Breaking the Stalemate on Upper Arun

Kathmandu has made a lean break. After months of waiting—and louder  ignaling from its southern the government has pulled the 1,063MW Upper Arun Hydroelectric Project off the World Bank’s lane and onto a fully domestic one.

In a statement on November 25, the Secretariat to the Minister for Energy, Water Resources, and Irrigation said Nepal will build Upper Arun on its own. “After the World Bank’s investment became uncertain, the government has decided to move the Upper  Arun Hydroelectric Project forward using financing from domestic banks and financial institutions, as well as investments from Nepalis at home and abroad,” it said. With that declaration, the government ended its wait. The World Bank, which was long expected to anchor  financing for the semi-reservoir project, was no longer at the center.

Until late 2023, the World Bank seemed ready to lead a consortium of international financiers. Its role was clear: mobilize funding for the 1,061MW Upper Arun in Sankhuwasabha, while the Asian Development Bank focused on the 635MW Dudhkoshi storage project. Together, Nepal’s two largest development partners were preparing to underwrite the next generation of large hydropower in eastern Nepal.

Momentum picked up after then Minister for Finance Dr Prakash Sharan Mahat met World Bank officials in Morocco in October 2023. Nepal sought up to $1 billion under a 70:30 debt–equity model, with the Nepal Electricity Authority (NEA) and the public as shareholders. The NEA set an ambitious schedule: financial closure by June 2024,  construction by mid-2025, and commissioning by 2031. Dudhkoshi followed a similar timeline, with financial closure expected by the end of 2024.

The progress, however, slowed, especially on Upper Arun, after India signaled interest. During then Finance Minister Barsha Man Pun’s visit to Washington in April 2024, Nepal and the World Bank reached an understanding in principle to move the financing process forward.  World Bank South Asia Vice President Martin Raiser agreed to advance preparations, raising hopes that the long delayed project would finally gain momentum.

But the World Bank has a standard requirement: upper  and lower riparian countries must not object to planned hydropower projects. “In keeping with that norm, the World Bank sought clearances from China, India, and Bangladesh,” former Finance Minister Pun said. “China and Bangladesh raised no objections, but India signaled  reservations. That ultimately created the World Bank’s indecision.”

As Nepal prepared to formalize agreements, New Delhi reportedly informed the World Bank headquarters that India preferred the project to be developed by an Indian entity. According to Nepali officials, that message slowed  internal decision-making. The World Bank did not withdraw, but it did not commit either. This placed the project in a holding pattern and froze the NEA’s timeline.

Kathmandu had expected the clearance process to be routine. It was not. A former Energy Minister, speaking  on condition of anonymity, said India wanted the project handed to an Indian developer. “The Indian side never stated this outright, but the message was unmistakable—the project should be handed over to an Indian developer,” the former minister said.

Although the World Bank never formally stepped back, Energy Minister Kul Man Ghising later said the absence of a “clear signal” left Nepal with little choice. On November 25, his ministry announced that Upper Arun would now rely on domestic financing—a move presented as both pragmatic and assertive.

Why India Wants a Footprint Upstream 

India’s interest is neither sudden nor unexpected. With its undertaking SJVN already constructing three downstream projects, New Delhi sees strategic value in securing  influence  over the entire cascade.

Upper Arun is the fourth project in the Arun cascade, situated upstream of Lower Arun (669MW), Arun III (900MW), and Arun-4 (490MW)—all being developed by SJVN. Above Upper Arun lies the proposed 454MW Kimathanka Arun, near the Chinese  border.

The former energy minister said although SJVN itself did not object to Nepal developing Upper Arun on its own, the Indian government still conveyed reservations to the World Bank about Nepal leading this project. “This suggests India sees strategic value in having its own entities involved,” he said. “Perhaps India wants an integrated ecosystem of hydropower projects involving Indian companies across the Arun River.”

Former Energy Secretary Dinesh  Ghimire shared the view. Since Indian companies are already involved in all downstream projects, he said, India sees  Upper Arun as strategically important. “My sense is that the southern neighbor wants Indian participation in this project too. That is why it expressed reservations to the World Bank,” he added.

India’s broader energy  strategy offers another layer of explanation. As its grid absorbs more solar power, it increasingly  needs flexible hydropower for balancing. Nepal can supply that flexibility. But New Delhi also wants influence  over which projects feed into its grid. This is why India refuses to import power  from projects involving Chinese  entities and has imposed a strict verification regime.

Given Nepal’s determination to move ahead  alone on Upper Arun, Ghimire believes  India may accept project implementation by Upper Arun Hydro-Electric Limited—established for this very purpose, if an Indian company gets a small stake. “A minority strategic shareholding would be enough for India to retain influence  without control,” Ghimire said.

Such an arrangement, he argued, could also reopen space for World Bank financing and ensure export access  to India.

Why Nepal Wants Upper Arun to Stay Nepali

Former Energy Secretary Ghimire argues  that maintaining a geopolitical  buffer is central to Nepal’s strategy. An Indian company is developing all the projects downstream of Upper  Arun, while Nepal has proposed that China develop the uppermost project, Kimathanka Arun, located near the Nepal–China border.

Allowing a foreign developer, especially an Indian one, to build a project so close to the Chinese border could trigger concerns in Beijing. Nepal first asked China to take up Kimathanka Arun during KP Sharma Oli’s 2016  visit to Beijing. In this context, Nepali policymakers view Upper Arun as too sensitive to hand over to an Indian developer—especially one already controlling the rest of the cascade.

In this context, Nepali policymakers see Upper Arun as too sensitive to hand over. “Handing Upper Arun to an Indian company would place two rivals face-to-face,” Ghimire said. “Nepal wants it as a buffer.”

A former energy  minister echoed this assessment. He said Nepal wants to avoid future friction between India and China by keeping the project domestic.

Has the World Bank Actually Stepped Back?

Officially, no. But months of indecision—combined with the World Bank’s consultations with India
and Bangladesh—created enough uncertainty that Nepal felt compelled to act. From Kathmandu’s perspective, the cost of waiting had become greater than the cost of moving ahead  alone.

The shift toward domestic financing reflects more than impatience. It is rooted in a deeper strategic goal: preventing any single power from dominating the Arun cascade; preserving diplomatic leverage with both India and China; and proving that Nepal can mobilize large-scale capital
when geopolitical  conditions tighten.

What Comes Next

The shift to domestic financing marks a significant turn in Nepal’s hydropower journey. It highlights both the rising geopolitical  weight surrounding major energy  assets and the limits of relying on international financiers when  regional powers have strong interests.

For now, the NEA is pushing ahead.  But policymakers know donor  priorities, Indian strategic concerns, and riparian politics will continue to shape  the project. In the Arun valley, hydropower has never been  just about turbines. It has always been  about policy, power, and politics.

Upper Arun’s next chapter will show which of these forces prevails. Whether this new direction speeds up or complicates the project remains to be seen. What is certain is that Nepal has chosen action over ambiguity.

How Nepal Plans to Build It Alone

For all the geopolitical  maneuvering surrounding Upper Arun, Nepal’s plan to build the project on its own is already taking shape. Upper Arun Hydro-Electric Limited has retained the 70:30  debt-equity structure. The estimated cost is $1.75 billion, about Rs 214 billion—once interest and inflation adjustments are factored in.

The equity model is broad. According to the energy ministry, 51% will be held as founder shares  by provincial and local governments, the NEA, Nepal Telecom, the Employees’ Provident Fund (EPF), Citizens Investment Trust (CIT), the Social Security Fund (SSF), HIDCL, insurance companies, and NEA subsidiaries. The remaining 49% will be offered as ordinary shares  to Nepalis abroad,  non-resident Nepalis, employees of founder institutions, project-affected communities, and eventually the general public. The structure spreads financial risk and keeps the project firmly Nepali.

On the debt side, domestic banks and financial institutions will contribute Rs 168 billion in syndicated loans. Commitments worth Rs 53 billion have already been  secured. It is one of the largest mobilizations of domestic capital for a single project, and reflects both confidence and political resolve.

Even as the financing plan firms up, early construction activity has begun in the remote highlands of Sankhuwasabha. A 21-kilometer access  road that cuts through steep, rugged terrain and will eventually serve as the project’s backbone during the construction phase  is under  construction. Once complete, Upper Arun is expected to generate 4.53 billion units of electricity annually, strengthening Nepal’s push to become a major renewable energy  exporter.

(This report was published in December 2025 issue of New Business Age magazine.)