Small is bountiful

Since the 1950’s Nepalis have dreamt of developing the country’s enormous hydropower potential for industrialisation and export to India. 

Nepal chose to avoid the path followed by Bhutan of handing over design, financing, and construction of hydropower to India. Policy makers tried instead to maintain control by soliciting assistance from bilateral donors and multilateral development banks to finance power projects using grants and concessionary loans. 

But as the size of investments increased, it resulted in greater reliance on international aid and technical assistance. Projects were typically designed by global consultants and constructed by international contractors through competitive bidding and once completed were handed over by the government to Nepal Electricity Authority (NEA) to own and operate. 

By the 1980’s a flaw in this approach had become clear: it had created another kind of dependence and loss of control. The electricity produced was expensive since these projects, although funded through grants or loans on concessionary terms, were transferred to NEA’s books at the full cost of the assets which needed to produce returns. 

A more debilitating effect was that almost no technical or financing capacity was transferred to NEA for the next power plant without more aid. As international assistance was always in short supply, Nepal’s hydropower development proceeded slowly and the electrification rate lagged at 15% in 2000. There was little prospect for exporting power since it was so expensive, and there was chronic domestic shortage. 

In his book What Went Right: Sustainability versus Dependence in Nepal’s Hydropower Development, Mark Liechty who is professor of anthropology and history at the University of Illinois at Chicago skillfully narrates the inspirational story of Nepal’s alternative hydropower development.  

At centre are Norwegian missionary Odd Hoftun and his colleagues, who over the course of five decades, did not just build power projects but laid the foundation for a vibrant domestic energy sector with thousands of competent Nepali engineers and technicians, hundreds of independent power producers, and dozens of construction companies, equipment manufacturers and engineering consultancy firms. 

This book should be required reading for development practitioners and aid agencies interested in critically examining how to get the best returns from international development assistance.

Liechty recalls the strategy to develop hydropower that was quietly taking shape in Butwal in parallel with the Kathmandu-centeric public sector-led model funded by the county’s major donors. The ‘Butwal Model’ emphasised vocational training and learning opportunities in the manufacture of components and by building actual power plants. 

Training of skilled manpower was born out of necessity in a region of the country with no industrial base, very few schools, and certainly none that imparted specialised technical skills required for hydropower development. The second element was the formation of local private companies to design, construct, and operate hydropower projects initially to electrify the training institute and supply nearby urban and rural communities, and eventually to feed surplus power to the NEA grid as the Butwal companies constructed larger power plants. 

As the companies grew in size and sophistication, they attracted increasing numbers of Nepali engineers, trained at universities and technical colleges in India and Kathmandu, who sought more a challenging professional work environment than at NEA. International experts from over a dozen countries, worked as volunteers alongside Nepalis training technicians, managers and entrepreneurs on the job. 

The training was as important as the construction of hydropower plants. The power projects were also initially funded with international aid, mainly from the Norwegians, but it was sympathetic to the vision of using project design and construction as an opportunity to build lasting human capacity in Nepal. 

Hoftun came to Nepal as a Norwegian Christian missionary and was primarily responsible for conceiving and initiating the Butwal hydropower development model. His development philosophy grew organically as a series of practical steps required to meet needs, rather than as a fully thought through answer from the beginning. Hoftun died aged 95 earlier this year.

Hoftun believed in frugal use of resources, a framework of moral business practices, and a belief that private companies working under ethical principles were the most efficient vehicles for Nepal’s economic development. That philosophy resonated with Hoftun’s Nepali colleagues such as Balaram Pradhan, who may not have shared his religious faith, but found strong overlap with their own commitment to national development. 

Hoftun first came to Nepal in 1958 to build Tansen Mission Hospital, the only modern medical facility at the time in the region. He had to train masons, carpenters and electricians realising on completion that he had also developed a cadre of technicians. 

He established the Butwal Technical Institute (BTI) 40km south of Tansen to provide on-the-job training to Nepali teenagers in metal welding, carpentry and electrical vocational skills. Requiring a reliable power source for BTI he invited the skilled workers trained in Tansen to construct, in stages, the 1 MW Tinau project starting in 1965, with the first 50 kW completed in 1970 and the final stage in 1978. 

The Butwal Power Company (BPC) was formed in 1965 as an electrical utility to oversee construction as well as to operate the power plant and supply power to BTI along with the residents and small-scale industries of Butwal. This virtuous cycle of building ever larger  hydropower projects and training more people went on for 30 years, with the 5MW Andhi Khola (1990) and the 12MW Jhimruk (1994). 

Hoftun’s approach of starting with labour intensive technique to dig tunnels and utilising refurbished second-hand hydropower equipment from Norway resulted in Tinau and Andhi Khola being built at a fraction of the cost of power plants being constructed for NEA. Hundred percent construction by Nepali companies meant that even the Jhimruk power plant which used mechanized drilling and all new electro-mechanical equipment was completed at around one third the per MW cost of larger NEA-owned projects. 

This alternative model came with challenges. Liechty details conflict Hoftun faced with fellow missionaries who believed their commitment was to serve the poor in Nepal through health and education rather than economic development through private companies. Working with government meant getting permissions every step of the way from bureaucrats who did not always Hoftun’s development philosophy. 

Liechty also documents how the model hits its limits when Hoftun attempted to mobilise financing for the 60MW Khimti in partnership with international private companies, the World Bank and Asian Development Bank. As project size grew and international commercial financing was required, the Butwal model also obey diktat of donors.

Khimti was eventually financed and constructed after meeting all the requirements of international lenders but at significantly higher cost, and in the process BPC’s ownership  came down from an initially planned 50% to just 15%.  

I was one of the Nepali engineers that joined the Butwal effort after completing my overseas engineering degree and was able to see firsthand how Nepali companies and technicians were able to construct high quality hydropower projects at affordable costs. 

That experience moved me to form the Alliance for Energy in 1993 with other likeminded activists to oppose the construction of the 201MW Arun III being planned by NEA using the conventional model with no prospect for increasing national capacity and reducing aid dependence. 

Our concern was that at a price tag of $1.1 billion the project was unaffordable for Nepal compared to viable alternatives. Arun III would cost ten times as much per MW as Andhi Khola. We were also concerned that it was overly risky for the country to develop a single, expensive mega project, at one end of the country. It would be wiser to support a dozen smaller projects throughout Nepal to generate the same amount of power, using the Butwal model and in the process augment in-country capacity. 

The World Bank and other funders withdrew their support to Arun III in 1995, accepting NEA could not satisfactorily meet its environmental, social and management responsibilities. The Alliance had proposed donor-financed alternatives, but even without them Nepal now has a vibrant and competitive hydropower sector with over two hundred Independent Power Producers with financing from dozens of Nepali banks. Many of the leaders of these companies got their start in hydropower at BPC and its sister companies. 

Liechty’s book provides important documentation of what it takes to do good development in one of the world’s poorest countries – in contrast with conventional development assistance as practiced by international donors when they prioritise building infrastructure rather than building capacity. 

It may be slow but building domestic capacity is the only way for countries to develop sustainably. This book will hopefully inspire a new generation of activists, entrepreneurs, engineers, and economists to demand that development aid coming in their name be required to meet a higher bar.