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May 2015 Economy and Policy

Published on: 2015-05-27 00:00:00     1051 times read    0  Comments
As part of its policy of increasing private sector’s participation in the hydropower sector, Nepali government has been distributing licenses to the private sector developer.
 
--By Prof Dr Kamal Raj Dhungel
 
The End of Panchayat Era
Popular people’s movement of 1990 disposed the Panchayat Raj in an astray. It helped in restoring the multiparty political system abducted in 1960.  Changed political circumstances changed the economic policy of the regime. The new economic policy stressed on paving way for liberal economic system. It considered the involvement of the private sector vital for the development of Nepali economy. There was a realization for utilizing the untapped water resources. The changes in policy aimed at attracting private sector investment. For attracting private sector investment in hydropower, policies, rules and regulations were modified, updated and subsequently enacted and enforced. The updates also expected to attract foreign investors in the sector. The rate of both domestic and foreign private investments in the hydropower sector in the 1990s was encouraging to some extent. However, the participation rate of Indian investment for the development of hydropower was close to zero. 
 
Long before the restoration of multiparty system, Tanakpur project was started in 1980s with an objective of replacing the obsolete Sarada Barrage, on the bank of Mahakali River. The decision to construct this project was unilateral. There was no bilateral agreement between Nepal and India.  India obviously wanted to legalize this project by hook and crook. Subsequently India presented various options to develop this project outlining various benefits to Nepal from this project. 
 
Of these options, the first was proposed in the first half of 1990s in the form of Pancheswor Multipurpose Project (PMP). The project was to be built on the bank of Mahakali River with a electricity generating capacity of 6480 MW. Nepalis were divided on the outcome of the project. A section believed that the PMP with distant possibility of materialize was initiated by India only to legalize the Tanakpur irrigation project. While the other section strongly believed that the PMP would materialize soon and would equally benefit Nepalis in changing the fate. Despite these countering argument, Nepali parliament ratified the Mahakali Integrated Treaty (MIT) and paved way for the implementation of PMP in 1996 and thereby legalized the Tanakpur irrigation project. 
 
Sant Pun summarized the treaty and its outcomes stating “The Pancheswor Multipurpose Project was the flagship item of the 1996 Mahakali Treaty. Except for a tiny minority, an overwhelmingly majority of the joint session of houses of parliament ratified the Mahakali Treaty in a historic fashion on the night of September 20, 1996. In an overt effort to pat their own backs, party leader publicly made various tall claims about the billions of rupees that would accrue to Nepal from electricity export to India. In fact a gleeful and euphoric Water Resources Minister, Pashupati SBJ Rana, even claimed that the sun would now begin to rise from the west. However, the Pancheswor flagship faltered and had been floating listless and directionless for the last 18 years.” However, things seem to be changing recently with the Indian Prime Minister Modi’s announcements to recommence the construction of the PMP within a year. 
 
After the End of Conflict
As part of its policy of increasing private sector’s participation in the hydropower sector, Nepali government has been distributing licenses to the private sector developer. Indian companies GMR and Sutlez have bagged licenses of three noted Nepali hydropower projects through competitive bid in 2008. Upper Karnali and Upper Marsyangdi with a electricity generation capacity of 300 MW, which were later upgraded to 900 MW and 600 MW respectively, have been licensed to GMR and Arun III with a electricity generation capacity of 900 MW has been licensed to Sutlez. These projects with the combined electricity generation capacity of 2400 MW are in pipeline. They are primarily designated to produce electricity for export rather than for domestic consumption. Upper Karnali and Arun III have met all necessary institutional prerequisite for starting the implementation of the project.
 
Modi’s Visit
 In his first visit to Nepal in early August 2014, Indian Prime Minister Narendra Modi expressed positive views to harness Nepal’s hydropower potential to light Indian mega cities like Delhi. He promised to buy electricity from Nepal if it has power for sale to cater to the power needs of Indian cities. He also assured to assist Nepal in terms of investment to exploit untapped hydropower potentials of Nepal to yield power for both countries. Despite his call for plans in this direction from the Nepali government, Nepal still remains undecided on how it is going to invite Indian investors to invest in its hydropower sector. This indecisiveness has no immediate resolution as Nepal lacks thought, vision, commitment, devotion, trust, consensus and plans for harnessing the nation’s untapped water resources in a rational and progressive manner. 
 
Power Trade Agreement
Following Modi’s visit, India and Nepal inked a historic landmark Power Trade Agreement (PTA) on October 21, 2014. The PTA allows the right to conduct power trade between two countries. Both countries can export and import electricity as and when needed.  Effective implementation of this agreement is conditional: condition to develop hydropower for the purpose of export. Presently Nepal itself is facing short in supply of electricity. It has no energy surplus to export. Instead it has been importing electricity from India to supplement its domestic needs. But the unit of electricity Nepal is importing under the power exchange agreement is not sufficient to meet its demand. India may have willingness to export electricity to help Nepal to reduce load-shedding hours but it is constrained by ability. India itself faces short supply. Even if India has excess energy to export to help Nepal the existing transmission line does not have the capacity to bear extra load. The present infrastructure is inadequate to increase the trade volume of electricity. 
 
Target on four Large Projects
Nepal and India have also agreed to develop four large-scale Nepalese hydropower projects for which the projected total benefit is approximately US$17 billion. The estimate includes such factors as free energy, royalties, tax income and dividends and is close to Nepal’s annual GDP. Among them two big projects, Upper Karnali and Arun III are in pipeline. The Power Development Agreement (PDA) of these projects has signed by both nations. A brief description of these projects is presented below.
 
Upper Karnali
The PDA of Upper Karnali hydropower project between Investment Board of Nepal and Vice-chairman of GMR-ITD Consortium was signed on September 19, 2014. As per the agreement, Nepal will receive 27% free share and 12% of free energy from the project. GMR will sell the remaining power to India.  GMR Consortium will secure the investment, amounted to Rs 1.4 billion.  This project is due to be completed in 2021.  The project will be handed over to Nepal after 25 years from the date it starts power generation. GMR will also be obliged to build a separate 2-MW power house for the purpose of supplying electricity to communities in Surkhet, Achham and Dailekh districts. The PDA, especially the aspect of GMR selling the generated power to India when Nepal, is itself under a severe power crunch, has been a contentious issue with rifts inside the coalition partners itself along with the opposition parties. Negotiations and discussions around whether GMR should be allowed to sell electricity to India instead of Nepal and if so then what proportion of the generated power it should be allowed to sell to India have been the main reasons behind the delay in the signing of the agreement.
 
Arun III
In the first half of 1990s, Arun III was in pipeline for construction with investments from the World Bank. There were some debates over the implementation of this project. Due to these negative perceptions surrounding the development of this project, the World Bank had withdrawn its decision to invest in it. After a long span, the Nepali government signed Project Development Agreement (PDA) with Satluj Jal Vidyut Nigam Limited (SJVNL) on November 26, 2014 for developing this 900 MW project at an estimated cost of Rs 104 billion. The government had awarded the project to SJVNL through open bidding. The Indian power developer had proposed to offer 21.9 percent energy free of cost to Nepal. The affected households will get 30 units of electricity free of cost every month. Similarly, they will get the opportunity to buy shares worth Rs 800 million at the rate of Rs 100 per unit. SJVNL will float additional shares worth Rs 800 million at premium rates to people of affected districts. SJVNL will also build a 56-km transmission line free of cost to link power generated by it to a substation of Nepal Electricity Authority (NEA) for electrification in the project-affected areas.
 
The author was Professor of Economics at the Tribhuvan University.

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