West Seti Project - a Nepali Perspective

(Courtesy: Ratna Sansar Shrestha, FCA)

West Seti project is one of the best projects of the genre, because it not only generates 3,636 GWh of peak-in energy (750 MW of power) – good quality power – but such power at low cost and also results in flood control in downstream areas, mainly India and dry season augmented flow of 90 m3/s. Moreover, export of hydropower to India from this project results in carbon offset benefit which is tradable and is a good source of revenue.

Part I: Benefits, costs and allocation thereof

Downstream Benefits and Power Benefit

Although, there is no information available on the quantum of flood control benefit, but 90 m3/s of augmented flow during the dry season is worth $ 83 million (equivalent to Rs 5.81 billion) annually based on the principle set forth by the agreement between Lesotho and South Africa[i] for the purpose. We could also develop a mechanism to share such benefit on the precedent set by the Columbia Treaty.

Under Article V: “Entitlement to Downstream Power Benefits” of this treaty “Canada is entitled to one half the downstream power benefits”. The downstream power benefit has been defined by Article VII as “the difference in the hydroelectric power capable of being generated in the United States of America with and without the use of Canadian storage.” Drawing a parallel with the West Seti project, as the installed capacity of this project without a reservoir is just 100 MW, the power benefit of the construction of the reservoir is 650 MW and Nepal, under the principle established by this Treaty, is entitled to 325 MW.

Similarly, under Article VI of this treaty Canada gets a lump sum of $ 64,400,000 as “Payment for Flood Control” from USA. Additionally “the United States of America shall pay Canada in United States funds in respect only of each of the first four flood periods for which a call is made 1,875,000 dollars and shall deliver to Canada in respect of each and every call made, electric power equal to the hydroelectric power lost by Canada as a result of operating the storage to meet the flood control need for which the call was made,” moreover, under Clause (b) of Section 4 of this article US is required to pay to Canada a “compensation for the economic loss to Canada arising directly from Canada foregoing alternative uses of the storage used to provide the flood control.”

Unfortunately, the extant paper work between Nepal and the proponents of West Seti project has deprived Nepal of these innate rights. Nepal deserves to be recompensed for the downstream augmented benefit based on the lines of agreement between Lesotho and South Africa or on the basis of the precedent set by the Columbia Treaty. Failing to emulate the principles set in one of these treaties, there is no point in implementing this project.

Climate Change – Carbon Offset

Emission of carbon dioxide from the use of fossil fuel has resulted in global warming in a larger scale which in turn has induced climate change. In order to mitigate this problem, the Clean Development Mechanism (CDM) has been put in place which is a mechanism within the Kyoto Protocol that allows industrialized Annex I countries to implement projects that reduce emissions in non-Annex I countries (developing countries) and get credits for meeting their commitments to reduce emissions.

Generation of hydropower does result in environmental additionality due to carbon offset by it, in not emitting green house gases (GHG) in environment. As envisaged by Kyoto Protocol, trading in such carbon offset, also known as carbon credit, is already taking place. However, as Nepal is bereft of any fossil fuel exploration activity, and its use of such polluting source of energy as a source of energy is negligible and, therefore, Nepal’s baseline is deemed to be the hydropower which doesn’t pollute. Because, under Kyoto Protocol, a country like Nepal with hydropower as its baseline, environmental additionality is not deemed to be accrued by generating additional hydropower for domestic use, except in the case of hydropower plant of up to 15 MW. Therefore, most of the projects are not considered to be generating environmental additionality. Whereas, as West Seti project exports “clean” power to a country whose baseline is not hydropower, the transaction does succeed in offsetting carbon dioxide.

In view of this, export of hydropower from Nepal to India is a good candidate for trading in such carbon credits for which West Seti project is in a comparatively better position to do so. Of the annual generation of 3,636 GWh, this project is obliged to provide 10% to Nepal free of cost and it will be exporting 3,272 GWh to India each year. As one liter of diesel generates, generally, 4 kWh of electricity, export of power from West Seti will displace 818,100,000 liters of diesel each year in India for generation of power. As the emission factor for carbon dioxide (CO2) for diesel is 2.68 kg per liter[ii], consumption of 3272 GWh of electricity imported from Nepal will offset 2,192,508 tons of CO2 in a year in India. Similarly, as diesel also emits Nitrous Oxide (N2O) and Methane (CH4) besides CO2 and the emission factor as given in the IPCC[iii] for N2O is 0.032 kg CO2 equivalent per liter of diesel with global warming potential (GWP) of 300 and 0.004 kg CO2 equivalent per liter of diesel for CH4 emissions with GWP of 21. Therefore, the export of 3,272 GWh to India each year will also offset N2O by 26,179 tons of CO2 equivalent and CH4 by 3,272 tons of CO2 equivalent. In total the export of electricity from this project will offset by 2,221,960 tons of CO2 equivalent in a year. Such carbon offset has a market under Kyoto Protocol. Although the price of carbon offset ranges between $ 5-15 per ton of CO2 equivalent, for the sake of simplicity, using a median price of $ 10 per ton of CO2 equivalent yields a revenue stream of $ 22.2 million (equivalent to Rs 1.55 billion) per annum.

In view of the numerous benefits, as described above, that construction of this project will educe this is definitely one of the best projects of the genre. However, benefits don’t come alone and there are always numerous and matching costs.

The Costs

But there are costs (beyond the initial investment) involved in building this project in terms of environmental degradation, submergence of forest, cultivable land, etc. that Nepal will have to bear. The project’s reservoir inundates/submerges 25.1 km of the Seti River and a total of 28.0 km of five main tributaries (Chama Gad, Dhung Gad, Saili Gad, Nawaghar Gad, and Kalanga Gad) which displaces 18,289 people[iv]. According to the same report “The permanent project features will require the acquisition” of 659 ha cultivated land, 806 ha forest, 169 ha shrubs, 246 ha grassland, 9 ha abandoned land, 5 ha settlement, 409 ha river feat. and 23 ha rock/cliffs/screes totaling 2,326 ha of land[v]. Similarly, 678 ha will be “utilized for the transmission line ROW.” In total the project will use 3004 ha land permanently. The acquisition of land as such is covered by the EIA report. The project proponent has plans on the anvil to rehabilitate the displaced people by providing land in lieu of cultivated land. However, the land occupied/cultivated by the displaced populace is just 659 ha of cultivated land, comprising 22% of total land to be acquired. In order to rehabilitate the displaced people, the project will be providing land in lieu for the cultivated land in Nepal. In this manner the project will be using Nepal’s additional land for the purposes of rehabilitation. However, the project has no plans to provide land in lieu of remaining 2345 ha land (3004 ha minus 659 ha) that the project is to use. An important question that arises is why Nepal should sacrifice 2345 ha land to provide good quality low cost power to India, which will also enjoy the benefit of flood control in rainy season and augmented flow in the dry season.

But, according to Dr Anand Bahadur Thapa, additional 1,630 ha land gets submerged permanently and 645 ha partially in Banke district, in Holiya, Bethani, Gangapur, Matehiya and Phattepur VDCs, resulting in displacement of 15,174 people, due to Laxmanpur “barrage” in India coupled with the augmented flow. This is not covered by the EIA report and, therefore, no rehabilitation plan has been put in place. This raises the question as to why an institution like ADB is associating itself with such a project. One is forced to wonder if it is happening with its concurrence or complicity.

Clause 7.2(d) of the Project Agreement and Rule 20 of Electricity Regulations, 2050 puts restriction on consumptive use of water in the upstream area in order to ensure adequate water for the project to generate electricity. This restriction adversely impacts following VDCs which will not be allowed to use water in the upstream area for consumptive uses like irrigation etc: Rayal, Dangaji, Parakatne, Bhairabnath, Chaughari, Kotbhairab, Malumela, Matela, Subeda, Luyata, Hemantabada, Chainpur, Sunkuda, Banjh, Khiratadi, Dahabagar, Pipalkot and Kapalseri in Bajhang District, Belapur in Dadeldhura District, Shivalinga, Dhungad, Sigas and Thalakada in Baitadi District and Lamikhal, Mahadevsthan, Dahalkakikasthan, Girichauka & Chhapali in Doti District. The project people are trying to undermine the importance of the issue by saying that there will not be any restriction on drawing of water by the people in these villages for the purposes of drinking. The important issue here is the water for irrigation purposes. Due to the restriction imposed by Clause 7.2(d) of the Project Agreement and Rule 20 of Electricity Regulations, 2050 no new irrigation work will be allowed to be undertaken in these villages. Their attempt to obfuscate the mater will not help the project. Rather, this is the best way to lose their own credibility in the eyes of the people adversely impacted by the project in particular and others in general. Water also will become unavailable for use by locals in the de-watered area which adversely impacts Bayarpada, Banlek, Jijaudamandu, Latamandu and Pachanali VDCs in Doti District and Belapur in Dadeldhura District. The environmental flow of 10% that the project is required to leave in the dewatered area will not be adequate for the residents of the villages on the banks of the dewatered river to undertake irrigation work.

Allocation of Benefit and Cost

After having established the various benefits and costs of the project it is time to assess how such benefits and costs are allocated, which is depicted in the table below:

From the above table it is clear that all of the costs have to be borne by Nepal while benefits go to India making one wonder why Nepal is allowing implementation of such a project. The question that occurs to patriotic/nationalist Nepali people is why should Nepal sacrifice 4,634 ha of land permanently and 645 ha partially in order to provide (a) good quality power at low cost, (b) flood control and augmented dry season flow free of cost to India and (c) also carbon offset benefit to India. As a country there is sense in inundating its land mass in one area in order to benefit other area in terms of flood control and augmented flow which will make multiple cropping possible, including off season planting of high value agricultural produces. But that is not the case here.

As the issue of good quality power at low cost to India is dealt with below, the issue of flood control and augmented flow will be briefly discussed here. It does not require the knowledge of rocket science to understand that building a reservoir – to store the rainy season water and use it during the dry season – does indeed result in flood control during the wet (rainy) season and augmented flow during the dry season. In view of the fact that Seti is a relatively small river compared to Karnali (Ghagra in India) River, although the flood control benefit by building the reservoir will definitely accrue, but may not be highly significant.

However, there is no doubt whatsoever that the retaining water of the rainy season in the reservoir built for electricity generation will augment the flow in the Seti River in the dry season and, consequently, in Karnali in Nepal and Ghagra in India substantially. As 75% of the dry season flow of Ganga River is contributed by rivers in Nepal, Karnali being one of the major ones, the incremental flow will be significant. Only issue that needs to be settled is the quantum of such augment flow, objectively. Dr Anand B Thapa, an eminent scholar, has opined that it will amount to 90 m3/s while others feel that this is slightly overestimated quantum. The issue that needs to be debated is not how much will be augmented – which can be scientifically assessed – but why should Nepal have its land, forest, infrastructure, etc. submerged and have its populace displaced in order to provide additional fresh water to India free of cost. There are people in Nepal who are happy to surrender everything to India, even Nepal’s sovereignty, while paying lip service -cf]7] eQmL_ to the spirit of working to the best interest of Nepal and its people. But the majority, thankfully, will never agree to the sell out of Nepal’s interest in any form. Unfortunately, the majority is neither well informed nor is in a position to stop the hydrocracy (politicos, bureaucracy and intellectuals involved in water resource sector development) from signing away Nepal’s interest, in treaty after treaty; manifesting in the treaties for Nepal’s major rivers like Koshi, Gandaki and Mahakali[vi]. That was a phase where such bi-national treaties were signed and a lot of controversy raised. These people, with the inclusion of Article 126 in the Constitution of 1990 (Article 156 in Interim Consitution), requiring ratification of such treaties by simple majority in the case of treaties of ordinary nature and by two-thirds in the case of treaties that affect the nation extensively, seriously or in the long term, have changed track. They are now putting forth fronting companies which secure Indian interest in Nepal’s water by getting licenses for hydropower. Thus in the name of hydropower development, Nepal’s land, forest, infrastructure, etc. is submerged and have its populace displaced to provide flood control benefit and augmented flow in the dry season free of cost to India.

India's union water resources minister Mr. Saif Uddin Soz had been frank and honest in admitting, with Navin Singh Khadka, BBC Nepali Service, 12 September 2008, that “Our main interest is flood control and irrigation. Those are our first and second priority. If we get hydroelectricity as by product, that will be a bonus for us.”[vii] This is the first time that an Indian official (of highest level) has been candid in admitting as much. Surprisingly, however, this has yet to be understood by Nepal’s hydrocracy. Or it may be a case of them pretending not to understand it, in order ensure that Indian interest is served by implementing projects in the name of hydropower that afford flood control benefit and augmented flow at no cost to India. What galls ordinary Nepali citizenry is the fact that these people parrot the statement that they are working to serve the best interest of Nepal and its people while betraying the nation and the population no end.

This breed of “patriotic” people even sarcastically dismiss the issue by saying that the water from the tailrace of the West Seti project will not just jump into Indian territory and go on to add that between the tailrace and Indian territory the augmented flow traverses over 100 km of Nepali territory. What they don’t admit is the fact that if West Seti project isn’t built as a multipurpose project, with an objective to irrigate Nepali land by using the augmented flow, the augmented flow will fall in Indian lap as a low hanging, ripe fruit, and after using such water during a couple of seasons, they will have a strong case to invoke the principle of “existing prior consumptive use.” It is well known by now that using this very principle the water from Mahakali River – deemed to be a border river and each country being entitled to half water – India got away with 96.5% water and leaving just 3.5% for Nepal. Interestingly, this breed of people even come to the defense of the treaty – and by extension India – by arguing that it doesn’t make sense for Nepali people to clamor for 50% share of the water when Nepal isn’t even able to use 3.5% (such is their patriotism!).

They further demonstrate their “patriotism” by adding that even the water in the rivers flowing in Nepali territory – forget the border rivers – does not exclusively belong to Nepal. They profess to subscribe to the principle of “international water course” and assert that India too has right to the water in such rivers in Nepal. If that is the case then Nepal too has right to the water in Nepali rivers while they are flowing in China. But they never dare to raise voice as such, except to assert Indian right over the water in the rivers in Nepal. This is a shockingly subservient view, as Indian government has already acceded that “HMG shall have every right to withdraw for irrigation and for any other purpose in Nepal water from the Kosi river and from the Sun-Kosi river or within the Kosi basin from any other tributaries of the Kosi river as may be required from time to time. The Union shall have the right to regulate all the balance of supplies in the Kosi river at the barrage site thus available from time to time and to generate power in the Eastern Canal” pursuant to Clause 4 (i) of Koshi Agreement[viii]. It is clear that these people are – advertently or inadvertently – furthering Indian interest, but the Indian government does not seem to subscribe to the principle these very people swear by. Otherwise India wouldn’t have built the Farakka barrage to divert water from Ganga River to Kolkata, thus depriving Bangladesh of the water she is rightfully entitled to – thereby leaving the Dhaka port high and (literally!) dry.

Even if one was to accept the logic of international water course, the augmented flow will not be the “same” water. What the proponents of this concept need to understand is that the augmented flow generated by storing it in a reservoir inundating Nepal’s land is the water with temporal value added by Nepal. Therefore, Nepal is entitled to the “value” that has been created/added by way of storage of such water in Nepali territory. The problem lies in their mindset that the water flows down to India anyways -au]/ pt} hfg]_. The water that flows down during the normal course is the water which is devoid of any value addition. Such water even causes flood during rainy season. But by building a reservoir additional value has been created/added on the free flowing water. Therefore, Nepal is entitled to a “fee” for the value added as such. People advocating allowing such value added water to India free cost can in no way be deemed to be working for the interest of Nepal and its people. This thinking on their part is the other half of the oxymoron statement that the water normally flowing in the river is waste of “valuable” water. They don’t tire of attributing value (hence the relevance of wastage) to the normally flowing water which is bereft of any value addition (neither spatial, nor temporal) but are adamant to bestow value added water free of cost to India.

Carbon offset does indeed occur by the export of hydropower from Nepal to India. It is also true that, due to submerged vegetation in the reservoir, methane is indeed generated by the reservoir. If the carbon offset by the former is more than carbon equivalent emitted by the latter, then there is considerable value in such carbon offset. A pragmatic approach on the part of Nepali hydrocracy would have been to ensure that Nepal isn’t shortchanged of the proceeds of carbon trading emanating from the export of hydropower from West Seti project. But this section of hydrocracy that profess their love for Nepal, wish that no question like this is raised such that Indian establishment becomes annoyed at the ineffectiveness of Nepali hydrocracy in protecting the Indian interest. West Seti project management opines that carbon offset hasn’t been traded for projects larger than 200 MW. There are two issues: One, there is no harm in trying for a larger project. Two, it is incumbent on the part of GoN to ensure that if any carbon offset from this project is traded in the future, Nepal’s rights are protected.

Therefore, under the arrangement for West Seti project, Nepal gets shortchanged in many ways. She has to internalize various costs like inundation/submergence by the reservoir and in Banke district, displacement of people by the reservoir and in Banke district, restriction on consumptive (irrigation) use of water in upstream area, unavailability of water in de-watered area to irrigate. While providing good quality power to India at low cost on top of providing benefit from flood control, augmented flow and carbon trading.

Allurement

In this backdrop one wonders why Nepal is determined to go ahead with this project! The transfer of the power plant to Nepal after 30 years, free of cost has been used (even by the Supreme Court) to justify Nepal internalizing all the costs mentioned above to export peak-in energy at rock bottom price. However, India will keep flood control and augmented flow benefits permanently (even after handover of the plant in 30 years) as “existing prior consumptive use” principle will kick in while Nepal will lose 3004 ha under the reservoir and 1,630 ha permanently, 645 ha partially in Banke due to Laxmanpur “barrage” coupled with the augmented flow to India. In this backdrop it is hard to accept that even Supreme Court verdict has served national interest.

What has been said by the project proponents (echoed with glee by Nepal’s hydrocracy) is that Nepal will receive a project worth $ 1.2 billion free of cost in 30 years. This has got a cross section of Nepali hydrocracy enthralled which has succeeded in spreading the contagion to the uninformed general public. It needs to be remembered that the Present value of $ 1.2 billion to be received in 30-year hence is just $ 68.77 million – not a huge amount worth to be excited about. Similarly, looking at it from another perspective, depreciated value of the asset worth $ 1.2 billion today in 30 years is just, again, $ 48 million (after depreciating the property for 24 years). As the old saying goes, it will be tantamount to people going about bragging about having put on some weight while it was merely a case of swelling of the body. Because, thirdly, by then, although the civil works part may be in a fairly good condition but same will not be true in the case of electro-mechanical equipment which needs to be replaced in 25-30 years.

On the contrary Nepal stands to be shortchanged of $ 2.075 billion (at current price level) for the augmented flow of water over 25 years[ix], even if Nepal is to get back the augmented flow too after the handover of the project. Similarly, Nepal also is not going to receive $ 555 million for the carbon offset during 25 years operation of the plant that she is entitled to. Moreover, it also needs to be remembered that this calculation does not take into account the power benefit that is due to Nepal.

In this scenario, Nepal does not get what is rightfully due to it. But even after hand over of the project India will continue to keep benefit from flood control as well as from the augmented flow. She will end up having right to these permanently as she will use the principle of “existing prior consumptive use.” In Nepal’s case, the land inundated by the reservoir and Laxmanpur barrage will continue to remain unavailable to her permanently, till decommissioning of the plant.

Decommissioning

Besides, there is the issue of decommissioning[x] which both the hydrocracy and the project people don’t like to talk. Although the main source of Kulekhani reservoir, for example, is not based on silt laden river, the dead storage of this reservoir is already 25%. In other words, the capacity of Kulekhani reservoir has diminished to 75% of original capacity in about 2 decades. Seti River carries high silt load and West Seti project will transform into a run-of-the-river project from the reservoir project in about 30-40 years. At that time, after getting it handed over to Nepal, this project’s dam will have to be decommissioned. As the private sector has not provided any budget for this purpose, the government of Nepal will be forced to spend money for this purpose. Meaning, when Nepal is supposed to be “enjoying” electricity from this project handed over free of cost, she will be forced to shell out money for decommissioning which will cost more than the initial investment to build this project.

Part II: Economic Assessment

An objective assessment of a project also needs its economic assessment. The best way to do so is by examining/analyzing various linkages to the economy like backward, forward, investment and fiscal linkages of the specific projects. As the reader have already perused this issue in my paper titled “Irrelevant debate of small vs. big”, only the mark sheet is recapitulated below:

Mark-sheet

One can easily make an assessment of this project by compiling the marks it secures as follows:

The aggregate mark secured by this project is the lowly 16.55 out of a total of 308.5 which comes to just 5.36%. A project’s advisability from national perspective must be decided on the basis of its score on above basis. If a project deserves at least 150 marks out of 308.5 then that project enriches the economy a lot than a project like West Seti.

Part III: Recommendations and Conclusion

In view of the above, the only condition Nepal should allow implementation of this project is by adopting the principles established by the Columbia Treaty. Nepal should receive 325 MW as power benefit under Clause V and payment for flood control under Clause VI which recognizes that the upstream country is entitled to “compensation for the economic loss to Canada arising directly from Canada foregoing alternative uses of the storage used to provide the flood control.”

Alternately, India should provide land in exchange of inundated/submerged land of over 4,000 ha pursuant to precedent set by Sarada Agreement of 1920, the 3rd clause of which reads: “That the Nepal Government would transfer necessary land for the construction and maintenance of canal works which is provisionally estimated at 4,000 acres and would receive land equal in area from the British Government.” because, the inundated/submerged land under the reservoir will never become available for economic/productive uses by Nepal.

The Ideal structure of West Seti Project is as follows:

If above structure is unacceptable to the stakeholders, then the project should be structured as described in following lines. It should be built as a multipurpose project in order to irrigate land in Nepal and the dam height should be fixed according to irrigation need of cultivable land in Nepal. Therefore, the inundation/submergence of land in Nepal should be commensurate to the extent of Nepal’s irrigation requirement only. The electricity should be used to meet Nepal’s need of peak-in energy demand and export only excess energy to India, not power. Besides, as long term PPAs yield low tariff (and vice versa – depicted by the diagram below), no long term PPA should be executed. Only short term PPA should be signed with an eye on Nepal’s need each five-year blocks.

The proponents of the project seem to be trying to obfuscate the important (with high value for Nepal) issues by citing indirect benefits to Nepal in terms of employment generation etc. occurring during construction period which automatically occur in the alternative models recommended above. Similarly, they have a litany of “anticipated spin off benefits” which too does take place in the recommended models above.

Footnotes:

[i] South Africa pays to Lesotho a lump sum $25 million (in 1991 prices) each year for 18 m3/s water from Lesotho Highlands Water Project.
[ii] http://www.defra.gov.uk/environment/envrp/gas/10.htm
[iii] http://www.ipcc-nggip.iges.or.jp/EFDB/find_ef.php
[iv] Source: Environmental Assessment Report, prepared by West Seti Hydro Limited for ADB.
[v] As specified in “Table 3: Land Use on Sites to be Permanently Acquired” of Environmental Assessment Report prepared by West Seti Hydro Limited for ADB.
[vi] First signed away in the name of MoU for Tanakpur power project, but after the intervention of Supreme Court, in the name of package deal, Nepal was betrayed by signing a treaty for the whole Mahakali River which was even ratified by the Parliament – an act of national betrayal.
[vii] A transcript of the interview has been published in Nepali Times weekly, 19-25 Sept 2008, #418.
[viii] Source: “Revised Agreement between His Majesty's Government of Nepal and The Government of India on The Kosi Project.”
[ix] Based on the precedent set by the agreement between Lesotho and South Africa.
[x] Decommissioning means either stopping production of electricity from the plant or the demolition of the civil and electric infrastructure in order to restore the river ecosystem, minimize or eliminate safety hazards and put the river and land resources back to economically productive uses, when the useful life of the project expires.

Flood Control and Irrigation: First and Second Priority of India

(Courtesy: Ratna Sansar Shrestha)

India's union water resources minister Saif Uddin Soz has been frank and honest in admitting, with Navin Singh Khadka, BBC Nepali Service, 12 September 2008, that “Our main interest is flood control and irrigation. Those are our first and second priority. If we get hydroelectricity as by product, that will be a bonus for us.” A transcript of the same has been published in Nepali Times weekly, 19-25 Sept 2008#418.

But Nepali hydrocracy (bureaucrats, intellectuals and politicos related to hydropower) still firmly believes that what India wants is the hydropower. You will remember me opining as follow in this respect. I urge you to review it in the new light.

It’s Fresh Water, Not Energy

One thing is common in all these treaties and agreements – ensuring fresh water for India. Without spelling it out explicitly, Nepal’s right to water in these rivers have been ceded. The issue in terms of downstream benefit in the case of reservoir projects is relatively easy to understand (some politicos refuse to understand the value of stored water while going about lamenting that water flowing in rivers, for which no one will be willing to pay a price without adding spatial or temporal value to it, is going awaste). West Seti project, for example, augments the dry season flow in the downstream areas in India by 90 m3/s, equivalent to 7.77 billion liters per day. In order to understand the value of such water one needs to know that Nepal is planning to invest in the order of Rs 30 billion to bring 170 million liters per day into Kathmandu. Had West Seti project been conceptualized as a multipurpose project, there would not have been an issue of downstream benefit to India. However, as there are no plans for Nepal to benefit from the augmented flow, India will receive such stored water free of cost, besides benefiting from flood control benefits. The issue here is why Nepal should inundate over 4,000 hectares of its land (to build the reservoir and due to inundation in Banke district as a result of Laxmanpur barrage and augmented flow) and displace over 30,000 people just to provide additional water to India during dry season, free of cost. Politicos and bureaucrats sermonize that Nepal is free to use such water while it flows within Nepal. But without a multipurpose project being conceptualized for Nepal to use such water, India, after using the augmented flow during one season, will start asserting the principle of “existing prior consumptive use” and Nepal will lose the right over such bodies of water permanently. This principle has already been used in structuring Mahakali Treaty to the disadvantage of Nepal. This is one way of gifting precious fresh water produced by storing it in Nepal to India.

One will need to study Columbia Treaty under which Canada is compensated for losing alternative use of the land inundated and also for augmented flow in the dry season from USA, besides the power benefit shared between the two countries for constructing the reservoir project. Nepal should have insisted on using this treaty as a precedent in getting recompense for land mass lost due to submergence (including forest resources, wild life, existing infrastructure, etc.) in the case of West Seti project. But …

Another way Nepal is ceding its right to water becomes apparent with some difficulty. Run of the river projects like Upper Karnali and Arun III do not generate augmented flow and, hence, apparently, no water related issues are involved. But an in depth study will make it clear that water issue is involved even in these projects. Section 20 of Electricity Regulation, 1993 guarantees “Right on Water Resources” which says that “The licensee, who has obtained license for production of electricity, shall have the right to use the water resources for the works as mentioned in the license to the extent of such place and quantity as specified in the license.” As stipulated by this section someone possessing a license to a specific site is guaranteed that no consumptive use of water will be undertaken in the upstream areas of the project, which might entail reduction of flow to the project site. By getting various “investors” to secure licenses to sites in Nepal, India has succeeded in ensuring that Nepal is forced to refrain from using the water for consumptive uses in these areas. In this manner too downstream flow to the Ganges is successfully secured with the issuance of each license and Nepal misses an opportunity to use such water, for example, to irrigate its arable land. In order to put things in proper perspective, one needs to remember that the Ganges receives 41% of its flow from Nepal in the wet season and 75% in the dry season.

On the other hand, although quite a few of Nepal’s hydrocracy (bureaucrats, intellectuals and politicos related to hydropower) believe that India badly needs electricity from Nepal, time has already proven that it’s not so. Take the example of West Seti. If India was badly in need of electricity from this project, Indians would have made sure that this project was built more than a decade ago. In other words, they would not have allowed this project to hibernate for one and a half decade. Same conclusion could be drawn from Mahakali Treaty as well. The detailed project report (DPR) for Pancheswar project was supposed to be ready within six months of execution of this treaty. It’s been over a decade now but the DPR is nowhere near sight. From this it could be easily seen that India is not that desperate for electricity from the rivers in Nepal, as is being perceived (and also propagated) by Nepal’s hydrocracy. If indeed India was starving for electricity she could have easily ensured that Pancheswar project (6,480 MW from storage project and 240 MW from reregulating dam) is built and, probably, commissioned by now. By getting Nepal to sign on the dotted lines in the treaty document, India succeeded in legitimizing the use of water in excess of what she is entitled to (50% of the water in Mahakali – deemed to be a border River), which she had been illegitimately using prior to execution of the treaty. And it’s also not that difficult to see that she is in no hurry to get this project commissioned.

Nepal's Military Doctrine

(Courtesy: Chiran Jung Thapa)

Indeed, Nepal is endowed with a distinct martial potential. Known as the land of the fearless and lethal "Gurkha warriors," Nepal's martial prowess has received worldwide acclaim. This is mainly because Nepalis have fended off hostile forces with great resilience and tenacity to preserve the Sovereign and Independent status of the nation. Additionally, the worldwide recognition of Nepal's Military prowess can be attributed to the outstanding martial performance exhibited by Nepalis in numerous global battlefronts.

Nepal's Military Doctrine is an embodiment of Nepal's intention concerning the use of its military power in pursuit of safeguarding its National Interest and accomplishing its National Objectives. By rendering direction to the subordinate concepts like force structure, education and training, operation planning, rules of engagement, and tactics, this doctrine aims to instil a sense of purpose and provide guidance to the men and women in uniform.

This Doctrine delineates the necessity of maintaining a military capability to defend and deter any hostile armed attack against Nepal's National Interest as the primary function of the Military. Essentially, it is a strategic guideline that underscores a firm resolve to guarantee military security to Nepal without any assistance from other states.

The military security of Nepal is guaranteed by denying any aggressor its military objective. If confronted with an unprovoked armed aggression, Nepal's military will adopt self defensive measures in ways that it deems appropriate to dissuade and deter the hostile forces. To serve this purpose, Nepal's military will remain continually prepared for conventional as well as asymmetric confrontations. While maintaining the asymmetric capabilities in its arsenal, the military-training and preparation will be primarily geared towards mobile defence.

In conformity with its strategic objective of institutionalizing peace and promoting prosperity, Nepal's Military Doctrine is peaceful and constructive in nature, and self-defensive in posture.

Any unprovoked armed aggression by any State against the Sovereignty, Independence and Territorial integrity of Nepal will compel Nepal to consider the aggressor as an enemy. Any accomplice abetting the aggressor shall also be regarded as an enemy. And to defend itself from the enemy, Nepal shall employ all available national instruments to put a rapid and decisive end to hostilities and swiftly restore the status quo.

To thwart the threat of military aggression, Nepal shall:
· refrain from branding any state as an enemy
· not employ the instrument of force in its interstate relations
· not pre-emptively deploy its military against any State
· not join any military alliance unless its National Interest is imperilled
· not allow the stationing of foreign troops within its territory
· maintain a military force capable of conducting defensive operations
· consistently train its military to engage in both conventional and asymmetric warfare
· strictly adhere to the charter of the UN and international laws
· continue with its commitment to assist in maintaining international security

Under this doctrine, the following acts shall constitute as threats which will prompt a military response:
· incursion into Nepali territory by any hostile foreign armed force
· armed assault against the Nepali population or the Nepali armed forces by any organized armed group
· armed insurgency aimed at undermining the authority of the state

In addition to its core task of guaranteeing military security, Nepal's military will be prepared to undertake a range of other operations in support of its national interest and strategic objectives. Nepal's Military will be further trained and prepared for 4 additional tasks:

i) Counter Insurgency Operations (COIN):
Nepal has endured a decade long brutal insurgency which pushed the nation to the brink of catastrophe. Notwithstanding the little knowledge and experience in COIN, Nepal's Armed forces were haphazardly deployed to mitigate the threat posed by the insurgents. Devoid of a proper political stratagem, however, the military response failed to yield the intended outcome.

Such recurrence in the foreseeable future cannot be ruled out. Hence, effective and efficient military measures to counter such undesirable recurrences are exigent and imperative. A counter-insurgency manual will be conceived in accordance with the emerging trends in COIN, the capabilities, the needs and the past experiences of the military. Also, a new training facility will be established with the aim of equipping Nepal's armed forces with the skills necessary to engage in COIN.

ii) Peace-Keeping operations (PKO): As a responsible stake holder of the international order, Nepal accords high importance to maintaining international security. Nepal's commitment to fostering international security has been manifested by its robust participation in multilateral peace keeping operations (PKO) under the aegis of the United Nations (UN). Nepal will continue to provide special peacekeeping training to its military and make further efforts to enhance its performance in PKO undertakings. To further reflect Nepal's staunch commitment to upholding international security, Nepal will strive to remain in the hierarchy of top five troop-contributing nations in UN sanctioned PKOs.

iii) Disaster Relief Operations (DRO): With its logistics and mobilization capabilities, Nepal's Military has throughout its history played a pivotal role in DROs. As the likelihood of natural or man-made disaster perpetually persists, Nepal's military will be kept prepared to engage in DROs. In the aftermath of disasters, the military will be mobilized to accomplish three vital tasks: a) search and rescue operations, b) distribution of the temporary relief supplies (water, food & medicine) and c) rebuilding/reconstruction process. A special Rapid Relief Unit (RRU) will be setup within the military to develop better logistics capabilities and more efficient deliverance methods.

iv) Infrastructure Building Operations (IBO): Nepal's Military has played a crucial role in the nation's development. It has been engaged in numerous infrastructure projects. With a competent supply of disciplined labour, the military has delivered on some significant infrastructure projects. During times of peace, one battalion will be specialized and dedicated to the nation's infrastructure building effort.

Taking into account the multitude of tasks assigned to the military, upgrading of military's aviation assets is indispensable. The rugged terrain of the country and the lack of proper infrastructure serve as significant impediments to even the normal mobility of troops. In contingencies, when rapid deployment is warranted, mobilization is further strained and operations are acutely affected due to the proper lack of adequate aviation assets. Thus, upgrading of aviation assets is evidently the most optimal counter-measure against these setbacks.

To enhance it aviation assets, Nepal will aim to increase its fleet of VTOL (vertical-take-off-and-landing) and STOL (short-take-off-and landing) aircrafts. Nepal will conduct a thorough need assessment and feasibility study prior to procuring an optimal mix of VTOL and STOL aircrafts. After procurement, special measures will be taken to minimize the downtime, increase the operability of the each aircraft and ensure an all-weather and all time flying capability. The upgraded aviation capabilities will aim to meet the "RST" (Reconnaissance, Rescue operations, Suppressive firepower and Transport) needs.

On the Highway to People’s Republic

(Courtesy: Krishna Giri)

I do not know much about Tanka P Acharya, who broke the traditional trend by visiting China, and hence can not speculate on the facts of media coverage then. However, when Maoist supremo followed Acharya’s footsteps, many Nepali and Indian tabloid have covered the news as ‘first time’ adding historic, challenging, brave etc. Keeping the tradition of ‘Baleko Ago Tapne’, media and civic societies never bother to compare the trip in its core terms. The purpose of Achary’s trip to China was to show the integrity and sovereignty of an independent nation, when India was trying to swallow the region after freeing from multiple generation of colonisation. Where as, Prachanda’s trip to China was to visit the Mao’s home, a shrine for communists, and to appreciate the success of a totalitarian regime. In Hindu traditions, when people start to do some ‘Subhakarya’, they visit some temple and Prachanda did exactly the same by visiting the Mao’s home to initiate his mission to establish Nepal as People’s Republic. His mission has started from China but it will not be completed without getting blessings from India. And he is back after having mysterious blessings from India. We do not know the contents in that package of blessings but he had illustrated to the world a lucid picture of a Nepali executive head while hugging Indian PM. His posture, gesture, facial expression, and body language were by no means a representation of a PM and if I have to compare that event with some one, I would compare that with a 5 year old hugging an uncle who offers him/her heaps of lollies. Nevertheless, I do respect him as a leader but not his ideology.

Prachanda knows better than any one else about India and her roles in the recent years that give rise to Maoists in Nepal. Their safe hideaways during insurgency; 12 pact agreement arrangements; Jana Andolan II; overthrow of the Monarchy; CA election; and CA alliance for PM. These all have happened only because of India. I do not recall any leader from SPAM who opposed the above roles of India. Maoists have publicly acknowledged that credit to their success goes to wrong moves by the King and 12 pact agreement with SPA. Nepali politics is being rocked by shifting of Indian favouritism from traditional NC to Maoists. These unprecedented moves by India have created havoc among democratic forces in Nepal, particularly NC. Knowing the fact that they have failed to deliver any concrete objectives to people for almost two decades and almost 70% Nepalese people have voted for one or other communists’ party in recent popular poll, the only hope for NC to lingering around POWER was India. Detour Delhi ‘RUN’ by Girija during SAARC summit was not successful to electrify Delhi Palace. Shattered by CA poll results, unsuccessful presidential motive, and upsetting Delhi run, Koirala had shown tremendous fitness in his late eighties to knock every possible political doors to revive the Presidential ‘unholy alliance’, as referred by Maoists. Koirala had two objectives:
1. To show his power and influence in Nepali politics and
2. To send a clear message to Delhi Palace - ‘ We are not finished yet’

India has political, social, economic, and security interests in Nepal. Especially with the recent economic boom, one of the most challenging issues for India is to meet the energy demand. India always have had ‘eagle eye’ on Nepal’s hydropower resources but failed to cooperate with Nepali regimes in the past. Royal regime was dominated by ‘anti Indian’ and ‘nationalism’ sentiments whereas post 2046 regimes were too unstable, controversial and corrupted. India needed a stable regime in Nepal who listens to India. India has realised that what they achieved in 50years with NC can be achieved in 5 years with the Maoists. Maoist’s success in grass level through insurgency and their demonstrated loyalty to India in last few years were compelling enough for India to recognize them as ‘new power’ of ‘new Nepal’. India needs hydro power, a security buffer zone, a social inclusive zone, and a power play agenda in vis-à-vis with China. And Indian can achieve all those objectives through a stable government in Nepal. Maoist’s want to stay in power for at least few decades, declare Nepal a People’s Republic through democratic process, generate 10,000MW of power in 10 years, massive infrastructure and social developments, strengthen youth force and establish labour camps (employment). And Maoists can achieve all these objectives with positive gestures from India.

Recent open remarks made by Prachanda in Delhi to declare Nepal a People’s Republic within 2 years through CA assembly have raised lots of eyebrows among political pundits in South Asia. Maoist’s constant remarks on People’s Republic and India’s unbroken calmness and softness in these notes have left the Nepali democratic forces in very difficult and dangerous juncture. NC, the largest democratic force in the country, is vastly engaged in intra party feud and they have lost grounds in the grass root levels. YCL and PLA control the 90% of rural Nepal and that left the democratic forces to work and plan only in urban areas. Maoists want to finish their unfinished business by not letting democratic forces to go back to rural areas and trap them in urban areas, and suppress them democratically. The way Maoists are heading and the support they are getting from India, Nepal is well and truly on the highway to become world’s newest People’s Republic. To satisfy the democratic process, it may happen through CA Assembly, it may happen through a referendum, or it may happen though next parliament. It all depends on the process that India and US see as more democratic. End of the day, what matters is ‘how others see our democracy’ rather than ‘how we see our democracy’. India finds acceptable democracy in Bhutan, US finds in Saudi Arabia, and China finds in Vietnam. The recent activities by one of the high profile Maoist minister in Siraha and extra judicial killing of a youth NC leader in Kathmandu, have demonstrated the style of governance we going to have in new Nepal. The emergence of militant style youth forces from leftist parties have indicated for transformed approach of ‘Mao’s cultural revolution’. If ‘morning shows the day’, I leave that to you to envisage on the ‘Maoists day’ ahead.

Supreme Court Verdict – Nepal’s Misfortune

(Courtesy: Ratna Sansar Shrestha)

I did an in-depth economic analysis of West Seti project, using it as a model to ascertain whether the concept of “small is beautiful” versus “big is bountiful” is grounded to the reality or not. This was posted early this week under the title: “Irrelevant Debate of Small vs. Big.” The readers will recall that this project received an aggregate of 13.66 marks out of 300 marks from which the magnitude of positive impact (extremely limited) of this project on the macro economy of Nepal becomes clear.

Now, it’s time to examine adverse impacts of this project, which has received green signal from the Supreme Court. There are a couple of important ways this project adversely impacts Nepal:

1. Arun III is a Run-of-River project and it neither inundate/submerge any land nor displaces any inhabitant of the area. You must be aware that Sutlej Bidyut Nigam of India has agreed to provide 21.9% free energy to Nepal after implementing this project over and above the royalty of 7.5%. On the contrary, West Seti inundates 2,750 hectares of land and displaces 18,289 people. But SMEC, the proponent of this project, is providing only 10% as free energy to Nepal (on top of royalty of about 2.89% as royalties and export tax. This is rather highly unfair.

2. I have quoted the above data with regard to inundation and displacement from the EIA report of this project. But these numbers do not depict the whole truth. You must be aware that India has built embankments almost all along and very close to, the border of Nepal in the South, in contravention of international law. The Laxmanpur embankment and Girjapur barrage currently inundates 5 VDCs in Bank district and displaces 15,174 people each rainy reason – about 4 months in a year. With the implementation of West Seti project these 5 VDCs will be inundated around the year due to the augmented flow – by about 90 m3/s – and 15,174 inhabitants will be permanently displaced (instead of just 4 months in a year). EIA prepared for this project, therefore, is truncated and incomplete. Due to this reason 1,630 hectare will become permanently inundated and 645 hectares partially. This fact has been brought to the light by Dr Anand Bahadur Thapa, a water resource expert of repute, by publishing an article on the subject in Spotlight on 28th March 2008.

3. This project, being a reservoir project, generates peak-in electricity which is highly valuable (I am sure people are aware of this). NEA is buying electricity from Chilime project – a run of the river project – at Rs 6.47 (equivalent to US 9.24 ¢ at Rs 70/USD) per kWh and it costs NEA Rs 31 (US 44 ¢) per kWh to generate peak-in electricity from its thermal power plants in Duhabi and Hetauda. Moreover, when Bangladesh wanted to buy electricity from the Indian state of Tripura, the Indians quoted INR 7 (US 16 ¢)) per kWh. In this backdrop the negotiated/agreed rate of US 4.86 ¢ for peak-in electricity generated from a reservoir project is literally taking Nepal for a ride. It needs to be remembered here that the meager energy royalty of 2% Nepal gets will be based on the revenue stream – higher tariff means higher volume of revenue stream and, therefore, higher amount of royalty revenue to the government treasury and vice versa.

4. As this is a reservoir project it generates downstream benefit in terms of flood control in the rainy season, augmented flow during dry season and additional electricity generation capacity. Under the paper work done for this project Nepal is deprived of any recompense for these. Under Columbia Treaty signed between Canada and USA, the former is entitled to such benefits. Specifically under Article V of the treaty, Canada is entitled to one half the downstream power benefits. Applying this principal to West Seti project, the installed capacity of which without a reservoir is only 100 MW, Nepal is entitled to power benefit of 325 MW, as this project’s installed capacity increases to 750 MW due to construction of the reservoir.

Similarly, in the Columbia Treaty there is also provision for (a) compensation to Canada for flood control benefit in USA – due to storage of water during rainy season, and (b) augmented flow in USA during the dry season. USA paid a lump sum to Canada for flood control as well as for the economic loss to Canada arising directly from Canada foregoing alternative uses of the storage used to provide the flood control. Nepal is getting nothing for these downstream benefits that India will enjoy with the completion of this project. From this project India stands to receive 90 m3/s during the dry season which works out to 7.77 billion liters per day. In Nepal 170 million liters per day of water is planned to be diverted from Melamchi River at the cost of $ 310 million. Looked at the issue from this perspective India is going to receive such a huge volume of water absolutely free of cost. This does seem to be fair or justifiable, rather it is unconscionable.

To use another example, Lesotho receives US $ 25 million annually for 18 m3s water it supplies to South Africa. At this rate Nepal becomes entitled to US $ 125 million per annum for the augmented flow of 90 m3s which has been sacrificed.

5. The proponents of this project are going around trumpeting about the benefit to Nepal that will accrue to it after handover of this project in 30 years and don’t forget to add that Nepal will receive this project with a value of $ 1.2 billion. What they gloss over is the fact that this project will not be worth this much due to wear and tear after its use for 30 years. In this manner they also gloss over another serious issue. As the mountains of Nepal is rather young, the silt load in all rivers of Nepal is very high and within a short span of time dead storage in the reservoirs tend to increase (the dead storage of Kulekhani – whose sources are small rivulets with very little silt load – has already reached 25% and is increasing). Once the reservoir gets filled up with silt, India will start clamoring for the decommissioning of the dam. But the proponents of this project have not made any budgetary provision for this purpose. Meaning Nepal will have to foot this bill too in the near future. This will amount to a big set back for Nepal.

Irrelevant Debate of Small vs. Big

(Courtesy: Ratna Sansar Shrestha)

Ever since Schumacher wrote his influential book “Small is Beautiful,” there is a raging debate as to whether Nepal should pursue small hydro development primarily for domestic and local use, or it should go for big dams with electricity for export. On the one side, there are people who firmly believe that “small is beautiful” while people on the other extreme of the spectrum chant the Mantra that “big is bountiful.” They consider their respective mantras very sacred and refuse views of others outright.

As it is, what is small and what is big is very arbitrary. In India, a project of up to 25 MW installed capacity is deemed to be small while in Pakistan this threshold is fixed at 50 MW. But in Nepal, a project of up to 10 MW is categorized as small.


Economic Linkages


Instead of arguing whether a small or big hydropower project is good for Nepal, the assessment of whether a project is “good” for Nepal must be judged from its impact on and contribution to the economy of the nation. Such an assessment can be made by examining/analyzing various linkages to the economy like backward, forward, investment and fiscal linkages of specific projects. In this endeavor, this paper is attempting to examine/analyze the linkages to the economy of Nepal using West Seti hydropower project, 750 MW, undertaken by Snowy Mountain Engineering Corporation (SMEC), to illustrate the point.


Backward Linkage


Hydropower projects are of capital intensive nature, entailing high initial investment. Depending on the nature of backward linkages of a specific project, the contribution of each project to the country’s economy can be assessed by evaluating how much of the initial investment is retained by the economy, resulting in employment generation, higher level of industrialization, increased contribution to foreign exchange reserve, capacity enhancement and capital formation. Absorption capacity of the economy also dictates the value/volume of the backward linkage.

Obviously, if closer to a hundred percent of the initial investment percolates into the economy, the contribution of such a project to the economy due to backward linkage will be very high. Conversely, if the economy is able to retain very little of the initial investment then the benefit accruing to the economy from such a project will be proportionately low. From this perspective, a project which makes substantial contribution to the economy due to backward linkage is good for the country and vice versa.

It is now time to see how backward linkage takes place or fails to take place. As mentioned above, this write-up attempts to estimate the contribution to the Nepali economy by the West Seti project due to backward linkage, to drive the point home. For this purpose, one needs to take a look at the structure of the initial investment[1] which is as follows (the amounts are inclusive of contingency at the rate of 15% for civil works and at 10% for equipment, project management and resettlement, as provided for in the Detailed Engineering Report of the project):





Of the total cost of civil works of $ 469 million, most of it will be incurred for the procurement of cement, steel bars and other construction materials. Although there are two cement factories (other factories mainly grind clinker imported from India and fill in sacks) the production capacity of these are not adequate even to meet the present domestic demand. And there also are a number of factories producing steel bars in Nepal but these too are unable to meet domestic demand (and, moreover, as these use imported raw materials, the percolation from the use of such steel bars into the Nepali economy is very little). Therefore, the requirement of this project will have to be met by imports. The project will, however, be able to source for gravel and sand within Nepal and it is estimated to cost about $ 1 million.

As Nepal is yet to set up industries manufacturing/fabricating electro-mechanical equipment even for projects below 10 MW, the entire budget of $ 180 million is likely to be spent on imports of electro-mechanical equipment for the project. Same will be the case of investment of $ 22 million in the transmission line. However, it can be fairly assumed that it will cost about $ 1 million in Nepali workers in the installation/erection of electro-mechanical equipment and transmission network.

The resettlement entails purchasing land and building houses for the displaced populace and the land and construction materials is expected to cost 50% of the budget. Project management, to be the responsibility of SMEC, is expected to be predominantly expatriate affair and about 10% is expected to be spent on the technocrats from Nepal.

SMEC has been making it public that 5,000 unskilled workers are expected to get employment during the construction period (as have been seen during the construction of most of the hydropower projects, most of the skilled workers will be sourced from foreign countries). Over the construction period, lasting 5.5 years, the workforce at the construction site will be relatively small in the initial years which will peak during the 4th year and will taper off as the time of commissioning of the plant nears. Therefore, it is estimated that the construction of the project will entail 165,000 worker/months. Total payment to the workers over the construction period is estimated amount $ 15 million at the rate of Rs 6,000 per worker/month.

Multilateral Investment Guarantee Agency (MIGA), being a member of the World Bank group, the premium of $ 34 million will be spent overseas. Similarly, as debt financing for the project will be coming from foreign financial intermediaries, the interest during construction and other financing costs will not percolate into Nepali economy. It is expected that about $ 0.2 million will be spent on lawyers from Nepal and the balance of $ 17.8 million will be paid out to foreign lawyers. SMEC is entitled to a development cost of $ 27 million for preparing the project and it can be fairly assumed that about 10% of this amount will be spent in Nepal.

In this manner, of the total initial investment of $ 1,097 million, about $ 39 million will be spent in Nepal – amounting to 3.56% percolation into the domestic economy. Therefore, the employment generation, level of industrialization, capacity enhancement and capital formation will be limited by this percentage. In the similar vein, although this project entails foreign direct investment of $ 1,097 million but the contribution to foreign exchange reserve of Nepal (another form of backward linkage) will be limited to $ 39 million that will be spent in Nepal. Rest will come to Nepal as the foreign direct investment and will desert the country immediately due to outlays in foreign countries.

Had the absorption capacity of Nepali economy been better, the percolation or backward linkage benefit of this project would have been higher. Conversely, backward linkage benefit of other projects which are not too dependent on foreign sources will be higher. An ideal hydropower project from this perspective will result in 50% or more absorption of the initial investment. Therefore, the debate should be over choosing projects that results in higher backward linkage benefit based on the absorption capacity of the economy. It should also be remembered that the absorption capacity of an economy is not static. It grows with the industrialization of the country. Today backward linkage benefit from this type of project is less than 5% but within a couple of decades it will be closer to 50%. Therefore, from the perspective of absorption capacity of the economy West Seti project is not an ideal size in the near future but it will become an ideal size in a couple of decades.

Forward Linkage


Another important way a hydropower project can benefit an economy is due to the forward linkage benefit which entails using the electricity domestically. Use of electricity by an economy results in multiplier effect on the economy resulting in employment generation, higher level of industrialization, increased contribution to foreign exchange reserve, capacity enhancement and capital formation. The electricity, upon it becoming available, can be used in all sectors. It can be used, for example, in agro-processing, like tea which is currently processed using furnace oil or firewood. With this one change economy will benefit from decrease in import of fossil fuel that drains hard currency, decrease in deforestation and decrease in environmental pollution. Similarly, by using electricity for irrigation, farmers, consequently the economy can benefit due to cultivation of multiple crop, cash crop, etc.

Currently industrialization in Nepal is stifled due to non-availability of abundant electric energy. Even existing industries have to rely on fossil fuels which are not cost effective – resulting in higher cost of production that impacts both the industry and its consumers. But it also drains foreign exchange reserve and also results in environmental pollution due to emission of greenhouse gasses. The fate of transport sector is also not different from the industry which is heavily dependent on imported fossil fuel requiring convertible foreign exchange and resulting in environmental pollution in massive scale. Similar parallels can be drawn in connection with tourism, health, education and domestic sectors.

From the above it is clear that use of electricity generated by a project results in import substitution to an extent and, therefore, positively impacts foreign exchange reserve. However, there are “economists” who believe that exporting electricity from such a project to India helps mitigate the problem of balance of payment deficit of Indian currency – to the extent of total revenue generated by this project by exporting electricity. This, unfortunately, is untrue which can be substantiated by looking at future cash flow of the project subsequent to its commissioning. For the duration of debt service period of about 15 years, of the total revenue generated by this project a large portion will be used up in the payment of interest on the debt and repayment of a part of the principal. Anything left after meeting the debt service requirement as such and operation and maintenance cost will be distributed as dividend of which only 15% will reach Nepal. However, as Government of Nepal is borrowing money to invest in the equity of this project company, most of the money from dividend in the hands of GoN will be spent in meeting this part of the debt service obligation. Therefore, the only “foreign exchange” that will enter and stay in Nepal in the first 15 years of project operation are the energy and capacity royalties, which adds up to about 2.66% of the total export revenue in the case of this project (this is further elaborated under fiscal linkage below).

If the electricity generated from a project like West Seti is to be used domestically, the forward linkage benefit to Nepali economy would have been tremendous. In order to simplify the matter, as only 10% of electricity generated from this project will be available to the Nepali economy,[1] we can award it 10% mark for forward linkage.

From the perspective of forward linkage, therefore, the debate should focus on use of the electricity domestically, instead of size, in order to ensure that Nepal benefits from the project. In other words, if a project is built for domestic consumption, irrespective of size it would be a better project than an export-oriented project.


Investment Linkage


Under investment linkage the economy will benefit due to construction and operation of the project from the perspective of return on investment. The return, in the hands of the recipient, will either be used as increased purchasing power which will result in employment generation or will be saved and invested again resulting in capital formation. If a project is fully financed domestically then the financial intermediaries would have earned interest on their investment and the equity holders would have received dividend both of which would have stayed in Nepali economy.

In the case of West Seti, as all debt is being sourced from foreign financial intermediaries and all equity investors are foreigners, except for 15% of GoN, almost all of the return on investment will not percolate into Nepali economy. If the GoN was to take up 15% equity in this project from domestic sources, at least 3.75% of the return from the project would have accrued to Nepal. But, as GoN is borrowing money to invest in this project whatever dividend GoN will receive from this project will flow right back to the lender in debt service. Therefore, this project gets less than 0.1% mark on this count.

It is now clear that the country’s economy gains due to construction and operation of a project as such if it is fully financed from domestic resources due to investment linkage. At this juncture, Nepal is not in a position to invest from its domestic resources in this sized project. However, in a couple of decades this will not be the case. Therefore, from the perspective of investment linkage, this sized project is not an ideal size now but with the gradual increase in the capacity to mobilize fund domestically even this sized project will become appropriate for Nepal.

Fiscal Linkage


The fiscal linkage of a project to the economy of the country manifests in its contribution to the treasury – in the form of payment of various rates, taxes and duties. A hydropower project’s fiscal linkage takes place in two stages – during construction period and post commissioning.

For the construction/erection of a hydropower plant, as described above, a lot of materials and equipment are required to be imported. The hydropower projects are entitled to exemption from custom duty on its import of plant, machinery and equipment, except for 1%. Exemption of value added tax (VAT) on the import of plant, machinery and equipment is applicable for projects up to 3 MW only and projects bigger than this size are required to pay VAT on import of such items. However, as this project is entitled to exemption from sales tax (applicable prior to imposition of VAT), the chances are high that GoN will interpret the legal provision to grant it exemption of VAT. In this manner, this project will be paying about $ 2 million as custom duty on the imports of electro-mechanical and transmission equipment at the rate of 1% during the construction period. This works out to 0.18% of the total initial investment. Apart from this, this project will not be making any contribution to government treasury during the construction period. Compared to this other projects (above 3 MW) would be contributing 2.31% of the total initial investment to the treasury – as 1% custom duty and 13% VAT on the electro-mechanical and transmission equipment. What West Seti Project pays into the treasury as such works out to 7.79% of what other projects would have paid.

During the operational period a hydropower project is required to pay capacity royalty of Rs 100 per kW and energy royalty of 2% of the revenue during first 15 years of the project operation. Due to variation in plant capacity factor of each plant (which in turn is governed by the factors like hydrology, exceedence, etc.), the total contribution to the treasury in the form of royalty ranges from 2.4% to 2.85% of the total revenue of a power plant. Under the prevailing Electricity Act, 1992, the applicable rates for both capacity and energy royalty are common to all projects and this project will be paying 2.84% as royalties. Under current Nepal law, a hydropower project is required to pay income (corporate) tax at the rate of 20% of the net income post commissioning. However, West Seti project is exempt from paying income (corporate) tax. Therefore, this project will not be paying any taxes to GoN during the first 15 years’ operation, except for a very meager export tax of 0.05% of the revenue, which other projects do not pay. Whereas, other projects will be paying income tax at the rate of 20% of the net income, which works out to over 7% of the revenue during the first eight years (debt service period) and exceeds 14% from 9th year onwards. Moreover, under the Project Agreement GoN has exempted even the tax on interest paid out to the lenders and dividend distributed to equity holders/owners. Other projects do contribute to the national treasury through these taxes as well. Compared to this project, paying only 2.89% as royalties and export tax (and no income tax) after commissioning other projects will be paying income tax additionally – this project will be paying less than 25% of what other projects will be paying.

Furthermore, as this is a reservoir type project, it augments the downstream flow during the dry season by 90 m3/s; equivalent to 7,770 million liters per day (MPLD). No arrangement has been made to receive recompense for this. No efforts seems to have been made even to emulate the precedent set by Columbia Treaty between Canada and USA. Lesotho, a country in Africa, gets US $ 25 million annually for the augmented flow of 18 m3/s from South Africa. Using this rate Nepal is being short changed of US $ 83 million per annum (for the augmented flow during 8 months each year).

From this it is clear that the fiscal linkage of West Seti project, both during the construction period and during the operation period, with the government treasury is tenuous at best. In other words, the contribution to the treasury of this project to the GoN is quite low compared to other projects (7.79% of what others pay during the construction period and one fourth of what others pay subsequent of completion of the project).


Conclusion: Mark-sheet


This project contributes 3.56% as backward linkage, 10% as forward linkage and 0.1% as investment linkage (the lower fiscal linkage contribution of this project is not considered here as it is not due to the size). From this it is clear that out of the aggregate of 300 marks this project’s tally is a meager 13.66. Therefore, the debate should not be as to the small or big project. A project’s advisability from national perspective must be decided on the basis of its score on above basis. If a project deserves at least 150 marks out of 300 then that project enriches the economy a lot than a project like West Seti.

Backward linkage of small and medium sized project now is higher than this sized project and this will increase with the increase in the absorption capacity of the economy. Similarly, if the electricity generated from a project is exported, there will be no the percolation into economy in terms of forward linkage. Moreover, foreign investment means percolation of benefit accruing from investment linkage in the foreign countries. Thus, foreign investment in export oriented project is a deadly combination which deprives Nepal of both forward and investment linkage. Conversely, even if the backward linkage is low, the project will contribute to the Nepali economy substantially if it is constructed for domestic consumption with domestic investment. In this way it is not the size that matters but how the project is structured.


[1] Pursuant to the decision of Natural Resource and Means Committee of the Parliament, GoN is required to take 10% of the electric energy in kind, although the Project Agreement with the proponents of this project (as amended by 8th amendment) envisages receiving money in lieu of energy. In this paper, it is assumed that GoN will succeed in amending the project agreement to receive energy itself, instead of money in lieu, in order to conform to the Committee’s decision.



[1] Source: Detailed Engineering Report of West Seti Hydroelectric Project, prepared by SMEC International PTY. LTD., December 1997.

Nepal in Transition: History Being Re-Written

(Courtesy: Dipak S. Sah - Originally published on www.newsfront.com.np)

Nepal is a country in the throes of radical, political change. On the one hand, there is a much hoped-for transition to a liberal democracy. On the other, there is a cosmetic democratic process of power consolidation at play. It is becoming increasingly likely that the latter of these competing forces will prevail. Explained below, is why.

In essence, Nepal's liberal democrats have experienced a pyrrhic victory - they won a tactical fight against the Monarchy only to lose the strategic war against the Maoists. The country has transformed into an ideological battleground between a liberally educated elite and those who have risen to power through the most illiberal means - violence, intimidation and coercion.

The liberal democrats - abroad and in Nepal - are an ultra-minority. The Maoists' and their supporters, are the overwhelming majority. Given that democracy is a system where the rule of the majority (theoretically) is meant to undermine the "tyranny of the minority," the prospects for Nepal's transition to a liberal democracy in the foreseeable future, are nil.

The establishment of a liberal democratic framework is an end-goal in a process - a process that has taken Western democracies, decades. Such is the logic that is regurgitated in response to criticisms of Nepal's liberal democrats. But as the noted Economist John Maynard Keynes once said, "In the long run, we are all dead" - so what of the consequences of Nepal's current trajectory over the short-to-medium term?

The tragedy here, is three-fold. First, Nepal is "re-writing" her own history; not "making" history. At a macro-level, there is little by way of fundamental differences between King Mahendra's policies and those that are being forwarded by Nepal's Maoists.

King Mahendra's system was a one-party polity. It was at clear odds with the global democratic movement. The Maoist framework includes multiple parties and as such, qualifies as a system under the larger umbrella of "democracy." For all practical intents and purposes however, the system the Maoists are implementing in Nepal is designed to consolidate State power within a single, dominant entity - the CPN-M (Communist Party of Nepal-Maoist).

Second, the Maoist agenda is one that concentrates on "immediate" improvements; the focus of Nepal's liberal democrats is on "continuous" improvements. When resource constraints are injected into this equation, these agendas become mutually exclusive. The argument forwarded by Nepal's Maoists' is for State resources to be allocated to address the peoples' most immediate needs. The logic is unassailable - it does little to consolidate a liberal democratic polity but will work wonders when it comes to consolidating Maoist popularity, just in time for parliamentary elections.

Third, Nepal's liberal democrats have no legitimate political representation. If by default, the NC (Nepali Congress), with its antiquated leadership is Nepal's only hope for a liberal democracy, there is no hope at all. Because at the grass-roots, it matters not that the NC has always stood for democracy. What matters is, that which works; the NC does not work and the Nepali public, through universal suffrage, has made its verdict clear.

The position that the NC and other liberal democrats find themselves in, is exactly where the Maoists want them to be - in complete and utter disarray. It is widely rumored that the NC's southern interlocutors have advised the party's leadership to "allow" the Maoists to run the government and ultimately fail. The MPRF (Madhesi Peoples' Rights Forum) is apparently at the same southern interlocutor's beck and call - they will supposedly pull out of the coalition when told to do so.

However, the efficacy of such conjecture (if at all true), is grossly over-exaggerated and severely counter-productive. The question that needs to be asked is this: "Is the consolidation of Nepal's democracy served or undermined if the Maoist-MPRF-UML coalition is permitted to fail?"

Answering this question places advocates of liberal democracy in a catch-22 situation - an unenviable position that more rational observers had warned was bound to emerge. And, contexts such as these are where liberal education systems that rely on "shades of grey," falter. If the liberal democrats encourage the failure of the current coalition, they stand to incur widespread, public condemnation; if they endorse the continuation of the current coalition, they undermine their own long-term agenda.

Further, based on electoral results, the international community has endorsed the Maoist-led government in Nepal. Implicit in this endorsement is legitimization of the controversial methods used by Nepal's Maoists' as a means to power. Given this position, the liberal democratic community and their international benefactors are equally liable for institutionalizing the very culture of impunity that these groups claim, continues to mar Nepal's progress.

These are but some of the glaring contradictions that are inherent to the "New Nepal." To borrow from Michelle Obama, Nepal is a country where the "current of history meets a new tide of hope." It is utterly disheartening however, to find that in Nepal, it is the same "current" under a democratic disguise, that an incapable (and falsely progressive) "tide" is set to meet. It is shattering to find Nepal's liberal democrats wake up to the realization that they, like others before them, have served as nothing more than stepping stones on the Maoists' path to power.

Related Posts:

Paradigm Shift - Where Does Nepal Stand?
http://nepaliperspectives.blogspot.com/2006/05/paradigm-shift-where-does-nepal-stand.html

Asian Centre for Human Rights Report on South Asia - A Cursory Examination of Reporting on Nepal
http://nepaliperspectives.blogspot.com/2008/08/asian-centre-for-human-rights-report-on.html