pounds I klW = kilowatt = 1,000 watts 1 MW = megawatt = 1,000 kilowatts 1 kWh = kilowatthour = 1,000 watthours 1 GWh = gigawatthour = 1 million kilowatthours ABBREVIATIONS AND ACRONYMS ADBN - Agricultural Development Bank of Nepal AIC - Agricultural Inputs Corporation BLGPO - Bhairawa Lumbini Groundwater Project Office DADO - District Agriculture Development Officer DI - Department of Irrigation DOA - Department of Agriculture ERR - Economic Rate of Return HMG - His Majesty's Government of Nepal ICB - International Competitive Bidding LCB - Local Competitive Bidding MA - Ministry of Agriculture MF - Ministry of Forestry MA - Ministry of Agriculture MWR - Ministry of Water Resources NEC - Nepal Electricity Corporation GRDB - Groundwater Resources Development Board O&M - Operation and Maintenance PCC - Project Coordinating Committee NEPAL FINANCIAL YEAR July 16 - July 15 FOR OFFICIAL USE ONLY KINGDOM OF NEPAL BRAIRAWA-LUMBINI GROUNDWATERSTAGE II PROJECT Credit and Project Summary Borrower: Kingdom of Nepal Amount: Special Drawing Rights (SDRs) 15.1 million ($16.0 million equivalent) Terms: Standard Project Objectives The project aims at ensuring the proper operationand and Description: maintenance of the tubewellsincluded under Stage I, introducingimproved tubewell irrigationsystems on a pilot basis, promoting the participationof farmers in the project, ensuring the provision of adequate inputs and extension services to farmers and strengtheningthe institutionsconcerned with the project. The project would comprise (a) the completion, operation and maintenance of 64 tubewells built under Stage I; (b) the constructionof 15 improved tubewells on a pilot basis; (c) the constructionof power transmissionfacilities; (d) the provision of technical support and training; (e) the provision of agriculturalextension; (f) improvementand repairs of Birganj tubewells; and (g) a study to determine groundwaterdevelop- ment strategiesfor the Terai. The major benefits from the project would be increased foodgrain production,foreign exchange earnings, employment opportunitiesand net farm income. The possible risks related to the project are failure on the part of HMG to provide adequate power for the wells, failure of project staff to properly operate and maintain the project facilities,and failure to achieve the active participationof farmers in the project. However, adequate safeguards have been built in the project to limit these risks. This document has a restricteddistribution and may be used by recipients only in the performance of their officialduties. Its contents may not otherwise be disclosed without World Bank authorization. -ii - Estimated Cost: US$ Million Local Foreign Total Civil Works and Materials 1.9 1.9 3.8 Land Acquisition 0.1 - 0.1 Vehicles and Equipment - 1.1 1.1 Agricultural Inputs - 0.1 0.1 Salaries and Operating Cost 1.3 0.5 1.8 Electricity Cost 0.2 0.6 0.8 Technical Assistance and Training 0.6 3.1 3.7 Birganj Wells Improvement 0.4 0.7 1.1 Stage I Completion 1.0 1.2 2.2 Base Costs 5.5 9.2 14.7 Contingencies: Physical 0.5 1.1 1.6 Price 1.3 1.8 3.1 Total Project Cost 7.3 12.1 19.4 Financing Plan: HMG 3.2 - 3.2 IDA 3.9 12.1 16.0 Farmers 0.2 - 0.2 Total 7.3 12.1 19.4 Estimated IDA FY FY83 FY84 FY85 FY86 FY87 FY88 Disbursements: Annual 1.0 3.2 3.9 4.2 3.0 0.7 Cumulative 1.0 4.2 8.1 12.3 15.3 16.0 Economic Rate of Return (entire project): 29% (excluding sunk cost and technical assistance) Staff Appraisal Report: No.4038-NEP, dated December 6, 1982 Maps: IBRD 16431 and 16432 1/ Project costs include taxes and duties estimated at US$0.2 million. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE KINGDOM OF NEPAL FOR A BHAIRAWA-LUMBINI GROUNDWATER STAGE II PROJECT 1. I submit the following report and recommendation on a proposed development credit to the Kingdom of Nepal in an amount of Special Drawing Rights (SDRs) 15.1 million ($16.0 million equivalent) on standard IDA terms to help finance a Bhairawa-Lumbini Groundwater Stage II Project. PART I - THE ECONOMY 1/ 2. The most recent economic report, "Nepal - Policies and Prospects for Accelerated Growth" (Report No. 3577-NEP) was distributed to the Executive Directors on October 15, 1981. The principal findings of the report and recent developments are described below. Country data are shown in Annex I. 3. By almost any standard, Nepal is one of the least developed countries in the world. Per capita income is estimated at $156 (1981) 2/ and health and education standards are well below the average for South Asia: life expectancy at birth is only about 44 years, infant mortality is 150 per thousand, and adult literacy is only about 20%. The population, estimated to be 15.0 million (1981), grew at a rate of about 2.6% per year during 1971 to 1981. About 95% of the population live in rural areas. 4. Population density with respect to arable land has reached very high levels and is threatening to overwhelm the resource base of the economy. Cultivation has been extended beyond economically feasible and ecologically safe limits in the Hills, and together with denudation of forests to meet housing and fuel needs, soil erosion has become a critical problem. Firewood and water have become more difficult to obtain as the forests are reduced and springs and streams dry up. This degradation of the agricultural base has made even the present low level of living standards difficult to maintain. 5. Agriculture accounts for nearly 60% of Nepal's GDP and 75% of merchandise exports, and provides the main source of livelihood to over 90% 1/ Parts I and II of this report are substantially the same as in the President's Report (Report No. P-3211-NEP) dated May 20, 1982 for the Petroleum Exploration Promotion Project in Nepal, distributed to the Executive Directors under cover of the Secretary's Memorandum IDA/R82-69. 2/ World Bank Atlas methodology, using the exchange rate then prevailing ($1 = Rs 12). -2- of the population. Crop production accounts for about 60% of agricultural output, livestock for 30%, and forestry for 10%. Paddy is the predominant food crop (planted on about half of the total cropped area), followed by maize, wheat, millet, and barley; cash crops (oilseeds, jute, sugar and tobacco) are grown on about 10% of the cropped area. About 25% of total rural incomes arise from nonagricultural activities, of which cottage industries are one of the more important and engages over one million people on a part time basis. 6. Apart from agricultural land, Nepal's only other important exploitable resources are hydropower and tourism. The exploitation of the vast hydropower resources, however, beyond that required to satisfy the country's own power demand, will depend crucially on Nepal's ability to enter complex financial, exploitation and export agreements with neighboring countries. The tourism sector, based on Nepal's magnificent landscape and rich cultural heritage, has been dynamic though it still accounts for only about 1% of GDP. 7. When modernization efforts started in the early 1950s, there was virtually no economic or administrative infrastructure, and initial develop- ment efforts were necessarily concentrated on establishing a foundation for future development. The Fifth Development Plan (1975/76-1979/80) marked a shift in development objectives; acceleration of economic growth, employment creation and raising living standards of the population became major plan objectives. Development expenditures rose during this period and there were substantial shifts in the composition of spending away from transport to agriculture, power and social services. GDP growth, however, barely kept up with that of population, and the continued economic stagnation since the mid 1970s needs to be overcome. 8. Part of the reason for this stagnation lies in factors beyond Nepal's control. The difficult topography and poor resource base are obviously important in retarding growth. Nepal's landlocked position, long open border with India and the dependence of its overseas trade on transit through India create additional disadvantages. While Nepal benefits from the proximity of a vast potential market for Nepalese goods, the ability to pursue independent economic policy measures is circumscribed. Furthermore, industrial develop- ment faces the competition of a far larger and more efficient industrial sector in India. 9. But factors within Nepal's control have also contributed to the stagnation. Problems with the implementation of projects in most sectors of the economy have constrained the growth of public sector capital formation which grew at an average of only 5.5% per annum in real terms during the 1970s. In addition, the returns on investments were often lower than expected because necessary complementary investments or current spending were lacking, and because of managerial deficiencies.