Report and Recommendation of the President to the Board of Directors

Sri Lanka Project Number: 39399 March 2014

Proposed Loan for Additional Financing and Administration of Grant

for Additional Financing

Nepal: South Asia Tourism Infrastructure Development Project This document is being disclosed to the public prior to Board consideration in accordance with ADB’s Public Communications Policy 2011. Subject to any revisions required following Board consideration, this document is deemed final.

CURRENCY EQUIVALENTS (as of 31 January 2014)

Currency unit – Nepalese rupee/s (NRe/NRs)

NRe1.00 = $0.01011 $1.00 = NRs98.89533

ABBREVIATIONS ACEF – Asian Clean Energy Fund ADB – Asian Development Bank CAAN

CPTS – –

Civil Aviation Authority of Nepal clean public transport services

GBA – Gautam Buddha Airport IEE – initial environmental examination LDT

O&M TIA

– – –

Lumbini Development Trust operation and maintenance Tribhuvan International Airport

NOTES

(i) The fiscal year (FY) of the Government of Nepal and its agencies ends on 15 July. FY2014 ends on 15 July 2014.

(ii) In this report, “$” refers to US dollars.

Vice-President W. Zhang, Operations 1 Director General J. Miranda, South Asia Department (SARD) Director K. Yokoyama, Nepal Resident Mission (NRM), SARD Team leader G. Gewali, Senior Project Officer, NRM, SARD Team members Y. A. Kim, Counsel, Office of the General Counsel

D.K. Lee, Principal Transport Specialist, SARD N. Pradhan, Project Officer, NRM, SARD D. Singh, Senior Environment Officer, NRM, SARD S. Subba, Senior Gender and Social Dev. Officer, NRM, SARD L. Subedi, Senior Social Safeguard Officer, NRM, SARD K. Tamaki, Senior Urban Development Specialist, SARD Peer reviewer D. Margornsztern, Urban Development Specialist (Transport), Central

and West Asia Department

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page

PROJECT AT A GLANCE

I. THE PROPOSAL 1

II. The Project 1

A. Rationale 1 B. Impact and Outcome 4 C. Outputs 4 D. Investment and Financing Plans 4 E. Implementation Arrangements 6

III. Due diligence 7

A. Technical 7 B. Economic and Financial 7 C. Governance 7 D. Poverty and Social 8 E. Safeguards 9 F. Risks and Mitigating Measures 10

IV. ASSURANCES AND CONDITIONS 10

V. RECOMMENDATION 10

REVISED DESIGN AND MONITORING FRAMEWORK (DMF) 11

LIST OF LINKED DOCUMENTS 16

PROJECT AT A GLANCE

1. Project Name: South Asia Tourism Infrastructure Development Project- Additional Financing 2. Project Number: 39399-034 3. Country: Nepal 4. Department/Division: South Asia Department/Nepal Resident Mission 5. Sector Classification:

Sectors Primary Subsectors Transport and information and communication technology

√ Air Transport

Transport and information and communication technology

Road Transport

6. Thematic Classification: Themes Primary Subthemes Economic growth √ Widening access to markets and

economic opportunities Environmental sustainability Urban environmental improvement

Regional Cooperation and Integration Other regional public goods

Capacity Development Institutional development

6a. Climate Change Impact Adaptation Medium Mitigation Medium

6b. Gender Mainstreaming Gender equity theme (GEN) Effective gender mainstreaming (EGM) Some gender elements (SGE) √ No gender elements (NGE)

7. Targeting Classification:

General Intervention

Targeted Intervention Geographic

dimensions of inclusive growth

Millennium development

goals

Income poverty at household

level √

8. Location Impact: National Medium

Regional High Urban Low

9. Project Risk Categorization: Low

10. Safeguards Categorization: Environment B Involuntary resettlement B Indigenous peoples C

11. ADB Financing: Sovereign/Nonsovereign Modality Source Amount ($ Million) Sovereign Project loan Asian Development Fund 30.0

Total 30.0

12. Cofinancing: Financier Category Amount ($ Million) Administration Type

Asian Clean Energy Fund Official –Grant 3.0 Full

Total 3.0

13. Counterpart Financing: Source Amount ($ Million) Government 17.71

Total 17.71

14. Aid Effectiveness: Parallel project implementation unit No Program-based approach No

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on a proposed loan to Nepal for the additional financing of the South Asia Tourism Infrastructure Development Project.1 The report also describes proposed administration of a grant to be provided by the Asian Clean Energy Fund (ACEF) under the Clean Energy Financing Partnership Facility,2 for the additional financing of the South Asia Tourism Infrastructure Development Project, and if the Board approves the proposed loan, I, acting under the authority delegated to me by the Board, approve the administration of the grant for the additional financing. 2. The additional financing will support restructuring of the Nepal portion of the project to meet cost overrun as a result of price escalation and a change in scope of the Gautam Buddha Airport (GBA) from the originally designed regional international airport to a full international airport and safety improvements to provide unconstrained air connectivity for international tourists visiting the world heritage site at Lumbini. This is considered critical to achieving the objective of the original project, which was to develop Lumbini, the birth place of Lord Buddha, as an attractive cultural tourism destination and to upgrade GBA to link it with international tourist circuits in South Asia. Expanding the project scope—from an upgrade to regional international airport standard to a full international standard—will also enable GBA to serve as an alternate and backup international air transport point for Nepal in the event that poor weather conditions or a natural calamity shuts down Tribhuvan International Airport (TIA). TIA currently is the only airport in the country that can accommodate full-size aircrafts. Restructuring and completing the delayed project is expected to provide benefits that will outweigh the costs, and is preferred over downsizing or cancelling it by ADB as the government has accorded it a high priority.

II. THE PROJECT

A. Rationale

3. The South Asia Tourism Infrastructure Development Project was approved by the Board of the Asian Development Bank (ADB) on 16 November 2009 to develop and improve tourism-related infrastructure in Bangladesh, India, and Nepal.3 It aimed to support a future pattern of tourism in South Asia and envisioned the development of international circuits of interlinked nature and cultural tourism sites across the region. The project’s intended impact was the establishment of an integrated pattern for the future growth of tourism in South Asia that would enhance the sector’s contribution to sustainable and inclusive economic growth. 4. The intended outcome in Nepal was the further development of Lumbini as a tourism destination, building on its natural attraction for the world’s Buddhists and many other cultural tourists and on its inclusion on the World Heritage List of the United Nations Educational, Scientific and Cultural Organization.4 The key output designed to achieve this outcome was the upgrading of GBA, which is 20 kilometers east of Lumbini and could accommodate only

1 The design and monitoring framework is in Appendix 1.

2 Established by the Government of Japan.

3 ADB. 2009. Report and Recommendation of the President to the Board of Directors: Proposed Loans, Asian

Development Fund Grant, and Administration of Loan to the People's Republic of Bangladesh, India, and Nepal: South Asia Tourism Infrastructure Development Project. Manila (ADF Loan 2580 $12 million to Bangladesh; OCR Loan 2578 $20 million to India; and ADF Loan 2579 $12.75 million and Grant 0179 $12.75 million to Nepal).

4 The World Heritage List includes 981 sites that are considered to form part of humankind’s cultural and natural

heritage and to have outstanding universal value.

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domestic flights, so that it could provide direct air connectivity to Lumbini for international tourists currently travelling via TIA. Due to the project’s delay, the lack of direct international air link continues to keep tourism growth in the Lumbini area from reaching its full potential. The runway and apron at GBA do not meet the standards for international flights by even medium-sized jet aircrafts, and the airport also lacks facilities for processing international passengers.5 In 2012, most of the 795,800 recorded visitors to Lumbini traveled by road from points in Nepal and from India. International visitors who travel by air must be routed through TIA to connect from international flights to domestic flights to GBA.6 5. Upgrading GBA for access by full-size international aircraft will enable airlines to establish direct air services from countries that generate the majority of visitors to Lumbini. Currently, in order of visitor numbers, people from India, Sri Lanka, Thailand, and Myanmar have visited Lumbini. The expansion could also increase tourism from more distant sources, such as the People’s Republic of China, Japan, and the Republic of Korea.7 Direct international air routes to GBA could also attract foreign tourists who visit three other cultural sites in India on what is called Footsteps of Lord Buddha tourist circuits but who now must travel by road or a roundabout air route through TIA. 8 With the GBA upgrade, annual international annual passenger traffic through GBA is forecast to reach 759,639 in 2030, including 281,806 visitors to Lumbini.9 Although this was not considered in the original project design, the government now sees GBA upgrade as critically needed since it will provide Nepal with a second international air access point in an emergency and prepare for the eventual overloading of capacity at TIA (para.

2). 10

The original project also included steps to enhance Lumbini as a tourist destination by

improving the environment and services for visitors, fostering participation by local communities in livelihood opportunities tourism growth will offer, and strengthening the project management capacity of related government agencies.11 These activities will be completed and augmented alongside the enhanced GBA upgrade under the proposed additional financing (para. 8). 6. The original financing agreement for the Nepal portion of the project provided a loan and a grant from ADB’s Special Funds resources, each equivalent to $12.75 million. It was signed on 25 May 2010 and declared effective on 3 September 2010. In addition, the OPEC Fund for International Development agreed to cofinance the project through a loan of $15.0 million that was to be administered by ADB but has not yet been disbursed due to project delay. 7. The costs of upgrading GBA have risen 38% over the original project appraisal estimates in 2008 mainly due to price escalation during the project delay for key construction materials and equipment. Based on the detailed engineering design in 2013, the base cost for

5 The originally designed upgrade was to enable access to GBA by medium-size aircrafts such as Boeing 757 and

Airbus 300 designated as Code 2 by the International Civil Aviation Organization. 6 Travelers from within Nepal make up 68% of visitors to Lumbini. The most numerous foreign visitors are from India

(120,584 in 2012). Many visitors from India now travel by air to points near Nepal, such as Kushinagar, from which they are then transported by tour buses the 150 kilometers to Lumbini.

7 International tourism is growing rapidly in Lumbini. The number of foreign tourists excluding those from India rose

from 39,800 in 2005 to 136,000 in 2012, or at an annual growth rate of 19%. The main countries of origin in 2012 were India (47.0%), Sri Lanka (20.5%), Thailand (11.1%), and Myanmar (6.9%). Others included the People’s Republic of China (3.4%), the Republic of Korea (2.0%), Viet Nam (1.4%), the Netherlands (0.8%), and Japan (0.7%).

8 The Footsteps of Lord Buddha circuit consists of Lumbin in Nepal, and Bodhgaya, Sarnath, and Kushinagar in

India. 9 In 2012, the level of aircraft activity at GBA amounted to 4,172 annual aircraft movements, or an average of 5

flights per day, which carried a total of almost 122,000 annual domestic passengers. 10

TIA is in a high-risk zone to a major earthquake and vulnerable to liquefaction. It has also reached runway capacity saturation during daylight hours and is expected to be fully congested in 2021.

11 The related government agencies are the Lumbini Development Trust and the Civil Aviation Authority of Nepal.

3

the originally planned GBA upgrade, excluding contingency, had increased from $32.4 million in mid-2008 prices to about $44.6 million in mid-2012. The expanded scope of the upgrade will improve safety and allow the use of larger international aircrafts and unconstrained traffic growth at the airport. The scaling up of the original upgrade design will add 400 meter length to the runway and 300 meter length to the taxiway, overlay the existing 1,500 meter runway for use as a parallel taxiway, construct 15,169 square meter terminal building, improve drainage system, and install more advanced navigational aids, equipment and airport lighting for air safety.12 These are estimated to require additional 74% of the updated cost for the original scope, or 140% of the original project estimate in 2008.13 8. The additional financing will restructure the project and improve implementation as design and supervision consultant has been recruited, and procurement of civil work to up-scale GBA upgrading from the original design has been commenced. Past performance and expected improvements are summarized below:

(i) Results against expected outputs. A bid document for the main output of upgrading GBA has been completed. The bidding process for the contract has begun, with the award contingent upon ADB approval of the additional financing. A contractor has been selected to upgrade water supply and sanitation and build a new visitor center and information displays, car parks, and bus stops for the second output—improving the tourism destination environment and services in Lumbini. A consultant has been mobilized for the third output—enhance capacity, increase community participation, and improve project management.

(ii) Implementation progress. As of January 2014, with 55% of the financing period elapsed, the cumulative contract award was $3.95 million (15.5% of available loan and grant proceeds) and cumulative disbursement was $1.92 million (7.5%). Procurement of design, supervision and project management consultants and related disbursements, and contract award for construction of information center in Lumbini have contributed the progress. Upon award of the main contract for upgrading GBA, overall progress on implementation is expected to improve substantially.

(iii) Safeguard compliance. Overall, the current project is in compliance with specific assurances and environmental and social covenants stipulated in the financing agreement.

(iv) Management of risks. The main risk associated with implementation arrangement has been mitigated satisfactorily, because the project coordination unit and project management and implementation units are well established and have adequate full-time staffing. The consultant for design and supervision has been mobilized and is performing satisfactorily.

(v) Project performance rating. The current project performance is rated on track.14 The restructuring of the project will expedite the award of the main contract for upgrading GBA, and the improved disbursement will help project performance stay on track.

12

GBA needs the increased capacity to handle full-size, wide-body passenger airlines currently serving TIA. These include Code E aircrafts designated by the International Civil Aviation Organization such as Boeing 777 and Airbus A330. The design under the original project to use an existing unfinished concrete frame for the international terminal was found to be technically unfeasible.

13 The base cost for upgrading of GBA, excluding contingency, was estimated $32.4 million at appraisal period (mid-2008 prices), and updated in mid-2012 prices to cost about $44.6 million.

14 A project with a total rating score of 0.90 is on track. The five indicators have equal weight and relate to technical, procurement, disbursement, financial management, and safeguards performance.

4

9. ADB’s administration of a grant to be provided by ACEF for the additional financing will support the introduction of clean public transport services (CPTS) using electric vehicles for tourists and local residents in Lumbini area. This will help reduce noise and pollution from poorly maintained diesel and gasoline engine buses and add value to tourism experience.15 10. Restructuring and completing the South Asia Tourism Infrastructure Development Project offers more benefits than scaling it down or cancelling it. 16 The restructuring is necessary to achieve original project’s intended impact and outcome. The ACEF-financed CPTS will complement the project’s other elements and enhance its overall tourism development objectives. The project remains technically feasible, economically viable, and financially sound. It is accorded high priority by the government and, consistent with priorities in the civil aviation and tourism sectors outlined in the country’s new Three Year Plan (2014-2016). 17 The proposed additional financing supports the strategic objectives of improving connectivity, which is established in ADB's Nepal country partnership strategy, 2013–2017 and is included in the country operations business plan, 2014–2016.18 The project meets eligibility criteria for additional financing.19 B. Impact and Outcome

11. The impact will be the enhanced contribution of tourism to sustainable and inclusive growth in Nepal. The outcome will be nature and culture-based tourism destinations improved. An outcome indicator will be added on tourists’ public transport service usage, as a result of the ACEF-financed CPTS. C. Outputs

12. As in the original project, the outputs will be (i) enhanced connectivity to and from Lumbini; (ii) improved community services and tourism facilities; and (iii) improved capacity in tourism development and project management. As a result of the scaling up of the GBA component and the additional financing, the performance indicators for the first two outputs have been revised. To achieve enhanced connectivity, GBA will be upgraded to operate as an international airport by 2017, rather than regional international airport in 2015. To improve the destination, the scaled-up project will aim to put electric vehicle-based CPTS for tourists and local people in Lumbini into operation by 2017, in addition to improved destination environment and infrastructure. D. Investment and Financing Plans 13. The project is estimated to cost $97.2 million with the additional financing (Table 1). 14. The government has requested a loan in various currencies equivalent to SDR19,487,000 ($30.0 million equivalent) from ADB’s Special Funds resources to help finance the project. The loan will have a 32-year term, including a grace period of 8 years, an interest

15

The CPTS has been designed in line with the Lumbini Master Plan prepared by the United Nations Educational, Social and Cultural Organization.

16 Scaling the project down to compensate for the cost overrun would produce an incomplete investment that fails to provide safety and capacity improvements necessary to achieve the original development objectives.

17 Government of Nepal. 2013. Three Year Plan (2014-2016). Kathmandu

18 ADB. 2013. Country Partnership Strategy: Nepal, 2013–2017. Manila; ADB. 2013. Country Operations Business Plan: Nepal, 2014–2016. Manila.

19 ADB. 2011. Additional Financing. Operations Manual. OM H5/BP. Manila.

5

rate of 1.0% per annum during the grace period and 1.5% per annum thereafter, and such other terms and conditions set forth in the draft loan and project agreements. 15. Grant cofinancing equivalent to $3.0 million will be provided by the ACEF under the Clean Energy Financing Partnership Facility, and administered by ADB. 20 16. The financing plan, which reflects the additional financing, is in Table 2. The detailed cost estimates by expenditure category and detailed cost estimates by financier are in the project administration manual.21

Table 1: Project Investment Plan ($ million)

Item Current Amount

a

Additional Financing

b Total

A. Base Costc

1. Connectivity infrastructure (airport) 32.36 45.27 77.63

2. Destination improvement, including clean public transport services (Lumbini site) 2.25 3.06 5.31

3. Support for capacity development, community participation, and project management 4.60 0.00 4.60

Subtotal (A) 39.21 48.33 87.54

B. Contingenciesd

6.57 1.88 8.45

C. Financing Charges During Implementatione 0.72 0.50 1.22

Total (A+B+C) 46.50 50.71 97.21 a Refers to the original amount. Includes taxes and duties of $3.15 million to be financed from government

resources. b Includes taxes and duties of $5.89 million to be financed from government resources.

c In mid-2008 prices for current amount, and in mid-2012 prices for additional financing.

d For current amount, physical contingencies computed at 10% and price contingencies computed at 0.8% on

foreign exchange costs and 7.0% on local currency costs. For additional financing, physical contingencies computed at 5% of base cost and price contingencies computed at 0.8% on foreign exchange costs and at 5.0% on local currency costs. Includes provision for potential exchange rate fluctuation under the assumption of a purchasing power parity exchange rate.

e Includes interest charges. Interest during construction has been computed at 1.0% per annum during the grace

period of 8 years. Source: Asian Development Bank estimates.

Table 2: Financing Plan

Currenta Additional Financing Total

Source Amount

($ million) Share of Total (%)

Amount ($ million)

Share of Total (%)

Amount ($ million)

Share of Total (%)

Asian Development Bank 25.50 54.84 30.00 59.15 b

55.50 57.09 b

Special Funds resources (loan) 12.75 27.42 30.00 59.15 42.75 43.98

Special Funds resources (grant) 12.75 27.42 0.00 0.00 12.75 13.12

OFID 15.00 32.26 0.00 0.00 15.00 15.43

ACEF (grant) 0.00 0.00 3.00 5.92 3.00 3.06

Government 6.00 12.90 17.71c

34.93 23.71 24.39

Total 46.50 100.00 50.71 100.00 97.21 100.00

ACEF = Asian Clean Energy Fund, OFID = OPEC Fund for International Development. a Refers to the original amount.

20

The Government of Japan approved the grant on 20 December 2013. 21

Project Administration Manual (accessible from the list of linked documents in Appendix 2).

6

b The current country limit for Nepal is 80%.

c Includes $0.06 million government contribution as tax and duties for ACEF.

Source: Asian Development Bank estimates

E. Implementation Arrangements

17. The implementation arrangements are summarized in Table 3 and described in detail in the project administration manual (footnote 20). 18. The implementation arrangements for the additional financing will remain unchanged from those for the original project.22

Table 3: Implementation Arrangements Aspects Arrangements

Implementation period March 2014 to June 2017

Estimated completion date 30 June 2017

Management

(i) Oversight body Project Steering Committee: Secretary, MOCTCA (chair); Representative, Ministry of Finance; Project Director, PMIU for GBA upgrading; Project Director, PMIU for Lumbini improvement; and Director General, CAAN (members); and project coordinator (member secretary).

(ii) Executing agency MOCTCA

(iii) Key implementing agencies CAAN and LDT

(iv) Implementation unit Kathmandu and Lumbini, 17 staff

Procurement International competitive bidding 4 contracts $87.9 million

National competitive bidding 2 contracts $0.7 million

Consulting services Project management consultant Design and supervision consultant (through extension of the existing contracts, which were procured following QCBS)

90 person-months, national 36 person-months, international; and 78 person-months, national

$0.12 $0.8 million

Consultant for CPTS, financed by ACEF, administered by ADB

i. QCBS ii. Single source selection

(UNESCO consultant from the University of Tokyo team)

2 person-months, international; and 9 person-months, national 1 person-month, international

$0.2 million

Advance contracting Goods and works, and consulting services.

Disbursement The loan and grant proceeds will be disbursed in accordance with ADB's Loan Disbursement Handbook (2012, as amended from time to time) and detailed arrangements agreed upon between the government and ADB.

ADB = Asian Development Bank, ACEF = Asia Clean Energy Fund, CAAN = Civil Aviation Authority of Nepal, CPTS = Clean Public Transport Services, GBA = Gautam Buddha Airport, LDT = Lumbini Development Trust, MOCTCA = Ministry of Culture, Tourism and Civil Aviation, PMIU = Project Management and Implementation Unit, QCBS = quality- and cost-based selection, UNESCO = United Nations Educational, Scientific and Cultural Organization.

22

The completion date and closing date will be extended to coincide with the additional financing.

7

Aspects Arrangements Source: Ministry of Culture, Tourism and Civil Aviation.

III. DUE DILIGENCE

A. Technical

19. The project will use proven technology and is technically viable and sound. The engineering design is based on site condition surveys and field investigations. The improvement works are designed for optimal economy and construction efficiency in accord with applicable international design standards. Proven technology and standard materials that are compatible with local conditions will be used in the construction. To enhance resilience in severe climatic events and threats, hydrological hazards have been given local consideration. This includes an elevated design for the new runway and taxiway and provision for adequate drainage. B. Economic and Financial

20. The economic assessment was carried out in accordance with ADB's Guidelines for the Economic Analysis of Projects.23 The overall project, including the revisions under the additional financing for cost escalation and the expanded GBA and destination upgrades was examined. The economic costs considered included all investment costs and airport operation and maintenance (O&M). The estimated economic benefits from the project included airport revenues from aircraft services, passenger fees, and commercial activities at GBA; as well as the benefits from increased tourist spending in Lumbini. The economic rate of return for the entire project with the additional financing was estimated to be 16.3%, which is higher than the opportunity cost of capital at 12% and indicates sufficient return and economic viability. The results of sensitivity analysis, which produced returns of 13.5% - 16.3%, showed the project’s economic viability to be robust against downside risks. These included a 10% cost overrun, a 10% decline in expected benefits, 10% higher O&M costs, and a delay in benefits of 1 year. 21. The financial analysis assessed whether revenues from the GBA improvements would cover the capital and operating costs of the upgrade. The estimated financial rate of return of the overall project, including the additional financing, was estimated at 12.9%. The analysis was restricted to the viability of GBA expansion. It used the most likely traffic forecast. The estimated financial rate of return is higher than the 4.6% weighted average cost of capital, indicating an adequate financial return. The return remained satisfactory and in a range of 10.8% - 12.9% under sensitivity analysis. The scenarios tested included a 10% capital cost overrun, a 10% O&M cost overrun, a 10% decline in projected revenue from international visitors, and a 1-year implementation delay. The financial sustainability assessment indicates that the project will generate sufficient liquid cash resources to meet its O&M costs and debt service obligations. C. Governance

22. Policy, legal, and institutional capacity. The Civil Aviation Authority of Nepal (CAAN), the implementing agency for GBA upgrading, was established by the Civil Aviation of Nepal Act, 1996 as an autonomous state authority. It is supervised by the Ministry of Culture, Tourism and Civil Aviation and responsible for administering and regulating civil aviation in Nepal, for operating both domestic and international airports, air traffic, and air navigation systems. The Lumbini Development Trust (LDT), the implementing agency for tourist destination improvement

23

ADB. 1997. Guidelines for the Economic Analysis of Projects. Manila.

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activities, was formed by the Lumbini Development Trust Act, 1985 to restore the Lumbini Sacred Garden under the Lumbini Master Plan. The CAAN and the LDT have sufficient capacity, past experience, and institutional strength to implement the overall project. Both are being supported under the original project by consultant services for detailed engineering design, preparation of bidding documents, and identifying and monitoring safeguards requirements. 23. Financial management. The financial management assessment of the CAAN was updated in 2013. The update covered funds-flow arrangements, governance, staffing, budgeting, accounting and financial reporting systems, internal control procedures, financial information systems, and internal and external auditing arrangements. The CAAN will prepare a business plan, and design, install, and operate a financial management reporting system that will link GBA with the CAAN corporate financial management information system in Kathmandu. The CAAN and the LDT will maintain separate project records and accounts to identify the financing resources received and expenditures made for the project, ensuring an adequate audit trail. They will have the annual financial statements audited by an auditor acceptable to ADB in accordance with auditing standards acceptable to ADB. 24. Operation and maintenance. The CAAN’s Airport Operation Directorate provides adequate maintenance services for TIA and 46 domestic airports, including GBA. The directorate comprises an aerodrome engineering department, an electromechanical department, and fire and rescue department. With only 85 staff in the CAAN, it relies on external local contractors for several maintenance functions including some major activities for maintaining runways, taxiways, and aprons. The CAAN plans to establish a separate airport operations division for the upgraded GBA with aerodrome, electromechanical, and fire and rescue units that will have 10 fulltime maintenance workers. Additional or more specialized maintenance staff will be seconded from the CAAN when required. 25. Procurement and anticorruption. All procurement of goods and works will be undertaken in accordance with ADB’s Procurement Guidelines (2013, as amended from time to time). All consultants will be recruited according to ADB’s Guidelines on the Use of Consultants (2013, as amended from time to time). The government’s procurement environment is improving. The government is strengthening its effort to fight corruption. Nepal has legislation with anticorruption provisions in force, including the Promoting Market Competition Act, 2006; Right to Information Act, 2007; Special Court Act, 2002 (amended in 2007); and Anti-Money Laundering Act, 2008. 26. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the government, the CAAN and the LDT. The specific policy requirements and supplementary measures are described in the project administration manual (footnote 20). D. Poverty and Social

27. The poverty and social analysis has been updated, and the overall project is classified as some gender elements. Women and men will benefit from the project through improved opportunities for income generation and employment, directly by participating in the tourism activities and indirectly through increased employment to be generated by the economic growth spurred by increased tourist inflows. The improved international connectivity through the GBA upgrade and the better tourist infrastructure and amenities in Lumbini will also result in general benefits to local communities, including women. An increase in tourist arrivals and spending will expand the market for local handicrafts and community-based tourism, which will also benefit

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women. The CAAN will give special attention to constructing infrastructure in the GBA terminal that caters to the needs of women, children, the disabled, and the elderly. E. Safeguards

1. Involuntary Resettlement and Indigenous Peoples 28. Land acquisition and resettlement. No additional land or asset acquisition will be required under the additional financing. The additional financing is classified as category B for involuntary resettlement safeguards, since compensation has already been completed for 95% of those affected by the upgrading of GBA. After due diligence, the original resettlement plan was revised, agreed to by the CAAN and disclosed on 18 November 2013. It addresses the outstanding activities from the original plan and is in line with Nepal’s laws and policies and ADB’s Safeguard Policy Statement (2009). The original project was classified as category A. The construction of the 3,000 meter GBA runway was expected to affect 590 agricultural and residential land plots (92.89 hectares) belonging to 312 households, as well as some public and private infrastructure. During detailed design, the acquisition of some residential and commercial structures was avoided, but a few additional land plots (4.38 hectares) were required. The number of land plots to be acquired rose to 869. They belong to 389 households. Compensation for 5% of these plots has yet to be settled. They are associated with 33 households of which 23 households cultivating 27 community-owned plots are eligible for compensation through skills development training. The remaining 16 plots are owned by 14 absentee landowners, who are in contact with the CAAN regarding compensation. The CAAN will organize income generation training, give priority to the affected people in income opportunities during construction and operation of GBA, and restore an affected village road as part of the civil works contract package during construction. 29. Impact on indigenous peoples. No impact on indigenous peoples is envisaged, and the overall project is classified as category C. If adverse impacts are identified during implementation, the CAAN and the LDT will ensure that a plan for indigenous peoples is prepared for ADB approval in accordance with the Safeguard Policy Statement before award of the related civil works contract and implemented before relevant civil works begin.

2. Environment

30. The project is classified as environment category B, and an initial environmental examination (IEE) and an environmental management plan were prepared in accordance with ADB’s Safeguard Policy Statement. Community consultations were carried out during preparation of the IEE. The IEE concluded that no significant environmental impacts can be expected from project implementation. The IEE was disclosed on 18 November 2013. However,

it has listed potential risks—change in land use, inundation of the project area by flooding,

possible occupational health and safety effects on workers during construction, and potential noise nuisance, and pollution from unmanaged solid waste disposal. The CAAN will comply with and implement the environmental management plan in the IEE by adopting proper mitigation measures to avoid, minimize, or compensate for any adverse environmental impacts. It will establish a mechanism to resolve grievances by affected people. The CAAN also prepared an environmental impact assessment report for extension of the runway to 3,000 meters, which the Ministry of Environment approved on 15 March 2011. Implementation arrangements provide for inputs by environmental specialists at the project coordination unit and project management and implementation units to implement the environmental management plan effectively, undertake monitoring, and submit reports periodically to ADB.

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F. Risks and Mitigating Measures

31. The overall risk assessment is low, and the integrated benefits and impacts are expected to outweigh costs. Major risks and mitigating measures are summarized in Table 4 and described in detail in the risk assessment and risk management plan.24

Table 4: Summary of Risks and Mitigating Measures Risks Mitigating Measures

Implementation may be delayed with changes in political situation and policies.

The PCU and PMIUs have been established with adequate staffing. The consultant for design and supervision has been mobilized and is performing satisfactorily. The engineering design and bid document for the revised project scope is complete. The bidding process is underway for the award of contract upon ADB approval of the additional financing. ADB will also mobilize additional consultants to ascertain the efficiency and quality of procurement process.

Government counterpart funding may be inadequate or delayed.

The government considers the project one of its highest priorities and will ensure allocation of the required budget. The government has already allocated NRs2 billion (equivalent to $20 million) for FY2014.

ADB = Asian Development Bank, CAAN = Civil Aviation Authority of Nepal, FY = fiscal year, NRs = Nepalese rupee, PCU = project coordination unit, PMIU = project management and implementation unit. Source: Asian Development Bank.

IV. ASSURANCES AND CONDITIONS

32. The government; the Ministry of Culture, Tourism and Civil Aviation; the CAAN; and the LDT have assured ADB that implementation of the project shall conform to all applicable ADB policies including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the project administration manual and loan documents. 33. The government; the Ministry of Culture, Tourism and Civil Aviation; the CAAN; and the LDT have agreed with ADB on certain covenants for the project, which are set forth in the loan, grant, and project agreement.

V. RECOMMENDATION

34. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the loan in various currencies equivalent to SDR19,487,000 to Nepal for the additional financing of the South Asia Tourism Infrastructure Development Project, from ADB’s Special Funds resources, with an interest charge at the rate of 1.0% per annum during the grace period and 1.5% per annum thereafter; for a term of 32 years, including a grace period of 8 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft loan and project agreements presented to the Board.

Takehiko Nakao President

4 March 2014

24

Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).

Appendix 1 11

REVISED DESIGN AND MONITORING FRAMEWORK (DMF)1

Design Summary Performance Targets and Indicators with

Baselines Data Sources and

Reporting Mechanisms Assumptions and

Risks

Impact

Current project Current project Current project For all indicators

Current project

Enhanced contribution of tourism to sustainable and inclusive growth in the country

(i) A 30% increase in the aggregate contribution of tourism to GDP by 2020.

(ii) A 12% increase in total employment from additional tourism-related jobs by 2020 from 3% total employment in 2009.

Tourism statistics of Nepal World Tourism Organization statistics World Travel and Tourism Council’s Annual Tourism Travel and Economic Research Country Socioeconomic Indicators

Assumption

The country remains committed to tourism development in a sustainable and inclusive manner Risks

Political uncertainty and inadequate security Economic upheavals

Overall project

Unchanged

Overall project

(i) Tourism’s aggregate contribution to GDP increases by 35% by 2020 (from 3.6% in 2009).

(ii) Unchanged

Overall project

Unchanged

Overall Project Assumptions

Unchanged Risks

Unchanged

Outcome

Current project Current project Current project For all indicators

Current project

Nature - and culture-based tourism destinations of country importance (i) improved connectivity, (ii) better quality environment and visitors services, (iii) enhanced natural and cultural heritage, and (iv) stronger linkages with communities.

By 3 to 5 years after project completion: (i) Connectivity to Lumbini improved – Tourist arrivals increased by 25% – Number of trips to Lumbini increased by 20%

(ii) Lumbini destination improved – Tourist’s average daily expenditure

increased by 10% – International tourists’ average length of

stay increased by 1 day (iii) Lumbini master plan is guiding

management; sustainable heritage and tourism action plans being implemented; about 100 staff trained in heritage and tourism asset management by the end of the project

(iv) Around 400 individuals spread over 10 communities have undergone training on heritage management and tourism-related skills by end of the project

(v) About 20,000 jobs created in the tourism industry and other industries related to tourism, and at least 2,000 livelihoods created benefiting local people living around the sites

Tourism reports and statistics of Nepal World Tourism Organization statistics World Travel and Tourism Council’s Annual Tourism Travel and Economic Research Proceedings of the task force meetings Project completion reports

Risk

Delays in implementation of institutional financial and operation improvement action plans.

Overall project

Nature-and culture-based

Overall project

(i) a. International tourist arrivals in Lumbini increased by 100% in 2017 from 82,000 in

Overall project

Unchanged

Overall project Risk

Global economic

1 Some changes in the DMF were reflected to align with the current DMF guidelines.

12

Design Summary Performance Targets and Indicators with

Baselines Data Sources and

Reporting Mechanisms Assumptions and

Risks

tourism destinations improved

2009 b. Number of trips to Lumbini increased by 20%

(ii) a. Average daily expenditure by international tourists increased by 50% in 2017 from $24 in 2009 b. Average international tourist length of

stay increased by 1.6 days in 2017, from 1 day in 2009

(iii) a. About 20,000 jobs created in the tourism and related industries by 2017 b. At least 2,000 livelihoods created

benefiting local people living around the site

(iv) Tourists’ public transport service usage (i.e., ridership) increased by 100%.

crisis adversely affect domestic and international tourism

Outputs Current project

Current project

Current project For all indicators

1. Enhanced connectivity

By the end of the project: GBA upgraded to a regional international airport, resulting in enhanced access to Lumbini

Project quarterly progress reports ADB review mission reports Proceedings of task force meetings Project completion report Reports of national tourism organizations Reports of sector agencies, e.g., CAAN reports, and reports of national public works departments

Overall project

Enhanced connectivity to and from Lumbini

Overall project

GBA upgraded to an international airport by 2017

Overall project

Unchanged

2. Improved destination

Current project Current project Current project For all indicators

Current project

By 2015, upgrading of Lumbini Development Area completed, including (i) development of car parking and bus stop and pedestrian walkway at the entry of the site, (ii) completion of the unfinished portion of the perimeter road around the site, (iii) provision of local source-based drinking water supply and toilets in several key locations, (iv) solid waste management improvements, (v) enhancement of on-site interpretation displays and signage, and (vi) construction of a visitor center and landscaping and pedestrian walkways around the center.

Project quarterly progress reports ADB review mission reports Proceedings of task force meetings Project completion report Reports of national tourism organizations Reports of other international agencies, e.g., UNESCO Reports of national sector agencies; e.g., Lumbini Development Trust

Assumptions

Capacities were built for sustainable protection and management of heritage tourism destinations Communities were engaged in heritage management and tourism activities Risks:

Community engagement is limited

Overall project

Improved community services and

Overall project

(i) Indicators unchanged but timeline moved to 2017

(ii) Clean public transport services for tourists

Overall project

Unchanged

Overall project

Unchanged

Appendix 1 13

Design Summary Performance Targets and Indicators with

Baselines Data Sources and

Reporting Mechanisms Assumptions and

Risks

tourism facilities inside Lumbini available starting 2017

3. Enhanced capacity, increased community participation and improved management

Current project

Current project

By 2015, capacity development : (i) 50 staff of tourism ministries, board, and departments have undergone training in tourism planning, coordination, monitoring, and marketing (ii) A marketing and promotion program has been prepared and implementation initiated under regional TA (iii) Management and master plans for Lumbini prepared and endorsed (iv) Organizational and financial management measures for the LDT developed and being implemented (v) 15 LDT staff have undergone training on planning, protecting, and managing the nature and culture-based sites, as well as world heritage site (vi) A business plan for GBA prepared with measures for sustainable operation and management of the airport, including enhanced revenue base and financial management. Staff have undergone training in airport management (vii) Stronger partnerships between communities, tourism industry, and governments at destinations established (viii) Action plan to promote subregional cooperation in tourism being implemented Fostering Community Participation: a. Community awareness raising programs

conducted on value of natural and cultural heritage and role of community in management of heritage sites, and potential benefits from heritage-based tourism to the local economy

b. Value chain analyses undertaken in each country to establish stronger linkes between tourism and local economies

c. Pilot schemes for tourism-based livelihood generation involving social mobilization and microfinance services designed and implemented

d. Tourism-related skills development activities in heritage management and hospitality-related skills among the communities around Lumbini implemented

e. Partnerships between communities, private sector, and public sector established for

Current project For all indicators

Project quarterly progress reports ADB review mission reports Proceedings of task force meetings Business plans and annual accounts of sector organizations Project completion report Reports of national tourism organizations Reports of country sector agencies

Current project Assumptions

Sector agencies remain committed to develop capacities and take necessary actions for institutional and financial improvements. Sector agencies make staff available for training. Sector agencies remain committed to involve communities and establish partnerships with them and communities are willing to engage in heritage management and tourism.

14

Design Summary Performance Targets and Indicators with

Baselines Data Sources and

Reporting Mechanisms Assumptions and

Risks

enhanced site management and viable community tourism product development

Overall project Improved capacity in tourism development and project management

Overall project

By 2017, capacity development: (i) Unchanged (ii) Moved under Activities (iii) Management and master plans for Lumbini endorsed (iv) Organizational and financial management measures for the LDT implemented (v) 15 LDT staff have undergone training on planning, protecting, and managing the nature and culture-based sites, as well as world heritage site (vi) a. Business plan for GBA completed with measures for sustainable O&M of the airport, including enhanced revenue base and financial management b. 20% of staff have undergone training in airport management (vii) Partnership agreements between communities, tourism industry, and governments at destinations signed (viii) Action plan to promote subregional cooperation in tourism implemented (ix) About 100 staff trained in heritage and tourism asset management by the end of the project (x) Around 400 individuals spread over 10 communities have undergone training on heritage management and tourism-related skills by end of the project * Fostering Community Participation indicators moved under activities.

Overall project

Unchanged

Overall project

(i) Unchanged (ii) No significant

movement of trained staff occurs.

Activities with Milestones (Overall Project) Inputs

Output 1: Enhanced connectivity to and from Lumbini

1.1 Consultants appointed by 31 August 2011 (completed) 1.2 Engineering design and tender documents prepared by 30

September 2013 (completed) 1.3 Contract awarded and construction started by 30 June 2014

(additional) 1.4 Construction completed by 30 June 2017 Output 2: Improved community services and tourism

facilities

2.1 Consultants appointed by 31 August 2011 (completed) 2.2 Detailed design for infrastructure improvements prepared by

20 February 2012 (completed) 2.3 Contract awarded and construction commenced by 30

September 2013 (completed) 2.4 Construction completed by 30 June 2016 (ongoing) 2.5 Procurement and deployment of electric vehicles by 30 June

2017 (additional) Output 3: Improved capacity in tourism development and

project management

3.1 PCU and PMIUs established by 31 October 2010 (completed) 3.2 NGOs recruited by 31 March 2014 (ongoing) 3.3 Community awareness raising programs on tourism

Loan and Grant ADB

$25.5 million (current) $30.0 million (additional) $55.5 million (overall)

Grant ACEF

$0.0 million (current) $3.0 million (additional) $3.0 million (overall) Government

$6.0 million (current) $17.71 million (additional) $23.71 million (overall) Loan OFID

$15.0 million (current) $0.0 million (additional) $15.0 million (overall)

Appendix 1 15

management commenced by 31 May 2014 3.4 Partnerships between communities, private sector, and public

sector established for community tourism by 31 December 2014

3.5 Value chain analyses undertaken by 31 May 2015 3.6 Capacity development of agencies and the community skills

training and social mobilization programs commenced by 31 May 2014 to be complete by 31 May 2015

3.7 Marketing and promotion program prepared and implemented by 31 May 2015

3.8 Pilot schemes for tourism-based livelihood programs designed and implemented by 31 December 2015

3.9 Tourism-related skills development activities around Lumbini implemented by 31 December 2015

3.10 Cultural heritage sites master plans initiated by 30 November 2014 and completed by 31 December 2016

ADB = Asian Development Bank; ACEF = Asian Clean Energy Fund; CAAN = civil aviation authority of Nepal; GBA = Gautam Buddha Airport; GDP = gross domestic product; LDT = Lumbini Development Trust; NGO = nongovernment organization; OFID = OPEC Fund for International Development; PCU = project coordination unit; PMIU = Project Management and Implementation Unit; O&M = operation and management, UNESCO = United Nations Educational, Scientific and Cultural Organization. Source: Asian Development Bank.

16 Appendix 2

LIST OF LINKED DOCUMENTS

http://www.adb.org/Documents/RRPs/?id=39399-034-3 1. Loan Agreement

2. Grant Agreement

3. Project Agreement: Civil Aviation Authority of Nepal

4. Project Agreement: Lumbini Development Trust

5. Sector Assessment (Summary): Transport, and Information and Communication Technology-Air Transport

6. Project Administration Manual

7. Summary of Project Performance

8. Contribution to the ADB Results Framework

9. Development Coordination

10. Economic and Financial Analysis

11. Country Economic Indicators

12. Summary Poverty Reduction and Social Strategy

13. Initial Environmental Examination

14. Resettlement Plan

15. Risk Assessment and Risk Management Plan

Supplementary Documents

16. Financial Sustainability Assessment

17. Financial Management Assessment

18. Peace-Building

19. Disaster and Climate Change Risks Screening

20. Lumbini Clean Public Transport Services Profile