The Wall Street Journal billed it a national debacle akin to the World Bank´s withdrawal from the controversial Arun III hydel project in August 1995. But strangely enough, the announcement by the multinational Enron corporation that it was withdrawing from its bid for the 10,800-megawatt project on the Karnali river raised hardly a ripple of concern in Kathmandu.
Enron ´came´ to Nepal on September 1996, 16 months after the Arun III project had ´gone´, the World Bank having withdrawn from the latter in the face of spirited challenges put up by Nepali activists. The lack of concern for Enron´s departure might have had to do with the fact that Enron itself had been lackadaisical in bidding for Karnali, seeming to want only to have its foot in the door on the basis of grandiose claims about unbelievable bonanzas that would accrue to Nepal.
While Nepalis may not have been overly concerned over Enron´s withdrawal, there was every reason to worry about the country´s image visa-vis foreign investors, however. For, Enron being a loud and aggressive player in South and Southeast Asia, its departure attracted an unprecedented press internationally. Increasingly active in the Subcontinent, from Maharashtra to the Sunderban, Enron´s withdrawal was read by the media as proof that Nepal was not yet ´ripe´ for foreign direct investment.
Bad news, good news
The fact of Enron´s departure was true enough, but the reasons for its pulling out was misconstrued by most of the press. The spin that Enron´s publicity department put on its departure, as reported in the Wall Street Journal, was that “the regional market for power may be insufficient at this time for us to continue our development efforts”. The Journal also swallowed whole Enron´s other claim for the departure, which was that “forecasts showed slower growth for China, a primary market to which Enron hoped to sell power from Nepal”.
All this showed an extremely poor grasp of the South Asian market and Asian geography on the part of the Journal and other papers who reported on Enron. This allowed Enron the ability to get away with its story that the departure was based on the unavailability of market.
The fact is that while the Chinese market is indeed too remote to export to, the South Asian market at Nepal´s doorstep is very much there. The power-hungry north Indian grid provides demand enough long into the future, other things remaining the same. What Enron miscalculated was the inefficiencies of the Indian power system, as well as the grey zones that yet exist in the Nepal-India axis in terms of sharing power. The latter point relates to the value of the ´regulated water´ that would accrue to the plains as a result of a high dam at Karnali, and as such becomes a subject of bilateral state-to-state negotiation. This went beyond Enron´s brief.
Essentially, Enron was into Nepal for an adventure which might give it some easy pickings. This was the strategy which in the end led to the company´s retreat.
In proclaiming Nepal´s lack of readiness for foreign investment, the media outlets also failed to take note of some positive developments in the Nepali power sector. Firstly, the cancellation of the Arun III project has actually led to a flowering of several medium-sized projects over the last four years which, according to one analyst, “will provide a third more power in half the time at half the cost” than would have happened with the “crowding out effect” of the 201 MW Arun III project.
What was also ignored was a major US-Nepal joint venture breakthrough only a few months previously – agreement on a 36 MW project on the Bhote Kosi river in eastern Nepal which was approved by the Nepali government. The USD 97 million project has the participation of the US-based companies Panda International and Harza Engineering, and it has been praised as a relatively ´clean´ project in a country where the waters are too often muddied by kickback merchants and influential middlemen. The Bhote Kosi project is managed by a prominent Nepali corporate house, and the dealings have been comparatively transparent.
Unlike Panda International and Hazra Engineering, and in keeping with its reputation internationally, Enron did not enter Nepal through the front door. Rather than make its application to survey the Karnali project with the Ministry of Water Resources and its Electricity Development Centre, as required by the law on prospective investors, the company made a direct approach to the office of the then Prime Minister Sher Bahadur Deuba through its local agent who happened to be a cousin of Deuba´s by marriage.
The Enron proposal was given the thumbs-up by the prime minister´s office, with support from Finance Minister Ram Sharan Mahat, a well-known proponent of big-time investment in Nepal´s water/energy sector. But then Enron´s boat hit a rock in the form of Minister of Water Resources Pashupati Shumshere Rana, who, while also a big-project proponent, showed a sudden disinclination towards the proposal.
It was Rana´s dilly-dallying that proved to be the undoing of Enron´s bid, and this delay may have had to do with an uncertain period of politics in Nepal in which the minister may not have wanted to push through a controversial project. On the other hand, Rana´s lack of reaction either way on the Enron application is strange, given the fact that he has been Nepal´s minister of water resources a number of times and has intimate knowledge of all possible hydropower projects; also, he has long been advocating that Karnali be built before Pancheswar (the much-vaunted Indo-Nepal agreement to build a big dam on the Nepal-India border).
Because the authority to provide a survey licence rests with the Water Resources Ministry, Prime Minister Deuba sent his recommendation in favour of Enron to Rana, who sat on the file from October 1996 through January 1997. Then suddenly, he announced that both the Karnali and Arun projects would be opened for international bidding.
On January 1997, Robert Kelly, managing director of Enron International Renewable Energy, came to Kathmandu and put up a glamourous show for the benefit of ministers, MPs, and senior officials. With slides and overheads, Kelly painted a fiscal and financial Utopia for Nepal. By allowing Nepal to move ahead with the Karnali and Arun projects, said Kelly, the country would earn USD 70 to 130 million annually from royalty and taxes over the first 15 years. After that, the income would be as much as 10 times more. If Nepal did not go in for Karnali with Enron, right now, Kelly warned the gathering of VIPs, Nepal would be losing a total of USD 2 billion as sales revenue.
Whereas Nepali experts have only looked to the Indian market, now Kelly claimed that it was possible to look beyond India to market Karnali´s electricity. In what was thought would be welcomed by supposedly Indo-phobic Nepalis, Enron claimed that it would export Karnali electricity northwards, across the expanse of the Tibetan highlands all the way to the Chinese mainland city of Xian. (Incidentally, if it were that easy to export Nepali electricity to Xian, then Kathmandu´s planners may as well plan on selling electricity to Irkutsk, Tehran, Bandar Abbas, Phnom Penh, and, why not, to Kanyakumari and Colombo as well. See map.)
The fast-paced American presentation of the brave new world did bowl over most of the ministers and MPs present who included members of the opposition Communist Party of Nepal (UML). But not Pashupati Shumshere Rana. However, before Rana could go ahead with his plans for global bidding in the first half of 1997, he lost his water resources portfolio, which fell upon Prime Minister Lokendra Bahadur Chand. As Enron officials flew in and out of Kathmandu, Chand´s government also fell. It was as late as September 1997 that the first official meeting took place between Enron and the Nepali Government. Enron had come to realise, even if late, the need for an accross-the-board understanding on the matter. Upon Enron´s suggestion, an all-party meeting was held to discuss its proposal. Following the meeting, Enron was assured that it would receive the licence it sought to survey the Karnali site.
However, with the Water Resources Ministry not having provided the promised licence as late as November 1997, Enron finally buckled under and in December filed an application with the Electricity Development Centre, as required by law in the first instance. Even that, however, did not work for Enron, and it was yet to receive the promised licence when it decided to eject itself from the entire process on 9 April.
The truth was that Enron had undermined the merits of its own proposal when it tried to jump the queue and get its project approved by political fiat. When Enron withdrew, it did not refer to the problems it had within Nepal, and ascribed the blame instead to the downturn in the market. “The key decision to withdraw was market-driven… the uncertainty of selling a large block of power to certain entities outside Nepal,” said an Enron spokeswoman.
While political uncertainty and a certain amount of malfeasance seem to have been present in Nepal, the major obstacles that Enron faced during its Karnali misadventure seem to have been of its own doing. It tried to bypass the set procedures, deciding to follow them only at the last moment. It made unrealistic claims regarding its marketing ambitions, which naturally made it lose credibility. And, in the end, rather than point to the uncertainties of Nepali politics, the sensitivities of a cross-border project, and the unknowns that regard to the various state electricity boards of north India, Enron sought to hide behind the fig leaf of lack of market. Enron mades its mistakes, but Nepal got its face painted black in the haute finance press in return.
The only person who seemed to be openly lamenting in Kathmandu, however, was former Prime Minister Deuba. Well, he and the present once-again Prime Minister, Girija Prasad Koirala, who used every pulpit as he took office in early April to call for Enron´s return. So much so that when Koirala addressed a group of American businessmen (many of whom would have had no love lost for Enron as their competition), he asked their help to get Enron back to Nepal.
The prime minister´s desperation was political, and understandable, for he did not want to be seen as the person who shooed Enron away. Besides, in the surface-level politics of Nepal, whichever government is able to bring large dollops of foreign aid or projects is seen to be successful. That is why, even though in private conversation Koirala claims to be smitten by the ´small is beautiful´ philosophy of E.E Schumacher, in public he speaks of the need for mega projects to convert the flowing water into green dollars.
That, at least, is what Nepali politicians have been saying ever since they knew that flowing water could produce electricity. Enron, too, thought so, for a while.
Endnote: Visiting Nepal in mid-May, China´s Deputy Water Resources Minister Yan Kequiang dismissed the idea that China had any plans to import elecricity from Nepal. Rather, he was keen on Nepal-China joint investments in hydropower to export elsewhere, i.e., to India.