WATER GOVERNANCE IN “FEDERAL” NEPAL -Conclusions and Recommendations

Adoption of federalism in Nepal has serious ramifications on Nepal’s natural resources, including on her hydro resources. Water can not only generate hydropower, but there is no alternative to water whereas power can be generated with a number of alternative sources. Although, Nepal is famous for being rich in water resources, the richness is limited to statistics as long as it is not harnessed. She is actually rich in potential for a number of its uses, not in the conventional sense of the term evidenced by the load shedding as well as water scarcity problems.

History of Nepal’s hydro resource is a checkered one; milestones being various treaties and agreement signed till now. However, cancellation of Arun III in 1995 by the World Bank amounted to a breakthrough in implementing hydropower projects with domestic and foreign investment.

The provisions of Interim Constitution, Electricity Act, etc. have become anachronistic in as much as these were enacted when federalism was not envisaged. All relevant legislation will have to be brought in tune with the aspirations and expectations of federal Nepal. Similarly, various policy, plan and strategy related to water and hydropower to will not be able to cope with the requirements of federal Nepal.

Water is needed for generation of energy not only as hydropower but also in nuclear as well as thermal power plants. Nepal has succeeded to harness very little of her hydro resources. The reasons behind such a phenomenon may lie in defective licensing mechanism. Or it could be ascribed to the institutional arrangement that fails to create conducive environment for exploitation of hydro resources.

In its endeavor to attract domestic as well as foreign private capital, GoN has announced several facilities like, repatriation, employment of expatriates, etc. Moreover, there provision for exemption of import duties during construction period, and income tax holiday during operational phase.

GoN has even allowed liberty to choose foreign jurisdiction, but, unfortunately, the effectiveness of this right to choice is limited to dispute resolution through arbitration. There is provision for payment of modest royalties to GoN and infinitesimal amount as export tax.

During last two decades, NEA and the private sector succeeded to add 384 MW to the INPS which had accumulated 239.918 MW in 80 years; private sector (including general public) mobilizing $357.286 million to $797 million mobilized by GoN/NEA.

Some people are belaboring under the misconception that there is no market for Nepal’s hydropower potential while others don’t want to hear about export of power. Both of these are extreme stances. Aim should be to reap benefit by using electricity in increasing quantum domestically and also to benefit from the complementarities of export market.

There are various issues involved in hydropower tariff but a prudent course will be to fix tariff at a point closure to the equilibrium of demand and supply which will entail fixing season and time-of-day sensitive tariff for both wholesale and retail market. This will become more effective when both wholesale and retail markets become competitive.

Negative externalities in the form of adverse environmental impact are a fact of life and each development activity is fraught with these. It is not wise to stop all development work due to these. The best course lies in following standard guidelines, like WCD guidelines, to eliminate/minimize such externalities while harnessing hydro resources.

There are some negative ramifications of federalism on hydropower. Therefore, care should be taken while agreeing on the basis of restructuring of the State, deciding on the number of constituent units, developing criteria for delineating the constituent units, deciding between whether to share resources or the benefits, fixing dispute resolution mechanism, etc.

In this backdrop, the study has arrived at following recommendations:

Sentimentally speaking even Himalayan range is Nepal’s natural resource. But only water resource has the capability to metamorphose her by ramping up her industrialization and employment generation at a higher plane. Forest has depleted to such an extent that there isn’t much scope to further exploit it. Nepal lacks mainstream minerals like fossil fuel, iron ore, precious metals, etc. However, she possesses lime stone and magnesium in abundance, processing which requires energy intensive industry. Therefore, by harnessing water resources for the generation of hydropower and to generate regulated/augmented flow, Nepal’s destiny can be rewritten. In this backdrop restructuring of the State to adopt federalism needs to be handled with care, in order to ensure that nothing comes in the way of optimum exploitation of Nepal’s hydro potential with effective management for the benefit of Nepal and her people.

In this backdrop, the best possible restructuring of Nepal is formation of three constituent units based on the river basins of three major rivers: Sapta Koshi-Mechi, Sapta Gandaki and Karnali-Mahakali, based on the watershed of each river as follows:

In order to ensure that there are no impediments to harnessing of Nepal’s hydro resources subsequent to implementation of federalism, it will be prudent to conduct a study as regards how to mitigate negative ramifications of it. Such a study could also work out the basis of restructuring, developing criteria for delineating constituent units, determining whether it will be beneficial to all concerned to share resources or the benefits, fixing dispute resolution mechanism, etc. such that the high level commission, wherever it is formed, is afforded valuable help.

Various legislations related to hydropower development are on the anvil for amendment. But the ground reality is about to change significantly after State restructuring. Therefore, extensive studies should be undertaken before making any amendment that will become redundant after Nepal goes federal such that Nepalese authorities at the different tiers of government could be supported to make informed decisions on constitutional design and issues of legislation regarding water resource use in the backdrop of positive and negative externalities of harnessing it. Besides, legal aspects of access to and control of water resources (ownership) and attribution of water user rights, inter alia in the backdrop of ILO Convention 169, both for consumptive uses and non-consumptive uses needs to be fully explored.

A study needs to be undertaken to formulate strategies for protection and conservation of water resources in quantity and quality and the concept of integrated water resource management such that disputes between centre and constituent units and amongst the constituent units could be kept to bare minimum. Similarly, conflict at international level also could increase in the future and well thought through mechanisms and institutions for conflict resolutions have to be developed, for which comparative studies of countries like Switzerland, India and Canada will have to be undertaken.

In above background the decision-makers needs to be assisted by providing input for a new regime of Water Resource Management for hydropower generation by providing quality information and expertise on policy issues and options.

Investment friendly environment is a precondition to hydropower development and GoN is responsible to create enabling environment for the purpose. The enthusiasm of the first decade of economic liberalization doesn’t exist anymore. Besides, there is uncertainty as to how the State restructuring will affect private sector investment in the sector. Therefore, it is imperative that studies be undertaken to ascertain how to engender investment friendly environment in the country.

Endeavoring to attract foreign investment GoN did amend FITTA to afford choice of governing law to foreign investors. But for lack of necessary ground conditions, settlement of dispute by taking recourse to judicial decision is nonexistent. Therefore, an in-depth study needs to be undertaken to determine how to make the liberty to choose foreign jurisdiction effective.

People are still quoting the oft repeated theoretical and economic feasible potential determined by Dr Hari Man Shrestha in early 60s when not a calculator was available to him, let alone a computer. It is high time that a study is undertaken to develop an inventory list of potential projects and also to determine realistic hydropower potential of Nepal.

Some people are not in favor of exporting power. However, such a predilection is not pragmatic. Hydropower potential of Nepal should be exploited to the utmost possible level and energy should be exported after Nepal’s demand is fulfilled to the saturation level. It will be prudent to conduct a domestic market survey to determine the quantum of power that could be consumed domestically.

IPPs are clamoring for revision of bulk tariff upwards, but NEA is unable to afford any such revision without corresponding revision of retail tariff which tends to be unpopular with the retail consumers as well as politicians that depend on the vote bank comprising of the electricity users. Besides, it is high time to introduce both time and season sensitive tariff based on the forces of demand and supply. Moreover, subsequent to implementation of federalism in Nepal, a user residing in a constituent unit producing more than its need should not be paying same level of tariff as a user in deficit prone constituent unit. A thorough study needs to be conducted to develop criteria for fixation of bulk and retail tariff.

It is possible that a constituent unit may be required to bear most of the negative externalities while positive externalities fall in the lap of other constituent unit. Therefore, it is imperative that a mechanism is developed to “price” both positive and negative externalities and also a mechanism to share such externalities fairly and equitably.

Chapter 5 of the report submitted to Forum of Federations, part of which was published by FoF.