Status: Lending Sector: Banking (100%) Theme: State enterprise/bank restructuring and privatization (P)

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1 Section I - Basic Information Date ISDS Updated: 12/19/2003 A. Basic Project Data (from PDS) I.A.1. Project Statistics Country: NEPAL Integrated Safeguards Data Sheet (Negotiation Stage) Project ID: P Project: Financial Sector Restructuring Project Task Team Leader: Simon C. Bell Authorized to Appraise Date: vember 15, 2003 IBRD Amount ($m): Bank Approval: February 24, 2004 IDA Amount ($m): 75.5 Managing Unit: SASFP Lending Instrument: Specific Investment Loan (SIL) Status: Lending Sector: Banking (100%) Theme: State enterprise/bank restructuring and privatization (P) I.A.2. Project Objectives (From PDS): The objective of this operation is to support the continuing efforts of HMGN to improve the financial sector in order to bring macroeconomic stability and promote private sector-led economic growth. The proposed involvement is the second phase of a larger financial sector reform effort which would lead ultimately to a third and final phase of reform involving privatization of state owned commercial banks. Phase I involved bringing in three management consultant teams to: restructure and re-engineer the central bank; and reform the two commercial banks (Rastriya Banijya Bank RBB and Nepal Bank Limited NBL). The proposed (Phase II) operation will assist in (a) right-sizing the two commercial banks through the implementation of Voluntary Retirement Schemes (VRS) reducing operating costs and making them viable propositions for privatization (b) (b) bringing in Sales Advisors to assist in bank privatization, (c) providing further assistance to a second phase of Central Bank re-engineering, and (d) supporting the continuation of professional management team up until the point of privatization of these two banks I.A.3. Project Description (From PDS): i. Support to Voluntary Retirement Schemes: NBL and RBB have a total of 10,792 employees in the two banks. In order to right size the banks they have recently announced their individual VRS targeting a total reduction of 4,695 excessive workforce retrenchment by 44 percent - at a cost of US$ 66.4 mn/npr 4.9 bn (Average of US$ 14,133 per employee). The project will support retrenchment costs. ii. Hiring of Sales Advisors: To help sell the banks to fit and proper investors at the completion of the bank restructuring process. This could happen sooner or later depending upon the progress made by the two Management Teams in re-engineering these two banks and/or the potential interest by outside parties in purchasing these institutions. Their role would be to prepare a sales prospectus for the banks, undertake a road show to sell these institutions and take them through to the point of privatization. The project will support this component. iii. Phase II of ongoing NRB re-engineering: To build upon the progress made to date at the Central Bank under the existing Financial Sector Technical Assistance (FSTA) credit, further assistance should continue in

2 the areas of: (a) human resource re-engineering; (b) accounting support; (c) bank supervision and regulation and that, in addition, support should be provided for (d) Information Technology (IT) up-gradation. iv. Continuing Management Team Support: Whereas the Management Teams in the two banks are currently working on a two year plus one (2+1) contract privatization could feasibly take longer than this to achieve. Reverting to poor management before privatization would result in a loss of the good investment which has taken place so far in these banks. Consequently, this component of new support is intended to take the banks from the end of the third year of the Management Team contracts through to full privatization without any breaks. Given the uncertainty of this time period, the estimate for this component will need to be adjusted as the banks get closer to privatization. I.A.4. Project Location: (Geographic location, information about the key environmental and social characteristics of the area and population likely to be affected, and proximity to any protected areas, or sites or critical natural habitats, or any other culturally or socially sensitive areas.) There are no environmental issues related to this operation but there is a possibility of social consequences arising from the implementation of the Voluntary Retirement Scheme. The VRS will be implemented nationwide as NBL and RBB have more than 200 branches throughout the country. B. Check Environmental Classification: C (t required) C. Safeguard Policies Triggered (from PDS) (click on for a detailed description or click on the policy number for a brief description) Policy Triggered Environmental Assessment (OP 4.01, BP 4.01, GP 4.01) Natural Habitats (OP 4.04, BP 4.04, GP 4.04) Forestry (OP 4.36, GP 4.36) Pest Management (OP 4.09) Cultural Property (OPN 11.03) Indigenous Peoples (OD 4.20) Involuntary Resettlement (OP/BP 4.12) Safety of Dams (OP 4.37, BP 4.37) Projects in International Waters (OP 7.50, BP 7.50, GP 7.50) Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)* Section II - Key Safeguard Issues and Their Management D. Summary of Key Safeguard Issues. Please fill in all relevant questions. If information is not available, describe steps to be taken to obtain necessary data. II.D.1a. Describe any safeguard issues and impacts associated with the proposed project. Identify and describe any potential large scale, significant and/or irreversible impacts. The project will have positive social impacts by protecting the small depositors who are likely to be hurt if a banking crisis developed. Worker retrenchment will be tracked with a social assessment, tracer and tracking surveys to assess the impact of the Voluntary Retirement Schemes to be implemented in the two banks.. II.D.1b. Describe any potential cumulative impacts due to application of more than one safeguard policy or due to multiple project component.

3 ne. II.D.1c Describe any potential long term impacts due to anticipated future activities in the project area. ne. II.D.2. In light of 1, describe the proposed treatment of alternatives (if required) t applicable. II.D.3. Describe arrangement for the borrower to address safeguard issues Technical assistance will be provided under the project to assess social impacts arising as a result of worker retrenchment (on a voluntary basis) in the two banks. The consultants made an assessment of training and counseling as a sub-component of the Project. After undertaking considerable due diligence initially in October 2003, and then again in vember,2003 as part of the appraisal mission, several areas of concern arose which resulted in the decision by the project team to drop the training and counseling component of the project. The reasons included: (1) the lack of government buy-in for the component which raised the issue of whether the project team was being truly client responsive ; (2) the absence of an effective on-the-ground agency with the ability to handle the complexity of this component; and (3) the absence of support by bilateral partners and international NGOs (DFID and GTZ) for this component. Most importantly, the retirees themselves, many with second jobs while working for the bank, are not considered the poor or the vulnerable groups in Nepalese society. By Nepalese standards, the employees of these two public sector banks are relatively well off and, during meetings with and without union representation, RBB and NBL employees did not view positively the training and counseling component. At the request of HMGN this component has been dropped from the project. netheless, in an effort to learn about the effects of retrenchment and discontinuation of employment in Nepal, two surveys will be carried out as part of this project. An exit/retraining survey will provide vital information on the attributes and profile of all staff retiring from NBL and RBB. A second, more long term, tracking survey will be conducted among a smaller sub-sample of these retiring workers to track their progress in their postretirement lives so that future programs can be adequately adapted to meet the special needs of this sub-group of retiring ex-state owned enterprise workers. The Bank has been in contact with DFID concerning the Exit/Retraining Survey and the subsequent tracking survey and there is an agreement in principal that the UK Government will fund this survey work. The project team has identified MARG Nepal, a subsidiary of ACNielsen based in Kathmandu, as the most appropriate research agency to conduct and analyze both surveys. MARG Nepal is a large multidisciplinary research and consultancy agency which is registered with the Ministry of Commerce (Nepal) and with the Bank in the South Asia region. MARG is experienced with handling large studies in urban and rural settings, in a wide range of subject areas (health practices, corruption, poverty alleviation opinion polls) for agencies such as the United Nations, DFID, and Transparency International II.D.4. Identify the key stakeholders and describe the mechanisms for consultation and disclosure on safeguard policies, with an emphasis on potentially affected people. The key stakeholders include HMGN, potential buyers of the banks to be privatized, existing private shareholders of NBL, retrenched workers (under VRS), the unions representing the workers, the management of the bank and small depositors.

4 The project has conducted a participatory process that involved affected parties and their representatives and, as a result of this undertaking, has established that there is no demand for a training and counseling component or that such a component would serve a useful purpose at the current time. Formal and open consultations were held with the affected parties. A social assessment of the training and counseling component was carried out with the conclusion that it was not needed. Extensive discussions were held with the unions, focus groups and others by the Management Teams in the banks, the Appraisal Mission team members, and a social consultancy consultant prior to that to ascertain interest. It is clear that there is very little interest from the workers or the Government for training and counseling. The team has, nonetheless, undertaken extensive due diligence on this issue. E. Safeguards Classification (select in SAP). Category is determined by the highest impact in any policy. Or on basis of cumulative impacts from multiple safeguards. Whenever an individual safeguard policy is triggered the provisions of that policy apply. [ ] S1. Significant, cumulative and/or irreversible impacts; or significant technical and institutional risks in management of one or more safeguard areas [ ] S2. One or more safeguard policies are triggered, but effects are limited in their impact and are technically and institutionally manageable [X ] S3. safeguard issues [] SF. Financial intermediary projects, social development funds, community driven development or similar projects which require a safeguard framework or programmatic approach to address safeguard issues. safeguard policies are triggered by this operation. The social assessment is being done not because any safeguard policy is triggered. F. Disclosure Requirements t applicable, as no safeguard policy is triggered by this operation. Environmental Assessment/Analysis/Management Plan: Expected Actual Date of distributing the Exec. Summary of the EA to the Executive Directors (For category A projects) Resettlement Action Plan/Framework: Expected Actual Indigenous Peoples Development Plan/Framework: Expected Actual Pest Management Plan: Expected Actual

5 Dam Safety Management Plan: Expected Actual If in-country disclosure of any of the above documents is not expected, please explain why. EA is not applicable to the proposed project. Signed and submitted by Name Date Task Team Leader: Simon C. Bell Project Safeguards Specialists 1: Asif Faiz (environmental issues) Project Safeguards Specialists 2: Nina Bhatt (social issues) Project Safeguards Specialists 3: Approved by: Name Date Regional Safeguards Coordinator: Frederick Edmund Brusberg Sector Director Joseph Del Mar Pernia