Because it is there: Foreign money, foreign advice and Arun III

The debate swirling around the Arun III project has been the first controversy about a major development project in Nepal. The democratic changes of 1990 allowed the public to speak up on matters on which they had remained silent for decades, and this dam project planned for the Arun Kosi river in east Nepal provided the first opportunity for those who were concerned enough to question the mistaken developmental path that had led to a project such as this..Since 1987, this one project has become synonymous with hydro-power development in Nepal, as the government and donor agencies seemingly want to consider nothing else. Conceptualised as a 402 megawatt project at the outset, for a site known as Arun III (third of the six sites initially identified in the Arun Valley), the Nepali Government de-cided in 1992 to proceed with the first half of Arun III, to provide 201MW of power. The final decision on funding this oversized "Baby Arun" has yet to be taken by the donors..Internationally, the Arun opposition distinguishes itself by being a dam protest with a difference: clear alternatives have been presented that no one has been able to dismiss. In f ac t, the Arun controversy is not ab out opposing dams as much as it is about ho w forei gn aid defines development priorities of aid-dependent countries like Nepal. It is about the condition-alities countries like Nepal must sub-mit to in order to receive aid, and about how these conditions can in¬hibit real development of the country. The criteria being used by its critics to assess Arun will in future be used for other areas of development and foreign aid-giving in Nepal. In this sense, some new ground has been broken by the opposition..Constitutional GuaranteeThe first public attempt to question the Arun project was at a hearing organised in February 1993 at Hotel Kathmandu by the Nepal Forum of Environmental Journalists (NEFEJ) and ten other organisations. "In keeping with the healthy democratic atmosphere prevailing in Nepal, the promises of the Constitution both on the right to development and the right to information, as well as the excep¬tional dimensions of Arun III itself, it is appropriate that the project be discussed and debated openly with relevant information at hand," stated the organisers of the public hearing..Apanel of experts had questions ready for the officials invited, ranging from the environmental safeguards being followed to how equity was going to be ensured in rehabilitation. The hundred or so lay persons who attended wanted answers on why hydropower was so expensive in Nepal compared to neighbouring Bhutan, India and China; why all of rural Nepal must bear the burden of providing electricity to urban dwellers; and why Nepali engineers seemed incapable of developing small hydropower plants as a substitute to perpetual dependence on international contractors..Only the representatives of the Nepal Electricity Authority (NEA) arrived to take their seats at the podium, and their answers were limited to technicalities of the project. There was no one to respond to questions on the issues of national hydropower policy, as the chairs set aside for officials of the National Planning Commission, the Ministry of Water Resources, and the Ministry of Finance remained empty..Judging that the main problem lay in the absence of a coherent hy-dropower policy in the country, with the result that no serious thought would be given to smaller alternatives when a project like Arun was proposed, a group of Nepali professionals, some of whom had met for the first time at the February hearing, formed a group the following month called the Alliance for Energy..In a series of white papers and newsletters over the next two years, the Alliance put forward its concerns regarding the high cost of energy from the Arun project, highlighted the risks to the national economy from investing in a single overwhelmingly large project, andlaid out what it called the "alternative approach" to Nepali hy-dropower development..Towards the end of 1993, the Arun Concerned Group, a coalition of human rights organisations, which included activists from the Arun river valley, was formed. One of the first actions of the Group was to file a case with the Supreme Court demanding information from the Ministry of Water Resources and NEA on the Arun project. In a ruling that will no doubt set a precedent for development debates of the future, the Court ruled that the Nepali public had a right to be fully informed about the details of development projects. I£ directed the government to make available to those who made the request a list of all the documents on the project. Only thereafter could it declare which documents were classified and could not be given out..The World BankAs the lead donor organisation in Nepal´s power sector, the World Bank has been the project´s chief defender. The Alliance first encountered the ´donors´ in the form of the Bank´s Appraisal Mission for the Arun project at a stormy meeting in the Bank´s Kathmandu office in May 1993. The Asian Development Bank (ADB) and the German Bank of Reconstruction (KFW) were also represented in the Mission, whose job was to collect information and appraise the latest developments on Arun. The members´ attitude was that they would be happy to listen to alternatives the Alliance might present but it was not their job to answer criticisms on Arun III. The government of Nepal must do that..After hearing the presentation on alternatives, Donal O´Leary, leader of the Mission and the Bank´s Task Manager for Arun who had chaperoned the project from the start, argued that there were not enough feasible small schemes in Nepal to produce the power of Arun, and certainly none were studied in enough detail to come on line before Arun. Secondly, he argued that capability within Nepal was limited and what was there could not be built up fast enough to supply Nepal´s power requirements. NEA, O´Leary argued, did not have enough capable experts to be spread over a number of construc-tion sites, and involving the private sector would only increase the cost of energy for the Nepali consumer, as it would have to take loans at commercial rates and also plan to make a profit..The Investment Plan for the NEA prepared in May 1993 with approval from the World Bank had Baby Arun coming on line in 2002, with over 100 MW of diesel-generated power filling the rising demand during the interim nine years. O´Leary´s Mission defended this Plan as the most cost effective solution for power generation in Nepal, as also verified by the Least Cost Generation and Expansion Plan (LCGEP), an earlier exercise sponsored by the Bank which concluded that Arun provided the least cost energy addition to Nepal´s grid..The Mission members were forthright in stating that arranging financing for one large 200 MW project was a lot less work for them than arranging financing of a basket of ten 20 MW projects, which would mean ten funding packages, ten panels of experts, ten detailed feasibility studies, and as many contractors. They argued that it takes six years to complete studies and to arrange funding for any hydropower project no matter what its size and four more years to construct it, thus there was little point in looking at small schemes..With Nepal´s annual power require-ment growing at around 25 MW per year, clearly, schemes of smaller than 200 MW capacity were of little interest to the appraisal team..Interestingly, when the Ap-praisal Mission returned to Kathmandu for its next visit in September 1993, they had made one significant addition to the NEA Investment Plan. The new plan had the 100 MW (first phase) of the Kali Gandaki ´A´ project coming on line in the year 2000, two years before Arun. It also acknowledged that Khimti (60 MW) and Modi Khola {14 MW) in the private sector would be on line before Arun III. This modified Investment Plan was based on a revised projection of annual growth in power demand from eight percent to ten percent. This represented amajor reversal from a position the Bank had held as recently as May that no other hydropower scheme would be able to come on line before Arun. However, by notching up the growth rate of demand. Kali Gandaki, Khimti and Modi were no w presented as complementing Arun, rather than as alternatives..The Arun opposition´s dialogue with the Bank culminated in a meeting chaired by Joe Wood, Vice President for the South Asia Region, at the Bank´s Headquarters in Washington DC on 28 June 1994. The meeting concentrated on the issues of alternatives to Arun, environmental mitigation and social equity issues and, finally, access to information and public participation. At the end of the day. Wood promised to take into account the issues raised by the NGOs. Thereafter, the NGOs also met with the major Executive Directors of the Bank, who are the ones that projects once they are brought to the Board by the Bank management..The Staff Appraisal Report which was presented by the South Asia Region office at the end of August 1994 was disappointing. Wood´s office had merely used the NGOs´ reasonings to polish its own arguments and had not made any change in the strategy and investment plan of hydropower schemes for Nepal..While in Washington DC, the NGOs also met and challenged Richard Stern, Director of the Bank´s Department of Energy and Industry, on the Bank´s LCGEP exercise. It was Stern´s department which had provided the professional input to the South Asia office in analysing the best power investment for Nepal. It emerged that the Bank had actually done an internal comparative study in the summer of 1993 to compare costs of two plans, known as Plan A and Plan B. Plan A represented the investment plan as it stood with Baby Arun coming on line in2002r and Plan B looked at a basket of six schemes in the 30 MW to 80 MW range supplying power to the grid till the year 2010, when Arun would come on line..Evidently, the comparison was not at all conclusive, showing that in a high grow th scenario, Plan A would be five percent cheaper for the coun¬try and in a low growth scenario. Plan B would be cheaper by the same amount; and this too after an arbi-trary 20 to 40 percent cost addition was made to the smaller schemes to account for the "uncertainty" of less detailed studies. In May 1993, the Bank had favoured the lower (eight percent) demand growth scenario which would have proved Plan B was cheaper, but by September it had accepted the high growth (ten percent) scenario, which meant an immediate construction schedule for Arun..Director Stern conceded to the Nepali NGO representatives that "to the limit of economic and scientific analysis my department is not able to recommend one plan over the other." So what did then determine which Plan the World Bank is finally pre-pared to fund for Nepal? Said Stem: "Government of Nepal´s strong com-mitment to the (Arun) project is the determining factor for the Bank´s support".Inspection PanelUpon their return from Washington DC, the Arun Concerned Group filed the first-ever case with the Inspection Panel of the World Bank on 24 Octo-ber 1994. The Panel is an independent body, newly established by the Ex-ecutive Directors of the Bank, to investigate claims from people affected by the Bank funded projects on whether the Bank Management has followed its own Operational Directives and Policies..The ACG claim cited violations, in the Bank´s preparations of Arun III, of the Bank´s Operational Directives and Policies on Environmental Assessment, Indigenous Peoples, Involuntary Resettlement, Disclosure of Information, and Economic Evaluation of Investment (Alternatives). Unfortunately, the Executive Directors clipped the wings of the Panel by limiting its inquiry to only the first three directives. The Bank´s policy on disclosure of information, the Directors claimed, was evolving so quickly that it was difficult to judge viola-tions; on the question of inadequate analysis of alternatives, they passed judgement that "the most appropriate alternative is ultimately a matter of judgement as to when enough in-formation is available to make a pru-dent decision.".By not including the issue of alternatives in the authorisation of investigation by the Inspection Panel, the Executive Directors side-stepped the need to inquire into whether Arun represented the best investment in the power sector for Nepal..The Panel finished its report and submitted it to the Executive Directors on 21 June. The report is said to be critical of the Nepali government´s progress so far on rehabilitation and involuntary resettlement of those displaced by the access road to the dam site. According to reports, the inspectors have also criticised the Bank itself, for having failed to follow its own policy on resettlement by not supervising this component. The issue of alternative economic analysis, being kept out of the ambit of investigations, was left untouched by the panel..The Bank management is now expected to pressurize the govern-ment of Nepal to take action on the issues of environmental mitigation and rehabilitation pointed out by the Inspection Panel so that the project can be taken to the Board of Executive Directors for approval sometime in October 1995.All Those In FavourRam Saran Mahat, the Vice Chairman of the National Planning Commission under the Congress government till October 1994 and arguably its loudest development ideologue, puts forward most clearly the position of those in Nepal who supp ort the Arun project in its present configuration. His argu¬ments are as follows..International experts say this is best for us. All aspects of the Arun project have been studied to the greatest detail by renowned inter-national experts who have found the project to be sound on account of risk from glacial lake outburst floods, environmental issues, affordability, and ´crowding out´ of other sectors. Arun provides the least cost energy for Nepal. The Bank´s LCGEP studies in 1987, 1990 and 1994 have all confirmed this.We need big power projects. Nepal has no choice but to develop large projects if it wants to supply urban centres, promote industrialisation, and export power. We cannot wait 50 years for Nepali capability to be built so that it can construct the large schemes we need today.Money from donors is available. International sources have committed money for Arun and this money is not transferable to other projects, as alternatives have not been studied. Banks provide money on a project-by-project basis and do not give chunks of money to countries to spend at will. Donors are prepared to fund this project, we cannot afford to lose the funding by asking a lot of questions on the project and proposing alternatives that are only theoretical. Endless protests by NGOs and the arrival of newly elected governments that want to review the project again and again might well result in ´donor fatigue´. Eighty percent of the funding of the project is in grant form and does not need to be returned. The terms of funding are too good to turn down. We cannot let go of the bird in hand in anticipation of two in the bush..Across the political spectrum, similar sentiments continue to be heard. The Left government, while it did come to power full of scepticism about the project´s appropriateness, has quickly joined the ranks of those who see no alternative to Arun. Prime Minister Man Mohan Adhikari reportedly said recently in Copenhagen: "The donors are ready to fund this project. We will proceed with it. We do not have a lot of choices." Pashupati SJB Rana of the Rastriya Prjatantra Party, a Minister for Water Resources under the Panchayat, has stated from a number of public platforms: "One has to think big to make progress in this world. If Prithvi Narayan had not thought big where would Nepal be today? We would do Karnali if we could get funding for it."Neo-Gandhians of NepalThe arguments of Mahat and his peers are quite coherent in themselves, and the dominant developmental culture finds them convincing if not com¬pelling. It would be surprising if this were not so. After all, in Nepal, these same arguments—use foreign aid because it is there, ask the foreign consultant, do not ask the locals— have been used in almost 40 years of development to justify projects as diverse as the Prithvi Highway, the Marsyangdi Hydroelectric Project, the Narayani Lift Irrigation, and the Karnali Bridge..Except for persons such as Devendra Raj Panday, former Finance Secretary and subsequently Finance Minister in the hiatus after the people´s movement of 1990 (see "The Enigma of Aid", Himal Mar/Apr 1992), few Nepalis in or out of government have questioned the debilitating impact that foreign aid has had on the country´s progress or asked if the prevailing aid and development paradigm can be challenged in favour of one that benefits Nepal more..The Arun debate represents the first instance where the challenge is specific and asks the question, "Does Baby Arun in its present form represent the best use of aid money for the development of hydropower in the concern?"The controversy challenges all political parties to look within themselves, to go back to their defining ideologies, and to provide answers on the path of hydropower de-velopment the country should follow the prevailing approach or the "alternative approach"..When asked if the Arun project was not contrary to the Nepali Con¬gress Party´s ideology, which was Gandhian and in line with E.F. Schumacher´s SmallisBeautiful,Maha. clarified, "My leader B.P. Koirala believed in a Gandhian economy. I disagreed with him and have consistently argued that in today´s world we will isolate ourselves with a Gandhian economy." As if to stress the point, the Ministry of Water Resources sent a fax on 8 February 1994 threatening to close down the Kathmandu office of the Intermediate Technology Development Group (founded by Schumacher in 1965), for suggesting to donors that they sup-port small and medium hydro alter-natives in place of the Arun project..The Eggs in the BasketThe arguments against the project are that Arun puts the country in grave economic risk,and that the conditionalities are unacceptably severe and restrictive..Risk to the social sector. Martin Karcher, former Division Chief for Population and Human Resources in the Bank´s South Asia Region office resigned from the World Bank after 29 years of service because he objected to the Bank´s handling of Arun. He makes the following point: a large project like Arun only starts to produce power once it is 100 percent finished. A 90 percent completed project still produces no power. Imagine a scenario where in the stipulated eight years of construction the project might be 75 percent complete and have a 20 percent cost overrun (not an unusual situation, as Bank records show that 40 percent of the Bank funded schemes have significant cost and time overruns). With load-shedding building up, the government of that time will be under tremendous pressure to take resources out of whatever sector it can—health, education, rural transport—to complete this project, especially if this is the only major power plant under construction..Risk to the national economy. Simply put, the danger is that of putting all eggs in one basket. Like other hydropower schemes in the deep Himalaya, Arun would also be under risk of being washed away by GLOFs and other kinds of sudden flood. From a national strategic point of view, it is dangerous to build a single large project at one end of the country. It becomes even more risky when by the time the Lower Arun and Upper Arun projects are completed, the Arun valley could be supplying over two-thirds of the power on the national grid. One flood of great intensity of the kind that has occurred in the Arun could wipe out theNepali economy. A sound strategy requires dividing the power plants among a number of river valleys..Riparian risks. An additional problem with the Arun project not shared by others in Nepal is that over 80 percent of the waters at the project site have their origins in Tibet. The 500 km stretch of the Pengqu (Arun) as it flows through Tibet provides numerous opportunities for irrigation projects to withdraw water. One such project, the Changsuo Basin Irrigation project inside the Qomolongma (Mt. Everest) Nature Preserve, meant 1 to irriga te 9000 hecatres, has been operational for the second dry season this year. A diversion across the Fengqu and the main canal have been constructed; once the proposed 227 km canals of the distribution system are built, this one project alone can draw up to a third of the dry season flow of the Arun. China has reportedly applied to the UNDP for funds to develop this distribution network..China has thus been actively planning to withdraw water upriver on the very river on which Nepal plans to place its only major power scheme. This is unacceptable risk, there is not an international court where a lower riparian can contest the consumptive use of water by an upper riparian..Risk of dooming the hydropower sector. The Arun project represents a serious threat to the future of hydropower development in Nepal because it will siphon funds away from other prospective investments. Arun is to be funded jointly by all four of Nepal´s largest donors (the World Bank, ADB, the Germans and the Japanese) and will consume a very large part of what hydro money is available to Nepal in the coming decade. There simply will not be money for two parallel paths of hydropower development..If the country does not begin to build small and medium hydropower schemes today, Nepali engineers and consultants will never get the opportunity to fully design and execute their own schemes. Nepali contractors will never get a chance to construct them, and Nepali banks will lose the opportunity to finance schemes supplying power to the national grid. This in turn will mean that hydropower produced in Nepal will never be competitive..Conditionalities. Arun comes packaged with conditionalities which represent an insidious threat to the country´s development and to its democracy. The two most immediate conditions, set by the Bank, are that NEA increase electricity tariff by a further 124 percent before Arun comes on line, and that the Authority take permission from the Bank before it builds power plants of more than 10 MW capacity..Because of the size of project, the conditional! ties go beyond the hydro-power sector and into the running of the Nepali economy as a whole. The bank has made structural adjustment reform´ a precondition for Nepal to receive loans to build Arun III. If the Nepali government and NEA, for a whole host of potential political, economic and other societal reasons, cannot maintain managerial and budgetary discipline as detailed in the project financing and loan documents, then the Bank will slash credit flows to Nepal by half to one-third of current levels—and not just in the power sector..If the electricity tariff is not increased as per the schedule set by the Bank, Nepal risks losing funding not only for Arun but all other sectors that the Bank funds—by up to two-thirds as a penalty. Similarly, if the World Bank is unhappy with the Ministry of Finance budget which is announced every July, ongoing funding for Arun can come to a grinding halt. Finance Minister Bharat Mohan Adhikari´s 11 July budget announce-ment for the financial year 1995/96 is a major test case. Will the Bank consider Nepal´s development budget for this year (which has dramatically increased spending through direct rural disbursements and by initiating a host of new social welfare programmes) to be at variance with the Bank´s reform programme?.According to the existing agreement (of June 1994) on the project, the cost of taking on Arun is that no matter which government comes into power, the real macro-economic policies of the country for the next decade will be fixed and tied to a reform programme, one that has been set by the Bank. Few governments would be willing to challenge the Bank, for fear of having funds withdrawn from the country´s largest ongoing develop¬ment project. Essentially, elected representatives who make up the Nepali government would not be free any more to evolve innovative strategies of development for the country. Their hands would have been tied by the Bank.The Alternative ApproachThe alternative approach espoused by the Alliance for Energy is based on the premise that hydropower should be cheap for the Nepali consumer and competitive to sell to India. Nepali engineers and workers should gain the capability to build power plants, the sector should use Nepali money, it should create jobs for Nepalis, and power projects should be spread out across the country..Inexpensive kWh. There is only one way to make hydropower inexpensive in Nepal, to make it affordable to Nepali consumers, and competitive for sale to India. And that is to get Nepalis to build the plants themselves. In India, if the cost of installing 1 MW of hydropower crosses the NRs 10 crore mark, it is considered a risky investment. In Nepal, rates are routinely twice as high as this. In the case of Arun, it comes to NRs 27 crore. However, the Butwal Power Company, using Nepali engineers, has built the 5 MW Andhi Khola Project and the l2MW Jhimruk at rates of NKs 5 crore and NRs 8 crore per MW respectively (1995 rates).Decentralised hydropower development. The alternative app¬roach envisions small hydropower schemes of less than 20 MW size built in a number of districts spread throughout the country. These schemes could be owned by private companies who would sell power to the national grid. They could also be owned by municipalities and districts which would generate power, consume what they need, and sell the remainder to the national grid. These decentralised producers would sell power to the NEA grid at a publicly announced fixed buy-back rate. NEA should make up the shortfall of what the private sector and the districts cannot build, but would otherwise concentrate on managing the national grid and distribution networks. This model has worked in all the major hydropower producing countries, including Switzerland, China and Norway.Use Nepali money. As far as possible, these schemes would be funded by commercial banks in the country or by the sale of national hydropower bonds in which Nepalis can invest. In the same way that Nepali engineering capability is not being used and thus is not enhanced within the prevalent paradigm of building large schemes through foreign aid, similarly, Nepali money is sitting idle when it could be used to develop hydropower in the country. Stagnant money that is presently merely helping increase real estate prices in Kathmandu Valley can easily provide the engine for hydropower development.Hydropower must create jobs. The construction of hydropower schemes is an industry in itself. If a decentralised, labour-intensive hydropower strategy is employed, within a decade this industry could be employing as many as 35,000 people directly and 200,000 people in support activities. The added advantage is that workers would not crowd the cities, and they would be employed in rural areas all over the country.District development. Imagine a situation where each of the 75 districts in Nepal received 72 crore rupees over the next eight years for hydropower development from the central government. With that much money, each district could develop its own hydro station of 7 to 10 MW. On average, a hydro scheme of this size will generate NRs 10 to 15 crore worth of electricity a year at present rates. If the initial investment were provided to the district on loan terms similar to what NEA receives, the repayment on this would be around NRs 7.5 crore each year and the rest would be in¬come for the district..The district would use the money it earns from electricity sales to the grid to electrify itself as well as to spend for education,health, roads and other development activities for which presently it depends totally on grants from Kathmandu. Hydropower is one of the few resources that mountain districts can sell to urban markets. Use of an investment equivalent to what is proposed for Arun would enable all 75 districts to graduate "from being given a fish every day to lear-ning how to fish". Because road connection is needed to build a hydropower scheme, this strategy will also provide the district with two pillars of the modern economy at one stroke—roads and electricity.Where the Decision LiesThe final argument of Mahat and others who support the Arun project is that Nepal cannot afford to refuse money received on concessional terms, and that the donors will not agree to substitute alternatives that are not well studied. This supposedly clinching argument holds no strength..Of the four largest donors who have committed money for Arun, Germany provides the only grant, amounting to around 11 percent of the entire cost of the project. This grant was earmarked by the Bundestag for the Arun project. However, consider the following exchange between MP Chris top h Matschie of the Social Democrats and the German Parlia¬mentarian State Secretary of the Ministry for Economic Cooperation:.Question: If a decision is made not to s upport Arun 111, is it possible to redirect the grant of DM 235 million of Germany for other development projects in Nepal?.Answer: On principle this is pos-sible. Yet DM 23.5 million of the DM 235 million assigned for Anin III have been spent for engineering services. For the remaining DM 211,5 million, the replacement clause for the benefit of other projects is valid and binding by international law if the project is not realised. However, Nepal´s limited absorption capacity should be mentioned in this context..Clearly, the remaining DM 211.5 million is available for other projects as long as Kathmandu is willing to make a case. The warning to be heeded is that Nepal´s absorptive capacity is so low that there is a d anger the money would be frittered away in the ab¬sence of a large project like Arun to use it up completely..The money from the two multilateral banks and Japan are concessional soft term loans. It is difficult to predict what the Japanese will do, but it is a fact that they have not yet committed in writing that they will provide money for Arun. The World Bank and the Asian. Development Bank lend Nepal money to a level they consider the economy is able to handle. Within this resource envelope, a certain level of invest-ment is considered affordable for investment in the power sector, immaterial of which specific projects are included..There is thus every likelihood that donors and financiers will continue to support Nepal´s hydropower development even if the Arun project is turned down. So the decision, in a real sense, still lies with Nepal. If we are confident that we can develop the alternatives within the next couple of years, none of the money that is committed to Nepal need lapse or go waste. If we are not prepared to do the homework required for this, and expect that the donors will continue to spoon-feed us and prepare the alternative projects for us just as they prepared the Arun package, however, there is really little sense in rejecting Arun.