Marsyangdi hydroelectric power project
 Report No: ; Type: Report/Evaluation Memorandum ; Country: Nepal; Region: South Asia; Sector: Electric Power & Other Energy Adjustment;
                                      Major Sector: Electric Power & Other Energy; ProjectID: P010200


Nepal: Marsyangdi Hydroelectric Power Project (Credit 1478- NEP)

The Implementation Completion Report (ICR) on the Nepal Marsyangdi Hydroelectric Power Project (Credit 1478-
NEP, approved in FY84) was prepared by the South Asia Regional Office and reviewed by the Operations
Evaluation Department (OED). An IDA Credit in the amount of SDR 100.6 million was approved on May 22, 1984,
and closed on December 31, 1994, four and a half years after the original closing date. Of the credit amount, SDR
75.3 million were disbursed, and the remaining SDR 25.3 million were canceled at the time of closing. Cofinancing
was provided by the German Kreditanstalt f■r Wiederaufbau (KfW), the Asian Development Bank (ADB), the Saudi
Fund for Development (SFD), and the Kuwait Fund for Arab Economic Development (KFAED). The ICR includes
comments from the KfW, but not from the other cofinanciers or the Borrower.

The main objectives of the project were: (i) to meet the forecast power demand of Nepal in a least cost manner; and
(ii) to help establish and strengthen the Nepal Electricity Authority (NEA), an autonomous public sector corporation
which was created in 1985 through the amalgamation of a number of other public sector organizations involved in
the power sector. The project comprised: (a) the construction of the 69 MW Marsyangdi hydro power plant; and (b)
a technical assistance program to strengthen the NEA in the areas of finances, accounting and auditing, plant
maintenance, reduction of system losses, and training.

The project fully achieved its physical objective. The Marsyangdi hydroelectric project was commissioned in 1990,
only seven months behind the appraisal timetable, at a cost 20 percent lower than the appraisal estimate, and has
significantly improved the reliability of power supply for NEA's 400,000 customers. However, the outcome of
resettlement was unsatisfactory since most of the 226 families affected by the project have been unable to purchase
alternate land with the compensation provided, of which 41 families were still in need of rehabilitation. A
satisfactory resolution of this issue is being pursued by IDA with the Government. Another issue is increased
sedimentation and the threat of flooding from the outburst of an upstream glacier lake. A catchment management
plan financed under the project was completed and its implementation has become part of the Power Sector
Efficiency Project (Credit 2347-NEP, approved in FY92).

In regard to institutional strengthening, the project successfully supported the establishment of the NEA and, in
comparison to its predecessors, its accounting and auditing has improved. However, NEA's finances have not
strengthened as fast as expected at appraisal (its rate of return on assets was only 1.6 percent in 1994, vs. an appraisal
projection of 6 percent), major plant maintenance was delayed until after project completion, the loss reduction
program fell short of the modest targets set at appraisal, the training program made only limited progress after a
much-delayed start. The economic rate of return of the project was reestimated as 6.7 percent in the ICR, slightly
higher that the 5.9 percent estimated at appraisal (using tariffs which significantly understate the project's real
economic benefits in terms of consumers' willingness to pay), mainly because of lower costs.

OED rates the outcome of the project as marginally satisfactory, its sustainability as uncertain, the institutional
development impact as moderate, and the Bank's performance as unsatisfactory. The ICR rates outcome as
satisfactory, mainly because of the successful construction of the Marsyangdi plant in a difficult context. However,
given the highly unsatisfactory outcome of resettlement and the limited progress on institutional development a
marginally satisfactory rating is more appropriate. The ICR rates sustainability as likely. Given NEA's continued
weak financial performance, its failure to improve its operational performance (in relation to its predecessor
organizations), its poor record with the maintenance of projects, as well as major unresolved issues in relation to
sedimentation and the threat of a glacier lake outburst flood, OED believes that the long-term sustainability of the
benefits of the project should more accurately be rated as uncertain. The ICR rates institutional development impact
as moderate, in agreement with OED. The ICR rates the Bank's performance as satisfactory since the Bank carefully
linked the processing of the operation to the development of a technically sound project. However, since a
satisfactory resettlement plan had not been prepared by the time of negotiations, as required by the guidelines, and
the appraisal was overoptimistic in relation to the speed at which NEA's capabilities could develop, an unsatisfactory
rating is considered more appropriate.

As indicated in the ICR, this project illustrates the fact that, in the infrastructure sectors, borrowers tend to own
physical project components more clearly than institutional ones, because they usually request the Bank's assistance
primarily to finance capital intensive facilities such as power plants. To improve the long-term sustainability of the
benefits of such projects, the Bank needs to pay greater attention to the Borrowers' ownership of the policy and
institutional strengthening aspects, including resettlement management, of the implementing agencies.

The ICR is satisfactory. It provides a well-organized discussion of the implementation experience of the project,
identifies the appropriate lessons, contains good operational and financial indicators, and provides a detailed plan for
future operation of the project. However, it would have been useful for the ICR to have discussed in greater detail
the risks posed by increased sedimentation, a glacier lake outburst flood, and the strategies for addressing these
threats and the unresolved resettlement issue. The project may be audited.