BUDHIGANDAKI PROJECT

Pricey power

August 16, 2017 01:00 AM Satis Devkota


The Maoist-led government bypassed Public Procurement Act, Good Governance Act and Financial Act in giving the project to CGGC.

Nepal’s demand for electricity has long outstripped supply due to chronic underinvestment, poor transmission network and inefficient distribution system. Those in turn are result of rent-seeking behavior of our top bureaucrats and politicians, the decade-long Maoist insurgency and geo-political nature of the Himalayan watershed in the Indian subcontinent. The Maoists are now into political mainstream. But the other two problems remain, and they must be solved for quick development of hydropower in the country.
Let me illustrate these problems with the example of the much-touted 1,200-MW Budhigandaki Hydroelectric Project. The past Maoist-led government and the then Energy Minister Janardan Sharma signed an agreement with China Gezhouba Group Corporation (CGGC) to build the project under an engineering, procurement, construction and finance (EPCF) model. 

Baburam Bhattarai, former prime minister and current coordinator of Naya Shakti Party, is against the agreement signed by the Maoist-led government. But other political parties are silent on this important and sensitive issue. Bhattarai’s party has made two demands: one, the agreement be declared null and void; and two, since it is a national pride project, it must be constructed by the government by mobilizing domestic resources. I agree with their first argument but not with the second. 

Even though the CGGS is currently building two smaller hydropower projects—30-MW Chameliya in the far-western development region and 60-MW Upper Trishuli 3A in the central development region—and has already completed one other project in Nepal, its performance has been unsatisfactory on all three. In those projects, CGGS has consistently broken its time and budget limits. There are also many differences between Budhigandaki project and those three small-scale projects in terms of technology for construction, cost, expertise required for design and engineering, and many more. Looking at the performance of CGGS in global and domestic markets, we suspect its capacity to complete such a big project on EPCF model. It will rather delay and ultimately derail construction. 

Fast track 

The government should have initiated an international bidding process, evaluated the competitors’ past performances on similar projects, judged their financial and technical proposals and only then selected the most competitive firm for Budhigandaki. Instead, the Maoist-led government followed an inappropriate procedure and bypassed the Public Procurement Act, the Good Governance Act and the Financial Act. There is thus room to suspect foul play. 

This situation reminds me of Botswana, a landlocked country in Sub-Saharan Africa. Since 1970, almost 75 percent of the GDP of Botswana has come from export of diamond. We can say that diamonds are as valuable to Botswana as water is to Nepal. Botswana got its independence from the British in 1966 and shortly after the political transition also ended. Seretse Khama became the first president after independence. At the time of independence, there were no good roads and only two secondary schools in Botswana and it was one of the poorest countries in the world. After the death of Khama in 1980, Quett Masire was elected president. He ruled for another 18 years. 

Both these presidents were incredible leaders. They wanted to build an independent, viable and prosperous nation and seem to have been completely uninterested in extracting rent. The result: the country has enjoyed political stability for past 50 years; its GDP was US $15.51 billion in 2016, when adjusted for purchasing power parity (PPP)! 
Khama and Masire have become role models for world leaders today. If they had tried to survive on rents from diamond industries, Botswana would also be like its poor neighbors in Sub-Saharan region. I wish our leaders could learn from this amazing story of Botswana.

Coming back to the second issue with Budhigandaki raised by former Prime Minister Bhattarai—that the government must build it by mobilizing domestic savings—is unconvincing. Is there a guideline to define a national pride project in Nepal? If not, how can you say Budhigandaki is a national pride project? 

Wasted dollars 

Based on international norms and standards, a national pride project must have long-term strategic and economic goals. For example, the OBOR is considered a national pride project in China since it has the long-term strategic goal of maintaining high growth and enhancing China’s diplomatic and business relationships with countries around the world. The Budhigandaki does not have any such strategic importance for Nepal. In relative terms, its economic importance is also negligible if we compare its benefits with its costs. So it cannot be a national pride project. 

Next, the economic indicators of the project are not favorable. Its estimated cost of US $2.5 billion does not include resettlement and rehabilitation costs for 45,000 people. If this is included, project cost could increase to $3.35 billion (approximately by one-third). The estimated cost per unit of energy in the project is 22.5 cents, which is four times the price per unit in the local market. If we add resettlement and rehabilitation costs, per unit energy cost will increase to 30 cents (also by one-third). That means the project is not attractive at all for an honest foreign direct investor. This is why Naya Shakti wants the government to build this economically unattractive project. 

Yes, Nepal faces a severe energy crisis and every family in the country is desperate to get reliable energy. However, they are not ready to pay four to five times what they are now paying. 

No doubt, the Maoist-led government made a mistake. However, the proposal of Bhattarai and his party is not a solution either. I know Nepali consumers are frustrated by prolonged load-shedding and I am not against development of sustainable hydro projects. But Budhigandaki is not the right project. There are other excellent alternatives. We need courage and political consensus to exploit those far more viable projects. 

The author is assistant professor of economics at University of Minnesota Morris (UMM). The views expressed are personal. 

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