World Bank flip-flop on Upper Arun

Last October, upon returning from the annual meetings of the International Monetary Fund (IMF) and the World Bank Group in Morocco, Finance Minister Prakash Sharan Mahat announced that the World Bank would be the primary financier to develop Upper Arun.

This would be Nepal’s largest hydropower project so far with an estimated cost of $1.8 billion. The site is 15km from where the Arun River enters Nepal from China, cutting between Mt Everest and Kangchenjunga.

Nepal decided to develop the 1,061MW project six years ago and set up Upper Arun Hydropower Limited, a subsidiary of the Nepal Electricity Authority (NEA), and oked its feasibility study in 2021.

There is a certain déjà vu here because in 1995, the World Bank abruptly pulled out of the Arun III project in 1995 after James Wolfensohn took over as Bank president. The project has now been upgraded to 900MW, and is in its final stages of completion by India’s state-owned SJVN Limited.

The Bank’s readiness to back the Upper Arun, upstream from Arun III was greeted with enthusiasm in Kathmandu. The financial package included 70% through loans and 30% in equity, with the World Bank committing to $750 million and the Asian Development Bank (ADB) possibly joining.

World Bank Managing Director Anna Bjerde flew to the project site last November with Finance Minister Mahat and ADB Director Ramesh Subramaniam. In April, an agreement ‘in principle’ was reached between Nepal’s next Finance Minister Barsaman Pun and World Bank Vice President for South Asia Martin Raiser to develop Upper Arun.

A concessional loan agreement during an investment summit later that month did not happen due to ‘lack of preparation’. Now, the World Bank appears to have developed cold feet.

Bank officials reportedly told the Nepali side a final decision would be taken at its board meeting last month after the proposal failed to gain traction during the Group’s International Development Association (IDA) Replenishment Meeting in Nepal in June. But there is a deafening silence.

“The World Bank board did not get back to us in August, so we cannot conduct financial closure as planned by October,” Fanendra Raj Joshi, Managing Director of Upper Arun Hydro-electric Limited, told Nepali Times.

For Nepali officials, this is reminiscent of 1995 and several said the Bank was reluctant to commit without a green light from New Delhi.

The World Bank, however, had communicated to both India and China about its intention to invest in Upper Arun. Beijing said go ahead, but New Delhi’s response was that 'further discussions' were needed.

“India has not communicated this to us directly, but its displeasure at the World Bank’s decision to invest in this project is well understood,” an official at the Finance Ministry told us.

In fact, Indian officials directly expressed their interest in Upper Arun during Prime Minister Pushpa Kamal Dahal’s visit to Delhi in June to attend Narendra Modi’s swearing-in, under the same condition as Arun III: Nepal gets 21.9% of the electricity generated free for 25 years.

Dhani Ram Sharma of the Finance Ministry’s International Economic Cooperation Coordination Division says negotiations are ongoing with the Bank on finalising the loan and financial package.

Finance Minister Bishnu Prasad Paudel is set to lead the Nepali delegation to the IMF Annual Meeting and the World Bank Group (WBG) on 21 October in Washington DC, and Upper Arun is expected to figure prominently in discussions.

World Bank Group president is Ajay Banga, and he cancelled a visit to Nepal at the last moment during the IDA Replenishment Meeting in Kathmandu in June. Sources told Nepali Times that India has been urging the Bank to let it invest in Upper Arun.

Upper arun breakthrough — BREAKTHROUGH: Prime Minister Pushpa Kamal Dahal at the ceremony in June marking final drilling of the tailrace tunnel of Arun III, the 900MW project being built by India's state-owned SJVN company. Photo: PRESS INFORMATION BUREAU INDIA

Downstream from Upper Arun, India’s state-owned SJVN is completing a cascade of big projects, including the 900MW Arun III. It has also got Nepal's approval to develop the 679MW Lower Arun and 490MW Arun IV projects (map).

With Upper Arun, India would be generating over 3,032MW of electricity from the Arun River alone, of which Nepal would get 21.9% free of charge.

Unlike the run-of-river projects downstream, Upper Arun is a semi-reservoir project that can generate electricity at full capacity for up to six hours during winter when demand in Nepal is highest. The project also has low social impact since it is in a relatively uninhabited area with only 22 households needing relocation.

However, Upper Arun is located directly downstream from numerous glacial lakes in Nepal and China, which have been expanding dangerously due to climate breakdown.

A glacier collapse in Sikkim last year completely destroyed the Chungthang Dam with similar cost and capacity as Upper Arun. In 2021 the Chamoli disaster swept away an under-construction project in Uttarakhand.

India can connect power from Upper Arun to the 400kV transmission line that it is building to evacuate power from its other projects on the river.

Besides the Arun cascade, Indian is building projects in Nepal with a combined capacity of 8,000MW. SJVN Limited has also proposed taking over the 769MW Tamor project on a tributary of the Arun, which was earlier set to be built with Chinese investment.

Upper Arun shows every sign of being a geopolitical hot potato, since the Chinese would be averse to such a large Indian project so close to its border.

The Chinese had earlier pressured Nepal to cancel a major solar power project in Mustang with European investors, and Indian objections led to the cancellation of a 125MW Chinese solar project in the Tarai.

Another Indian public sector hydropower company NHPC Limited is developing the 750MW West Seti dam, the Seti VI and Phukot Karnali 480MW in partnership with NEA subsidiary Vidhyut Utpadan Company Limited. It also wants to develop the 1,902MW Mugu-Karnali.

Last week in Delhi, GMR signed up co-investors Indian Renewable Energy Development Agency (IREDA) and SJVN for Upper Karnali 900MW after repeatedly failing to meet Nepal's deadline on financial closure. Kathmandu was not kept in the loop.

India is playing hardball, and refuses to buy electricity from power projects in Nepal it deems to have involvement of China and other countries, like the 456MW Upper Tamakosi.

Currently, India buys only 1,000MW of electricity from Nepal. In January, Nepal and India finalised a long-term energy trade deal during Indian External Affairs Minister S Jaishankar’s visit to Nepal that set an export target of 10,000MW by 2034.

A writ petition filed against the deal by former government secretary Surya Nath Upadhyay is pending in Nepal's Supreme Court.

For now, uncertainty over the Upper Arun and the lack of a clear answer from the World Bank has thrown the future of Nepal’s largest hydroelectric project into doubt.

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.”