Sunday, March 22, 2009

Re: Your Article on Arun III

March 15, 2009

Ms Mandira Shrestha

Water Resource Expert

Dear Mandirajee

Glad that you took the initiative to comment on my paper. You have raised a very important issue and it will be my pleasure to share with you my perspective with regard to the points you have raised which will be of interest to the silent majority too who do not take initiative to send in comments, unlike you, but are monitoring such a debate very closely. I couldn’t revert back to you promptly as I had to rush from Kathmandu to Laos at a very short notice. Hence, I am writing following to you now.

Answer to a difficult question (you indeed have thrown a tough gauntlet at me) can be given in a very simple manner if the question is turned on its head. This will make it easier for the general readers to understand it effectively as well. That’s what I propose to do (and fulfill my obligation of picking up the tough gauntlet you have thrown, too).

I. Let’s assume that WB is lenient about the said covenant and, therefore, Nepal goes ahead with the implementation of Arun III (201 MW) along with other private sector projects making many a hydrocrats happy. Even under this scenario there are several important issues that people needs to be considered:

Before Enron implemented Dhabol project in Maharashtra, the oft repeated mantra in India was “it is better to have expensive electricity than not to have electricity.” Post Dhabol Indians have become wiser and the new mantra there is “it’s better not to have electricity than to have expensive electricity.” If Nepal would have implemented the previous incarnation of Arun III (estimated to cost over $ 5,000/kW), then Nepal would have been relearning the very basic economics that Indians learnt from Enron fiasco – like finding out that the fire does indeed burn as the popular saying goes, instead of learning from those who have already got burnt. This wouldn’t have been prudent at all, in view of the inordinately high upward pressure on consumer tariff or negative pressure of higher magnitude on NEA’s bottom-line had Arun III been built at that time.

I can feel it in my bones that you are having an urge to interrupt me and point out that the estimated cost was so high merely because this project was burdened with the cost of infrastructure like over 200 km road and high voltage transmission network covering almost the same distance. I have to admit that the value added to the economy due to construction of the road and erection of the transmission network in such an area will be significant. Every paisa incurred for the purpose is worth its while as these itself do go a long way in uplifting the economic wellbeing of the beneficiaries/denizens of the area. Meaning construction of infrastructure can never be underestimated.

However, I am sure that you are aware that the new incarnation of Arun III (402 MW) is estimated to cost $ 2,137/kW only and this cost is inclusive of investment in infrastructure at the same level. Meaning there was a lot of padding in the cost estimate of the previous incarnation of Arun III and its cancellation has deprived the corrupt people within and without Nepal of a lot of moolah and, no wonder, they are unhappy. They even dislike coming across an analysis like mine because it exposes their malafide intent and design. But Nepal was saved from a big financial fiasco as such – building 201 MW at over $ 1 billion, instead of just $ 400 million, the reasonable level of cost for a 201 MW. This should make patriots like you very happy.

Please allow me to repeat here that the previous incarnation of Arun III, estimated to cost $ 5,000/kW, was likely to have ended up costing over $ 8,000/kW as do the track record of Nepal’s public sector infrastructure projects demonstrate (you are aware that Middle Marsyangdi is not the sole example). Due to cancellation of Arun III, Nepal didn’t get trapped into this vicious cycle and all economically conscious intellectuals should be appreciative of this fact – mainly because of, to repeat, the potential upward pressure on electricity tariff and negative pressure on NEA’s bottom-line as well as on the macro economy, by a huge magnitude.

II. You also question whether “the covenant (will) also hold for IPPs” too. I would like to wonder aloud along with you but for following facts”

1. I wonder if you are aware that private sector wing of WB has financed both Khimti and Bhotekoshi projects and in such a scenario there is no question of these projects getting IFC funding if Arun III was implemented with WB funding. You may have had a valid point if these projects were to be financed from sources other than WB. Therefore, with the implementation of previous incarnation of Arun III, 96 MW (out of 128 MW of private sector projects) would not have seen the light of the day.

2. Moreover, you may recall that I was working for the implementation of Khimti in those days (at the critical time) and I know for a fact that it was a case of either or from their perspective. I can even confide in you with the information I gleaned in those days that IFC people too were instrumental in getting Arun III cancelled to ensure that their “pet” project/s got financed.

III. Moreover, I hope you know that due to the cancellation of Arun III, Nepal lost only 57 MW as ADB used the same pot of money to finance Kali Gandaki A – daily pondage project, and at much lower cost ($ 2,600/kW). From this perspective too cancellation of Arun III was a lucky turn of event for Nepal.

IV. Although my analysis was focused on Arun III, but the achievement during the decade that I highlighted, was due to the policy change but I pointedly didn’t dwell in this aspect due to space constraint. Besides, the policy change became helpless in the 10th plan period as the new policy initiative got muddled up in the bureaucracy and politics and people’s war also ruined the investment climate.

I agree with your concluding sentence and I am doing my bit by writing and publishing to empower people with more information and knowledge.

With best regards,


Ratna Sansar Shrestha,

From: mandira shrestha []
Sent: Sunday, March 15, 2009 16:27
Subject: Your Article on Arun III

Dear Ratna Sansar ji,

Thank you for sharing the Arun III article which I read with interest. It is always good to reflect and derive lessons from past experiences to move forward. From your article I note that all your analysis is based on one particular point on the covenant imposed by the World bank in the loan documentation of Arun III. I quote " The covenant stipulated that NEA … would seek IDA’s specific consent before undertaking any investment projects that would increase generation capacity by more than 10 MW capacity or transmission projects costing more than $ 3 million". With this as your main assumption you have come up with a detailed analysis of the various scenarios and where we are at now with load shedding. I was just wondering whether in your analysis you have accounted for the policy change and the government's efforts towards encouraging IPPs during the 1995-2005 period. As you show in the Table1 over 128 MW is from IPPs. My question is would the covenant also hold for IPPs or only NEA. If it is for both then your analysis holds but if it is only for NEA then the scenarios I would say would be different. With the Arun III implementation would the governments approach towards IPPs been different or would it have been the way as it has developed? Anyway, these are just some thoughts that come to my mind as I read your article.The most important thing is how we proceed forward collectively to manage this electricity crisis and develop our hydropower for a more secure future for us all.

Best Regards