Mired in politics, there’s little likelihood Budhi Gandaki will take off

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Negotiations with China Gezhouba, which was awarded contract without competitive bidding, have stalled for months

In September last year, the KP Sharma Oli administration decided to rope in China Gezhouba Group Corporation to develop Budhi Gandaki Hydropower Project, disowning the erstwhile Sher Bahadur Deuba government’s decision to develop the 1,200MW project with internal resources.

A Cabinet meeting on September 22 last year directed the Energy Ministry to initiate the process to award the project to the Chinese developer. As per the Cabinet decision, the ministry was asked to hold talks with Gezhouba, prepare a proposal and strike a deal to execute the $2.5 billion reservoir project in Gorkha and Dhading.

Accordingly, the Ministry of Energy sought opinions from the Ministry of Finance and the Ministry of Law and Justice so that it could take the project forward.

But there was a strong reservation from the Ministry of Finance, and the Ministry of Energy stalled further negotiations with Gezhouba.

The project is in a state of limbo now.

In an interview with the Post, Energy Minister Barsha Man Pun confirmed that project negotiations with China Gezhouba Group have stalled for long. “We held two rounds of negotiations with the Chinese firm in initial days. Since then, there is hardly any progress,” he said. “We are just distributing compensation to the affected people. The project is in a standstill.”

Budhi Gandaki is one of the most talked-about projects, and the first feasibility study was conducted in 1984 as it was viewed as a mutual benefit project with India.

The project never came out of the drawing board until the second feasibility study was completed in 2014.

The controversy started after the then Pushpa Kamal Dahal government in May 2017 awarded a contract to the Chinese firm on his last day in office under the engineering, procurement, construction and financing (EPCF) model, but without competitive bidding.

But the decision to award the contract to the Chinese developer was quashed by the Deuba government in November 2017, saying that there were some procedural flaws while awarding the contract.

After scrapping the agreement with the Chinese company, the Deuba government set plans to build the project using domestic resources via the state-owned Nepal Electricity Authority.

Officials at the Law Ministry said they are yet to receive any request from the Energy Ministry seeking views on legal issues regarding the signing of a memorandum of understanding with the Chinese developer.

Subsequently, a committee was formed under then National Planning Commission vice-chairman Swarnim Wagle to explore financing options to build the power plant.

But the Oli administration again awarded the project to the Chinese firm.

The government has listed it as a national priority project.

The project which has been mired in politics has geopolitical contexts as well. Though India is not involved in the project some say, the Oli government’s decision to make a beeline for the Chinese firm did not go down well with New Delhi.

Nonetheless, the project currently is in a standstill, and officials say Nepal does not have required laws and regulations to take the project forward at this point of time.

“I do not see this project taking off anytime soon in the present situation,” said Pun. “We have to look for another model to develop this project because we cannot put it in limbo for long.”

The Energy Ministry now is in a mood to develop the project with internal resources and it is likely to allocate some budget for this in the upcoming budget.

During a recent amendment in laws to attract foreign investment, the government has made a provision that if investors are ready to develop under the EPCF model, they can get permission.

The Nepal Investment Board can move ahead with the project that can be developed under the EPCF model, but a lot of work is required to ensure that this provision is applicable in Nepal. Second, by-laws required for EPCF model are not ready yet.

In its comments forwarded to the Energy Ministry, the Finance Ministry raised a couple of questions and concerns over developing the project under the EPCF model and project development modality.

“We have received comments from the Ministry of Finance raising some concerns. The ministry has expressed some reservations,” said Prabin Aryal, spokesperson for the Energy Ministry.

The Finance Ministry has asked about laws to support the EPCF model and clarity on the development model and urged the Energy Ministry to hold a competitive bidding process before awarding the project to any firm, said officials.

Another big concern raised by the Finance Ministry is about the cost of the project which is unrealistic advising the Energy Ministry to go for competitive global bidding by reducing the cost of the project.

After Cabinet’s direction, the Energy Ministry had prepared a draft of the memorandum of understanding to be signed with the Chinese firm that included development modality, estimated cost, loan and provision of loan, among others, and was preparing to sign a deal during the Second Nepal Investment Summit in March-end.

After strong reservations from the Finance Ministry, the process of signing the MoU with Chinese firm was postponed until further notice and the Energy Ministry did not seek comments from the Ministry of Law.

“We have not received any papers from the Energy Ministry regarding Budhi Gandaki,” said a senior official at the Ministry of Law.

Former energy secretary Anup Kumar Upadhyay said that no country in the world lends such a big amount of money.

“There was confusion about the EPCF model because this is something new for us; we have not tested or tried it. Second, it can be developed with our internal resources by taking a soft loan from countries like, say, Japan and multilateral lending agency like Asian Development Bank,” said Upadhyay.

“Third, the approach of securing the project first, then looking for a loan from outside where the Nepal government should give the guarantee of the loan has made the project difficult.”

The government has collected billions of rupees by imposing infrastructure tax on petroleum products, but the fund is sitting idle. So it is better to develop the project with internal resources, said two officials familiar with the Finance Ministry’s response to the Energy Ministry.

The Nepal Oil Corporation has collected Rs30 billion in infrastructure tax to develop the project with internal resources. As per estimates, the government can raise Rs164 billion in the next 10 years through this tax if fuel consumption goes up by 10 percent per year. Records suggest fuel consumption in the last five years has doubled and import of petroleum products from 2016/17 to 2017/18 increased by 20 percent.

“We are not in contact with the Chinese developer since long. At this point in time, I do not see any possibility of taking forward the project due to various reasons,” said Pun but stopped short of giving further details.

Budhi Gandaki is a multipurpose project, which will not only generate electricity but also generate public goods such as flood control, navigation, fisheries and irrigation.

It is a costly project in the present model, the Finance Ministry had commented, adding the investment model to fund the project is also not clear.

During talks with Energy Ministry officials, representatives of China Gezhouba Group had stated that they would facilitate a loan from Chinese banks but they were not going to raise money themselves to develop the project.

The group also insisted that the Nepal government write to the Chinese banks seeking a loan for which the firm would facilitate, which had made Energy Ministry officials suspicious, according to sources.

At present, the Energy Ministry is distributing compensation to the affected locals. Compensation distribution and land acquisition will complete this fiscal year.

“There are only a few options left,” said Upadhyay. “Either the political leadership of Nepal and China should agree on some kind of funding modality for the project, or we have to go for a normal bidding process to build the project.”

After the Nepali side put the project on hold, the Chinese firm has also stopped holding political parleys or meetings. Nor has there been a follow-up.

“This is an expensive project,” said Upadhyay, the former energy secretary. “And due to unfair competition among the local agents, it can become even costlier.”