Trading off a jewel

At an October 2003 'track two' meeting in the Nepali capital between the Centre for Policy Research, (CPR) from New Delhi and the Institute for Integrated Development Studies (IIDS), Kathmandu on Indo-Nepal water resources development, the Indian delegation extolled the virtues of the 'Bhutan model'. According to them the USD 600 per capita income accrued to Thimphu from 336 megawatt (Mw) Chukha is expected to rise to USD 1200 once the 1,020 Mw Tala hydroelectric project comes on stream in 2005. The CPR representatives also apprised the Nepali participants that India's National Hydroelectric Power Corporation Limited (NHPC) was in town, negotiating the 300 Mw Upper Karnali hydropower project. A CPR gentleman further stated that the estimated equity distribution for the project could be 85 percent NHPC, 10 percent for the Nepal Electricity Authority (NEA) and the remaining 5 percent for the Soaltee Group, a Nepali private company. The Nepali participants were not bowled over by the Bhutan model projects as they were constructed entirely on India's financial strength and ended up with India-imposed power tariffs. The Nepalis instead questioned the status of several regional projects: the American-led Four Border South Asian Regional Initiative on Energy (SARI/E), the Asian Development Bank (ADB)-led Arun Valley Development and the Australian Snowy Mountain Electric Company's seven-year old project called West Seti. Furthermore, the Nepalis summed up that all roads lead to Delhi. But it was on the Upper Karnali issue, that Nepali eyebrows were raised, for the 85-10-5 sharing of the spoils was not something that was in the public domain before this.

How much private sector?
The fact that His Majesty's Government of Nepal (HMGN) had traded off the 300 Mw run-of-the-river Upper Karnali to the Government of India (GOI) had been reported in the media for some time. However, the sudden appearance of the GOI owned public sector undertaking, NHPC, in the present politically troubled waters of Nepal does indeed raise many questions, at least among the more critically inclined. When HMGN offered these two projects to GOI, it was believed that the private sector of both the countries— Federation of Nepalese Chambers of Commerce and Industry (FNCCI), Confederation of Indian Industry (CII), and the Federation of Indian Chambers of Commerce and Industry (FICCI)— would be involved. During King Gyanendra's last India visit, a memorandum of understanding (MOU) between FNCCI and FICCI was initiated for joint private sector participation in trade and investment with a tourism and hydropower development focus. In fact, knowledgeable circles assert that the strong Indian multinational, the Reliance Group of the Ambanis, was very keen to execute the Upper Karnali project. Reliance must have also had its eyes on the much larger jewel, the 10,800 Mw Karnali Chisapani "Kohinoor", to demonstrate that it could succeed where Enron had failed in the past (see Himal March 2002). As it transpired, it was the GOI which effectively blocked Reliance's bid. GOI's policy, for the time being, seems to be that all infrastructure projects in Nepal will have to have the full stamp of Indian public sector undertakings. It was presumably this presence of the public sector that prompted the Embassy of India in Kathmandu to go out of its way to extend reassurances to Nepal. The Commercial Secretary of the embassy made the laboured explanation that this is "…the first time that an Indo-Nepal hydel project is being envisioned on commercial lines. … It is not a project run on a government to government basis but being done by a company on a commercial basis that makes sound economic sense".

Nepali reactions
There were varying reactions to the recent developments on Upper Karnali but all have the same conclusion: that the aggressive approach of GOI and NHPC indicates that they are going for the "quick and final kill". Some, like Ananda Bahadur Thapa, former Executive Secretary of Nepal's Water and Energy Commission, bemoaned the possible death of a 4,000 Mw storage scheme that could also have been built on the river at this stretch. It will be interesting to see how the two governments react to this complaint: a run-of-the-river power-only project as opposed to a project with valuable stored water in addition to power. Others lamented that the "jewel in the crown" in the country's hydropower treasure chest should have been for Nepal's own domestic use and is wrongly being licensed for export. The cheap power, they argue, would have played a vital role in stabilising Nepal's spiralling power tariff. There are still others who question the tiny 15 percent equity that Nepal is being apportioned. This point has been rebutted by some Nepalis themselves with the query, "How much cash does NEA have? Has NEA ever paid dividends to HMGN? Therefore, in the circumstances, can NEA afford to cough up the equity investment for Upper Karnali?" Apparently these Nepalis have been badly bitten by the "commercialisation bug" of the industrialised countries which now plagues the developing world. The question that should actually be raised is, which South Asian electric utility coughs up its own cash for its capital intensive generation expansion works?  But one does, however, hear that some Nepali investors are seriously jockeying for reasonable stakes in the pie. There is no question that the pie needs to be apportioned properly. As the rightful owner of the resource, it is Nepal, and no one else, that should be doing the apportioning.

The Upper Karnali project is located in the corner of the districts Dailekh-Achham-Surkhet in midhill west Nepal, on the Karnali river (the Ghaghra in India), one of the mighty tributaries of the Ganga emerging from the central Himalaya (see map). The backwater of the 10,800 Mw Karnali Chisapani project is quite far away from the Upper Karnali powerhouse site. One does, however, notice the tellingly seductive loop of the Karnali river when it suddenly changes its course by a full hundred and eighty degrees. No doubt, this is nature's precious gift to Nepal. A mere 2.2 kilometre tunnel creates a drop of 141 meters to generate an average annual energy of 1915 million units. In contrast, the 144 Mw Kali Gandaki project, financed by the Asian Development Bank (ADB) and Japan's Overseas Economic Cooperation Fund (OECF),  has a six km tunnel to get the 115 meter drop to produce only 842 million units. In the case of the Upper Karnali, accessibility is already available through the Surkhet to Jumla road that touches the project's proposed headworks. A mere 22 kilometres of road is necessary to connect the headworks with the powerhouse. This is the reason why all eyes are focused on this 300 Mw "jewel".

Very Hot Tariff
With an average selling price of NRN 7.02 per unit (US cents 9.5 at an exchange rate of NRN 74.09 to the dollar), Nepal's electricity tariff is the highest in South Asia. The USA's average national tariff is about six cents per unit, but in hydro-dominated states like Washington the average tariff is only four cents per unit. Among the major reasons attributed for Nepal's high tariff are:  heavy reliance on bilateral and multilateral agencies, extensive employment of international consultants and contractors, difficult terrain with non-existent infrastructures and very limited in-house construction and manufacturing capability. Sadly, Nepal has also been unable to capitalise on the economies of scale. This is what has led to the recent spurt of many small hydropower projects. As in most South Asian countries, corruption, no doubt, is instrumental in padding up that tariff.  There is, however, one aspect that many do not factor in, namely, project selection. Projects are supposed to undergo a rigorous Least Cost Generation Expansion Plan (LCGEP) before they are finally selected for implementation. But when the statistics are conveniently fudged and "sexed up" by the decision makers themselves, then the proverbial garbage in/garbage out is the outcome, naturally. This is one of the main, often-glossed-over reasons for Nepal's inordinately high tariffs. The aborted Arun III project of east Nepal on the Arun tributary of the Kosi is a case in point. The LCGEP debate on Arun III is still shrouded in a lot of smoke. The two concerned multilateral donors, the World Bank and ADB, were not on the same wavelength regarding the Arun III project, with the latter criticising it for its high costs and the former hell bent on pushing it through. The dilemma was very succinctly expressed by a very senior ADB staff at a Kathmandu donors' meet in 1994 when he said, "While Arun III is in our head, it is Kali Gandaki that is in our heart". When Arun III ultimately did get "smoked out", ADB was quick to pick up the Kali Gandaki project. It was now the turn of the World Bank to gleefully criticise the project -Kali Gandaki- for being too expensive! Only a stern official letter from the ADB to the World Bank, querying point blank "Do you or do you not support Kali Gandaki?" permitted ADB to finally proceed with the project.

The jewel in the crown
Given the maladies that have plagued hydro-development in Nepal it will be useful to compare the proposed Upper Karnali project with other schemes that have been implemented. Table 1 provides details of some of the existing run-of-the-river plants incorporating tunnels in the Nepal power system, both public and private sector, compared with Upper Karnali and Bhutan's Chukha and Tala project.

Leaving aside the two "take or pay" Khimti and Bhotekosi in the private sector, the major workhorses of Nepal Electricity Authority (NEA) are the 462 Gwh Marsyangdi and 842 Gwh Kali Gandaki power stations. Both were built through multilateral/bilateral donor loans and have very high capacity cost of over USD 2,600 per Kw. There may still be some increase in the cost of Kali Gandaki when the contractors' 'claims' are settled. Though Marsyangdi, funded mainly by the World Bank and the German bank, Kreditanstalt für Wiederaufbau (KfW), is still the most expensive project, proponents assert that the project was constructed during the difficult "trade embargo" period with India. About 60 percent of any hydropower project's total cost is notched up by civil works, with the headrace tunnel accounting for a major portion of that cost. Both Kali Gandaki and Marsyangdi have tunnels over 6 kilometres in length. Even the tiny Puwa and Chilime, that generate a meagre 48 Gwh and 137 Gwh respectively, have tunnels in the range of 3 kilometres. Bhutan's much talked about 336 Mw, 1320 Gwh Chukha project, despite a 468 metre head, needed a 6.5 kilometre tunnel with a twin 0.95 kilometre tailrace tunnel. Similarly, Tala in order to produce 3962 Gwh of energy needed a 23 kilometre tunnel plus the 3.1 kilometre tailrace tunnel. The production of 1915 Gwh from a mere 2.2 kilometre tunnel truly makes Upper Karnali Nepal's "jewel in the crown".

Upper Karnali was therefore not kept in HMGN's "solicitation list" of 22 projects. HMGN feverishly doled out the licenses to such media savvy developers as EuroOrient, which promised to immediately start the spade work on the famous 402 Mw Arun III project. None of the 22 "solicited" and licensed projects have started their 'spade' work despite the lapse of four years. The World Bank, that was involved in both the pre-feasibility and feasibility studies of Upper Karnali, did toy around with market testing this project for Nepal's incipient Power Development Fund (PDF). But then the Bank sheepishly settled for the tiny 30 Mw Kabeli to market test PDF. ADB was approached for a possible public/private joint venture. But this was ill-timed as both ADB and OECF were then totally engrossed with the Kali Gandaki. There were then a lot of behind-the-scene manoeuvring to pocket the Upper Karnali license. One of them was a Nepali private power developer who, through a lot of Delhi/Lucknow pilgrimages, had an invitation to come for the Upper Karnali power purchase discussion on the official pad of India's Uttar Pradesh State Electricity Board. The strong Canadian firm SNC Lavelin did use its own "influence" unsuccessfully. It was the "weird" French humanitarian organisation, Elysses Frontier, that finally pocketed the license by offering NEA/HMGN 30 percent equity without having to dole out a single paisa from their coffers. That the Cabinet Committee on Fast Track Projects could approve such a questionable agreement made one question the very credibility of the Cabinet Committee itself. But this is how the new "privatisation and liberalisation" mantra works in the Nepali power sector, particularly when the political environment is murky. With the "jewel" now firmly in the hands of GOI/NHPC, no more "pundits with new mantras" are expected.

The Laotian way
So then, how can Nepal and India move forward? There is no question of reneging on the Indo-Nepal agreement to implement the Upper Karnali. No one questions the Indian participation, as the consuming market is theirs. But Upper Karnali belongs to Nepal and the power to utter an emphatic "no" on the terms and conditions rests with Nepal. Hence, it all boils down to an equitable sharing of the pie, and the 80-10-5 formula that has been inadvertently leaked can certainly not be considered fair by a huge margin. Nepal must not even remain content with a mere "30 percent equity", as some have suggested, whether this be in the public, private or combined domain. Nepal simply does not have the luxury of relinquishing its "fair and equitable share" in such an attractive project. For those who question where Nepal can access the funds required for Upper Karnali, perhaps a look at the Laotian-Thailand model, the 210 Mw Theun-Hinboun hydropower project, would provide the answer.

Thailand is to Laos what India is to Nepal—a large industrialised giant breathing down the neck of a small landlocked country rich in water resources. The joint public-private Theun-Hinboun power plant in Laos is dedicated to the Thai market, as would be Upper Karnali to the Indian market when built. It is an inter-basin transfer where a 6.2 kilometre tunnel creates a head of 240 meters and generates an average annual energy of 1645 Gwh. The project component also includes the 86 kilometre 230 Kv double circuit transmission line to the power delivery point on the Laos-Thailand border. The project construction started in November 1994 and by March 1998 the plant had started commercial operation, i.e. within 40 months. Despite the use of international consultants such as the Norconsult and electrical and mechanical contractors such as ABB and Kvaerner, the total project cost of this plant was an incredibly modest USD 240.3 million or USD 1144 per Kw. The ownership structure of the Theun-Hinboun power company is indicated in Chart 1 while Chart 2 depicts its complex financial structure.

The government utility, Electricite du Laos, retains the major equity of 60 percent. MDX Lao, with 20 percent equity, is actually a Laotian registered Thai company. Statkraft of Nordic Hydropower is the same Norwegian utility that has a 75 percent equity stake in Nepal's Khimti/Himal Power Company. Statkraft's partner, Vattenfall, is a Swedish utility.

Nepal needs to note how Electricite du Laos got the finance for the 60 percent equity. ADB provided a USD 57.7 million loan to the Laos government at the usual one percent service charge, 40 years maturity period with ten years 'grace'. The government then re-lent USD 51.5 million to Electricite du Laos at 6.21 percent interest, 25 years maturity and five years' grace. The government also provided a loan of USD 8.5 million to the Theun-Hinboun power company but at a higher commercial interest rate of 10 percent with only 16 years maturity and four years grace period. Commercial banks also lent out USD 64.8 million and there was a good portion of USD 58.6 million as export credit. It is high time that Nepal learn a lesson or two from this Laotian model. Thailand, which purchases the power generated by the company, was quite content with a humble 20 percent equity. So was Nordic Hydropower, on whose strength the export credit was availed. After commercial operation, ADB noted, "The equity investment is expected to be fully returned within six operating years of the Project".

The final word
Table 2 demonstrates where Nepal's Upper Karnali stands. It clearly stands head and shouldesr above Bhutan's much acclaimed Chukha and Tala projects. By 2005, India will start commercial operation of the 1,020 Mw Tala hydroelectric project in Bhutan, constructed at a cost of about IC Rs 40,000 million or USD 864 million (at the exchange rate of IC Rs 46.3 per USD). This works out to a capacity cost of USD 847 per Kw. By this same formula, Upper Karnali will cost only USD 254 million and not USD 454.3 million as estimated by some Canadian consultants. The normal 70:30 loan/equity financing ratio would mean a total equity of USD 76.2 million. So what exactly is a "fair and equitable" share for Nepal in this 'jewel'? A 60 percent stake is the minimum that Nepal should settle for. It is not asking too much of HMGN/NEA to hunt for the measly USD 46 million that the 60 percent equity constitutes. The World Bank and ADB, after having invested so heavily in Nepal's power system, cannot abandon it in knee-jerk fashion. But it is HMGN that must nudge the two institutions and GOI/NHPC to create a conducive environment.

One must not forget that Nepal's fledgling private sector should also get a firm berth in this project. The policy of negotiating with the Soaltee Group alone does convey the wrong impression. There are a number of other corporates as well in Nepal—the Choudhary, Jyoti, Panchakanya, Golchha groups – to name just a few. Are they untouchables? Why should they be marginalised? One may then naturally ask, would GOI/NHPC be interested in such a Laotian model? If India is as pragmatic as the Thais showed themselves to be, and there is no reason to suppose that they are not, then they should have no objections at all. GOI/NHPC is well aware that all the goods and services (consulting, civil, mechanical and electrical contracts) including the cheap power accruing from Upper Karnali are all destined to head India's way. GOI/NHPC must remain pragmatic with a modest portion of the project. Otherwise, Nepal will be forced to perceive that it is not just the "jewel" that India wants but the entire "jewellery shop" itself!