Winds of change

After decades of being fearful that Nepal would be short-changed in India-Nepal water deals, power development agreements were finally signed in late-2014. Now, all that remains is honest implementation

Semanta Dahal

Winds of change

With his “earnest desire” to support and uphold the rights of the black South Africans, former British Prime Minister Harold Macmillan in 1960, said, while addressing the South African parliament, that “[t]he wind of change is blowing through this continent. Whether we like it or not, this growth of national consciousness is a political fact.”
Macmillan’s “winds of change” speech was epoch-making, enough to inspire the national consciousness among the black nationalists of South Africa to fight for their freedom and equality. This episode is a simple reminder of the importance of national consciousness and collective awareness for any tangible progress to occur in a nation – whether the progress be in political or economic front.
For Nepal, 2014 was a year of national consciousness and political concurrence working together to utilise Nepal’s water resources for its development. The political class matured enough to inspire confidence, provide support and trust the institutions and persons involved in finalising the water agreements. Because of the signing of the Power Trade Agreement (PTA) between Nepal and India and the signing of the Project Development Agreements (PDA) for the development of Upper Karnali and Arun 3 hydroelectricity projects, the apprehension that Nepal inevitably gets unduly cheated while negotiating water-related agreements with India appear now to be gradually dissolving.

The backdrop
Despite table talks, reports and desktop studies about Nepal’s water potential supporting the benefits of opening its water resources to private financing as early as in 1992, the country had not been able to attract required domestic and foreign private investments. The main factors for this included shifting political environment, policy inconsistencies, absence of a legal backing to trade electricity and the inability to procure desired contracts needed to invest in projects within the Public Private Partnership (PPP) framework.
After the signing of the first Concession Agreement (similar to the PDA) with Himal Power Limited for the development of 60 MW Khimti hydropower project in 1996, the government could successfully conclude another such agreement for 45 MW Bhotekoshi power plant in the same year. Both Khimti and Bhotekoshi projects are modelled under the “Build, Own, Operate and Transfer” (BOOT) of the PPP mechanism, with the concession period of 50 and 40 years, respectively. A third Concession Agreement was signed between the government and the Australia-based Snowy Mountain Engineering Corporation for the development of much talked-about export-oriented 750 MW West Seti hydro power plant in 1997. But the project could not make a substantive headway, even after the amended version of the agreement was initialled twelve years later in 2009. Eventually the agreement was terminated. SMEC could not generate financing for the project because of two reasons: (a) lack of stable framework to export and sell electricity (read: PTA) to India and (ii) inherent faults in the agreement which made the project unbankable.
The fourth such agreement was made in 2010 for the 37 MW Kabeli A project. But despite receiving a financing commitment of USD 40 million from the Word Bank, the project continues to be enmeshed in a jurisdictional turf war between the parliamentary panels, Ministry of Energy (MoE) and the Commission for Investigation of Abuse of Authority. Against this backdrop, similar agreements were signed for other infrastructure facilities, such as the one signed for the construction of the Kathamndu-Hetauda Tunnel highway in 2012. The Ministry of Physical Infrastructure and Transport has also circulated a concession agreement, along with the request for proposal for the Kathmandu-Tarai fast track.

The build-up
When exactly the government began to prepare fresh templates for concession agreements is hard to say. But the impetus seems to be the Memorandum of Understandings drafted for Upper Karnali and Arun 3 in 2008, which required the government to conclude a detailed Concession Agreement for the development, construction and operation of the projects. By April 2010, MoE had released a model PDA for further negotiations with concerned developers. While appearing to look detailed, the 2010 PDA, however, lacked the foundational risk allocation terms and was rejected by lenders for being too reliant on existing laws to guide the contract. Lenders typically require a concession agreement to spell out everything in detail, without being heavily conditioned by terms implied by background law.
From this point on, a need was felt to equip the government with resources to prepare a PDA that ensured bankability. The UK’s Department of International Development shouldered this responsibility and through one of its flagship project, Centre for Inclusive Growth, engaged reputed international consultants with solid experience in PPP and project financing to support the drafting of a bankable PDA template.
According the highest regard to Nepal’s objectives and understanding its struggle with the PPP projects, the consultants, along with the government officials, drove the process of drafting the PDA
Once the Investment Board was established by a statutory law in September 2011, hydropower projects, with capacity of 500 MW or more, were brought under its ambit. Soon after his appointment, the first CEO of the Investment Board, Radhesh Pant, framed nine directive principles on the belief that Nepal’s hydro resources should be managed wisely for the benefit of all Nepalis.
A PDA template founded on these nine pillars was further developed by a leading English law firm, Herbert Smith Freehills LLP. The Investment Board finally gave its approval to the revised PDA template in June 2012. After a few more revisions to incorporate suggestions received from the World Bank and the International Finance Corporation and after the formation of a seven-member negotiating committee by the Investment Board, the PDA was finally served to the private sector sponsors of Upper Karnali, Arun 3 and other hydropower projects in April 2013.

The process
The negotiations with the sponsor of Upper Karnali formally began in June 2013. With each round of negotiation, contentious points were cleared up. The focused leadership of the Investment Board and its zealous and well-armoured technical, financial, social, environmental, project and legal advisers fought aggressively for Nepal’s position. It will be tough to list down the names of all advisors involved here but all these young professionals, who worked on the deal, deserve special recognition for their hard work and dedication.
Also the visit of officials and advisors of Investment Board to the project sites in order to amass information and understand what the local people want from the projects immensely helped in putting together the contents of the PDA.
The outcome of the long negotiations was a draft PDA for Upper Karnali in late-July 2014, which fairly reconciled the differing objectives of the Nepal government, project sponsors and the lenders. Opinions and suggestions were solicited on this draft in a number of programs and briefings organised by the Investment Board, participants of which included energy experts, former energy ministers and secretaries, and leaders representing major political parties both in and outside the Constituent Assembly.
After incorporating the relevant suggestions, the PDA for Upper Karnali was moved to a meeting of the Investment Board in August 2014—just a day before Prime Minister of India Narendra Modi’s first visit to Nepal. The Nepal government thought that the PDA needed to be reviewed by government agencies having bearings on the PDA. Accordingly, a high-level committee, under the convenorship of the vice-chair of National Planning Commission, was formed and it reviewed the PDA, providing recommendations. After further negotiations on the draft with the project sponsor, a PDA, which met Nepal’s policy objectives—including local people’s interest; satisfying social and environmental standards; monitoring the projects; and furthering that which balanced out key project-related risks, such as timely handover in good condition, force majeure and the monetary compensation on premature termination—was signed for Upper Karnali in September 2014. Two months later, a PDA for Arun 3 was swiftly signed.  

PDA negotiations for Upper Karnali and Arun 3 were a journey of evolution and learning—an intense experience that sparked the desire to contribute more. The process has nurtured a breed of individuals, who have the capacity to analyse financial, technical, legal, social and environmental aspects of a project and to negotiate PPP agreements. It is imperative that the government utilises the newly attained knowledge effectively for other PPP projects.
Perhaps, most crucially, the PDAs have exorcised the fear of Nepal being at the receiving end of an “unfair bargain”, a fear which has lingered on in Nepal-India water deals, from the signing of Sarada Barage Project Agreement with British India in 1920 to the Kosi, Gandak and Mahakali treaties with the independent India. If the PDAs are implemented in the manner prescribed, they will stand as an epitome of this change in attitude. Let’s hope that the positive outlook continues and the projects achieve timely financial closure and construction completion.       

—Dahal was one of the lawyers who advised the government of Nepal, Investment Board on Upper Karnali and Arun 3 PDAs. Views expressed are personal. Twitter: the3rdbranch

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