Kabeli A Hydroelectric Project (IDA Credit No. 5338-NP & IDA Grant No. H900-NP) Implementation Support Review February 11 to 27, 2019 Aide-Memoire 1. The World Bank Group team1 led by Pravin Karki (Task Team Leader) and Subodh Adhikari (Co- Task Team Leader) carried out an implementation support review for the Kabeli A Hydroelectric Project (‘the Project’) from February 11 to 27, 2019. The findings of the review were discussed at wrap-up meetings with Mr. Dinesh Ghimire, Secretary, Ministry of Energy, Water Resources and Irrigation (MoEWRI) and Dr. Narayan Dhakal, Under Secretary, International Economic Cooperation Coordination Division (IECCD), Ministry of Finance on February 26, 2019. As agreed during the wrap-up meeting, this Aide Memoire will be disclosed as a public document according to the World Bank's Access to Information Policy. OVERALL STATUS AND KEY PROJECT DATA 2. The project development objective (PDO) is to “increase hydropower generation capacity to supply NEA grid through public private investment”. As there has been no construction progress of Kabeli – A hydroelectric Project (KAHEP) since the last review, the progress towards achievement of PDO is downgraded to Unsatisfactory. As the contractors were not performing as per the requirement of the contract, the construction activities have currently been suspended. Kabeli Energy Limited (KEL) also has initiated the process of contract termination. Due to significant delays, it is likely to hinder the achievement of PDO within the current closing date of December 30, 2019. An action plan prepared by KEL is presented in Annex 2. In addition, KEL has applied for the extension of the original commercial operation date (COD) of the Kabeli- A Project with the Nepal Electricity Authority until October 9, 2020. Similarly, limited progress is observed under the Investment Board Nepal (IBN) component. However, significant progress was observed under the MoEWRI component. As such, the overall implementation status has been retained as Moderately Unsatisfactory. Overall Status and Project Data Project Data Summary Ratings Previous Current Board Approval: July 1, 2014 Progress towards achievement of PDO MU U Effectiveness Date: June 20, 2016 Overall Implementation Progress MU MU Closing Date: December 30, 2019 KAHEP Component (US$40 million) MU U Amount: US$46 million MoEWRI Component (US$2.0 million) S S Amount Disbursed (as of IBN Component (US$4.0 million) U U February 28, 2019- US$ Procurement MU MU 9.73 million (about 23.1% Financial Management MS MS of committed amount) Safeguards MU MU Project Management MU MU Note: S = Satisfactory; MS = Moderately Satisfactory; MU= Moderately Unsatisfactory; U= Unsatisfactory 1 Pravin Karki (Task Team Leader/ Sr. Hydropower Specialist), Subodh Adhikari (Co- Task Team Leader/ Senior Energy Specialist), Rekha Shreesh (Social Development Specialist), Annu Rajbhandari (Environmental Specialist), Chandra Kishor Mishra (Sr. Procurement Specialist), Timila Shrestha (Financial Management Specialist), Nabin Rawal (Consultant, Social Development) and Alina Thapa (Team Assistant) 1 Key Points Discussed and Agreed Actions 3. KAHEP Component: The team held a series of meetings with KEL to discuss the status of the Project. Overall, the work progress is far behind schedule. The current Engineering Procurement and Construction (EPC) contractor Zheizang has been suspended due to non-performance and KEL is currently waiting for no objection from the lenders in order to proceed with the termination of the contract and drawing of the performance and advance payment guarantees. KEL presented their new plan to procure a new contractor and owner’s engineer to execute the Project under a FIDIC red book contract as envisaged back in 2014 when the Project was prepared for implementation. FIDIC red book envisages the design be finalized before the start of the construction. Back in 2014, the original design was prepared by Hydroconsult. The design was further finalized by using a hydraulic model study and the feedback from the international panel of experts. The Lender’s Engineer and the Bank’s team had further reviewed the design prepared by Hydroconsult. However, later, KEL decided to execute the Project as an EPC contract and awarded the project to Zheizang – including the design part. Nonperformance of the EPC contractor and KEL’s management of the Project has led to severe delays. 4. The Bank team reviewed the new plan (see Annex 2) proposed by KEL. The FIDIC red book-based contract is proposed with a team of Nepalese Owner’s Engineer and Civil and Hydromechanical contractors. The Bank team met with potential candidates including Hydroconsult as the Owner’s Engineer and High Himal Hydro as the civil Contractor and based on the presentation they made, KEL is convinced that they could execute the Project under budget and time. The electromechanical works remains with Chongqing – the original contractor. For hydromechanical works, KEL will appoint a new contractor. As given in Annex 2, KEL proposes to sign on the Owner’s Engineer on March 22, 2019 and the civil/hydromechanical contractors on June 3, 2019. KEL plans to commence the works at site on July 15, 2019. KEL has hired Dr Bishnu Sharma, formerly senior hydropower engineer with Mott Macdonald UK as the senior project manager to assist KEL to execute the new plan. 5. KEL presented a new financial model with inputs from the new plan with revised costs and implementation schedule. KEL is willing to move ahead with the new plan provided they have the lenders on board and IDA loan is available. KEL’s disbursement schedule shows US$24.70 million will be disbursed by the current closing date of December 30, 2019. 6. Due to delays in the project implementation, KEL will not be able meet the original Commercial Operation Date (COD) as referenced in the Power Purchase Agreement (PPA). As such, KEL has applied for the extension of commercial operation date until October 9, 2020. In parallel, KEL has also made a request for an extension of the IDA Project closing date to the GoN. The action plan to expedite the Project has been prepared by KEL and is presented in Annex 2. As no progress has been made since the last review under this component, the rating is downgraded as Unsatisfactory. 7. Ministry of Energy, Water Resources and Irrigation Component: This component supports the Department of Electricity Development (DOED) to: (a) supervise the implementation of the KAHEP to ensure compliance with the Project Development Agreement, Environmental Management Plan (EMP), and Social Action Plan (SAP); (b) build capacity for sustainable hydropower development, including integrated river basin management and Cumulative Impact Assessment (CIA); and (c) cover incremental operating cost for project implementation. The work on most of the activities have been ongoing. In particular, Cumulative Impact Assessment (CIA)– which constitute the major chunk of the overall activities – is progressing well and consultants are submitting the relevant reports for both DOED and Bank’s review in timely manner. Currently DOED is in the process of procuring consulting services for developing integrated software for monitoring hydropower projects. Given the continued implementation progress, implementation status of this component is retained as Satisfactory. 8. IBN Component: IBN is in the process of revising its procurement plan and intends to 2 include the procurement of: i) office equipment; ii) vehicle for project supervision; and iii) consulting/training services for capacity building – in hydropower due diligence, planning, financing, and implementation. Since very little progress has been made since the last review, this component’s rating is retained as Unsatisfactory. The Bank team recommends this component to be restructured. Safeguard Management 9. Environmental Safeguard: The Bank team reviewed the environmental and social safeguard status of the project based on field visit to the Kabeli “A” HEP site and discussion with Project’s team. Construction activities have come to a halt. The Chinese contractor has kept two guards at the powerhouse and construction site to guard their construction equipment and materials. The Bank team reiterated the need to ensure clear demarcation of the project site and have proper construction site access control. As agreed with the Bank, KEL has secured both the site (head works and powerhouse) by providing metal and bamboo fencing at the entrance, access at surge site, outlet portal and the semi-underground water tank. Additionally, KEL has also employed three Nepali guards at each of this site on an eight-hourly duty basis to keep watch of the sites. 10. KEL has taken initiative to spray water twice daily along the access road from head works site to powerhouse site to improve the ambient air quality and control dust which was observed to be a nuisance to the community. However, what was also noted that the construction activities of Madhya Pahadi Lokmarga (mid-hill highway) and Tamor corridor road projects are also major contributors in aggravating the dust pollution at the powerhouse side of the project area. KAECDU had put in a request regarding that the contractors of these respective road projects to also assist and contribute in dust control measurers but these contractors have yet to comply with the KAECDU’s request. 11. As of now there is no risk of slope failures. However, the consequences of Contractor’s disregard to environmental compliances of disposal of the excavated material down the hill slope slopes particularly at powerhouse site will be only seen with the onset of monsoon. The slope trimming remains to be done at certain areas. 12. Considering the timeline required for new contractor to be on board the temporary arrangement of bamboo fencing especially at the powerhouse and surge shaft needs to be replaced before the monsoon. KEL should also give continuity to the awareness program on safety hazards at the abandoned sites/structures, labor influx (mid-hill roads, Tamor corridor) to the communities residing in the vicinity of the construction site and unstable areas are to be identified for slope stabilization activities before the monsoon to reduce the risk of slope failures. The existing signboards, warning signs and danger signs at critical locations needs to be displayed to steer away local people from any dangers/hazards. Considering the security and safety issues environmental safeguard remains Unsatisfactory. 13. Social Safeguard: A Nepali summary of the SAP has been published as a booklet to be distributed to the but has not been yet disseminated. KAEDCDU has undertaken awareness program regarding labour influx issues with the community members in Pinnase area and as part of its mid- term activities, the KAECDU is giving continuity to health camp which is being carried out once a month. Similarly, KEL has contributed the deficient amount of resources required for rural electrification in the project area. Electrification is already completed in two areas and is being further expanded to other settlements in the Project area. 14. Four non-title holders out of 24 non-title holders are yet to be compensated. Two of the non-title holders are abroad while the remaining two are now settled in Birtamod. KAECDU has allocated the compensation amount and notified them but they have yet to collect their compensation. The project team should transfer the outstanding compensation amount plus 10% into a special purpose account and ensure remaining PAF’s are informed about the special purpose account. 3 15. The water supply management study for the army camp near the surge shaft area, powerhouse and headwork sites has been undertaken and the ESHS manager stated that the report would be finalized in a week. With regards to the water source for the powerhouse area, the KAECDU has identified three water sources. The KAECDU has already come to a monetary agreement with the Uttiseni Community Forest Group for using their source. The water source for the head works is inside the acquired land of KEL. 16. No new complaints have been registered in Grievance Redress Mechanism (GRM)unit. Altogether, 41 complaints have been registered of which 40 has been settled. One outstanding complaint yet to be addressed is the issue of compensation for loss of deposited sand at the headwork area. As things stand now, the complainant has been asked to furnish evidence of sand mining from local authorities and appeal to the third tier of the GRM. Considering the performance made in addressing social issues, social safeguard rating is upgraded to Moderately Satisfactory. FIDUCIARY COMPLIANCE 17. Procurement performance: Due to insufficient progress since the last review, procurement performance is retained as “Moderately Unsatisfactory”. The project officials of both the implementing agencies DoED and IBN are advised to plan essential new procurement activities and to execute pending processes of the approved procurement activities. Both DoED and IBN need to update their Procurement Plans (PP) of respective components on the Systematic Tracking of Exchanges in Procurement (STEP) online system of the World Bank, on a monthly basis preferably in the first week of English calendar. 18. Financial Management: The books of accounts in all implementing agencies (DOED, HIDCL and IBN) were found updated. DOED and HIDCL needs to improve timeliness of financial reports. The outstanding first trimester report of HIDCL for FY 2018/19 is expected by March 30, 2019. KEL, HIDCL, DOED and IBN’s audit report for FY 2017/18 were received with unqualified opinion. 19. The Project has incurred total expenditures of NPR 245.76 million (12.97% of the approved budget) up to the review date (February 10, 2019) for FY 2018/19. Low expenditure rate is resulting from contract implementation delays of KAHEP. KEL’s claim of USD 846,592.84 is yet to be paid by HIDCL. In case of IBN and DOED, no major activities have been initiated except procurement of goods (vehicles and computers). The budget for FY 2018/19 is considered adequate. 20. Total disbursement for the Project as of February 28, 2019 is SDR 12.07 mil (USD 9.73 mil.), Credit SDR 6.32 mil and Grant SDR 0.56 mil, which is around 33.44% of the total commitment of SDR 30.1 mil (USD 46 mil). This includes initial deposit to HIDCL under Credit of USD 1.2 mil and to DOED and IBN under Grant of USD 0.2 mil and 0.4 mil respectively. Based on overall performance, FM performance rating has been retained as “Moderately Satisfactory”. NEXT STEPS 21. The next implementation support review is planned for July/August 2019. Annexes: Annex 1: List of Officials met Annex 2: Agreed action plan Annex 3: Updated Results framework 4 Annex 1 List of Officials Met Ministry of Finance Dr. Narayan Dhakal, Under Secretary, IECCD Ministry of Energy, Water Resources and Irrigation Mr. Dinesh Kumar Ghimire, Secretary Department of Electricity Development Mr. Madhu Prasad Bhetwal, Director General Mr. Sandip Kumar Dev, Deputy Director General Kabeli Energy Limited Mr. Sher Singh Bhat, Chief Executive Officer Dr. Gyanesh K Shukla, Interim Environment Manager for KAECDU Mr. Ravi Gautam, Project Manager Mr. Homyoti Adhikari, Environment, Social, Health and Safety Manager Butwal Power Company Limited (BPC) Mr. Pratik Pradhan, Vice President Mr. Uttar Kumar Shrestha, Chief Executive Officer Fichtner Mr. Sebastian Palt, Team Leader Mr. Krishan Prasad Dahal, Engineer Infraco Asia Mr. Ian McAlister, Director (Project and Operations) Tata Consulting Engineers Ltd Mr. Adityanath Jha, Project Planner i Annex 2 Agreed Action Plan Actions By Due Date KAHEP Component Technical 1. Termination of contract with present Civil/HM Contractor: Kabeli Energy Limited • Get KEL stakeholders’ consent (KEL BoD consent on 20-Jan-19) • Completed • Get Lenders’ consent (consent request letters sent on 17-Feb-19) • March 20, 2019 (completed) • Send Letter of Termination • March 21, 2019 (completed) • Draw Performance and Advance Payment Guarantees • April 3, 2019 2 Request for extension of IDA loan draw down period from MOF • April 30, 2019 3. Procurement of a new Nepalese consultant (OE) strengthened by an Kabeli Energy Limited experienced international Project Advisory Engineer (AE) for project Owner’s Engineer services • OE proposal submission • Completed • OE contract negotiation and award • April 8, 2019 • AE proposal submissions • Completed • AE contract negotiation and award • April 15, 2019 4. Procurement of a new contractor(s) for project civil/HM works Kabeli Energy Limited (to be done primarily by new OE): • OE issue original tender documents to prospective tenderers • Completed • OE/AE review design and already prepared tender documents • April 19, 2019 • Carry out PQ for prospective contractors • April 19, 2019 • Issue updated tender documents for civil/HM works • May 17, 2019 • Tenders submissions • May 31, 2019 • Negotiate and award new civil/HM works contracts • June 14, 2019 • Contractors mobilization • July 12, 2019 • Contractors commencement of Works • July 26, 2019 ii Annex 3 Kabeli-A Hydroelectric Project Updated Results Framework Project Development Objective (PDO): add hydropower generation capacity to supply the NEA grid through public private investment. PDO Level Unit of Baseline Cumulative Target Values* Frequency Data Source/ Responsibility Description Results Measure Methodology for Data (Indicator Core Indicators YR 1 YR 2 YR 3 YR 4 YR5 Collection Definition) Indicator X One time KEL, KEL Actual One: MW 0 0 0 0 0 37.6 by project Contractors installed Generation completion capacity capacity commissioned commissioned under the Project INTERMEDIATE Intermediate Result (Component 1): Intermediate Trimester MOF MOF, Financing as Result USD 0 19 38 58 72 102 HIDCL HIDCL needed to indicator Million or as KEL KEL complete the One: Public needed KAHEP private with financing actual mobilized cost Intermediate % 0 (a) 0 (a) 10 (a) 40 (a) 80 (a) 100 Trimester KEL, KEL Result completion (b) 0 (b) 10 (b) 40 (b) 80 (b) 100 Contractors indicator two: of work (c) 0 (c) 0 (c) 20 (c) 70 (c) 100 Progress in volume construction of (a) dam, (b) tunnels & (c) powerhouse Intermediate N/A No signed effective effective effective effective Annually Independent KEL Result agreement Consultant indicator Three: Signing of HIDCL iii Consortium Agreement Intermediate Result (Component 2): Intermediate N/A No Under Draft Adopted Semi- DOED MOE Result Preparation completed by the Annually indicator GON One: Guidelines for CIA Intermediate N/A No Under Draft Adopted Semi- DOED MOE Result Preparation completed by the Annually indicator GON Two: Guideline for Resettlement Intermediate Result (Component 3): Intermediate N/A 0 0 1 2 3 3 Annual IBN IBN Result indicator One: Number of PDA signed with private hydropower developer (cumulative) Note: Given the physical properties of electricity, attribution to a specific project, such as KAHEP, of developmental outcomes associated with electricity is not possible *Target values should be entered for the years data will be available, not necessarily annually. iv