Document of The World Bank FOR OFFICIAL USE ONLY Report No. 15653 IMPLEMENTATION COMPLETION REPORT NEPAL MARSYANGDI HYDROELECTRICPOWER PROJECT (CREDIT 1478-NEP) May 20, 1996 Energy and Infrastructure Operations Division Country Department II South Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
Document of
The World Bank
FOR OFFICIAL USE ONLY
Report No. 15653
IMPLEMENTATION COMPLETION REPORT
NEPAL
MARSYANGDI HYDROELECTRIC POWER PROJECT(CREDIT 1478-NEP)
May 20, 1996
Energy and Infrastructure Operations DivisionCountry Department IISouth Asia Region
This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.
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CURRENCY AND EQUIVALENTSI Nepalese Rupce (NR) = 1(00 Nepalcse Paise
ADB - Asian Development BankBPC - Butwal Power CompanyCIDA - Canadian International Development AgencyDCA - Development Credit AgreementED - Electricity DepartmentEdF - Electricitc de France InternationalGLOF - Glacicr Lake Outburst FloodGTZ - Geselischaft fur Technische ZusammenarbeitIERR - Internal Economic Rate of ReturnHEP - Hydroelectric ProjectLHMG - His Majestv's GovcrnmentKFAED - Kuwait Fund for Arab Economic DevelopmentKfW - Kreditanstalt fur WiederaufbauLDC - Load Dispatch CenterLI - Lahmever InternationalLRMC - - Long Run Marginal CostMH-IDB - - Marsvangdi Hydroelectric Development BoardMI-IPP - Marsvangdi Hydroelectric Power PlantMOWR - Ministry of Water ResourcesNEA - Nepal Electricity AuthorityNEC - Nepal Electricitv CorporationOD - Operational DirectiveOMS - Operational Manual StatementPoE - Panel of ExpertsPSEP - Powcr Scctor Efficiency ProjectSCADA - System Control and Data Acquisition SsytemSFD - Saudi Fund for DevelopmentSLA - Subsidiary Loan AgreementSMEC - Snowv Mountains Engineering CorporationSPAF - Seriously Project Affected FamilyTA - Technical Assistance
FISCAL YEAREnding July 15
FOR OFFICIAL USE ONLY
NEPALMARSYANGDI HYDROELECTRIC POWER PROJECT
(CREDIT 1478-NEP)
IMPLEMENTATION COMPLETION REPORT
Table of Contents
PREFACE
EVALUATION SUMMARY ............................................... iThe Project and its Objectives .............................................. iProject Outcome ................................................ iSustainability of Benefits ................................................iiFindings and Lessons ............................................... iii
PART I: PROJECT IMPLEMENTATION ASSESSMENT ................................................ IA. Evaluation of Project objectives ................................................ 1
Project and Sectoral Context ................................................ 1Objective No. 1 - Meeting the Demand ............................................... 3Objective No. 2 - Strengthening the Sector Institutions ................................................ 4The Objectives in Perspective ................................................ 5
B: Achievement of Objectives ................................................ 5Objective No. 1 - Meeting Demand ......... 5.......................................Objective No. 2 - Strengthening Sector Institutions ................................................ 6Summary Assessment of Achievement of Objectives ................................................ 8
C: Major Factors Affecting the Project ................................................ 8Factors Generally not Under Government Control ................... ............................ 8Factors Generally Under Government Control ................................................. 9Factors in General Subject to Implementing Agency Control ................................................9Cost Changes ................................................ 9Implementation Delays ............................................... 10
This document has a restricted distribution and may bc used by recipients only in the performance of theirofricial dutics. Its contents may not otherwise be disclosed wi&.hout World Bank authorization.
PART II: STATISTICAL TABLES
Table I - Summary of AssessmentsTable 2 - Related Bank Loans/CreditsTable 3 - Project TimetableTable 4 - Loan/Credit Disbursements; CumulativeTable 5 - Key Indicators for Project ImplementationTable 6 - Key Indicators for Project OperationTable 7 - Studies Included in the ProjectTable 8A - Project CostsTable 8B - Project FinancingTable 9 - Economic Costs and BenefitsTable 10 - Status of Legal CovenantsTable I I - Compliance with Operational Manual StatementsTable 12 - Bank Resources: Staff InputsTable 13 - Bank Resources: Missions
ANNEXES
Annex I - Project Costs and Completion DatesAnnex 2 - Submission of Audited AccountsAnnex 3 - NEA Receivables from MHGAnnex 4 - Reduction of Systems LossesAnnex 5 - Land Acquisition and ResettlementAnnex 6 - Project and Actual Values of NEA's PrincipalOperational and Financial IndictorsAnnex 7 - Aide MemoireAnnex 8 - Operation Plan (Provided by NEA)Annex 9 - Comments Provided by Kreditanstalt fur Wiederaufbau
NEPAL
MARSYANGDI HYDROELECTRIC POWER PROJECT(CREDIT 1478-NEP)
IMPLEMENTATION COMPLETION REPORT
Preface
This is the Implementation Completion Report (ICR) for the Marsyangdi HydroelectricPower Project (Marsyangdi HEP) in Nepal for which Credit 1478-NEP in the amount of SDR100.6 million was approved on May 22, 1984 and made effective on January 29, 1986.
The credit was closed on December 31, 1994 compared to the original closing date ofJune 30, 1990. The Marsyangdi hydroelectric power plant was commissioned in February 1990and has since been in successful operation. However, the closing date of the Credit was extendedfour times for a total of four-and-a-half years in order to allow His Majesty's Government (HMG)to complete the other components of the Project (loss reduction program, training program,catchment management study, etc.). Final disbursement took place on June 6, 1995, at which timeSDR25,288,906.56 was canceled. Cofinancing was provided by Kreditanstalt fur Wiederaufbau(KfW), the Asian Development Bank (ADB - as part of ADB's Sixth Power Project), the SaudiFund for Development (SFD), and the Kuwait Fund for Arab Economic Development (KFAED).
The ICR was prepared by Mr. R. A. Ribi (Consultant) and Mr. Argun Ceyhan (TaskManager) of the Energy and Infrastructure Operations Division (SA2EI) of Country DepartmentII, South Asia Region. It was reviewed by Jean-Francois Bauer, Division Chief, SA2EI andKazuko Uchimura, Project Adviser, SA2.
The present ICR is based on material in the project files, interviews with IDA personnelinvolved in project implementation and the results of discussions with the Borrower and theBeneficiary that took place during the November 1995 ICR mission to Nepal and are reflected inthe aide-memoire attached to the present document'. Comments received from KfW have beenincorporated in the ICR.
The operation plan provided by NEA is given in Annex 8.
NEPAL
MARSYANGDI HYDROELECTRIC POWER PROJECT(CREDIT 1478-NEP)
IMPLEMENTATION COMPLETION REPORT
Evaluation Summary
The Project and its Objectives
i. The Marsyangdi Hydroelectric Power Project (the Project) aimed at helping the newnational electricity utility, Nepal Electricity Authority (NEA) to: (i) meet the power demand in thefirst half of the 1 990s at least economic cost to the country through the construction of the 69MW run-of-river Marsyangdi hydro powerplant some 100 km west of Kathmandu; and, (ii)strengthen the power sector in Nepal, through, inter alia, the implementation of technicalassistance in the areas of finances especially accounting and auditing, plant maintenance, reductionof system losses, and training. In parallel, to assure NEA's viability His Majesty's Government(HMG) and NEA were to comply with covenants, in particular on revenues and accountsreceivable. The Borrower of the IDA Credit 1478-NEP of SDR 100.6 million (US$107.0equivalent at appraisal) was the Kingdom of Nepal. As was the case with earlier projects, theMarsyangdi hydro power project was executed by the Marsyangdi Hydro Development Board(MHDB - the Executing Agency). Upon completion the facilities were transferred to the NepalElectricity Authority (NEA - the Beneficiary) for operation and maintenance. The debt incurredin building the plant was also passed to NEA for servicing. The institutional and financialcovenants aimed at developing NEA into a mature Government-owned utility, thus focused onNEA's performance.
Project Outcome
ii. NEA, with support from HMG achieved the physical objectives of the project with a highdegree of success. Though the plant and its associated facilities were completed in February1990, seven months late with respect to the schedule in the Staff Appraisal Report (SAR) theircost was some 20% lower than set forth in the appraisal estimate.(para. 13, Table 8A, and Annex1). Since 1991, the installation's output was consistently in excess of 400 GWh per year, i.e. morethan 10% higher than the expected average generation. The Internal Economic Rate of Return asrecalculated after project completion was about 6.7%, at about the same level with the rateestimated at project appraisal (5.9%).
iii. The closing date of the Credit was extended four times for a total of four-and-a-half yearsin order to allow His Majesty's Government (HMG) to complete the other components of theProject (loss reduction program, training program, catchment management study, etc.).Therefore, the Credit was closed on December 31, 1994 compared to the original closing date ofJune 30, 1990.
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iv. The implementation of the institutional measures included in the project was lesssuccessful than that of the project's physical component. NEA's institutional strengthening wasslower than expected. The sector finances remained weak throughout project implementation(para. 17). However, in the context of follow-on projects revenues dramatically increased,accounting and auditing improved both in quality and timeliness (Annex 2), and accountsreceivable from Government entities fell substantially (Annex 3). Most of the major maintenanceof existing plant which was planned to be carried out during project implementation had to bedelayed until after its completion (para. 18). The loss reduction program failed to achieve thetargets agreed at appraisal and was taken up in follow-on projects (Para. 19 and Annex 4)Training developed only slowly under the project; however, progress improved substantially in theearly 1 990s, once the main disagreements between Nepal and IDA on the one hand and theconsultants on the other were eliminated (para. 20). The subsequent Third Technical Assistance(Pancheswar) Project (TA III - Credit 1902-NEP) and the Power Sector Efficiency Project (PSEP- Credit 2347-NEP) included further institutional technical assistance in line with the previousprograms.
v. Furthermore, HMG's policy to compensate people to be resettled only in cash impeded theexecution of the limited resettlements required for the Project in accordance with IDA's policies(para. 31 and Annex 5). Satisfactory rehabilitation of 41 Seriously Project Affected Families(SPAFs) still remain. This issue was taken up, once again, with IDA's letter dated May 7, 1996,addressed to HMG.
vi. The emphasis of the Project clearly was on providing Nepal with a generation facility tomeet its internal power demand. The limited success of the institutional component was due toHMG's and IDA's optimism about the development and delivery of the sector and NEA. Thiswas addressed in the context of the succeeding TA III and PSEP projects which started in themiddle and toward the end of Project implementation. Establishment of NEA and relativeimprovement in the coordination between the planning, construction and operating functions weresteps in the direction of strengthening the power sector. On balance the outcome of the Project israted as satisfactory.
Sustainability of Benefits
vii The sustainability of the benefits of the plant is rated as "likely", as operation andmaintenance is well planned and properly executed, which is likely to continue provided NEAdoes not let the plant deteriorate by substantially reducing maintenance calling for stopping theunits in order to increase in the short term plant availability. The sustainability of the limitedinstitutional gains achieved under the Project is also likely mainly thanks to the follow-up carriedout under subsequent IDA projects (paras. 28 - 30).
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Findings and Lessons
viii. The major findings and lessons are summarized as follow:
a) The successful operation of the Marsyangdi plant suggests that the detailed planning,execution and monitoring of operation and maintenance carried out in this plant shouldbe applied in other facilities in NEA's system. This might involve the continuation, fora limited time, of the services of at least one specialized expatriate.
b) Project outcome confirms the lesson learned in other projects and which already forseveral years has been reflected in Bank policy: Projects with large, lumpy physicalcomponents should be submitted to Board consideration only after bidding for themain components has taken place.
c) The Project, as many before it, illustrates the fact that borrowers and beneficiaries tendto own physical project components of IDA projects more clearly than institutionalones, because they usually get involved with the IDA primarily to obtain financing ofcapital intensive facilities such as power plants. To improve the chances of success ofinstitutional project components associated with these projects, IDA should ensure theborrowers' and beneficiaries' ownership and use its leverage in a delicate and balancedway to lead in a reasonably short time to ownership by borrowers and beneficiaries ofthe objectives and measures considered. The measure of leverage applied inconnection with this and follow-on projects (i.e., TA III and PSEP), was adequate, ase.g. in mid-1990s, NEA is in a better financial shape than it was in the late 1980s.
d) Establishment of NEA and relative improvement in the coordination between theplanning, construction and operating functions were steps in the direction ofstrengthening the power sector. However, the overall performance level is notsufficient to tackle the challenges Nepal power sector faces in the second half of the1990s. A new strategy in line with the current power sector policy guidelines of theBank Group needs to be developed.
e) IDA created a precedent that when H1MG and NEA were not in compliance with theircommitments, these covenants were shifted to the next projects.
f) In its deliberation on the then proposed Arun III Hydroelectric Project, the InspectionPanel observed that "the Marsyangdi Project was completed without compliance onresettlement." IDA should ensure that the necessity to undertake rehabilitation andrestoration of livelihood of the project affected families be accepted as a principle byHMG.
NEPALMARSYANGDI HYDROELECTRIC POWER PROJECT
IMPLEMENTATION COMPLETION REPORT
PART I. Project Implementation Assessment
A. Evaluation of Project Objectives
Project and Sectoral Context
I. The two principal sources of energy in Nepal are forests and river systems. The formerare already overused. In contrast, the development of the large hydropower potential is still at anearly stage, though, for a long time it has been one of the main objectives of His Majesty'sGovernment (HMG). In the short run, it was aimed at meeting internal demand, but, in time, itwas also seen as a basis for future large scale exports providing revenues in foreign currency. Inthe long run it may also contribute to stop forest depletion. The Marsyangdi hydroelectricproject, which formed the core of the IDA operation (the Project) discussed here was well in linewith the first part of this strategy, as it aimed at meeting internal demand. IDA's parallel KarnaliPreparation Project (Credit 1452-NEP) was oriented towards developing Nepal's power exportcapability.
2. At the time of Project preparation, in the early 1980s, the sector was completing the 60MW Kulekhani hydroplant (supported by Credit 600-NEP), which suffered massive time and costoverruns (some two years and about 80% in current terms, respectively). The new facilitybrought the total capacity installed for public supply in the country to 133 MW (111 MW hydroand 22 MW diesel) and ended the load shedding that had hampered sector operations for severalyears. The corresponding total available energy reached 349 GWh including 62 GWh of netimports from India and an estimated 8 GWh generated by captive plant. This represented anexceedingly low 23 kWh per capita, which, at the time, was lower than the corresponding figurefor Bangladesh (26 kWh) and very much less than that for India (140 kWh).
3. IDA's power sector program in Nepal, included the 1983 Second Technical AssistanceProject supported by Credit 1379-NEP which helped HMG identify and prepare high priorityprojects in the sector for international financing. Investigations of various potential hydroelectricsites on the Marsyangdi River were begun in early 1960s. The site was first identified by a teamof Chinese engineers in 1966 who proposed a run-of-river project with a power station of about40 MW capacity. High dam alternatives too were investigated in several additional studies. In1979, Gesellschaft fur Technische Zusammenarbeit (GTZ) and Kreditanstalt fur Wiederaufbau(KfW), both of Germany provided funds for a feasibility study and detailed engineering,respectively, by a consortium formed by Lahmeyer lnternational (LI), also of Germany, andSnowy Mountains Engineering Corporation (SMEC) of Australia. In 1980, the Water andEnergy Commission of the Ministry of Water Resources (MOWR) compared 13 development
programs to meet load demands up to FY91. These programs included 6 possible hydro projectsand also various thermal (coal, gas, diesel) options. Based on this economic comparison, theMarsyangdi run-of-river project with an installed capacity of 69 MW was selected as the nextproject. The same year, IDA started the preparation of the Project by sending its first pre-appraisal mission. It took three further preparation and pre-appraisal missions and nearly threeyears to bring the Project to a level permitting IDA to appraise it, and a further fifteen months tomake it adequate for Board presentation, in May 1984. The main reason for this lengthyprocedure was that IDA wanted to avoid cost and time overruns of the type experienced in thecontext of the Kulekhani project. Therefore, it called for further investigations which Nepalcarried out under the guidance of a Panel of Experts (PoE). How justified this cautious approachwas is demonstrated by the fact that between 1980 and 1983 the estimated project costs increasedfrom US$ 150 million (only plant) to US$ 338 million (including technical assistance - TA -).These anticipated high costs, in turn, called for the identification of additional funds from bothinternal and external sources. Providing reasonable assurances for the availability of theseresources contributed to slow credit processing. As was the case with earlier projects,' IDAagreed to project implementation by a separate entity, the Marsyangdi Hydroelectric DevelopmentBoard (MBDB) established in 1981, which, after project completion and transfer of the plant toNEA's assets was to be dissolved.
4. At the time, a substantial number of entities were involved in power sector operations, themain utility being Nepal Electricity Corporation (NEC). The other entities were the ElectricityDepartment of the Ministry of Water Resources (MOWR), Eastern Electricity Corporation(merged with NEC in 1982), Butwal Power Company (BPC), and several development boards,including those for the Kulekhani I and Marsyangdi hydroelectric projects, transmission lineprojects and small hydro projects.
5. The ED was a department within the MOWR. It was responsible for planning, designingand constructing new projects which, after commissioning, were handed over for operation toNEC. However, projects in the Mid- and Far-Western Regions were retained and operated by theDepartment. The Department was headed by a Chief Engineer appointed by a Cabinet Committeeof HMG; he was directly accountable to the Secretary of the MOWR. In end- 1982, there weresome 900 staff, including 200 engineers of which about 150 were on secondment to otherorganizations in the power sector. All of the revenues of the ED were transferred to the Ministryof Finance, while funds for capital and operating expenditures were provided through the annualbudget.
6. NEC was established in 1962 under the Nepal Electricity Corporation Act of the sameyear, to enable the management of the important power system in northern part of the CentralRegion to be freed form the constraints of government bureaucracy. Later, NEC also took overthe operations in the Eastern and Near-Western Regions and in the remaining parts of the CentralRegion. In 1982, NEC had a staff of about 3,200 including about 100 engineers. It was thelargest entity in the power sector, responsible for generation, transmission and distribution ofelectricity in the said regions, transferred to its ownership by the ED and the development boards.
1 The Kulekhani hydroelectric project was executed by the Kulekhani Hydroelectric Development Board.
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It financed, designed and constructed modest reinforcements to its distribution network andextended supplies to new customers. It was also responsible for billing and collection of revenue.NEC had little contact with the ED or the development boards during planning, design andconstruction of new works even though the facilities were subsequently transferred to it foroperation and maintenance.
7. The development boards were established under the Development Boards Act to executelarge construction projects, which upon commissioning were handed over to other entities foroperation and maintenance. Board Members, in the case of the Kulekhani I and the proposedMarsyangdi projects, included the Minister of Water Resources as Chairman, and civil servantsfrom various Ministries, including the Secretary of MOWR and the Chief Engineer, ED. Theexecutive head of each Board was the Project Manager who usually was a senior engineerseconded from the ED. He was paid by the Board, was accountable to the Board and was also amember and Secretary of the Board. The Boards were staffed by engineers on secondment fromthe ED and by others specially selected. A few engineers were attached to the staff of theconsultants and contractors for the projects. Considering the early stage of power development inNepal and the lack of experience of the Nepalese with large projects, the Boards relied heavily onconsultants to supervise the execution of the projects.
8. During the preparation and appraisal of the Project, it was clear from experience that thismultiplicity of bodies to operate the Nepal electricity system contributed to a sector performancewhich was not satisfactory. HMG recognized that in order to meet the management and technicaltasks associated with the planned expansion and operation of the system, the power sector'sinstitutional structure needed streamlining. Consultants financed by the Asian Development Bank(ADB) developed the concept for a new sector organization around an autonomous corporation,the Nepal Electricity Authority (NEA), which would become responsible for the power sector ona national basis except for: (i) large complex projects involving neighboring countries; and (ii)small projects carried out under the jurisdiction of panchayats (districts). Conditions under ADB'sfourth and fifth power projects in the country called for establishing NEA by April 1985 along thelines established in the above studies. IDA integrated the same condition in the agreementsconcerning the Project.
9. The Project's broad objectives were (SAR, para. 3.04): (i) to meet demand in Nepal up toFY93 and (ii) to strengthen the power sector.
Objective No. I -- Meeting the Demand - The Marsyangdi Project
10. This objective was to be pursued by constructing the Marsyangdi hydroelectric project, arun-of-river plant 100 km west of Kathmandu, with an installed capacity of 3 x 23 MW and anexpected average annual output of 464 GWh (209 GWh firm, reflecting the fact that, on average,the capacity permanently available over the dry season does not exceed 25 MW). This plant hadbeen identified as the next step in Nepal's least cost power generation development program. Itwas to be completed by August 1989 at a cost of US$ 294 million, i.e. at a very high US$ 4,260per kW installed for the plant alone. Taking into account this large expenditure for additionalcapacity, the Project also aimed at reducing system losses (para. 16).
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Objective No. 2- Strengthening the Sector Institutions
11. The institution building component of the Project included measures in five main areas: (i)sector restructuring, (ii) finances, (iii) plant maintenance, (iv) the already mentioned reduction ofsystem losses, and (v) training.
12. NEA was created in August 1985, as the principal instrument of the sectorrestructuring, through the amalgamation of a number of public sector organizations, principallyNEC, ED and the Small Hydro Development Board. The NEA Act of 1985 established NEA as acommercial entity with responsibilities for generation, transmission and distribution throughoutNepal. However, the Act interfered with NEA's capacity to realize commercial objective throughlimits on the Authority's autonomy, as well as in the lack of mechanisms for accountability. The1988 Power Sector Review identified a number of impediments to NEA's efficient operation.With IDA assistance (Cr. 1902-NEP), NEA followed up on the Review's recommendations byentering into a twinning arrangement with a mature utility, Electricite de France International(EdF), in October 1989. The agreement provided for expertise in all aspects of modem powerutility practices, with special emphasis on assisting NEA to develop a corporate plan and improveoperations management. NEA and EdF developed a performance improvement plan which wasincorporated into a Performance Agreement (PA) between the Government and NEA. The PAwas signed by HMG and NEA in October 1992, as a condition of effectiveness of Cr. 2347-NEP.The NEA Act was amended in 1992 to address all the shortcoming identified by then, with theobjective of establishing an institutional framework which would enable NEA to operate as acommercial entity.
13. Although NEA did not deliver all the expectations by IDA and ADB (the most importantshortcoming being that HMG did not grant to NEA the necessary autonomy), it neverthelessconsolidated coordination between planning, construction and operating functions, therebystrengthening the sector's overall performance. However, the overall performance level is notsufficient to tackle the challenges Nepal power sector faces in the second half of 1990s.Therefore, a new strategy in line with the current power sector policy guidelines of the BankGroup needs to be developed.
14. The IDA operation also aimed at strengthening the sector finances by covenanting (i) areduction of the arrears of Government entities with NEC (and - once established - NEA) to twomonths' billings. By FY83, these had reached nearly two years' billings. Under previous credits,NEC was to generate intemally sufficient funds to produce, from FY83 on, a 6% return on netfixed historically valued assets. To achieve this, tariffs would have had to increase by 110% inthis same FY83. In connection with the preparation of the Project, Government and IDAacknowledging the political difficulties to implement such a steep adjustment, agreed on a twotranche approach with 65% steps in December 1982 and December 1983, respectively. Actually,a 58% increase (later reduced to 56%) took place in May 1983, and the second step, a 65%adjustment, became a condition of the new credit.
15. Until the commissioning of the Kulekhani plant in 1982, the shortage of available capacityhad induced NEC to postpone major repair and maintenance of its generating plant, which
therefore was deteriorating fast. To reverse this trend, the sector needed a substantialrehabilitation program, which, at the same time, would lay the ground for systematic maintenancein the future. The Project came to include the preparation and initial implementation of such aprogram.
16. A study carried out with ADB financing showed that, in spite of earlier efforts to reducesystem losses, in FY83, these were still in excess of 30% of energy sent out (Annex 4) andespecially high in the central sub-system. In the early 1980s, an ambitious program supported bya Japanese grant and an ADB loan was aiming at developing Nepal's distribution system especiallyin the central and eastern regions. These measures were essentially helping reduce technicallosses but did not directly address the energy theft issue. Nevertheless, the corresponding systemimprovements were expected to lead to a reduction of the losses by some 6 percentage points byFY86 and in excess of 10 percentage points by FY91. However, in 1983, it was already evidentthat the sector would not meet these goals. Therefore, the Project also came to include measuresleading to reductions in both technical and non-technical losses.
17. In the early 1980s, there was no formalized training in the sector. Therefore, the Projectcovered the establishment of an adequate training function, in particular the provision of (i) afacility for practical training and (ii) specific training in connection with the consulting engineers'and the contractors' work, in particular in assessing feasibility studies of hydro projects, designinghydraulic structures, managing construction, erecting and installing equipment, and operatinghydroplants.
The Objectives in Perspective
18. The objectives were well in line with IDA's general policies for the power sector(OMS 2.25 and 3.72). They also fitted into the agreed broad goals for the country. However, asdiscussed in paras. 16 to 21 below, the detailed sub-objectives for the sector's institutionaldevelopment were unrealistic, in particular with respect to the timeframe foreseen for achievingthem, the more so as their ownership by the Nepalese authorities was, in part, only at theintellectual level and turned out weak whenever concrete action was required (e.g. tariffadjustments and loss reduction program).
B. Achievement of Objectives
Objective No. I - Meeting the Demand
19. The Marsyangdi plant was commissioned in 02/90, seven months late with respect to thetimetable set forth in the SAR, but -- due to the long preparation time --, much later than plannedin the early 1 980s. Therefore, in the late 1 980s, there were limitations of supply, as demand hadgrown about as anticipated at appraisal. The shortfall was the more severe, as losses did notlessen and NEA felt unable to carry out the rehabilitation of its existing plant. The cost of theMarsyangdi plant and associated transmission facilities was US$ 244 million, which, though lessthan 80% of the appraisal estimate, still corresponds to a high 3,600 USS per kW. (Annex 1)
20. For a time, large claims from the civil works contractor carrying out the main conveyortunnel represented a major problem in particular after the contractor had filed two cases forarbitration. However, assisted by a claims expert, the PoE, and the engineering consultants, theexecuting agency (MHDB) was able to reach an out-of-court settlement by agreeing to pay US$3.5 million, a small fraction of the original amount claimed. Thus, the Project substantiallyachieved its objective of contributing in a major way to the sector's ability to meet domesticdemand. It achieved this, to a large extent, because the lessons learned in the context of thedisappointing outcome of the Kulekhani project were applied. However, as discussed below(para. 25), until the mid-i 990s, the loss reduction program failed to contribute in a substantialway to this same objective. The Internal Economic Rate of Return (IERR) calculated in the sameway as in the SAR came out at some 6.7% which, though low, is at about the same level with theappraisal estimate (5.9%). 2 3
Objective No. 2 -- Strengthening the Sector Institutions
21. Most institutional measures started late, developed slowly over the second half of the1980s and somewhat faster in the early 1990s. Some of these (e.g. those concerning maintenanceand training) proved to lack specificity in order to reach the objectives adopted. They had to befurther defined and, in part, included in a modified form in follow-on projects especially the 1988Third Technical Assistance Project (TA III) supported by Credit 1 902-NEP and the 1992 PowerSector Efficiency Project (PSEP) supported by Credit 2347-NEP. The origin of theseshortcomings of the Project was, on HMG's and the sector's side, deficient implementationcapability and weak ownership of several of the politically unsavory actions envisaged, and onIDA's side, an overly optimistic view of the sector's ability to strengthen its institutional capability.Factors that should have induced IDA to an even more cautious approach were: (i) the fact that,at Project start, the sector was to begin working under a new setup, which, even in a much furtherdeveloped environment, invariably involves a slowdown of many activities; (ii) cumulating theconstruction of the largest power plant in the country with a host of institutional measures, asjustified as they were, put an exceedingly heavy burden on sector management which was weak tostart with; (iii) the experience gathered during the long preparation time should have made clearthat whereas HMG and the sector strongly owned the physical measures (i.e. essentially plantconstruction), their ownership of the institutional measures was much weaker.
2 In the SAR the IERR was computed using the retail electricity tariffs as a proxy for the benefits of theProject. The tariffs in effect at appraisal were used for the base case. Tariff levels estimated based onadjustments agreed under the Project were used in a sensitivity run. The IERR for the base case andsensitivity run were computed as 3.9% and 5.9% respectively. It was mentioned in the SAR, that the trueIERR would be significantly higher if all the benefits, such as willingness to pay off all types ofconsumers, increased system reliability, etc. could be quantified. No sufficient base data was available forcalculating the above benefits. In the ICR, the tariffs in effect since the commissioning of the project wereused.
3 After commissioning of the Marsyangdi plant, IDA helped the sector bv financing part of theimprovement of the Marsyangdi-Mugling road, the main access to the plant, from funds remaining at thetime in Credit 1478-NEP.
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22. The sector started operating under the new organizational setup at the beginning of FY86,i.e. at about the time agreed. But NEA as its centerpiece did not develop as hoped for (paras. 17to 20).
23. The sector finances remained weak throughout project implementation. NEA was neverable to meet the revenues covenant agreed with IDA and, from FY89 to FY93, the operatingincome was negative. These shortfalls were the consequence of inadequate tariff adjustments andcost containment. A 35% tariff increase in FY 85 and one of 22% in FY86 allowed the signingof the Development Credit Agreement (DCA) 17 months after the Board had approved theProject. An 18% adjustment in FY88 and one of 61% in FY 92 in connection with the processingof the PSEP /4 were the only steps taken until the most recent change in HMG's approach, relatedto the 1992 Performance Agreement between HMG and NEA on the one hand, and thepreparation of the Arun III project, on the other. The FY88 and 92 increases were what HMGfelt in a position to concede when much larger boosts would have been needed to meet thecovenant in the subsequent year. During the period FY86-94 cash operating costs which areessentially those that NEA can to a reasonable degree control (except for fuel which depends onHMG decisions) have not decreased in constant terms and related to the kWh sold, although salesdoubled over the same period. Government's accounts receivable improved only in the 1990s,when, however, they still were substantially in excess of the three months' billings covenanted inconnection with the PSEP (Annex 3). During the May 1988 Paris Aid Group Meeting, donorsendorsed the Government's plan for improving the power sector's performance in general andNEA's financial performance in particular. This has formed a basis for the revenue covenants ofthe PSEP. It is important to note that early in the Project, monitoring of the returns and thereceivables was unreliable because of the weakness of NEA's accounting. But IDA's persistentefforts supported by those of other financiers, in particular ADB, contributed in a major way toimprove the accounting in general to a level that makes recent results reasonably credible. Inparticular, after NEA had started operations with an opening balance sheet including a highlysuspect valuation of the assets, it had consultants properly revalue these, which, in FY90, led to a300% increase in the valuation of fixed assets and to the installation of a method for their futureperiodic revaluation. At IDA's insistence during the implementation of the Project, NEA's debtobligations to the Government was established and finalization of all subsidiary loan agreements(SLAs - for all donor funded projects) was initiated. In absence of SLAs, NEA's debt serviceliability to HMG could not be correctly established. This was thus rectified. A further result ofthe above efforts was that, in FY93, NEA was able to provide audited accounts of significantlyimproved quality within the time frame agreed with IDA (Annex 2), but still with numerousqualifications by the auditors.
24. Financial constraints and the lack of preparation made it impossible for the sector to availitself of the opportunity created by the commissioning of Kulekhani to start carrying outpostponed maintenance at the older plants. This, together with demand growth about in the orderof magnitude expected at project appraisal soon led to severe capacity constraints which further
4 In connection with the PSEP two revenue covenants were formulated, one calling ftom FY96 on for aminimum rate of return and the other establishing a minimum contribution from internal cash generationto the local cost of NEA's investment program.
- 8 -
postponed the implementation of the rehabilitation program whose preparation andimplementation was included in the Project. In 1992, with Marsyangdi in operation, NEA carriedout the refurbishing of Kulekhani which, in the meantime, had also deteriorated. Further work wasincluded in the PSEP.
25. For many of the reasons set forth in para. 15 above, the losses reduction program failed toachieve the targets envisaged at appraisal. By FY93, when losses should have been below 20% ofenergy sent out, they were still about 25%. Most recently, in connection with the preparation ofthe follow-on project, NEA and IDA envisaged on a new target of 20% by FY 2000 (Annex 4)
26. Training suffered under similar shortcomings. In the early 1980s, the training needs hadbeen defined on the basis of a study financed by the Canadian International Development Agency(CIDA). But the training coordinator appointed in 1984 resigned and follow-up action stalled. In1987, NEA appointed Electricite de France (EdF) as training consultants. But it took until 1989to bring the program into full gear in the context of the twinning arrangement between NEA andEdF supported under IDA's TA III project. Subsequently, the program was repeatedly hamperedby the lack of local funds and slow procurement of training equipment.
Summary Assessment of Achievement of Objectives
27. The Project did not include macroeconomic policy, poverty reduction and genderconcerns objectives. Achievement of financial objectives for NEA and sector policy and publicsector management objectives was "partial" (paras 21-26). The physical objectives were achieved"substantially" with the satisfactory completion of the Marsyangdi hydropower project. Thehydro project was constructed in accordance with IDA's environmental guidelines in effect atapproval. However, during the implementation of the Project, it was determined that there wasneed to study further and then implement a management plan for the Marsyangdi catchment. Thiswas included in Cr. 2347-NEP. Over the last ten years a glacier lake has developed upstream ofthe Marsyangdi dam and the risk of a major glacier lake outburst flood (GLOF) has become apotential threat (Para.36). Therefore achievement of environmental objectives is assessed as"negligible". Completion of a satisfactory rehabilitation of the Seriously Project Affected Families(SPAFs) is still outstanding. Achievement of other social objectives is assessed as "negligible".
C. Major Factors Affecting the Project
Factors Generally not Under Government Control
28. Start of project implementation was substantially postponed by the long preparation time,which, however, was unavoidable in view of (i) the complexity of the physical part of the projectto be executed by a sector that was weak to start with and was to be reorganized immediatelyafter project start, (ii) the need to heed the lessons learned in connection with the earlierKulekhani project, (iii) the desirability for IDA to avail itself of the leverage provided by thesector's eagerness to secure substantial financing and its associated improved amenability to takesubstantial and difficult steps towards a sound financial development, and (iv) the fact that projectcost estimates increased from US$ 150 million in 1980 to over US$ 300 million in 1982-83,
-9-
which called for the mobilization of ever more co-financing, which, in turn made project setupmore complicated.
29. From 1989 on, the trade and transit controversy with India seriously affected Nepal'seconomy. However, it did not lead to major delays in the physical implementation, becauseHMG, giving Marsyangdi high priority, went so far as to have fuel flown from Bangladesh to thework site, of course, at the corresponding high cost.
30. The good performance of the engineering consultants and the valuable advice of the PoEwas a major factor in the relatively smooth construction implementation. The PoE and the claimsadvisor were also very helpful in resolving the impasse that the large claims submitted by thetunneling contractor could have created (para. 20).
Factors Generally Under Government Control
31. The main such factor was HMG's unwillingness to provide NEA the degree of autonomythat would have been a necessary (but not sufficient) condition to allow the utility to develop intoan efficient company. Especially, H-MG did not allow NEA to adjust adequately its tariffs, whichmade NEA even further dependent upon government financial support. This, in turn, gave HMGapparent justification for continued interference. The lack of local funds also contributed to thedelays suffered in the loss reduction, training, and plant maintenance/rehabilitation programs.Further, HMG's policy of compensating resettled people only in cash on the basis of their land'smarket value, impeded the execution of the limited resettlements required for the Project inaccordance with IDA's more recent policies (Annex 5). Satisfactory rehabilitation of 41 SeriouslyProject Affected Families (SPAFs) still remain. This issue was taken up, once again, with IDA'sletter dated May 7, 1996, addressed to H1MG.
Factors in General Subject to Implementing Agency Control
32. NEA's managerial and operational weakness was the main factor (closely tied to thepreviously mentioned ones) impeding a satisfactory institutional development of the utility. It wasre-enforced by the fact that, at the early implementation phase, the sector had to operate in a newsetup.
Cost changes
33. The power plant with the associated transmission facilities came to cost some US$ 244million, i.e. in current terms some 20% less than estimated at appraisal. In constant terms the costsavings were about 18 %. Whereas the equipment cost was substantially higher than anticipated,civil works costs came out more than 30% less than estimated. This outcome is certainly lessdisappointing than a cost overrun; but it still is not fully satisfactory, as (i) the deviation from theestimates was large, and, (ii) the large effort by HMG, NEA, IDA and the cofinanciers for themobilization of additional funding which was necessary because of the high overall estimate mighthave been avoided if a better estimate had been available. The latter could have been achieved by
- 10-
waiting with Board submission until after bids for the main contracts were opened. Since then,this procedure has become standard for this type of Bank Group projects.
Implementation delays
34. The power plant was commissioned seven months late with respect to the schedule setforth in the SAR. The delay was largely incurred at the start when (i) processing of the projectwas delayed (18 months between appraisal and Board presentation and 16 months between Boardapproval and credit document signature), mostly related to slow compliance by HMG with agreedmeasures especially in the field of tariffs, (ii) the late mobilization of the tunnel contractor incharge of the main tunnel which was on the critical path of the project. Two years after its start,the project was well over a year late, but the engineering consultants, the PoE, and the contractorwere able to devise and implement measures which allowed to make up for part of the delay.
D. Sustainability
35. The operation plan (Attachment 2) reflecting the presently implemented operationalprocedures provides an adequate basis for the sustainability of the benefits to be reaped from theMarsyangdi plant. However, in the wake of IDA's decision not to proceed with plans to supportthe construction of the Arun III Hydroelectric Project, substantial risks persist which could lead toNEA's inability to sustain these benefits. Major delays in the construction of the next power plantand NEA's failure to improve its operational capability could lead NEA to assign low priority tomaintenance work in its plants, as it happened once again in the early 1990s. HMG and NEA arefollowing a two-track approach for the construction of the next generation projects. While theycontinue their dialogue with ADB and bilateral donors for the execution of hydro power projectsby NEA, they take actions to induce private investors to Nepal power sector. HMG's dialoguewith IDA is currently focused on the establishment of a Power Development Fund which couldcatalyze investments in generation, transmission and distribution, by private developers and publicentities, under the condition that the latter meet PDF's creditworthiness criteria.
36. Another risk to the sustainability of benefits from the Project is the possibility thatincreased sedimentation at the Marsyangdi hydropower station intake. In this regard, IDA andMHDB (the Executing Agency) commissioned, in 1988, a catchment management plan study forthe watershed of the Marsyangdi project. The plan was revised and updated during the appraisalof PSEP, taking into account watershed management experience in other areas in Nepal, localnatural resource management traditions and the socio-economic dynamics of the region. A pilotproject, funded by GTZ of Germany is being implemented under PSEP5. About 80 km upstreamfrom the weir, a glacier lake (Thulagi lake) has developed over the last 10 years. As a result, therisk of a major glacier lake outburst flood (GLOF) became a potential threat to the power plant.Even though a GLOF may not have a direct impact on the weir, serious operational problems mayresult from such an event, owing to the increased bed load arriving at the intake over many
The pilot project attempts to incorporate land management practices that improve and lead to a greatersustainable productivity, derived from successful innovations in other ongoing projects or from localpractices that are encouraged. The strategy is to develop approaches for improved land management inthe village by the villagers.
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months after the overflow. Therefore, monitoring of the development of the lake, and, ifnecessary and feasible, appropriate measures to lower the water level should be given dueconsideration. KfW, upon request of the German Government, will commission a study on thisissue, which will be financed under the existing Studies and Expert Fund. In addition, KfW isinitiating a feasibility study on a new Load Dispatch Center (LDC) at Kathmandu which shall beequipped with system control and data acquisition (SCADA) system. The LDC should alsocontribute to an improved capacity utilization of the power generated at Marsyangdi. In view ofthe actions taken, the ICR considers that sustainability of the plant benefits as 'likely"
37. As discussed earlier, the institutional components of the project failed to achieve theirobjectives in the framework of the Project itself, but most were taken up, usually in a morespecific and promising form, in the context of follow-on projects. In this framework, they havegood prospects to be completed with a reasonable measure of success, which should make thesustainability of the limited institutional gains achieved under the Project likely, too.
E. IDA Performance
38. Despite the urgency of constructing a new generating facility, IDA steadfastly linked theprocessing of the operation to the development of a technically sound project that could beexecuted at a reasonably firm price. It also did not proceed with the signing of the DCA beforethe Borrower substantially complied with financial conditions, in particular tariff increases, agreedearlier. Indeed, insisting on the fulfillment of these conditions before Board presentation mighthave been preferable, as this would not have significantly further postponed the start of large scaleproject implementation but it would have avoided having an approved operation in abeyance for16 months. In addition, if IDA had waited with Board presentation until after the bids for the civilworks and equipment were opened, it would have avoided the large effort made by HMG, NEA,the cofinanciers and IDA itself to mobilize additional funding. Despite these shortcomings, IDA'sperformance in identification, preparation assistance and appraisal of the physical component ofthe Project is assessed as '"atisfactory"
39. As seen from Part II - Table 10, HMG and NEA did not comply with some of theircommitments under the Project, in particular with those commitments relating to institutionbuilding in the power sector6 and land acquisition and resettlement (Annex 5). The institutionalcomponent of the project suffered inter alia: (i) from IDA working on the basis of an optimisticview of the speed at which the sector and in particular NEA could develop; and, (ii) from anoverrating of the sector's capability to implement the measures envisaged on the basis of a TAprogram that was only defined in its outline. However, as the sector was being moved toward anew structure, expected to be more rational and efficient, IDA's above optimism should not beheld against IDA's performance in the identification/ preparation and appraisal stages of theProject. Therefore, IDA's performance in these stages are rated as satisfactory. Establishment ofNEA and relative improvement in the coordination between the planning, construction andoperating functions were steps in the direction of strengthening the power sector.
6 Reorganization of the sector (paras. 21 and 22), financial strengthening (paras. 23 and 24; and, Annexes 2and 3), reduction of system losses (para. 25; and Annex 4), and training (para. 26).
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40. IDA became quickly aware of this deficiency and, together with ADB, sponsored the 1987Power Subsector Review which, in turn, provided a basis for IDA's TA III project. This latteroperation took up in detail the loose ends of the institutional component envisaged under theProject. It was completed, and the supporting credit closed in 1994. However, this created aprecedent that when HMG and NEA were not in compliance of their commitments, IDA shiftedthe covenants to the next project and did not use its legal remedies available under the Project.The process continued under PSEP and during appraisal and negotiations of the Arun IIIHydroelectric Project (HEP)7. With regard to land acquisition and resettlement, the InspectionPanel of IBRD and IDA, in its deliberations on the then proposed Arun III HEP reviewed HMG,NEA and IDA's actions on this matter and observed that 'the Marsyangdi project was completedwithout compliance on resettlement"8. Although IDA's performance in supervising theimplementation of the physical component was satisfactory, in view of the shortcomings in theinstitutional component and the observation of the Inspection Panel, on balance, IDA'sperformance during the supervision of the overall Project cannot be judged satisfactory.
F. Borrower Performance
41. In the context of preparation and implementation of the physical component of theProject, HMG (the Borrower) and MHDB (the implementing agency) strongly assisted by IDA,ADB, KfW, the PoE, and the engineering consultants, performed satisfactorily. However, in1984/85, H1MG did not feel in a position to adjust tariffs as agreed and, thus delayed to an extentProject implementation. Since its completion by MHDB and transfer to NEA, the hydro powerproject has been operated and maintained satisfactorily. However, NEA is being assisted by anengineer from LI whose service is funded under a KfW grant.
42. In carrying out the institution building component of the Project, both HMG and NEAperformed poorly, in part because of a lack of capability, but also to an extent for their lack ofownership of the institutional measures agreed with IDA. This less than satisfactory performanceis also evident from the Borrower's failure to comply with a number of legal covenants (Table 10).
On August 1, 1995, IDA informed HMG of its decision not to proceed with plans to support the Arun IIIHydroelectric Project.
8 Memorandum to the President of IDA, dated June 21, 1995, from the Inspection Panel -Annex I to thesaid Memorandum; paras. I to 8.
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G. Assessment of Outcome
43. The emphasis of the Project clearly was on providing Nepal with a generation facility tomeet its internal power demand. The limited success of the institutional component was due toHMG's and IDA's optimism about the development and delivery of the sector and NEA. Thiswas addressed in the context of the succeeding TA III and PSEP projects which started in themiddle and toward the end of Project implementation. Establishment of NEA and relativeimprovement in the coordination between the planning, construction and operating functions weresteps in the direction of strengthening the power sector. On balance the outcome of the Project israted as satisfactory.
H. Future Operation
44. NEA's operation plan for Marsyangdi is based on a computerized system of planning,implementing, and monitoring plant operation and maintenance, that covers, besides the broadoutlines of these aspects several hundred individual activities defined in detail. The ICR missionwas able to confirm that the system (that, inter alia, includes performance related incentives forthe plant's personnel) is actually implemented and that personnel seems to identify with it.
I. Lessons
45. The successful operation of the Marsyangdi plant suggests that the detailed planning,execution and monitoring of operation and maintenance carried out in this plant should be appliedin other facilities in NEA's system. This might involve the continuation, for a limited time, of theservices of at least one specialized expatriate.
46. Project outcome confirms the lesson learned in other projects and which already forseveral years has been reflected in Bank policy: Projects with large, lumpy physical componentsshould be submitted to Board consideration only after bidding for the main components has takenplace.
47. The Project, as many before it, illustrates the fact that borrowers and beneficiaries tend toown physical project components of IDA projects more clearly than institutional ones, becausethey usually get involved with the IDA primarily to obtain financing of capital intensive facilitiessuch as power plants. To improve the chances of success of institutional project componentsassociated with these projects, IDA should ensure the borrowers' and beneficiaries' ownershipand use its leverage in a delicate and balanced way to lead in a reasonably short time to ownershipby borrowers and beneficiaries of the objectives and measures considered. The measure ofleverage applied in connection with this and follow-on projects (i.e., TA III and PSEP), wasadequate, as e.g. in mid-1990s, NEA is in a better financial shape than it was in the late 1980sEstablishment of NEA and relative improvement in the coordination between the planning,construction and operating functions were steps in the direction of strengthening the powersector. However, the overall performance level is not sufficient to tackle the challenges Nepal
- 14 -
power sector faces in the second half of the 1990s. A new strategy in line with the current powersector policy guidelines of the Bank Group needs to be developed.
48. IDA created a precedent that when HMG and NEA were not in compliance with theircommitments, these covenants were shifted to the next projects.
49. In its deliberation on the then proposed Arun III Hydroelectric Project, the InspectionPanel observed that "the Marsyangdi Project was completed without compliance on resettlement."IDA should ensure that the necessity to undertake rehabilitation and restoration of livelihood of
the project affected families be accepted as a principle by HMG.
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1: Statistical Tables
Table 1: Summary of Assessments
A. Achievement of Ob*ectives 1/ Substantial Partial Negligible Not Applicable
Macroeconomic policies ° °
Sector policies 0 °
Financial objectives ° * ° O
Physical objectives *
Poverty reduction ° 0 °
Gender concerns ° °
Other social objectives 0 0 E l
Environmental objectives ° **
Public sector management ° * ° °
B. Project sustainabilitv Likely Unlikely Uncertain
U 0 0
C. Bank Performance Highly Satisfactory DeficientSatisfactory
Identification a o 2/ 0
Preparation assistance a * 2/ 0
Appraisal a * 2/ 0
Supervision a O3/
D. Borrower performance Highly Satisfactorv DeficientSatisfactory
Preparation a U 0
Implementation O0 U
Covenant compliance 0
Operation (if applicable) O * 0
D. Assessment of Outcome Highly Satisfactory Unsatisfactorv Highlvsatisfactory unsatisfactory
° *4/ 0 0
1/ Para. 27.
2/ Paras. 38 and 39.
3/ Para. 40.
4/ Para. 43.
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Table 2: Related Bank Loans/Credits
Loan/Credit Title and Nr. Purpose Year of StatusApproval
Preceding Operations:
1. Cr. 600-NEP and 600-1 -NEP: Support construction of 1975 Completed inKulekhani Hydroelectric next generation plant on 1982; audited by
least cost sequence. OED
2. Cr. 1379-NEP Assistance to HMG in 1983 Completed inTechnical Assistance LI/I identifying and preparing 1990; PCR
high priority projects processedsuitable for IDA or otherexternal financing
3. Cr. 1452-NEP: Feasibility study of Karnali 1984 Completed inKarnali Preparation (Chisapani) Multi-purpose 1990; PCR
Project with an ultimate processedcapacity in excess of 10,000MW
Following Operations
1. Cr. 1902-NEP: Support preparatory work 1988 Completed inThird Technical Assistance for further development of 1994; ICR in
(Pancheswar) least cost supply for preparationdomestic needs and export.
2. Cr. 2029-NEP: Preparatory work for Arun 1989 Canceled inArun III Access Road III hydro project. 1995; ICR
There was an earlier project called "Technical Assistance Project" and supported by Credit 659-NEP ofUS$ equiv. 9.0 million approved in 1976. which ultimately did not include measures in the power sector.
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Table 3: Project Timetable
Steps in Project Cycle Date Planned Actual Date
Identification 06/79
Preparation 07/79-10/82
Appraisal 01/82 11/82
Negotiations 09/82 04/84
Board presentation 12/82 05/84
Signing 01/83 09/85
Effectiveness 12/85 01/86
Project completion /I 07/89 01/90
Credit closing 06/90 12/94
/1 Marsyangdi plant
Table 4: Loan/Credit Disbursements; Cumulative(Estimated and Actual)
Table 5: Key Indicators for Project Implementation
Not applicable as the Project predates the standard requirement for key indicators.However, see Annex 6
Table 6: Key Indicators for Project Operation
NEA's operation plan for Marsyangdi (presently generating about 50% of theenergy sent out by NEA) aims at optimally using the water available under therestrictions imposed by the role assigned to the plant in NEA's system and byproper maintenance of the facilities. It includes the preparation of:
(i) yearly generation objectives based on broad assumptions about availabilityof water and a general program of maintenance;
(ii) monthly programs based on the yearly plan but using already better defineddata on demand, water availability and maintenance requirements; and
(iii) the detailed daily operation program.
Several hundred activities related to operation and maintenance are defined indetail, as well as planned and monitored in the context of a computerized system,which also helps define the performance driven incentives to be provided to thepersonnel.
Table 7: Studies Included in Project
The Project did not include studies. Such technical assistance was covered in theTA II and III Projects, implemented in parallel with the Marsyangdi Project.
/1 Not included in appraisal estimate. The improvement of this road was financed through the part ofCredit 1478-NEP that was not disbursed after completion of the plant.
(*) ADB's financingcontribution to the Project waspart of ADB's Sixth PowerProject.
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Table 9: Economic Costs and Benefits
I. The ICR carried out a computation of the IERR (or, more precisely the IFRR) using the samemethodology as the SAR (Annex 24), i.e. equating the revenues with the economic benefits, which tends tounderestimate these benefits.
2. The main assumptions used were as follows:
- The capital costs appear in accordance with the actual expenditures. They further include renewal
costs of US$ 35 million in the FYs 2015 to 2018.
- Incremental generation corresponds to the actual generation until FY 1995; from then on it was
assumed 400 GWh until FY 2010 and 380 GWh thereafter. These figures compare with actual
generation between 400 and 450 GWh per year in the first half of the 1990s.
- System losses are assumed at actual levels (i.e. about 25% of energy sent out until FY 1995,
diminishing to 20% by FY 2000 (as assumed in the SAR for Arun III), and to 18% by FY 2005.
- Operating costs are estimated at US$ 1.5 million per year, which, though lower than the SARestimate (0.8% of capital costs) still represents a high 12 to 15% of NEA's total cash operatingcosts; thus, the computation should still be on the conservative side.
- Tariffs used are:
Case A: Actual average revenue per kWh sold as of the first year of operation (FY 1991), which
corresponds to the assumption made in the SAR (Case 1), i.e. 1994 NRp. 2.07 or 1994 USc 4.1
per kWh.
Case B: Actual average revenue per kWh sold as of FY 1995, i.e. 1994 NRp. 3.55 or1994 USc 7.1 per kWh. The resulting IERRs are:
Under Basic Operating Costs Tariffs 10% lower Tariffs 10% higherAssumptions 50% higher from FY 1995 on from FY 1995 on
Case A 2.8% 2.2% 2.0% 3.3%
Case B 6.7% 6.3% 6.0% 7.2%
4. Case B reflects more likely figures than Case A, as the higher revenues assumed under Case Bhave actually been achieved and are unlikely to suffer reductions in future. The resulting IERRs favorablycompare with those determined at appraisal (6.4% for a comparable case).
5. The above sensitivity analysis demonstrates that the IERR is insensitive to substantialmodifications of the operating costs, but, as could be expected, quite sensitive to variations in the averagetariff level.
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Table 10: Status of Legal Covenants
Agreement Section Present Original Revised Description of Commentsstatus fulfillment fulfillment covenant
date date
DCA 3.02(a) met n.a. n.a. HMG to employ Consultants wereconsultant employed.
DCA 3.02(b) met n.a. n.a. HMG to employ a Claims advisor wasclaims advisor employed
DCA 3.03(b) met n.a. n.a. AMG to maintain MHDB wasMHDB maintained until
commissioning
DCA 3.07 partly 01/86 06/86 HMG to adopt and Still pending. By 1994met implement a plan outcome not yet
for resettling satisfactory, albeitpopulation in the under conditionsimmediate project established in a 1989
area review and morestringent than agreedduring negotiations
DCA 3.08 plan 03/86 06/89* HMG to prepare, Plan implementationprep. adopt, and became part of the
but not implement a PSEPimpl. catchment
management plan
DCA 3. 10(a) met n.a. n.a. HMG to maintain Panel was maintainedexisting Panel of
Experts
DCA 3. 10(b) met n.a. n.a. HMG to arrange for NEA's consultantsperiodic inspection carry out suchof project facilities inspections under the
operation plan
DCA 4.01(a) met in n.a. n.a. HMG to assure that Throughout the 1980sform proper project quality of accountsonly accounts are unsatisfactory
maintained
DCA 4.01(b) not met n. a. n.a. Audited project Performanceaccounts to be improved in the mid-
submitted not later 1990s (see Annex 2)than 6 months afterthe end of the FY
DCA 4.02(a) met in n.a. n.a. HMG to cause NEA Accounting deficientform to maintain proper until projectonly accounts completion
23 -
DCA 4.02(b) not met n.a. n.a. Audited of NEA Performanceaccounts to be improved in the mid-
submitted not later 1990s (see Annex 2)than 12 months ofthe end of the FY
DCA 4.03(a) not met n.a. n.a. NEA to conduct its Improvements inaffairs in 1990s in connection
accordance with with twinningsound public utility agreement, but still
practices undue HMGintervention
DCA 4.03(b) met in 01/86 05/85 NEA to submit and implementation ofform (broad plan) implement a plan only in the mid-
maintenance plan 1990s
DCA 4.03(c) substanti 01/86 06/88 NEA to develop completion ofally met and implement an implementation
insurance program under PSEP
DCA 4.06(a) not met n.a. n.a. NEA to achieve a (see Annex 3)since return on assets of1986 5.5% in FY86 and
6% thereafter
DCA 4.07 met in 07/86 07/86 NEA to revalue its 1986 revaluation ofform assets periodicallv poor quality
DCA 4,08 met n.a. n.a. debt service No case oflimitation consultation with
IDA recorded
DCA 4.09 met n.a. n:a. NEA not to declare No dividendsdividends declared
DCA 4. 10(a) not met 01/86 09/86 HMG to submit and The issue was takensubmission submission implement a plan up again in the PSEP
of plan of plan for reducing (see also Annex 3)government arrears
DCA 4. 1 1(a) met in 03/86 01/86 HMG to submit a plan submittedsubstance plan for reducing
systems losses
DCA 4. 1 l(b) not met n.a. n.a. NEA to implement implementationloss reduction delayed; losses still
unduly high(see Annex 4)
DCA 4.12 met 6 months 4 months transfer of assets transferred toafter after Marsvangdi plant to NEA
commission. commission. NEA's assets(06/90)
- 24 -
Table 11: Compliance with Operational Manual Statements
The ICR did not identify any deviation of substance from the relevant OMS.
Table 12: Bank Resources; Staff Inputs
Stage of Planned Revised ActualProject cycle /2 /2
Weeks 1000US$ Weeks 1000US$ Weeks 1000US$
Through appraisal 104.7 200.8
Appraisal - Board 89.8 188.8
Board - effectiveness /I /I
Supervision 143.9 394.0
Completion 16.1 55.1
Total 354.5 838.7
/I included in supervision/2 not available (old project)
- 25 -
Table 13: Bank Resources: Missions
Stage of Month/ Number of Days Specialized Performance rating Types of
project cycle Year persons in staff skills problems
Field represented
Implementat Developmenion status t impact
Through 01/80 2 14 PE, FA -- -
appraisal 10-11/80 2 12 PE, FA
01-02/82 2 18 PE, FA
07/82 2 10 PE, FA
(Appr.) 11/82 4 29 PE, FA, EC
Appraisal 07/83 1 6 PE -- --
throughBoardapproval
Board 07/84 1 5 PE
approval 03/85 1 7 PE I I
througheffective-ness
Super-vision 02/86 1 7 PE 2 1
06/86 3 14 PE, FA, EC 2 1
10/86 1 7 PE 2 1
02/87 1 5 FA 2 1
03/87 2 5 PE,FA 2 1
02/88 6 20* DC, PE, FA, 2 1RS, ES, TS
11/88 5 20* SP, PE, FA, 2 1RS, ES
02/89 1 16* SP 2 1
05/89 5 16* PE, SP, FA, ES, 2 1RS
11/89 5 11 PE, SP, FA, 2 1ES, RS
05/90 2 5* PE, FA 3 1 Claims,finances,losses
11/90 2 13* PE, FA 3 2 (See above)
03/91 2 15* PE, FA 3 2 (See above)
12/92 3 13* SP, PE, FA 3 2 NEA manag.and finances
05/92 2 5 PE, FA 2 2
Completion 11/95 1 11 * PE -- --
Specialized Staff: DC (Division Chief), EC (Economist), ES (Environmental
Specialist, FA (Financial Analyst), PE (Power Engineer), RS (Resettlement
I Missions also providing substantial contributions to other power projects in Nepal.
- 26 - Annex 1
NEPAL
MARSYANGDI HYDROELECTRIC POWER PROJECT(CREDIT 1478-NEP)
PROJECT COSTS AND COMPLETION DATES
Evolution of Project Costs
I. One of the main reasons it took IDA more than four years to process the project was that it wantedto avoid the type of cost and time overruns it had experienced in the context of the Kulekhani project (75%cost overrun and 26 months delay -- Cr. 600-NEP and Cr. 600- 1 -NEP), which it had supported with Credit0600 approved in 1975. Table 1 shows how estimated costs and the commissioning date for theMarsyangdi project evolved over time.
Table 1: Evolution of Project Costs and Commissioning Dates
Date of Estimate Project Costs (Million US$) Commissioning Date
04/80 150 12/84
07/81 170 n.a.
03/82 213 n.a.
08/82 303 06/87
01/83 328 12/87
04/83 338 n.a.
05/84 (SAR) 323 07/89
03/86 207 12/89
03/88 250 06/90
Actual 244 03/90
2. The table clearly justifies IDA's cautious approach to the project and shows the growth ofestimated costs related to the deepening understanding of the technical difficulties of the project. Theprobing of the Panel of Experts was a major factor in this development. By mid-1983 the costs reached ahigh point and induced HMG to doubt the realism of the estimates. Though actual costs came out some20% below appraisal estimates (which was at about the same level as the maximum estimate), they stillwere some 70% higher than those determined in connection with the feasibility study.
Actual Costs in Current Terms
Table 2 sets forth the actual costs determined by NEA supported by their consultants.
- 27 - Annex I
Actual Project Costs in Million Current US$
Nr. Item Local Foreign Total
I Preliminary Cost 2.9 2.5 5.42 Administration 2.7 0.5 3.2
12 Transmission Lines 1.3 3.1 4.413 Substations etc. 2.0 22.1 24.114 Communications Link 0.1 0.4 0.5
Subtotal 12+13+14 3.4 25.6 29.0
15 Construction Supervision -- 21.9 21.9
16 Panel of Experts, Claims SpecialistSupervision of Loss Reduction Program /3 -- 0.7 0.7
17 Training 0.1 2.3 2.418 1.6 1.0 2.6
Subtotal 16+17+18 1.7 4.0 5.7
Grand Total 26.0 223.8 249.8
/I Contracted in 1995/2 Not explicitly included in SAR estimate/3 Estimated at about 20% of total TA for loss reduction.
- 28 - Annex I
Costs in Constant Terms, Quality of Cost Estimates
Using actual exchange rates for the conversion of local costs into NRs, the GDP deflator to adjust convertlocal current costs into constant costs, and the MUV index to achieve the analogous conversion of foreigncosts, leads to the results summarized in Table 3 below.
Table 3: Comparison of Costs in Constant Terms
Local Foreign Total
Estimated Base Costs 56 188 244in million 1984 US$
Actual Costs 24 176 200in million 1984 US$
Increase in Terms of -63% -6% -18%the Base Costs
The weakness of the above calculation is the distribution of the costs between local and foreign ones andthe assumed distribution of the costs over time. However, a sensitivity analysis involving once the doublingof the assumed local costs and once a grosslv different distribution over time lead to total costs in 1984terms that differ from the above by less than 2%. Therefore, the conclusion is that the total costs inconstant terms are valid in the measure that the actual costs in current terms are reliable. It appears furtherthat
total costs in current and in constant terms are in the order of 23% and 18% lower than thoseestimnated at project appraisal;
the civil works were substantially overestimated at appraisal whereas actual costs of equipmentwere in the order and partly (especially electrical equipment) even higher than the correspondingestimates; and
the construction supervision generated expenditures that were nearly three times those expected atappraisal; they represented some 12% of the total cost directly attributable to the plant constructionand installation, which is high but not extraordinarily so; the reason for this seems to be the longpreparation time and probably a low estimate to start with.
- 29 - Annex 2
NEPALMARSYANGDI HYDROELECTRIC POWER PROJECT
(CREDIT 1478-NEP)
IMPLEMENTATION COMPLETION REPORT
SUBMISSION OF AUDITED ACCOUNTS
I. Para. 2.10 of the DCA called for the submission of (i) audited project accounts and full reportingfor MHDB within six months of the end of each FY, and (ii) audited financial statements and full report forNEA within 12 months of the end of the FY. There also was an agreement that NEA's unaudited financialstatements would be submitted within six months of the end of a F Y.
2. The table below sets forth expected and actual dates of submission of the accounts as they appearin supervision reports. There often are discrepancies among successive reports, as audits appear assubmitted in one report, obviously when submission seemed imminent, and in the next report the samestatements appear as still not available. There also is a substantial delay between the completion of theaudit and its certification by the Auditor General, which contributes to the uncertainty about the definitionof the date of completion of an audit.
Anticipated and Actual Dates of Audit Submission
FY Project Accounts NEA Accounts
Due Actual Due Actual
86 01/87 02/87** 07/87 12/88
87 01/88 04/90 07/88 04/90
88 01/89 04/90 07/89 11/90*
89 01/90 03/91 07/90 03/91*
90 01/91 11/91 07/91 05/92
92 *** 07/93 10/93
94 *** *** 07/95 08/95
* Audited but not yet certified by Auditor General** Accounts not in accordance with standard accounting practices***Project completed, assets transferred to NEA.
3. The above table shows that, though performance improved over time, by project completion, NEAsupplied audited statements at least six months late, and this does not even include the further delay relatedto the certification of the audits by the Auditor General. However, more recently, NEA's performance withrespect to the timely submission of audited (but not yet certified by the Auditor General) financialstatements has become satisfactory as the accounts for FY93 were submitted before the limit date and thosefor FY94 within six months of the end of the FY. The quality of the accounts has also substantiallyimproved and are less the subject of observations by the auditors.
- 30 - Annex 3
NEPALMARSYANGDI HYDROELECTRIC POWER PROJECT
(CREDIT 1478-NEP)
NEA RECEIVABLES FROM HMG
1. The Borrower was expected to submit by 01/86 a plan for reducing NEA's Governmentreceivables. By 03/86 the submission date was postponed to 05/86. In 07/86, IDA threatened remedialaction unless a proposal was available to IDA before 09/30/86. The submission occurred at this limitdate.
2. Supervision missions consistently checked on the development of these accounts receivable, butthe resulting figures appearing in successive supervision reports are to an extent contradictory as set forthin the table below. Presumably, the main reasons for this were, that the accounts were unreliable in thefirst place and that various values for a given FY refer to different points in time in the course of thatyear. It is further likely that the figures appearing under sales to Government cover the entire publicsector and not only Government proper.
3. Even taking into account the uncertainty reflected in the table, it is evident that Government andNEA have, until now never complied with the covenant. However, in FY89 a substantial improvementtook place, when NEA implemented an action plan agreed with IDA. In connection with the 1992 PSEP,the parties agreed on a new action plan implying a methodical approach to ensure that within one year: (i)all consumer ledgers would be updated, (ii) correct consumer accounting procedures rigorously enforced,(iii) ageing analysis done, and (iv) collection performance monitored and maintained at satisfactory levels.At the same time, the parties agreed that Government receivables would not exceed three months billingsinstead of the two months' billings limit set in connection with the Project (SAR PSEP, paras. 4.13 to4.15). In FY93 NEA nearly achieved this goal.
- 31 - Annex 3
Government ReceivablesArrears Billings Arrears/Billings
FY92 Total 593 1441 4.9(NEA statement Gov. 168 132 15.3received in 11/95) non-Gov. 425 1309 3.9
FY93 Total 485 1794 3.2(NEA statement Gov. 49 164 3.6received in 11/95) non-Gov. 436 1630 3.2
FY94 Total 538 2437 2.6(NEA statement Gov. 83 201 5.0received in 11/95) non-Gov. 455 2236 2.4
-32 - Annex 4
NEPALMARSYANGDI HYDROELECTRIC POWER PROJECT
(CREDIT 1478-NEP)
REDUCTION OF SYSTEMS LOSSES
1. After the sector's first, unsuccessful, attempts at reducing losses in the first half of the1980s, ADB, in the context of its second power project in Nepal, provided funds for TA to studythe losses and the concrete measures to reduce these from a level in excess of 30% to some 15%in 1987. Before the start of the Project, NEC had already created in its own organization adepartment responsible for the reduction of system losses and was said to enact by-laws dealingwith electricity theft. Under the Project, IDA made available funds for studying a second phaseprogram with less ambitious targets. British Electricity International (BEI), the consultants hiredunder the ADB project submitted a draft program, which allowed IDA to consider that NEA hadmet the initial part of Section 4.11 (a) of the DCA calling for NEA to submit such a draft programby 03/31/86. The contract for the detailed design and the supervision of the implementation ofthe second phase was signed in 08/88 and work started in 03/89. Therefore, as set forth in furtherdetail in the table below, NEA was unable to comply with several targets agreed with IDA.
2. The main reasons for the low rate of meeting the targets seem to be: (i) the sector's re-organization that slowed down the sector's operations until the new setup was reasonablyfunctional, (ii) NEA's shortage of local funds, (iii) low priority accorded by NEA to the lossesreduction program, due to weak management, limited ownership of the program by NEAmanagement, and slow procurement.
Losses in Central Achieved inSystem: FY92: 32%- FY86: 25% n.a. FY94: 28%- FY91: 20% 32% In FY95 the target was revised to 20% by FY 2000
(SAR Arun III).
Metering all n.a. At the time, NEA's records were not reliablecustomers by enough to substantiate the percentage of metered09/30/86 connections. Indications are that target was
substantially met (Sup.R. 11/86). Phase II of theprogram was to address shortcomings in meteringmanagement and recording). NEA actively pursuesthe program.
Checking and sealing n.a. In 06/89, targets were changed to achieving underof the meters of all Phase II of the program:large customers by - inspection, control, and calibration06/88, and rectifying of 40,000 connections;and recalibrating all - replacement of 25,000 meters; andmeters by 06/90. - sealing all meters.
The program is continuing.Indications are that the set goals were substantiallyachieved, though later than anticipated.
- 34 - Annex 5
NEPALMARSYANGDI HYDROELECTRIC POWER PROJECT
(CREDIT 1478-NEP)
LAND ACQUISITION AND RESETTLEMENT
Background
1. The SAR (paras. 3.22 and 3.23) sets forth that the Project would require the acquisition of about69 ha of land from some 110 land owners /1. An additional 5 ha were needed for the quarry. By thepresentation of the Project to IDA's Board of Executive Directors, MHDB had purchased 7 houses and 49ha of land and already compensated the owners of 36 ha. It further envisaged to provide employment forthose whose livelihood would suffer most by the Project. The SAR further states that no tribal peoplewould be affected.
2. To cover the above aspects of the project, the DCA (Section 3.07) states that the Borrower, by01/31/86, would adopt and thereafter implement a "rehabilitation program satisfactory to the Associationfor those persons dislocated as a result of' the project. A side letter to the DCA specifies that the Borrowerwould adequately compensate the 110 /2 land owners mentioned above and about 8 former house ownerssuch as to allow these to continue in their work and profession. It was understood at the time that about 65of the affected land owners would retain land in excess of I ha (considered to be the minimum required forsustainable farming), about 42 would remain with less than one ha, and some three families would be leftlandless, but MNHIDB would provide employment for them /3. Thus, strictly speaking, the Credit documentsdid not covenant the resettlement and the development of a resettlement plan: Only a rehabilitation programfor the affected people was legally called for. This, of course, does not mean that IDA understood that aresettlement plan was unnecessary. But, it seems that, before credit approval, IDA was not particularlyforceful in conveying this message to the Nepalese side. It is worth mentioning that, during preparation andimplementation of the Project, IDA's codified policies on environmental issues evolved. Indeed, OMS 2.36on environmental aspects of Bank work was issued in 05/84 (i.e. about the time IDA's Board approved theProject) and OD 4.30 on involuntary resettlement in 06/90. Both directives replaced less explicit andweaker ones.
3. At the time of the Project's preparation and early implementation, HMG's policy on resettlementand land acquisition for major projects included the following main points:
- The project entity carries out a survey which is sent to MWR and, after decision, to the ChiefDistrict Officer of the Ministry, who publishes a notice informing landowners about the landacquisition.
/1 The figure became 186.
/2 Actually 186.
/3 According to an 11/14/86 internal memo on resettlement issues, at that time, the Project left about 37families landless or with plots of clearly uneconomic size. For as much as 50% of the affected families thesale of the land needed for the Project threatened to reduce them to marginality.
-35- Annex 5
- A price assessment committee including district and project representatives is constituted to fix thecompensation rate. In case of disagreement, there is a possibility to appeal to the ZonalCommissioner. (By mid-1986, 51 persons had appealed).
- HMG compensates in cash and lets people resettle in the place of their choice.
4. The Project consultants in their environmental impact assessment of 1981 had proposed that theaffected families benefit of 15% disturbance allowance on top of the market value of the land, specialassistance in hardship cases, priority for employment on the project work force, and assistance forincreasing production on the land situated in the immediate vicinity of the project but not affected byconstruction.
Action Taken During Project Implementation
5. The lack of precision in defining the issue at the preparatory stage and the low priority that the landacquisition issue had as well as other factors that delayed the Project resulted in HMG's inability to submita program for the "rehabilitation" within the agreed time frame. Nevertheless, in mid-1986, MHDBproduced a preliminary proposal, which lacked an action plan, but made clear that a total of 226 familieswould be affected and suggested that there would be no difficulties with claims for compensation.
6. In 11/86, IDA started a major effort to push this issue into the right direction. In particular, itmade clear that IDA did not consider cash compensation adequate for achieving the objectives ofresettlement in the context of an IDA Project, as it fails to assure that the affected people can continue tomake their livelihood through the activities they pursued before the Project started. IDA, taking a moreactive stance, suggested the preparation of a resettlement plan based on a strategy of agriculturaldevelopment, watershed management programs (also to be studied in the context of the Project) and thecreation of employment opportunities. To achieve this IDA proposed the preparation of a plan including (i)a census of the affected and host populations, (ii) an inventory of public and common infrastructure andresources, (iii) identification and assessment of new land and housing sites, (iv) survey of potential hostpopulation, (v) definition of resettlement policy to be applied specifically in the context of the Marsyangdidevelopment; (vi) setting up and training the organization required for the specific resettlement, (vii)defining development objectives and policies for the new sites and the possible new production systems,(viii) elaboration of programs for both agricultural of non-farm employment in the affected areas and thenew sites, (ix) planning of infrastructure needed for the above development, and (x) definition of timetables coordinated with those for the hydroplant, of the costs, and of the funding. /4 In view of the linksbetween the resettlement and the watershed development plan, IDA suggested that the consultants for thelatter area should also prepare the resettlement plan. HMG delayed the decision on this point andultimately refused to proceed as it did not wish to depart from its established policy and considercompensation other than in cash for the people affected by the project.
7. The controversy continued through 1988, when the Borrower agreed to have a Nepaleseconsultant carry out a socio-economic study on site. This analysis became available in 1989. Theconsultants were able to contact 78% of the affected households, which suggests that only a few familieshad left the area in the meantime.
/ 4 Internal note of 11/16/86.
- 36 - Annex 5
8. Compensation had been given in cash only, though a few landowners had asked for land. Ratespaid were below market prices, and most sellers were dissatisfied since they were unable to purchasealtemate land with the compensation provided. Most people whose land was acquired for the project had nolegal knowledge, and, in particular, no knowledge of their right to appeal the land deals. There is alsoevidence that the later acquisitions were at better prices than the earlier ones, which produced furtherdissatisfaction.
9. The study identified 42 hardship cases out of the 174 PAPs found on site, and recommended aseries of rehabilitation measures including redistribution of land acquired but no longer required by MHP,and income restoration programs. Although IDA follow-up missions continued to ask for a detailed plan forcarrying out the recommended scheme, the only outcome was grudging recognition that perhaps somehardship cases still needed to be dealt with. The Borrower thinned the number of hardship cases down to 27but until 1995 had still not undertaken any rehabilitation activities other than the initial cash compensationpaid between 1978 and 1985 when the land was acquired.
Further Action
10. An IDA mission undertook field investigations to review the situation of project affectees inMarch 1996, and held discussions with NEA to determine appropriate remedial measures. The findings ofthat mission are that (1) NEA commissioned an internal study in 1995 to develop a remedial plan but thestudy only covered the 27 households accepted by NEA from the 1989 study as being hardship cases; (2)the plans being proposed by NEA were inadequate to address outstanding resettlement issues; (3) allaffected households interviewed confirmed that land values paid to affectees were inadequate for them topurchase alternate land; (4) field investigations validate the basic data provided in the 1989 consultant'sreport but suggest that, if anything, their estimate of hardship cases was an underestimate; (5) the actualnumber of seriously affected households is 48, of which 7 have been rehabilitated through employment ofone person from each family on the project, but 41 still need rehabilitation; (6) MHP has 9.5 ha of land (8ha agricultural, 1.5 ha land adjacent to the road) acquired for MHP but no longer needed by the project; (7)NEA has been advised to re-design a manageable rehabilitation plan using the 1989 survey data as baselineinformation, with three basic rehabilitation packages: re-allocation of the 8 ha of agricultural land,development and redistribution of the 1.5 ha roadside plot as a commnercial area for redistribution, andprovision of livestock loans, to seriously affected households, leaving the choice of rehabilitation packageto individual households. NEA has expressed an interest in implementing the rehabilitation program,preferably through an NGO, to bring MHP to closure. The issue was taken up, once again, with IDA'sletter dated May 7, 1996, addressed to HMG.
- 37 - Annex 6
NiEPLPROJECTED AND ACTUAL VALUES OF NEAS PRiNCIPAL OPERATIONAL AND FiNANCiAL INDICATORS
' The indicators which use balance sheet data are estimates for FY93 and FY94 and need confinmation thon4gh nalysis ofNEA's audited rGncial statemensa.
- 38 - Annex 7
NEPALMARSYANGDI HYDROELECTRIC POWER PROJECT
(CREDIT 1478-NEP)
THIRD TECHNICAL ASSISTANCE PROJECT(CREDIT 1902-NEP)
1. Between November 8 and November 17, 1995, Mr. Rene A. Ribi, Consultant to theEnergy and Infrastructure Division of the World Bank's South Asia II Department, stayed inNepal to carry out the field work related to the preparation of IDA's ICRs for the two aboveprojects. The corresponding credits were closed in December 1994 and June 1994, respectively.Mr. Ribi worked under the guidance of the Task Manager, Mr. Argun Ceyhan, who was in Nepalon a different mission. Mr. Ribi would like to express his appreciation to the ElectricityDevelopment Center (EDC) of the Ministry of Water Resources (MOWR) and Nepal ElectricityAuthority (NEA) for their assistance and cooperation during the various discussions and the visitto the Marsyangdi plant that took place during his stay in Nepal. IDA's final comments will besent by Management following its review of the present Aide-memoire
2. The objectives of the mission were:
- to complement the data base for the report;
to discuss with NEA (a) the operation plan for Marsyangdi which NEA still has to provideand (b) the measure to which the goals set in the projects were achieved, and
to provide advice and support to the entities of the Borrower in preparing their owncontribution to the ICR;
Data Base
3. NEA has provided most of the data requested in IDA's letter of April 4, 1995. EDC andthe concerned departments of NEA have agreed to make available, by the end of November 1995,the remaining information called for. /i
/1 On November 15. only (i) the breakdown of the Pancheswar component of the TA III project, (ii) the finalcosts and financing of the various components of TA III for which NEA was responsible, and (iii) thebreakdown of NEA's operating costs for the past three fiscal years and a statement of the development ofGovernment receivables were still outstanding. Part of this information is likely to become availablebefore Mr. Ribi's departure from Kathmandu.
- 39 - Annex 7
Operation Plan
NEA has submitted a draft operation plan which the mission discussed with the main author. Itwas agreed that the final plan, which NEA is to provide by mid December 1995, would outline insome more detail than the draft the sophisticated arrangements directing operation andmaintenance of the plant, as these arrangements should be a model for the management of otherfacilities in the system.
Outcome of the Marsyangdi Project (Credit 1478)
4. IDA's ICR for this project, which was co-financed by His Majesty's Government (HMG),Kreditanstalt fur Wiederaufbau (KfW), the Saudi Fund, the Kuwait Fund, and IDA, willsubstantiate IDA's following main findings that crystallized before and during the mission:
NEA, with support from HMG achieved the physical objectives of the project with a highdegree of success: (i) though the plant and its associated facilities was completed sevenmonths late with respect to the schedule in the Staff Appraisal Report (SAR) their costwas some 20% lower than set forth in the appraisal estimate. (ii) the plant's output grewfrom 331 GWh in the first full year of operation (1990) to 438 GWh in 1994 whichcorresponds to a high plant utilization of 72% and represents about half the totalgeneration in NEA's system. At the time of the mission's visit, the installation was runningat over 75 MW, the name plate capacity being 69 MW.
The implementation of the institutional measures included in the project was lesssuccessful than that of the project's physical component: (i) NEA institutionalstrengthening was slower than expected; (ii) the sector finances remained weakthroughout project implementation; however, in the context of follow-on projectsrevenues dramatically increased, accounting and auditing improved both in quality andtimeliness, and accounts receivable from Government fell substantially; (iii) most of thepostponed maintenance which was planned to be carried out during projectimplementation had to be delayed until after its completion; (iv) the loss reductionprogram failed to achieve the targets agreed at appraisal and was taken up in follow-onprojects; and (v) training developed only slowly under the project; however, progressimproved substantially once the main disagreements between Nepal and IDA on the onehand and the consultants on the other were eliminated, which occurred in later stages ofthe Third Technical Assistance Project (Pancheswar) - TA III - . The subsequent PowerSector Efficiency Project (PSEP) included further training in line with the previousprograms.
Major complementary work at Marsyangdi, mostly financed or expected to be financed byKfW, includes: (i) the modifications needed at the manifold where hydraulic instability
- 40 - Annex 7
occurs and creates unplanned fluctuations in the turbine output; this work is presentlyunder negotiations with a member of the consortium that supplied the manifold; the cost islikely to be substantially higher than the DM I million still retained from the contractor;completion is expected for the first semester of 1997; (ii) at the weir site, NEA isconstructing facilities that will house central control equipment for all the gates in theweir/sedimentation pond/intake area and the laboratory for water and sediment analysis,and (iii) as a glacier lake in the upper reaches of the Marsyangdi catchment is growing andcould become a threat to the plant, a study of the problem is planned for 1996.
Outcome of the TA III Project (Credit 1902)
5. The ICR for the TA III project co-financed by HMG, KfW, and IDA will discuss thefollowing main findings by IDA:
The first project objective was to assist HMG in further ascertaining the least cost way todevelop electricity supply to meet expected local and export demand. It was achievedthrough the conclusion, about one year later than anticipated at project start, of the fieldinvestigations (on the Nepalese side of the Nepal/India border) for the Pancheswardevelopment.
The second broad project goal was to advance the design of Arun III which was achievedthrough the timely completion of the engineering for the facilities and of the powerevacuation study.
The technical assistance measures supporting the sector's institutional development wereconsolidated in a package that was executed in the context of the twinning arrangementbetween NEA and Electricite de France (EdF) concluded to follow up onrecommendations set forth in the 1987 Power Sector Review sponsored by ADB andIDA. At first, progress was disappointing. Only after the TA III project was essentiallycompleted, did the measures started under the project have a measure of success in thecontext of follow-on projects.
The 1 0-year transmission and distribution plan was successfully completed and fulfills thepurpose for which it was prepared. The same applies to the long-run marginal cost andtariff study which is one of the main bases used by NEA for its planning. The ruralelectrification plan, in turn, led to the inclusion of the implementation of a test scheme inthe Marsyangdi catchment under the PSEP; all these studies were somewhat hampered bythe limited response of NEA to their early results.
The design of the Trisuli-Devighat upgrading was the only item not specified at projectstart. However, it fit the concept of the project and formed the basis for theimplementation of the improvements under the PSEP.
- 41 - Annex 7
Borrower's and Beneficiary's Own Assessments
6. Section 3.03 of the Development Credit Agreement (DCA) for Credit 1478 requires NEAto prepare its own assessment and analysis of the project's implementation and outcome. Theessential content of such a report was discussed with NEA's project manager and it was agreedthat NEA would complete its contribution to the ex-post evaluation of the Marsyangdi project bymid December 1995.
7. The DCA for Credit 1902 does not include the section on the preparation of an ICR, butthe mission considers that it would be valuable to prepare such an assessment, the more so as theresponsibility for the various project parts were widely disseminated within the sector and most ofthe persons who, at the time, were responsible for the components are either in new positions orhave left the organization. Thus, the institutional memory for this project is vanishing fast.
- 42 - Annex 8
NEPALMARSYANGDI HYDRO POWER PLANT
(CREDIT 1478-NEP)
OPERATION PLAN
1. Operation Plan for Future Operation - The plant will be operated in the futurebased on the following operation plan.
Operation Plan
2. The plan is in operation since 1989 and has generated energy as follows (Annex 3):
During the last six years of operation many operational problems have been faced (referSection 3) and based on this experience suitable a operation and maintenance plan hasbeen established to ensure sustainability of its operation. The established operation andmaintenance plan can be summarized as follows:
Operation
3. Water Level -During the rainy season the reservoir will be operated at itsminimum level of 333.00 meter with continuous sluicing to maintain the bed load as lowas possible. During the dry season and whenever the sediment content is insignificant thereservoir will be operated at its maximum level of 337.5 meters.
4. Flushing. During the rainy season the flushing of sediments from the settling basinwill be done as per requirement without delay. About 20 flushings are required during onerainy season. The time required for one flushing operation has been optimized to about2.5 hours by proper coordination of the flushing procedure. The time estimated duringdesign phase was about 5 hours. Total time of flushing in a year has also been reducedfrom 254 hours design period to about 50 hours in actual operation. Flushing requirementis determined through daily echo sounding. Regular dredging of the compensatingpondage shall be carried out.
- 43 - Annex 8
5. Debris. The removal of debris shall be carried out regularly with the operation ofthe Intake Rating machine. Debris is also being partially retained in the floating boominstalled at the entrance to the compensating pondage. This retained debris is flushed outat the time of each flushing.
6. Unit Operation. Output of the individual unit shall not be below 16 MW for longperiod of time.
Monitoring Activities
7. Sediment. Major effort has been invested in the accurate measurement of sedimentconcentration, deposits and effects to the structure and equipment. A comprehensiveprogram including daily samplings echo sounding, and their analysis is being executed bythe regular plant personnel.
8. Structures. Yearly measurements are taken for anchors fixed on powerhouse slopefor analysis of their settlements. This year only these anchors have been retensioned totheir original values. Now slopes are stabilized and measurements shall be taken in longintervals.
Maintenance and Spare Parts
9. Maintenance System- A computerized preventive maintenance system has beenestablished. 1,774 (at the end of September 1995 )work orders (detailed instruction onprocedure for execution of the maintenance work) covering all the important equipmenthave been prepared for easy, timely and reliable execution. The execution work isconstantly monitored and up to date records are maintained. During the period of April95 to September 95 following numbers of maintenance activities have been executed bydifferent sections: civil maintenance - 463; mechanical maintenance 1,532; electricmaintenance - 1,745; operation 32.
Maintenance activities to be performed by different sections are distributed to thesection's chief regularly and after their completion reports are entered to thecomputer by the administrator of the program. Status of the maintenance workcan be received by the computer any time.
This system is quite new for NEA. It is very effective and efficient. Because of itseffectiveness NEA has initiated to use it in another powerhouse also.
Major Preventive Activities
10. Turbines. Based on our experience it has been found appropriate to carry out thepreventive overhauling of a unit every 3 years. In this overhauling the critical parts erodedand damaged are repaired and protected extending its useful life. The complete overhaul
- 44 - Annex 8
work is carried out by the plant personnel. Special high resistance materials (which havebeen selected after trail and run of many other products) are used in repair.
11. Sluice. The ordinary steel lining of the sluice was suffering very high degree oferosion due to high velocity of sediment and presence of boulders resulting in a majormaintenance every year. Special high resistance materials has been introduced for liningand it is expected that frequency of maintenance will be increased.
12. Concrete Ogees. Special material has also been used on ogees for their easyrepair.
13. Tailrace River Training. Accumulation of boulders and sediments on the tailraceoutlet affects and available head specially during the dry season. Tailrace river trainingwas done by the plant personnel with available equipment during the year 1994. It wasvery effective and now regular river training shall be carried out.
14. Availability of Spare Parts. A computerized Inventory Management system hasbeen established. Replacement of consumed part with procurement as per minimumstocks established and new requirements determined is being regularly made to ensuretheir availability.
15. Staffing of the Plant. The plant is being operated by NEA staff. There are 120 innumber out of which approximately 60 are technical. Almost all the technical staff havebeen trained for operation and maintenance.
A performance oriented incentive scheme has been introduced in this plant. Thisscheme is contributing a lot to motivate the staff for work. Several operations andmaintenance parameters including generation target, timely preventive maintenanceare monitored through this scheme. It is the intention of NEA to continue thisscheme of reward in fiiture also.
16. Operation and Maintenance Budget. An yearly budget is allocated to the plantbased upon the proposal of station manager. The station manager is solely responsible forthe administration of the approved budget and in case of unforeseen requirementsadditional budget is provided to the plant.
17. Performance Indicators. For monitoring the performance of the project in futureNEA maintains the following indictors:
18. Additionally at the plant level the following indicators will be maintained:
i) Productivity factor (KWh/person)ii) Direct cost of generation Rs/KWhiii) Forced outage hoursiv) Planned outage hoursv) Reliability factor (no of days-no of trip/no of days)
KfW's letter dated February 8. 1996. addressed to the World Bank
Subject Financial Cooperation with Nepal(i) Marsyangdi Hydro Power Project (Cr. 1478-NEP)(ii) Third Technical Assistance Project (Cr. 1902-IN)Draft Implementation Completion ReportsYour letter dated January 25, 1996
Dear Sirs:
This is to acknowledge with thanks the receipt of the Draft ImplementationCompletion Reports in caption. While we find the reports in general very comprehensiveand well conceived we would like to provide a short comment on the issue specifiedbelow.
With regard to "sustainability" of Marsyangdi Hydro Power Project (p.8, para 28of the Report) it may be worthwhile to mention that about 80 km upstream from the weira glacier lake (Thulagi lake) has developed over the last 10 years. As a result, the risk of amajor glacier lake outburst flood (GLOF) became a potential threat to the power plant.Even though a GLOF may not have a direct impact on the weir, serious operationalproblems may result from such an event, owing to the increased bed load arriving at theintake over many months after the overflow. Therefore, monitoring of the development ofthe lake, and, if necessary and feasible, appropriate measures to lower the water levelshould be given due consideration.
As you may already know, KfW, upon request of the German Government, shallcommission a study on this issue, which will be financed under the existing Studies andExpert Fund.
In addition we would like to point out that KfW is initiating a feasibility study on anew Load Dispatch Center at Kathmandu which shall be equipped with SCADA. TheLDC should also contribute to an improved capacity utilization of the power generated atMarsyangdi.
