Uncertainty Over World Bank Investment Pushes Nepal to Mobilise Local Resources for 1,063MW Upper Arun Hydropower Project

The government has decided to pursue the 1,063MW Upper Arun Hydropower Project with domestic financing after uncertainty emerged over the World Bank’s planned investment, reportedly due to India’s reservations, according to senior officials.

The World Bank, together with the Asian Development Bank, had earlier agreed in principle to invest in the project. Nepal had sought international financing for the scheme, and the World Bank had initially expressed readiness. However, officials say the World Bank has delayed its decision for months, as India has signalled interest in being involved in some form.

The World Bank had withdrawn from the Arun III project in the 1990s after opposition from the then CPN-UML, and the Nepal government had expected the Bank to re-engage through Upper Arun. But Energy Minister Kulman Ghising said Nepal is now moving forward with domestic financing due to the absence of clear signals. He said the World Bank has not formally declined participation but has not committed either.

The project’s investment was expected to be confirmed by October 2024, but the World Bank’s indecision has pushed the financing timeline further back.

Issuing a statement on Tuesday, the Secretariat of the Minister for Energy, Water Resources, and Irrigation said the government will now mobilise domestic banks and financial institutions, along with investments from Nepalis at home and abroad, to build Upper Arun Hydropower Project.

Below Upper Arun, three other projects—Arun-IV (490MW), Arun III (900MW) and Lower Arun (669MW)—are being developed with investment from India’s state-owned SJVN Limited. Arun-IV is a joint venture between SJVN and the Nepal Electricity Authority (NEA).

The semi-reservoir based Upper Arun project, led by NEA and located in Bhotkhola Rural Municipality of Sankhuwasabha, has an estimated project cost of USD 1.75 billion (about Rs 214 billion), including interest during construction period and inflation. The proposed financing structure includes 70 percent debt and 30 percent equity. Of the equity portion, 51 percent will be promoter shares and 49 percent ordinary shares. Promoter shareholders are expected to contribute Rs 36.67 billion, while ordinary shareholders will contribute Rs 35.23 billion.

The promoter group will include provincial and local governments, NEA, Nepal Telecom, the Employees Provident Fund, Citizen Investment Trust, Social Security Fund, HIDCL, insurance companies, and NEA subsidiaries. Ordinary shareholders will include non-resident Nepalis, Nepalis working abroad, employees of promoter institutions, project-affected communities, and the general public. Upper Arun Hydroelectric Limited has already been established as the project’s developer.

Domestic banks and financial institutions are expected to provide Rs 168 billion through a co-financing arrangement. Around Rs 53 billion has already been agreed in principle among NEA, the project developer, and participating banks.

The project is expected to generate 4.53 billion units of electricity annually. Pre-construction works are underway, including a 21km access road from the powerhouse site to the dam site in difficult terrain.

Why Nepal wants to build it on its own

Upper Arun lies above three hydropower projects with Indian investment—Lower Arun, Arun III, and Arun-IV. Above Upper Arun, the proposed Kimathanka Arun would be the fifth project on the river. Former energy secretary Dinesh Ghimire said Nepal wants Chinese involvement in the Kimathanka Arun project due to its proximity to the Chinese border. Granting Upper Arun to an Indian developer, he said, could place two geopolitical rivals face-to-face. “Nepal wants to build Upper Arun itself to create a buffer,” he said.

India’s interest

According to Ghimire, India wants involvement in Upper Arun because its state-owned SJVN is already engaged in three of the downstream projects. “India considers the project of strategic importance. Its dissatisfaction appears to have influenced the World Bank’s hesitation,” he said.

He added that allowing limited Indian shareholding could ease the entry of World Bank financing, facilitate electricity exports to India, help mobilise project financing, and provide technical support. India, he said, seeks hydropower from Nepal and Bhutan to balance the rapid expansion of solar and other renewables at home.