Arun access road project
   Report No: ; Type: Report/Evaluation Memorandum ; Country: Nepal; Region: South Asia; Sector: Other Transportation; Major Sector:
                                                 Transportation; ProjectID: P010331


 The Status of Implementation at Credit Cancellation Note (SICCN) for the Nepal Arun III Access Road Project
(Credit 2029-NEP, approved in FY89) was prepared by the South Asia Regional Office and reviewed by the
Operations Evaluation Department (OED). The Credit, in the amount of US$32.8 million equivalent, was approved
by the Board on May 30, 1989, and canceled on July 31, 1995. No disbursements were made from the Credit.

The main objectives of the project were to: (i) provide road access to the proposed Arun III hydroelectric dam
construction site; (ii) strengthen the administrative capacity of the Government to administer resettlement and
environmental programs; and (iii) reduce transport costs in the area of the proposed dam. In support of these
objectives, the project comprised: (a) a 192 km gravel road to the dam construction site; (b) a road maintenance
depot to maintain the new road; (c) resettlement of the population affected by the construction of the road; and (d)
consultant services for construction supervision, training of roads personnel and preparation and supervision of the
resettlement plan. The road project was canceled six years after Board approval, following IDA'S decision not to
support the Arun III Hydroelectric Project in view of the findings of the Inspection Panel in 1995.

The original rationale for the project was to proceed with the construction of the access road so that it would be
completed by the time construction began on the hydroelectric project. Bids for road construction were opened two
weeks after Bank approval of the project, but were subsequently rejected because of the high cost of the two bids
received. A year later, the Government decided to combine civil works for the access road and for the hydroelectric
scheme in one contract, since the advantage of having a separate road project had been lost. The alignment of the
road was completely changed to shorten the construction times, in line with the Arun III construction schedule.
These changes were made at the cost of failing to meet the project objective to reduce transport costs for people in
the area. The Credit was kept in abeyance in the expectation that the resources would be used to fund the advance
payment for the civil works of the combined project, but was eventually canceled after the Bank decided not to
proceed with the Arun III Project.

The timing of the road project did not take into consideration many of the risks associated with the Arun III Project,
including possible delays in construction of the hydroelectric dam (actual appraisal of the project was three years
later than estimated). However, there was clearly a high risk of delays, given that key measures, such as engineering
studies for the dam, the treaty for the sale of electricity to India and the financing for Arun III, had not been
completed or agreed at the time of project approval, and local institutional capacity needed to be substantially
strengthened. If approval of the project had been delayed by two weeks, after the bid opening, the high cost of the
bids and apparent risks of the project would have been more apparent, and might have resulted in quite a different
project design and timing. As it was, project implementation was held in abeyance for six years. Furthermore, at the
time of Board presentation, the Government had not agreed upon and approved an adequate resettlement plan for
those affected by the construction of the road, which was directly against Bank policies and Operational Directives
in effect at the time. After approval of the project, the Government proceeded to acquire land for the road and,
although most families still occupy the land, they remain without title. In view of the above deficiencies, OED rates
the Bank's performance as unsatisfactory.

The project demonstrates the risk of early and independent approval of the early phases of large projects before the
entire project framework and design are agreed and finalized. The negative impact on affected families in the area
demonstrates the importance of compliance with the Bank Group's current resettlement policy requiring the
adoption of adequate mitigation measures before land acquisition begins. The project also demonstrates the
advantages of firming up project cost estimates by withholding Board presentation until major procurement package
bids are opened, thereby reducing uncertainty over project costs and financing needs.

The SICCN has made a complete evaluation of the project.