Tuesday, January 25, 2011

Politics and economics of hydropower in Nepal

This blog post is adapted from an excellent rundown of the major political and economic issues pertinent to hydropower development in Nepal written by Deepak Adhikari, Nepal correspondent for the AFP.

Power to the people?

Deepak Adhikari

With winter in full swing, the spectre of planned power cuts, euphemistically called “load shedding”, is haunting Nepal's electricity consumers. The country’s citizens dread this time of year, which not only brings the Himalayan chill but also the inevitable power shortages, beginning in October to November and continuing until the monsoon arrives in June or July. By February the cuts are expected to intensify to 16 hours a day.

It’s a pattern that is fuelling the country’s debate over hydroelectricity – as well as frustration with the failure to move forward with dam projects. With a government eager to build large-scale schemes pitted against an active civil society keener on small-scale hydropower, progress has stalled. And a middle way is needed fast.

Nepal was not supposed to be like this. Or so its people were led to believe. Almost all educated Nepalis know the official magnitude of hydroelectricity that the country’s 6,000 rivers (many of them snow-fed) are capable of generating: 83,000 megawatts. But in a nation that produces a meagre 698 megawatts of hydropower – far below demand – such extreme estimates are increasingly questioned.

In a recent article on Nepal’s energy sector, two researchers sought to dispel the “83,000 megawatts” hydro-myth: “A Russian Masters level student, who, unfortunately, was not able to travel to Nepal for his research, came up with this number,” they wrote, referring to Dr Hari Man Shrestha, who carried out his research at the Moscow Power Institute. Citing two other contradictory figures (40,000 megawatts and 200,000 megawatts) that feature in discussion of the sector, the authors opined that a thorough study to establish the country’s true hydro potential was badly needed.

At a recent seminar on strengthening the Nepal Electricity Authority – a government body that buys, monitors and supplies electricity in Nepal – the energy minister, Dr Prakash Sharan Mahat, sounded cautious but optimistic. Reminding the audience of the ministry’s goal to produce 10,000 megawatts in 10 years, he said: “We’ll have to wait for four to five years, then we don’t have to face load shedding.” When a participant questioned the usefulness of a seminar conducted in a luxury hotel, he replied, “We should think big.”

To think big or small is at the heart of the hydro debate in Nepal, a country rich in biodiversity but also endowed with fast flowing rivers that surge through the Himalayas. The coalition government, like its predecessor, the Maoist government, has promised to cash in on the nation’s “liquid gold”. Though most of Nepal’s hydroelectric power can be generated using run-of-the-river systems, large dams, some argue, are inevitable for a nation only just emerging from the shadow of a decade-long civil war and desperate for development and growth. Government policy therefore remains large-scale and export-oriented. But Nepal’s “big thinking hydrology” has seen strong opposition from a vibrant civil society, especially since the restoration of democracy in 1990. Indeed, Nepal’s quest to exploit hydropower potential mirrors the political upheaval of the past two decades.

The early 1990s marked the World Bank’s infamous withdrawal from the 404-megawatt Arun III project located on the eponymous river in north-eastern Nepal. On the basis of a petition filed by members of the local community and activists, Nepal’s Supreme Court ruled that the World Bank and Nepalese government must provide information on the project to the public. There were several criticisms of the scheme, including the fear of a rise in the electricity tariff (the project’s estimated cost was US$5,400 [36,800 yuan] per kilowatt), the ecological impact of the plant on the rich biodiversity of the Arun Valley and the claim the project was too big for Nepal (the cost was equal to the country’s entire annual budget).

These concerns eventually forced the World Bank to back out, a phenomenon often equated with the shattering of the dream of prosperous Nepal. Writing a decade later in his book In Defence of Democracy: Dynamics and Faultlines of Nepal's Political Economy, former finance minister Dr Ram Sharan Mahat rues the project’s demise: “Arun III was lost, and with it the attractive financial package whose benefits included the huge social profit potential to boost the national revenue also vanished.”

Then came the Mahakali Treaty between Nepal and India in the mid-1990s, which envisioned the 315-metre high, multipurpose Pancheshwar dam, with water-storage capacity of 12.3 billion cubic metres and a 6,480 megawatt power house. Nepal’s Supreme Court determined that the treaty required ratification by a two third majority of the parliament. After intense debate, the agreement was finally ratified on November 27, 1996, but deep disagreement split the main opposition party (the United Marxist Leninists). The treaty stipulated that the detailed project report (DPR) would be completed in six months, but more than 10 years after signing it, India and Nepal have failed to make significant progress.

What could be the reason behind the initial euphoria and the now dormant status of the treaty? Some hydro-watchers say that India is not interested in exploiting and developing Nepal’s hydro potential and is, rather, thirsty for water. The critics says that the Indian side is eager to build the 269-metre high dam at Barahkshetra on the Kosi River, a major contributor to the Ganges in India, as a solution to the annual floods in Bihar and Uttar Pradesh, its two most populous states.

Prashant Aryal, a Nepali journalist who has written extensively on Nepal’s hydropower sector, says that India is drawn by water and irrigation, not electricity. “India imports power from Bhutan, its friendly neighbour; it has signed nuclear deal with the US; and has its own hydro capacity in north-east and other parts,” he says. “So, it would be incorrect to say that it is eyeing Nepal’s hydroelectricity.” Electrical engineer Bimal Gurung disagrees: “India, which is increasingly drawn into the climate-change debate, can’t use thermal plant,” he argues. “It would be cheaper to import from its geographically close neighbour Nepal than from remote Bhutan.”

But the Bhutanese model, in which India builds the project and then imports the power, has drawn criticism from experts in Nepal. In an article published in Himal Southasian magazine in August, leading water-resource expert Dipak Gyawali termed the model, a “neo-colonial path to power”. In the much discussed article (Bhutan business news editor Tenzin Lamzang has responded in the Bhutan Times), he writes: “A rent-seeking, royalty-earning model might enrich governments, politicians and senior bureaucrats for some time, much like the Arab sheikhdoms, but it does nothing to develop national capacity – which is what development is, in the true sense.”

The sentiment is echoed by Ratan Bhandari, a coordinator of the Water and Energy Users’ Federation Nepal (WAFED), an organisation that questions the utility of big dams and says that it fights for the benefit of the local people. “We are not anti-dam or anti-development per se,” he clarifies at the outset, before elaborating on the disadvantages of big dams: “They displace many thousands of people, destroy local environment and benefit only the rich.” In fact, Bhandari’s own involvement in the protest movement parallels the development of a hydro project in his home village in western Nepal.

The 750-megawatt West Seti project has been through many ups and downs, culminating in the sudden withdrawal of its Chinese investor early last year. Initially conceived as a 77-megawatt run-of-the-river project, it was later optimised to a 195-metre, concrete face rockfill dam capable of producing 750 megawatts of electricity. But, if it goes ahead, it is feared the dam will displace the people of four districts. The reservoir will cover 25 square kilometres and have a volume of around 1.5 billion cubic metres. “No project can be successful without the inclusion of the local communities,” Bhandari argues. “We should make sure that the projects are for our benefit not for some foreign investment company.” He says that the very concept of exporting electricity to India is flawed because it is only raw material, not a product to be exported.

Can Nepal itself develop the hydro projects that require huge investment? Bhandari and Gurung, who stand on opposite sides of the hydro debate, agree that there is money in Nepal but lack of security is hindering investment. Gurung argues that, since most of Nepal’s hydro plants would be run-of-the-river, and if care is taken to construct earthquake resistant facilities, even big dams are realistic. “The structure should be designed properly,” he says. “For rapid growth, big projects are what we need at the moment.”

According to US-based NGO International Rivers, 400,000 square kilometres of land has been submerged due to the construction of 40,000 big dams in the past 50 years. Critics of such dams say that there is no compensation for the social, economic and environmental cost of these projects.

How can these opposing development narratives for Nepal be reconciled? Perhaps there is a middle way after all. As Bhandari says, “Not all big dams are bad and not all small dams are good.” The solution may be promoting micro hydropower as well as investing in environmentally friendly and sustainable medium-sized and large-scale projects.

Aid & Pakistan’s political economy

[…] The deep pockets of the United States' civilian program in Pakistan-in the form of $1.5 billion a year in development assistance-don't seem to contain the leverage to push those reforms through.

[…] The IMF's view matters, because Pakistan has been waiting for the remaining $3.5 billion from an $11.3 billion bailout package that kept Pakistan's economy from collapse in the wake of the 2008 financial crisis. But that support carries explicit conditions, including progress on both energy pricing and tax reform.

[…] U.S. policymakers should note well this series of events and remember a simple lesson. Billions of dollars of U.S. assistance-and a sustained diplomatic focus on the reform agenda-have not given the United States the ability to dictate the outcomes of Pakistan's political process. This is inconvenient for the United States, but not surprising. For the United States and for other major donors in Pakistan, money has never brought leverage.

[…] Pakistan's energy sector demonstrates the difficulty in achieving the kind of influence donor countries would like to have. For decades, the World Bank and the Asian Development Bank-armed with sums greater than the current Kerry-Lugar-Berman U.S. aid package-have urged the Government of Pakistan to finally reduce the price subsidies on electricity, to no avail. Time and again, project documents cite the same problems, the donors recommend the same solutions, the government of Pakistan promises to implement the same reform, the government breaks (and donors lament) the same promises. Meanwhile, the basic politics maintaining the status quo have not changed-there are too many reaping the benefits of subsidized power, and ordinary consumers feel they aren't getting service that warrants paying more.

[…] When Vice President Biden visited Islamabad this week, he promised that the United States would "keep the entire commitment" of the pledged $7.5 billion in Kerry-Lugar assistance. This assurance will surely be welcomed by Pakistan, and it's a fair reflection of Pakistan's short-term and long-term importance to U.S. interests. Adjusting where and how aid is spent-including by taking the requests of the Pakistani government into account-is necessary to respond to the real needs on the ground. (On that note, we applaud the decision to put $190 million into direct smartcard grants to help Pakistani flood victims rebuild their lives). But U.S. policymakers should not expect the aid money to give the United States greater influence on economic reforms in Islamabad. This is not the point, nor the potential, of U.S. aid.

[…] The key point is that certain aid projects can carry both direct benefits (better services and infrastructure for the people of Pakistan) and indirect benefits (incentives for the Pakistani political system to achieve greater results with their existing resources). Here are a few examples to consider: U.S. investments in energy generation and transmission capacity can be linked to public commitments to raise electricity tariffs  only when brownouts have been reduced below an announced benchmark. In this grand bargain, as service quality improves, tariffs would go up, and another round of aid investments would be delivered. In another case, U.S.-financed tools can be deployed to help Pakistani citizens hold their government accountable-with regular reports on simple indicators of development, for example, or an easily accessible database of all development projects funded from internal or external resources.  Or a pilot Cash on Delivery aid contract in one or more Pakistani provinces could put levers in the hands of education reformers and help their ideas gain traction.

More by Nancy Birdsall et al. here.