Thursday, June 14, 2018

Nepal’s electricity to force India to kneel

Some Nepali dream of bringing India to her knees by simply switching off supply, after she becomes dependent on Nepal’s electricity! Their idea is for Nepal to export electricity to India to make her dependent on Nepal. There are others that attribute Bhutan’s “prosperity” to her export of electricity to India!

India becoming dependent on Nepal
The first school of thought believe that in the way India almost succeeded to force Nepal to her knees by imposing 6-month long blockade in 2015, in the wake of massive earthquake, Nepal too can turn the table on India by using electricity. Wickedly noble thought! Just switch it off to force India to kneel. From juvenile perspective this sounds plausible.

In the aftermath of Indian blockade on Nepal from 1988, the then Nepal’s Prime Minister Krishna Prasad Bhattarai did succeed to have India lift the blockade in 1990 by figuratively falling on his knees in Delhi. He even declared Nepal’s rivers common. Had he not been defeated in the general election, he would have concluded a treaty with India stipulating as such!

In this context, prime minister KP Oli turned out to be an exception, since he refused even to visit India till the blockade was lifted.

Indian fear psychosis
Not so surprisingly it is true that Indian rulers are apprehensive that if she were to become dependent on Nepal, she could be in trouble. Due to this fear psychosis she continues to exert control over structures built in sovereign Nepal as exemplified by barrages built on Koshi and Gandaki rivers.

People are ignorant of the fact that late king Birendra cancelled Karnali Chisapani storage multipurpose project (10,800 MW) after he was informed of Indian intention of deploying Indian security force in the project. Jagat Mehta, former Indian external affairs secretary has written that “Stray suggestions such that Karnali would be of such vital importance for India that it might have to be protected by Indian security forces only deepened the apprehensions that cooperation with India could jeopardize Nepal’s sovereignty” in his paper in his paper titled “India-Nepal relations: A victim of politics” included in the book titled “India-Nepal Relations – The Challenge Ahead”, published by Observer Research Foundation in 2004.

Security of hydropower project
In this backdrop, Nepal will not be in control of electricity supply to India. Rather, India will deploy her security force in projects that export electricity to her, thereby compromising Nepal’s sovereignty. Strangely, Nepal’s current federal MP Radheshyam Adhikari had opined in January 2010 that India can propose to deploy her own security force to protect her investment and he didn’t deem such proposal unnatural, in an article published in a vernacular weekly named “Yo Sata”. It is indeed strange and surprising that he sees no problem in compromising Nepal’s sovereignty, independence and nationality.
Let’s take a close look Arun 3, under development by Sutlej Jal Vidyut Nigam (SJVN). Its foundation was recently laid jointly by two PMs of Nepal and India online. Using above logic, it is possible that Indian security force will be deployed to protect Indian investment in this project.

In any case, full authority to decide as to when to generate electricity, how much to generate, whether to export or not, etc. will be vested in the project owner. Even if India doesn’t deploy her security force in it, government of Nepal cannot interfere in these decisions. Even in the projects that produce power for Nepal’s own consumption like Khimti, Bhote Koshi, etc. the decision as to how much to produce and when to do so are made by the owner. Nepal government has no authority to interfere. Except during emergencies, government cannot interfere in private businesses.

Power Purchase Agreement
Those with infantile dream forcing India to kneel don’t comprehend the mechanism of project implementation. A project cannot be implemented without obtaining generation license, condition precedents of which are signing of power purchase agreement (PPA) with electricity evacuator and achievement of financial closure. Once PPA is signed, the project is bound to supply electricity to the buyer as specified by PPA and failure to do so amounts to serious breach of contract amounting to default that could lead to eventual auction of the project. If something as disastrous happens, it will destroy Nepal’s image internationally.

Bhutan’s prosperity
Those enamoured of Bhutan model are unaware of main features of so-called “Bhutan model”. They are belabouring under mistaken impression that Bhutan implements export-oriented projects. Articles 8 and 9 respectively of agreements signed between Bhutan and India for development of Chukha and Tala projects clearly state that these projects export only surplus electricity after meeting Bhutan’s own needs.

Whereas, power development agreements (PDAs) related to Arun 3 and Upper Karnali state that these are export-oriented projects and only 12% and 21.9% electricity respectively is given to Nepal free of cost. These projects are not for internal consumption of Nepal, not designed to export surplus electricity. What adds insult to injury is the provision that even free energy to Nepal is to be exported.

Bhutan treats electricity as input of production and of the electricity consumed in Bhutan 80% is consumed by industries. Whereas, in Nepal only 40% of electricity consumed is used by industries. One should not lose sight of the fact that consumption of one unit of electricity can result in value addition by 86 US cents (equivalent to Rs 90 at current exchange rate) by multiplier effect coming into force. Hence, Bhutan became prosperous by using electricity in industries rather than by exporting.

Another reason behind Bhutan’s prosperity is the fact that these projects, built with 60% Indian grant and 40% soft loan, are owned by Royal Government of Bhutan. Therefore, all profit earned by these projects go into Bhutanese government treasury. However, it is not true in case of, for example Arun 3. All profit will be monopolized by SJVN. Nepal government could have shared the profit by way of income tax. But this project is entitled to 100% income tax exemption in first 10 years and 50% in following 5 years. Nepal’s fate will be limited to salivating at the quanta of profit such projects earn and repatriate.

Nepal will receive neither electricity, nor profit.

Electricity for Nepal
Some suffer from illusion that construction of export-oriented project will make electricity available in Nepal. Consumption of electricity in Nepal and export are mutually exclusive. Electricity will be available where the electricity is exported by these projects.

Bhutan has already achieved 100 per cent electrification, while it is claimed that 60 per cent have access to electricity in Nepal now and it will increase to 100 per cent in 5 years. The tragedy is that electricity may be accessible to 60 per cent but being unable to afford the cost of connection and utility bill many are forced to live in darkness.
Such darkness can only be dispelled by setting up industries where the electricity is produced to generate employment. No employment, no source of income to enable to afford electricity.

Mitigate trade deficit
Specifically looking at salient features of Arun 3, people with pipedream of bringing India to her knees also say that if Arun 3 exports 3,139 GWh electricity (total generation 4,019 GWh minus 880 GWh free to Nepal) at Rs 5/kWh, Nepal will receive Rs 15.69 billion/year. This is incorrect. As electricity exporter is Indian company and importer too will be Indian/foreigner, such payments will not even pass through Nepal.

Recently, MP Binod Chaudhary (Nepal’s sole multibillionaire) commenting on budget for next fiscal year in parliament reiterated the need to export electricity to mitigate trade deficit. He is not alone in believing as such. As explained above, export of electricity by project developed with foreign investment will not mitigate trade deficit effectively It can only happen with projects that are fully financed from sources within Nepal (for both equity and debt).

It can also be understood by comparing with commodity export: exporter would receive payment in Nepal through banking system and gets incorporated in current account of Nepal’s treasury impacting both trade and payment statistics. In case of exporting electricity from project developed with foreign investment, Nepal’s banking system will not see a rupee of the payment for exported electricity.

Risk of Nepal having to kneel
NEA has announced that there is no load shedding throughout Nepal, sometime back. That was deemed to be some sort of achievement. But almost 50 per cent electricity is being imported from India. The scenario will continue even when Arun 3 is commissioned which is export-oriented and Nepal will have to continue importing till projects are implemented exclusively for consumption in Nepal.

Nepal’s need for electricity, including latent demand, is huge. Former energy minister Top Bahadur Rayamajhi said that Nepal needs 5,000 MW. The requirement will be more if transportation is electrified. In 10 years Nepal can easily consume 10,000 MW. If double-digit economic growth is the ambition, even 20,000 MW will be like a drop in the ocean.

If Nepal continues on this trajectory (allowing to implement export-oriented projects and importing to meet Nepal’s need), Nepal will be in a tragicomic situation to have to import electricity of, for example Arun 3 via India. Insult will be added to the injury when Nepal is forced to import same electricity at higher price than it was exported at.

Another facet of this equation is that India would be in a position to turn off electricity supply anytime it is unhappy, thereby being able to force Nepal to kneel. Like the plan to export electricity in early 90s transforming into Nepal importing from India, plan to force India to bring to her knees could boomerang into Nepal having to kneel. Policy makers need to make course correction to avoid falling into such a trap, which will not only be ridiculous, but ludicrous too.

Therefore, allowing to develop projects as export-oriented amounts to shooting at one’s foot. Prudent course is to develop them for Nepal’s consumption and export any surplus.

Ratna Sansar Shrestha

Published in People's Review of June 14, 2018