Friday, January 23, 2015

“Export” of National Interest in Upper Karnali

In the wake of signing of project development agreement (PDA) for Upper Karnali Project (UKP) with GMR Upper Karnali Hydropower Limited (the entity incorporated in Nepal by GMR), PM Sushil Koirala, in an interview given to an English newspaper recently said, “Do not take me as one of the Koiralas who sold our rivers” and went on to assert that “I will not let anti-national act to take place in the country.” From this it becomes clear that he thinks pervious Koirala PMs committed anti-national act and is determined not to commit any anti-national act.

However, the PDA was signed notwithstanding raging protest against it, also while the matter was sub judice in Supreme Court, impelling “Civil Society Alliance for Rational Water Resources Development in Nepal” to send open letters to respective prime ministers of Nepal and India. Therefore, the PDA warrants an assessment with respect to whether any anti-national act was committed.

No mitigation of load shedding
One of the justifications trotted out by those in favor of PDA for UPK was that Nepal’s load shedding will be mitigated with commissioning of UKP as Nepal is slated to receive 12% free energy. While those opposing it, opined that free energy amounts to just meagre 18 MW in dry season and also pointed out that the full potential of the site (Karnali Bend) shouldn’t be killed, which is 4,180 MW reservoir, generating 4 times more electricity (actually helping Nepal achieve energy security). Reservoir project also would have ensured water and food security by generating lean season augmented flow of 500 m3/s.

In this backdrop it is surprising that PDA has a provision for export of free electricity in clause 10(14A) and GoN has to pay “transmission tariff” to GMR for the purpose. Under clause 11.15.4 GMR has been reposed with the responsibility to take care of export for which it would be paid trading commission, too. While there is no provision to use free electricity to mitigate Nepal’s load shedding, nor is there any provision to evacuate free electricity inside Nepal.

In view of this it is clear that even free electricity is to be exported which is tantamount to “exporting” national interest. Because the very foundation of justification for signing PDA was to use free electricity to mitigate Nepal’s load shedding problem.

Hence, anti-national act has taken place in 3 ways: (1) killing full potential of the site, thus depriving people from energy security, (2) depriving people of the region from water and food security (possible by multiple cropping with lean season augmented flow from reservoir) and (3) exporting free electricity against GoN’s assurance. This is a clear case of adding insult to injury in more than one way.

The PDA is detrimental to Nepal’s interest in following ways also.

Subsidy and exemption of tax and duties
There is provision for various financial/fiscal facilities to GMR in clause 9(2). GMR is entitled to cash subsidy of Rs 5 million/MW (totaling Rs 4.5 billion) for having paid VAT to GoN, although under Nepal law such subsidy is to be provided only to projects that connect to national grid to meet Nepal’s internal demand. This amounts to subsidizing Indian consumers. It is strange that Nepal, a poorer neighbor and a recipient of largesse from India, is reciprocating as such.
Further, GMR is entitled to 50% discount on custom duty on import of cement, iron and steel products (estimated amount: Rs 4.5 billion). This facility isn’t afforded to projects built to meet Nepal’s internal demand.

Similarly, GMR is exempt from paying custom duty (except for 1%) and VAT on import of plant, equipment and machinery (estimated amount: Rs 17.5 billion) under Electricity Act. Moreover, there is provision for income tax holiday for 10 years (estimated amount: Rs 40 billion @ Rs 4 billion/year) and 50% discount on income tax for next 5 years (Rs 10 billion @ Rs 2 billion/year) in accordance to Nepal law.

The sum total of subsidy and exemptions is Rs 76.5 billion. Nepal’s macro economy suffers in two ways due to these. One, cost of construction and, therefore, cost of energy generated also gets reduced, but Nepali people don’t get to use such low cost electricity. Two, Nepal’s treasury has to bear such a huge amount. A clear case of double whammy.

Providing such facility to projects for internal consumption is logical. Because, although GoN treasury suffers, populace benefit. In this instance GoN bears the impact of such facilities without general public benefiting (it could have been justified if Nepal was a part of India, which, thankfully, isn’t the case).

Gift of 900 MW project to India
Furthermore, the project site is the most attractive site of world (not just amongst the sites in Nepal) as there is natural dam of 140 meters (no investment required to build a dam of this height) by digging a tunnel of less than 2 km. Therefore; actual project cost is Rs 50/60 billion only according to knowledgeable people. Hence, instead of showering such largesse to GMR (through it to India) GoN could have easily implemented the project from its own sources (using fund involved in subsidy and tax exemptions).

In other words, in the name of attracting foreign investment, GoN has committed to provide subsidy and exemptions amounting to more than actual project cost. By doing so, GoN has essentially gifted UKP free of cost to India without taking any credit for it against Indian practice of publicizing worldwide, with fanfare, every time it provides a few million to Nepal.

Additional electricity generation
If any reservoir project/s is/are built in upstream of this project, its electricity generation will not only increase but its firm energy (which fetches higher tariff) generation also will increase by a magnitude. According to clause 6.1.1(D), GoN is entitled to only half of incremental generation. As Nepal will have to suffer from inundation and displacement by building storage project, she is entitled to not only all incremental generation but she deserves the incremental revenue from enhancement of firm energy as well. Therefore, this provision is another component of PDA, which is against Nepal’s national interest.

Selection of contractor/supplier
There is provision for awarding construction and supply contract in clause 11(34) without transparent and competitive bidding. The likely intention of this provision is to siphon off about Rs 80 to Rs 90 billion out of inflated cost of Rs 140 billion (as mentioned above the actual cost is about Rs 50 to 60 billion only) in collusion with contractors/suppliers. This is how anti-national act isn’t committed!

Revenue from carbon trading
Carbon offset results by exporting electricity from this project, which can be internationally traded. There is provision for sharing of revenue from carbon trading between GoN and GMR in clause 11(37) of PDA. As Nepal exports electricity depriving Nepal’s economy from its use, Nepal deserves the revenue generated by trading carbon offset. This is sacrifice of another source of revenue to GoN.

Force majeure
According to international practice none of the contracting parties are liable in the case of force majeure condition. But GoN is liable to compensate GMR for delays due to force majeure under clause 12.5.8 of PDA. In this way Nepal will have to bear additional financial liability when things are beyond its control. This provision too is obviously detrimental to Nepal.

Change in law
Nepali people are citizens of this country and are subject to all laws under the constitution of Nepal. Similarly, the company incorporated to implement UKP, which is a corporate citizen of Nepal, too is subject Nepal law with respect to all rights and duties, except for political right to cast vote. But under clause 12A of PDA, GMR will not be liable to any additional tax liability imposed by change in law. This amounts to preferential treatment of GMR to the discrimination of citizenry of Nepal (against the very principle of fundamental right to equality) and, hence, anti-national.

GoN to bear project expense
There is provision for constituting a project review panel (PRP) in clause 5 of PDA and under clause 5.5 costs related to PRP is to be borne equally by GoN and GMR. As this is purely a project related expenditure, there is no justification for GoN to share it and thereby enrich GMR; further burden on GoN treasury. Because since GMR wouldn’t share profit with GoN why should GoN share cost?

Facilitation fee to IBN
Under clause 11.28 GMR has to pay IBN $ 15,000 per quarter, totaling $ 60,000 per annum. PDA has made provision to benefit GMR in every way possible by billions of dollars. But charging GMR such a petty amount doesn’t make sense. Is ths how national interest is ensured?

PM’s claim re anti-national act
From the above it is clear that there are many provisions in the PDA, which are detrimental to Nepal. But PM Koirala insists that he has not done anything against Nepal’s interest. Killing potential capacity of the site of 4,000 MW itself constitutes treason and colluding with GMR to further bilk Nepal’s treasury in various pretence is absolute betrayal of our motherland.

Ratna Sansar Shrestha

Published in People's Review Weekly on 22nd January 2015

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