Upper Arun question mark

Thirty years after it abruptly pulled out of the Arun III project, the World Bank appears to have developed cold feet about an even larger project on the river in eastern Nepal.

After opposition by civil society in Nepal, Japan and Europe, the Bank’s new president James Wolfensohn exited from Arun III. The project’s generation capacity has been doubled to 900MW and it is being development by India’s state-owned SJVN Limited. 

Whereas in 1995, the opposition to Arun III was mainly from activists, this time it is said to India’s displeasure with the Bank’s involvement in the 1,061MW Upper Arun. Delhi is so sensitive to the issue that sources said it even leaned on Indian-born American President of the World Bank, Ajaya Banga to cancel his trip to Kathmandu for the IDA21 Replenishment Meeting in June.

When it gets the green light, Upper Arun will be the most expensive hydroelectric project in Nepal so far with a price tag of $1.6 million. The semi-storage scheme is located on the transboundary Arun River 15km from the Chinese border after it cuts through the Himalaya between Mt Everest and Kangchenjunga.

Beijing is said to have no objections to the project, but India’s silence is said to stem from its strategic interest in not allowing anyone else to build large storage projects on the tributaries of the Ganga in Nepal. India’s SJVN is also currently constructing three large projects downstream, including Arun III and Lower Arun with a total generation capacity of nearly 2,000MW. 

Nepal Electricity Authority (NEA) set up Upper Arun Hydro-electric Limited (UAHEL) as a subsidiary and in May signed up the French firm Tractebel for detailed design of the scheme. Experts say the design will have to take into account future climate-induced glacial lake outbursts like the one that swept away the 1,600MW Chungthang Teesta III in Sikkim last year built at a cost of $1.7 billion. 

Upper Arun’s financing will be 70% loans and 30% equity. The World Bank had already earmarked $750 million with the Asian Development Bank (ADB) with Japan’s JICA also joining. But UAHEL Managing Director Fanendra Raj Joshi said there was no word either way from the World Bank, which meant there was no financial closure yet.

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All this is in stark contrast to the optimism last year after Finance Minister Prakash Mahat returned from an IMF meeting in Morrocco and announced that the World Bank would be the main lender in Upper Arun. 

In November 2024, Mahat even took a helicopter with World Bank Managing Director Anna Bjerde and ADB Director Ramesh Subramaniam to the Upper Arun site and it looked like the loans were in the bag. It would also be the first large project in Nepal in which both big multilateral lenders would be involved. 

In April this year, an ‘agreement in principle’ was even reached between Mahat’s successor Barsaman Pun and World Bank Vice President for South Asia Martin Raiser to develop Upper Arun. But the loan meeting planned for June was cancelled.  

A Finance Ministry official told Nepali Times: “The World Bank told us categorically in November in Washington DC that India was opposed to its involvement in Upper Arun.”  

When Prime Minister Pushpa Kamal Dahal visited Delhi in June, Indian officials reportedly said they were interested in developing Upper Arun and evacuate its power through an extension of the 400kV transmission line it is building. Although Beijing had given the go ahead to the World Bank and ADB involvement in Upper Arun, it may not be as happy about an Indian company so close to its border.

As a semi-reservoir project, Upper Arun can generate electricity at full capacity for up to six hours a day even in winter, unlike the schemes downstream which are run-of-the river in which generation depends on water flow. 

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India is involved in projects in Nepal’s rivers that will generate a total of 8,000MW when complete. SJVN Limited is also taking over from the Chinese the 769MW Tamor project in the Arun Basin.  

Says Fanendra Raj Joshi of Upper Arun Hydro-electric Limited: “Nepal can find alternative sources of funding and we will go ahead with this project even if the World Bank decides not to provide the loan.” 

Joshi and the NEA’s Kulman Ghising (pictured, below) attended a hearing with indigenous communities at the project site in Sankhuwasabha this week. Ghising told the gathering that if the World Bank pulled out Nepal would carry on with Upper Arun through “domestic and diaspora investment with the same financial package as Upper Tama Kosi”. The 546MW Upper Tama Kosi was knocked by a massive landslide in September and will not be fully operation at least for a year.  

“This is a project that can transform the local economy and Nepal’s economy as well,” Ghising added. “We will go ahead with blended financing from all levels of government.”

Despite the lack of financial closure, construction of the project is expected to get underway in 2026 for completion in six years. Construction of a 21km access road from the power house to the dam site along the Kosi Corridor highway is in full swing through difficult terrain.