Himalayan Frontier

India-Nepal Hydroelectricity Deal: Making it Count

10 Sep, 2014    ·   4652

Pramod Jaiswal analyses the significance of the soon-to-be-signed power trade agreement and project development agreement between India and Nepal

Pramod Jaiswal
Pramod Jaiswal
Senior Fellow, China Research Programme (CRP)
With just two weeks left to seal the deal, the government of Nepal has formed a seven-member task force headed by Energy Secretary of Nepal to finalise the Power Trade Agreement (PTA) with India, and the Project Development Agreement (PDA) with Indian company GMR for Upper Karnali. The meeting of the Council of Ministers has authorised the team to hold dialogues with political parties of Nepal and forge consensus on the issue. The team has the drafts of the agreement presented by both the sides, as well as their reservations. The final agreement will be prepared after considering both drafts. The authorised team arrived New Delhi for negotiations on 3 September.

The PTA and PDA were expected to be signed during Indian Prime Minister Narendra Modi’s official visit to Nepal from 3-4 August. Citing the lack of enough deliberation, Nepal and India bilaterally decided to finalise the deals within 45 days. Unfortunately, not much progress has been seen in last one month.  

On 18 August, the Nepalese parliament’s Water Resources Committee asked the Energy Ministry to produce every document related to PTA, together with Nepal government’s June 2014 response to an earlier Indian proposal. The Committee also instructed the energy minister to present a progress report on the proposed agreement in the parliament. Media reports state that India had refused Nepal’s proposal – in PTA draft – for allowing investors from Nepal, India and other countries to trade power without any obstruction in both India and Nepal, as well as the permission to sell electricity generated in Nepal to the third countries through India.

If the project is completed on time, the 900 MW Upper Karnali Hydroelectric Project would generate dividends worth approximately $33 million from equity, royalty and free electricity throughout the concession period of 25 years. It is being constructed by the GMR Group, an Indian company, and will be handed over to the state-run Nepal Electricity Authority (NEA) after 25 years. Since it is being constructed on BOOT (build, own, operate and transfer) basis, the NEA will not have to share the project’s financial burdens.

The Investment Board Nepal, the government body overseeing the implementation of the Upper Karnali Project, has been negotiating the PDA with the GMR since April 2013. Additionally, a 13-member high-level committee that was formed under the National Planning Commission to deliberate on the draft PDA, raised two major concerns: First, the impact of the Upper Karnali project on the Rani-Jamara-Kuleriya and the Rajapur-Surya Patawa irrigation projects that are being constructed in Bardiya downstream of the project; and second, providing the cash incentive of approximately $51000 for every megawatt of electricity the project generates.

The first issue was addressed after the committee members agreed to deploy a team to conduct a study within six months of signing the PDA. But there some of the members of the committee held apprehensions on the proposal of giving cash incentives to an export-oriented project like Upper Karnali. They opposed on the grounds that such incentive should only be given to projects that generate electricity for domestic consumption.

Nepal should not get entangled in the issue of whether any sort of incentive should be given to an export-oriented hydropower project. Even if such a one-time incentive of $51000 is provided for every megawatt of electricity the Upper Karnali will produce, the government will lose only $400 million – which is an insignificant amount compared to the huge benefits the project will bring by harnessing the country’s water resources. The government must not waste time and energy on such minor issues that will ultimately be detrimental to the development of the Upper Karnali – and that will also set a precedent for other projects to be built with foreign direct investment.

Besides the PDA on the Upper Karnali, the government should also accelerate the process of signing a deal on the proposed PTA with India at the earliest, so that both Nepal and India can benefit mutually. Nepal has to sign this deal to send positive signals to the international market and to create an appropriate atmosphere to attract investments in the hydropower sector – crucial for the development of the country’s energy sector. The PTA will allow Nepal to import as much electricity as it needs when production falls and export power when there is surplus. Similarly, the signing of the PDA would demonstrate Nepal’s openness to investors who want to build export-oriented hydroelectric projects and pave the way for the government to generate income through royalties.

There are minor dissensions against the deal from the small leftist parties such as the CPN-Maoist. Reports also state that some senior leaders of the CPN-UML are against the deal but they have not made any comment – thereby giving tacit approval. India should also demonstrate a flexible approach to the deal. Signing immature deals in the past has not served any purpose. Hence, it should address Nepal’s genuine concerns whereby a conducive atmosphere for such similar future deals is created. The formation of a taskforce headed by the energy secretary is a welcome step towards the signing of a power trade agreement with India.