Multinational oil on troubled Indo-Nepalese waters

North India is reeling under a power shortage. Yet close by is 83,000 MW of hydroelectric potential in Nepal. This is by far Nepal’s biggest natural resource, which lies unexploited while its people are mired in poverty. It has a huge trade deficit with India. The obvious solution is for Nepal to harness its hydel potential and sell electricity to north India.

Enter politics. The Nepalese have long viewed India as a hegemonic power that arm-twists tiny neighbours. The trade curbs India imposed in 1988 brought Nepal’s economy to its knees. That country feels it got a raw deal in the old Kosi project, and is determined not to be taken for a ride again. All political parties in Nepal accuse one another of selling the country down the river to India. That is why the Nepalese constitution now provides that any agreement for sharing the country’s natural resources must be approved by a two-third majority of parliament.

India, in turn, has long regarded Nepal as suffering from a small-country syndrome, imagining .conspiracies that do not exist, and so being incapable of striking common sense deals. I always had a limited sympathy for Nepal’s position. Its apprehensions were exaggerated, but not baseless.

For decades, mutual suspicion made hydel cooperation impossible. Nepal feared India would use its superior financial and technical resources to foist unfair conditions. India wanted hydel power from Nepal on a cost-plus basis, whereas Nepal wanted it linked to the cost of thermal power that India would have to generate otherwise. Indian power engineers sneered that if they had to pay Nepal as much as for domestic power, why not produce it indigenously and avoid the hassles of international negotiations?

When I visited Nepal for the first time back in 1981, its energy bureaucracy spouted such strident anti-Indian venom that clearly no agreement was possible. I wrote then that politics made Indo-Nepalese hydel joint ventures impossible. The way out, I suggested, was to let such ventures be undertaken by multinationals (MNCs) rather than governments.

Why? Because Nepal was paranoid about being bullied into an unfair deal by India, but knew an MNC could not be bullied. Nepal resented India’s insistence on keeping talks bilateral, and would welcome MNCs as third parties. Many Nepalese resented the fact that 85 per cent of their trade was with India, and claimed hydel sales would increase such dependence. However, if the power was generated and sold by-an MNC, Nepal would not feel at India’s mercy.

I visited Nepal again last week, and was delighted to find MNCs pouring into the country to bid for new hydel projects. Statkraft and ABB of Norway are building a 60 MW project at Khimit. Panda International and Harza, two US companies, are setting u a 36 MW project on the Upoer Bhote Kosi. These are small projects for local Nepalese consumption.

But giant projects based on sales to India are on the anvil too. Snowy Mountain Engineering corportation of Australia has been awarded a 750 MW project on the West Seti river, which could cost $ 1 billion. Enron has bid for the giant 10,800 MW Kamali project, costing over $ 6 billion. Nepal now plans competitive negotiations for hydel projects, and so Karnali and the 210-MW Arun-3 project have been opened for bidding. Incidentally Tata Electric, Reliance and Essar are believed to have shown some interest too.

Why are MNCs, who showed no interest for decades, suddenly gung ho? For three reasons. First, India and Nepal signed the Mahakali Treaty in February 1996, which provides a framework for all hydel projects, and so surmounts the old political uncertainties. Second, MNCs regarded Third World investments as too risky two decades ago, but now perceive the Third World as a land of opportunity (private investment flows to the Third World are now close to $ 200 billion per year, 10-times more that the lending of the World Bank). Third, global financial markets were unwilling to lend significant sums to the subcontinent two decades ago, but are now willing to provide billions of dollars if a project is sound.

Note that MNC interest started only after the Mahakali Treaty limited the political risk. How did two quarrelsome neighbours finally resolve their differences? India decided that its old attempt to get the best possible conditions had proved counter-productive and fuelled anti-Indian sentiment in Nepal. So India decided on confidence-building measures as a first step to any cooperation at all. On two successive occasions it gave way to Nepalese demands on the Tanakpur Barrage and several other hydel issues. Old-style diplomats called this unwarranted surrender, but the new philosophy said these were minor sacrifices that would make possible huge mutual gains. Besides, the only way of getting both the main Nepalese parties, the Nepali Congress and United Marxist-Leninist (UML) party, to come on board was to make concessions to each of them when they were in power.

This, is turn, made it possible for the Nepalese Parliament to ratify the Mahakali Treaty by a two-thirds majority. The treaty laid down a framework not only for sharing Mahakali’s waters, but for all future hydel projects. It specified that anybody in Nepal could sell power to anybody in India. This opened the way for private companies to come in.

We are lucky that global markets have become interested just as the World Bank and ADB seem to be opting out of large dams, thanks to pressure from green lobbies. The World Bank backed out of Sardar Sarovar in India and Arun-3 in Nepal, and is no longer a dependable financier for such projects. Besides, not even the World Bank can provide more than a modest part of the $ 6 billion or so required by mammoth schemes like Pancheshwar and Karnali.

Thus, global capital has the ability to overcome not only the political, but financing problems in the hydel scene. For this reason, even inter-govemmental projects like Pancheshwar could end up being executed by a corporation with equity from MNCs and Indian and Nepalese companies.

Many problems remain. The state electricity boards (SEBs), monopoly buyers of power iii India, are broke. They are obliged by politicians to give highly subsidised power to farmers and other favoured lobbies. Major reforms are needed to reduce subsidies and induce competition and efficiency. These are politically difficult. Yet they are essential. MNCs will not invent billions to supply power to entities that cannot pay their bills. We have come a long way towards Indo-Nepalese cooperation in harnessing Himalayan rivers, but this will be in vain until we reform our SEBs.

What do you think?