Saturday, May 26, 2018

Arun-3 hydroelectricity project: Return of the damn plan

It was published in The Kathmandu Post, 25 May 2018


The Arun 3 saga is a case of squandered opportunities and politics before progress

On May 10, Prime Minister KP Sharma Oli and his Indian counterpart Narendra Modi remotely laid the foundation stone for the Arun 3 hydroelectricity project. This 900 MW mega project located in Sankhuwasabha district is unlike any other infrastructure project the country has seen so far. Its significance in terms of total electricity generation, free supply to Nepal, export to India, revenue generation and boost to local economic activities is immense. The scale of the proposed investment and required work is so large that it will take some time for people to appreciate its transformative nature in terms of potential to boost economic growth and job creation.

Looking back

Ironically, Arun 3 is also one of the most contested hydropower projects in Nepal, especially owing to non-governmental activism and the buy-in of exaggerated logic by the CPN-UML which has now merged with the Maoist Centre to form the Nepal Communist Party (NCP). The Arun 3 saga is a glaring example of opportunities squandered due to INGO and NGO activism and the communist government’s giving priority to politics over development. As per the agreement signed between Investment Board Nepal (IBN) and Satluj Jal Vidyut Nigam (SJVN), an India public enterprise, in November 2014, Arun 3 should be starting production by 2020. However, its failure to financially close the project on time has pushed the project completion deadline to 2023.

The Indian government and the State Bank of India are the top financiers of the $1.5 billion project. The project has already paid Rs5 million to IBN as licence fee. Nepal will receive about Rs348 billion in revenues and Rs107 billion in royalties over 25 years, after which the project will be handed over to the government. The benefit to local communities is also appealing: 30 units of free electricity per month to affected households, 12 percent of total royalties to project affected areas, 3,000 jobs, generous resettlement scheme and development of local infrastructure.

In the early 1990s, Arun 3 was originally envisaged as a 404 MW hydroelectricity project costing $1.08 billion which multilateral and bilateral donors, led by the World Bank (WB), were ready to finance with a combination of concessional loans and grants. Rather than the project itself, the conditions for financing and project design turned out to be the most controversial. A consortium of international and domestic non-governmental organisations spearheaded the opposition camp, at times blowing allegations out of proportion with a deliberate intention to derail the project.

On August 3, 1995, the then WB president James Wolfensohn called the then prime minister Man Mohan Adhikari to inform him of the WB’s decision to not move ahead with the project. Although the WB formally pointed out three main reasons for pulling out—lack of ability to manage the complicated project, politically difficult situation to rationalise electricity tariff and prioritise public expenditure, and cost escalation due to delays—in reality it bowed to intense international and domestic pressure to abort the project. The INGO and NGO activism had tacit support of the UML which was determined to overturn a large-scale project initiated by the Nepali Congress-led government. In fact, the then UML general secretary Madhav Kumar Nepal had written to the WB threatening to review the project if his party came to power.

The hurdles

The major objection of the INGO and NGO community was over cost, corruption, environmental damage and threat to livelihoods of indigenous people. An important point to note here is that even legitimate concerns were blown out of proportion. First, Nepal needed a large-scale hydropower project to fulfil demand increasing at the rate of 40 MW annually and increase access to electricity. Achieving these aims and providing adequate energy to industries, which were just beginning to take shape following first generation reforms in 1992, were not possible with small and medium scale hydro projects as the activists had suggested. Back then, Arun 3 was identified as the most viable in terms of cost and time. In fact, to address the cost issue, it was redesigned as a two-stage project of 201 MW each.

Second, there were no absolutely binding clauses that would have barred the country from initiating other hydroelectric projects of over 10 MW. The government had convinced the donors that the expected return from Arun 3 was more than enough to service debt, and thus it could use the savings for other projects, for instance, the 144 MW Kali Gandaki project.

Third, allegations regarding corruption were nonsense because big projects need to be contracted to international contractors as domestic firms don’t have the capacity to execute them. Subsequently, they sub-contract parts of the construction work to local contractors. Fourth, the 122 km access road would not only help Arun 3, but also be beneficial for the Lower and Upper Arun hydropower projects. Fifth, there are always trade-offs in mega development projects, and Arun 3 was no exception. A well laid out safeguards plan was agreed upon to address environmental and livelihood threats to the extent possible. The activists, with the support of the UML, won the battle, forcing the WB to pull out of Arun 3. In fact, the WB stayed away from energy sector investment.

Fast forward to 2018, the same party whose disastrously opportunist stance led to the demise of Arun 3, and that subsequently exacerbated an important binding constraint to growth (adequate supply of electricity), enthusiastically promoted and facilitated clearances and approval of the project. Most of the background work was done by IBN, which deserves special appreciation for the tireless work since its establishment in 2011. 

The controversies and delays surrounding Arun 3 remain an unfortunate example of why politics should not supersede development of transformative projects. The growth and employment trajectories would have been entirely different if the construction of Arun 3 had started in 1995. Let us hope that the NCP-led government, which has a sizeable majority at all three-tiers of government, will not again fall prey to outlandish growth-regressive activism.

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