Ending decades of uncertainty, Arun III is poised to become a model for development and foreign investment projects in Nepal.
In the history of hydropower development in Nepal, the Arun III Hydropower Project is perhaps the project surrounded by most controversies. But after remaining in a shadow of uncertainty for nearly two decades, Arun III is now considered as a model of project development in the country where large and strategic projects are scarce.
A Troubled Past
The government formed after the People’s Movement of 1990 decided to develop Arun III with financial assistance from multilateral development partners. The development of Arun III was stalled after the World Bank decided not to invest in the project in 1995. The bank’s pullout was a result of factors including controversy surrounding the project’s development cost, its necessity and suitableness for Nepal at that time and political wrangling over a number of issues such as social and environmental impacts of the project.
After the political change in 2006, Arun III was promoted as an export-centric project and the government adopted the policy to develop it with private investment by selecting a developer through international bidding. After conducting additional feasibility studies and keeping in mind the energy export potential, the installed capacity of the project was increased to 900 megawatts from 402 megawatts. After evaluating the proposals received for the development of Arun III, the contract was awarded to Sutluj Jal Vidyut Nigam (SJVN) Limited, a joint venture between India’s central government and state government of Himanchal Pradesh. A project development agreement (PDA) was signed between Investment Board Nepal (IBN) and SJVN Arun III Power Development Company (SAPDC) Pvt Ltd in 2012. As per the PDA, the project would be operated under the built-own-operate-transfer (BOOT) model and after 25 years of commercial production of electricity, the ownership of Arun III would be transferred to the Nepal government. Similarly, Nepal would receive 21.9 percent (197.1 megawatts) of electricity for free for the 25 years. When the company was awarded the contract, SJVN reimbursed the money spent by Nepal government for the feasibility study of the project.
The total cost of Arun III has been estimated to be USD 1.6 billion (Rs 104 billion). The run-of-river type hydropower project is currently under-construction at Arun River in Sankhuwasabha district in eastern Nepal. As per the engineering plan, a dam 70 metres in height and 466 metres in length will be constructed on Arun River near a place called Num to direct the flow of water at a rate of 345 cubic metres per second. The dam will have a 11.74 kms long circular headrace tunnel, 192 metres tailrace tunnel, two steel-lined pressure shafts and four penstock pipes. The plan is to force the water through the penstock pipes from a height of 307 metres to the underground powerhouse, which will house four Francis turbines having a capacity of 225 megawatts each, to produce electricity.
After Arun III starts generating electricity, 4 billion units of power produced by the project will be carried to Dhalkebar, a village in Dhanusha near the Nepal-India border, via a 300 kms long transmission line. The power will be then exported to India via the 140 kms long, 400 kV Dhalkebar-Muzzafarpur Transmission Line.
The Role of IBN
The role of IBN has been crucial for the development of this project. Similarly, the Department for International Development (DFID), the UK government’s overseas aid agency, also supported Arun III by providing foreign and Nepali advisors to IBN to prepare the necessary documents and reports for the project. Despite the unfriendly investment climate in the country in the early 2010s, the board played an important role of facilitator to fulfillthe needs of the promoters of Arun III by corresponding with the authorities concerned, providing recommendations and even arranging meetings to facilitate the development of the project. According to the promoters, Arun III project would have already failed without the sincere efforts of IBN.
After signing the PDA in 2012, it took eight years to complete important aspects of the development of Arun III including conducting technical and environmental surveys, concluding financial closure and commencing the construction of the project. SAPDC in February of this year secured Rs 101.35 billion in consortium loans from seven banks from Nepal and India. As per the agreement the consortium of five Indian banks, namely State Bank of India, Punjab National Bank, Exim Bank of India, Canara Bank and Union Bank of India will provide a loan of Rs 86 billion and two Nepali banks – Nabil Bank and Everest Bank – will provide Rs 15.35 billion for the project development, while the remaining Rs 2.65 will be invested by SAPDC.
Although the project has targeted 2025 to complete the construction works, there are high chances that it will be delayed due to the Covid-19 pandemic. The disturbances created by the global health emergency have hindered the project to deploy the necessary workforce at the construction site. “Currently construction works are ongoing in somewhat confined manners. 40 percent of the work has been impacted by the Covid-19,” informs Arun Dhiman, CEO of SAPDC. According to him, it is obvious that project’s costs will rise as the deadline gets extended. “Despite the difficulties, we are trying to cover up the losses due to Covid-19 by adding the workforce and increasing the use of machinery,” says Dhiman, adding, “The deadline for completing construction works is February 2025, but we are working to finish the project before the deadline.”
Meanwhile, the construction of the transmission line is also likely to get delayed. Apart from the Covid-19 disturbances, the construction of the power line has also been pushed back because of problems related to the acquisition of land and delay in providing permission for the felling of trees for the project. According to Dhiman, the construction of the transmission line has been affected the most presently. Nevertheless, SAPDC says that the construction of the transmission line can be completed without much delay if the issues are resolved soon.
The understanding gained from Arun III has also created a base for future development of foreign investment projects in Nepal. In a country like Nepal where the level of experience of constructing large projects remains relatively low, the development of Arun III has been very important in terms of lessons learnt. The practices used for the project has provided a great extent of clarity for key factors necessary for foreign investment including project development agreement, standards for environmental studies and commitments to be fulfilled by the government and investors. Other foreign investment projects that are going under-construction after Arun III have benefitted from these experiences.
The execution of the project has taught several important lessons in terms of government preparations, institutional responsibility, efficiency of negotiations to secure the nation’s interest, sacrifices to be made for attracting investors, and above all formulating a national policy for mobilising foreign investments for constructing large infrastructure in the country.
The development of Arun III has showed that the tendencies such as obstructing construction of projects claiming that we can develop on our own by advocating ‘nationalism’ and depending solely on foreigners for our development are wrong. It is true that Nepal suffered a lot when the World Bank withdrew from the project in 1995. But it is also a fact that after 25 years, different hydropower projects with a total installed capacity of 3,500 megawatts, with some projects already constructed and many others currently under-construction, in Nepal with private sector investment came as a result of this withdrawal. Similarly, Arun III also showed that developing hydropower projects keeping in mind the immediate energy needs of Nepal only is also a mistake.
Expanding the capacity of the 402 megawatts project to 900 megawatts considering the potential to export the generated energy to the Indian market has benefitted both Nepal and India. Likewise, Arun III has also broadened the understanding of hydropower sector stakeholders about necessary government support to attract foreign investment, impact on the credibility of the government for failing to provide the assistances and the problems it can have on bringing foreign investment in the future. In that sense, it has become necessary to assess the authority and responsibilities given to IBN.
While the Indian state-owned contractor SJVN is constructing Arun III without facing much trouble, it is yet to be seen whether other large hydropower projects with private investment can be executed in the same modality of Arun III. It is because the Power Purchase Agreement (PPA) of Arun III is yet to be finalised and no other organisations other than government bodies can avail billions of rupees in loans without PPA.
Not all large hydel projects share the same fate as Arun III. For instance, the Upper Karnali Hydropower Project is still awaiting construction. It was in 2008whenn the government awarded the 900 megawatts project (then 300 megawatts) to another Indian builder GMR Group. The Upper Karnali project received similar support as Arun III. Nevertheless, many people think that the non-progress of the development of Upper Karnali in all these years was because the promoter of the project is a private entity. But the signing of PPA between the GMR Upper Karnali Hydropower Limited and the government of Bangladesh in late 2019 has raised some hopes regarding the development of the project.
Arun III has opened the doors of opportunity in terms of exploring Nepal’s energy export potential and attracting foreign investment in the Nepali hydropower sector. If the government and other stakeholders understand that India can be the biggest and reliable energy export market for Nepal, investments for developing large hydropower projects will also come from India.