Legal education has been an important challenge in Nepal. Different law schools in the country have different programs for the undergraduate and graduate legal studies. Kathmandu University School of Law (KUSL) at Dhulikhel, the youngest law school in the country, also has unique perspective in legal education. New Spotlight spoke with Dr Adhikari recently on the specialty of their academic program, and their current approach in this regard. Excerpts:
By NEW SPOTLIGHT ONLINE July 22, 2018, 8:15 p.m.
How is the Kathmandu University School of Law (KUSL) doing in its fifth year of operation? Are you already established?
Yes, we are already established, and we are doing well. Our integrated undergraduate course, BBM,LL.B (Bachelor of Business Management and Bachelor of Law) is in high demand by now. At present, we are taking only 44 students every year. We have a plan to increase the intake number next year keeping in view the interest shown by the members of the bar, the parents and professionals in the justice sector. Our post-graduate degree, the Masters by Research in Energy and Infrastructure Law, has also been initiated with a cautious start. We take serious legal researchers in this course.
How is your BBM,LL.B and the degree in Energy and Infrastructure Law related with each other?
There are obvious differences between the first professional degree and Masters by Research.The BBM,LL.B is the first professional degree. However, even as a first professional degree, the BBM,LL.B has a strong focus on corporate and business laws while maintaining conventional standards of legal education. The management and business subjects have been interwoven with corporate and business laws in such a way that once graduated, graduates will be able to work smartly in the areas of international trade, international investment, intellectual property, energy, infrastructure, concession contracts, competition law, torts and corporate management. Graduates will have the confidence that has not been much seen in Nepal before.
The Masters by Research in Energy and Infrastructure Law builds on the BBM,LL.B degree and works towards creating specialists who can fill up the gap that exists in the legal profession of Nepal in this area. Obviously, they are interrelated. It is not necessary that the students who want to pursue the Masters by Research must have the BBM,LL.B degree, but some background in economics, finance, business management and quantitative techniques is very helpful.
What is the reason behind establishing the Masters by Research in Energy and Infrastructure Law?
The simple answer is that we don’t have an adequate number of quality lawyers in Nepal in this area, although there are many roles that need to be filled in that arena. We should understand that Nepal is constantly increasing its spending in the areas of energy and infrastructure than anything else.
Investment in energy and infrastructure is going to be one of the thriving sectors in the future. The country contains huge untapped hydropower potential. There are environmental issues, and Nepal is in dire of shifting its dependence on unclean energy to hydropower development and other sources of clean energy. Many projects have been identified and feasibility studies have been carried out for various development projects. It offers 100% FDI in various sectors. Local and international investment is also encouraged in Infrastructural investments in the areas of agriculture, tourism, public transportation, telecommunication, national and international airports, mines and minerals, health, and education. There are high stakes for the country.
What are those stakes?
We require good lawyers to advise the clients of all sorts across the entire sector. There is a dearth of trained lawyers in Nepal who can advise energy companies, financial institutions, institutional investors, sponsors, governments and contractors. We need lawyers who could help think innovatively and with sophistication to achieve their business objectives. The government needs trained lawyers and advisers, as there are huge consequences for the state when issues of liability and compensation arise, for example.
Also, there is a widespread feeling among Nepalese stakeholders that our civil and judicial bureaucracy is not trained enough to negotiate concession arrangements and prepare or review tender documents. Our bureaucracy has faced difficulties in providing counseling on claims and other issues that arise during the construction and operation phases. They have been relying on expensive foreign legal experts in a variety of projects, including hydropower, electricity transmission facilities, airports, railroads, highways, waste facilities, and water supply facilities.
How will the students you train be relevant to the public sector?
Lawyers serve both the public and private sectors. If you go by the programme of the Investment Board of Nepal (IBN), the major agency for FDI approval beyond a certain scale, there are major investments plan in the areas of agriculture, banking and finance, education, energy, health, and ICT. IBN is also committed to manufacturing industries, mines and minerals, tourism, and the transportation sector. It has been working for Arun III hydro-electricity project (HEP), Tamakoshi 3, Upper Marshyangdi, Upper Karnali, West Seti, the chemical fertilizer plants, and integrated solid waste management.
The list will continue to expand, because the government is planning to acquire benefits from the Chinese Belt and Road Initiative, and its trans-Himalayan multi-dimensional connectivity network in the fields of infrastructures, energy, transportation, and railways, to mention a few.
The issue is how we protect national interests, ensure competitiveness, and address financial requirements. Legal expertise is necessary from the project negotiation stage for the accomplishment of safe and secured transactions. As Nepal becomes more industrialized, we will need more lawyers who are skilled, innovative, and entrepreneurial.
At the moment, at KUSL, we only offer Energy and Infrastructure Law at the postgraduate level. However, we hope to expand to all major areas of the Rule of Law in order to cater to Nepal’s emerging trade, investment, and finance sectors.
What is the specialty of the course in Energy and Infrastructure Law?
This specialization is designed to provide students with a sophisticated set of legal skills and a solid analytical understanding of energy and infrastructure law. It will develop their insight into the policies, players, and stakeholders that are involved in this highly complex area, focusing on major players in the utility, power, tunneling, waste management, telecom, and related infrastructure development industries. Students will focus on energy regulation and public utility concepts, competition theory, resource efficiency efforts, social responsibility and environmental issues, integrated infrastructure planning, and public and private partnerships during thetwo-year course of study and research.
The Masters by Research degree in Energy and Infrastructure Law equips the students with specialist knowledge in this field in preparation for entrepreneurial career pathways, senior roles in the industry, or a future career in research.
How does the program achieve this?
A Masters by Research is a specialist degree. It provides students with an opportunity to expand their intellectual interests in the areas of energy and infrastructure law, build their skills, and sharpen their expertise. Since this is a research degree, it is important the candidates for this program are passionate about this subject, intellectually curious, and up for a challenge.
What type of research a student of Masters by Research produces?
In a two year period, a Masters by Research student produces an original piece of research under academic supervision. The research process enables a student to deepen his/her existing expertise and interests in this specific discipline, and develops in him/her a wealth of skills relevant to both industry and academic career paths.
What about coursework? Can a student master the subject without basic coursework?
The course is based on minor coursework (9 credits of taught instructions) and major research (21 credits). The coursework introduces the law of energy and infrastructure in the overall context to the subject matter. Both in-house teachers and external facilitators are involved. This includes economists, engineers, developers, and policy makers in the program area. It also includes legal research methodology. This assists the students to kick off the research on the desired subject of choice.
Why should the students prefer Masters by Research degree over the degree by coursework? Which one is considered better?
It is up to the student. Many students choose to undertake a research degree because they have the drive to progress as far as they can in their chosen fields with strong motivation and commitment. It develops in them required legal skills, the ability to think independently, critically and legally. They can solve problems and communicate effectively.
Researchers enjoy research. They like to take challenge and enjoy independent research. They are, for many, rewards in themselves. They enter into the profession not just with their certificates, but also a background with credible research. The transferable skills developed through a research degree are usually more durable. They are valuable as well. In this sense, they are precious than the gained knowledge itself. We take students selectively, based on their proposal and our capacity to supervise them. This shapes the scenario.
Does a Masters by Research lead to a PhD degree at your School of Law?
PhD is another level. Once a student completes the Masters by Research, he/she can think of a PhD immediately. The program prepares you with enough research skills to do so. The Masters by Research degree could help a student decide if he/she is suited to continue his/her studies with a PhD.
We have not yet offered PhDs. There are universities where the successful completion of a Masters by Research could lead to an instant enrollment in a PhD degree. Even without a PhD, the Masters by Research can perfectly prepare the student for several career opportunities.
Nepal’s high hope on the West Seti Hydropower Project is yet to be materialized despite the willingness of the Government to kick off the project as soon as possible. Recently, the Investment Board Nepal (IBN) has formed a seven-member panel to study and recommend measures to sort out the issues arising in the development of West Seti Project, a reservoir project of 750 MW.
The project involves making of hydro-electric dam on the Seti River in the Far-Western Development Region of Nepal. The power station would be located approximately 63 kilometers (39 mi) upstream of the Seti River confluence with the Karnali River, with the dam site located a further 19.2 kilometers (11.9 mi) upstream. All project sites, excluding the reservoir area and transmission line corridor, are located in either Doti and/or Dadeldhura Districts. The reservoir area is located in Doti, Dadeldhura, Baitadi and Bajhang Districts. The transmission line corridor is located in Doti, Dadeldhura, and Kailali and Kanchanpur districts. The reservoir-type West Seti project is being built at an estimated cost of $1.6 billion.
The dam would be a 195-metre (640 ft) high concrete-face rock-fill dam. The dam’s catchment area covers the upper 4,022 square kilometers (1,553 sq mi) of the Seti River Basin and its reservoir volume would be 1.5 km3 (1,200,000 acreтЛЕft) of with 926,000,000 m3 (751,000 acre ft) would be active (or “useful”) storage. The reservoir’s surface would cover an area of 20.6 km2 (8.0 sq mi) and stretch 25.1 km (16 mi) up river. To produce power, the design calls for a 6.7 km (4 mi) long headrace tunnel which would divert water around 19.2 km (12 mi) of the river’s bend to the power station.[1] The power station would have a rated capacity of 750 MW. The drop in elevation from the reservoir to the power station would afford a hydraulic head of 259 m (850 ft).
The construction of the West Seti project has not been materialized since long. In August 2012, the China Three Gorges Corporation (CTGC) subsidiary CWE Investment Corporation and Investment Board of Nepal (IBN) signed a Memorandum of understanding (MoU) to construct the hydropower project. The dam was to be built by Snowy Mountain Engineering Corporation (SMEC) under West Seti Hydropower Company Limited (WSHPL) under the earlier arrangement. However, in June 2011 the Government terminated the construction license due after SMEC failed to construct it. In 2010, the WSHPL lost two important investors, the Asian Development Bank and China National Machinery and Equipment Import and Export Corporation. A campaign by organizations opposing the dam also impacted construction. The dam was opposed based on its impact of the environment and relocation of residents. In May 2011, the CTGC expressed its interest in developing the project. In December 2011, Nepal’s Ministry of Energy proposed a publicтАУprivate partnership after CTGC’s interest.
In fact, it took more than five years to sign a joint venture agreement between CTGC and Nepal Electricity Authority (NEA), its venture partner in the project. As per the MoU, the Chinese company will have a 75 percent stake in the joint venture company while the NEA will hold the rest of the shares. The West Seti Hydropower Project is expected to generate 2.8 billion units of electricity per year. The estimated construction time of the project, which will have a 207-metre tall dam, is six and a half years.
The panel formed by the Investment Board Nepal (IBN) is required to look into the issue of tariff which has become a bone of contention between NEA and the joint venture partner China Three Gorges Corporation (CTGC). The Corporation claimed that the current tariff did not make the project feasible and demanded assurance for a rate of return on investment. During a meeting with IBN on 4th March 2018 the Chinese company reiterated that the 750 MW storage project would not be bankable at the power purchase rate fixed by the government and asked the board to guarantee a 17 percent return on the project. As per the power purchase rate made public by the Energy Ministry in January 2017, reservoir-type projects like the West Seti will get Rs 12.40 per unit during the dry season which lasts from December to May, and Rs 7.10 per unit during the wet season which lasts from June to November.
The Chinese developer has also asked IBN to allow hydropower projects to sell electricity in convertible currency for a period of more than 10 years. As per the existing guideline, hydropower projects can sell electricity in convertible currency for a period of up to 10 years or until the project has repaid foreign debts, whichever is earlier. The scheme will cost $1.8 billion including interest charges incurred during the construction period and $1.4 billion excluding interest charges, according to the NEA. As noted above, the two partners will invest in the project through their proposed joint venture company, West Seti Hydropower Project Development Limited. CTGC also had advised the board to customize the capacity of the power plant, but IBN officials and NEA were not able to decide the issue on their own.
Under the current arrangement, the CTGC has a 75 percent stake in the project, and the Nepal Electricity Authority has the rest 25 percent. The IBNтАЩs 29th board meeting led by Prime Minister K P Oli on 9 March 2018 decided to form the panel led by a secretary of the Office of the Prime Minister. According to a press release issued on Friday, the panel will come up with a concrete future plan within a month. This is the first board meeting of IBN after Oli assumed office in February.
The seven members in the panel include officials from the Ministry of Irrigation and Energy, Investment Board Nepal, Ministry of Finance, Nepal Electricity Authority and local stakeholders. The panel may also take expert opinion.
The Memorandum of Understanding (MoU) signed by the Government of Nepal (GoN) with China Gezhouba Water & Power (Group) Co Ltd (CGGC) seven months ago to develop the 1,200-megawatt Budhigandaki Hydropower Project has come under controversy from day one. The project is a storage project that promises to provide the much-needed hydro-electricity to solve the perennial power crisis in Nepal.
The MoU signed on May 4, 2017 paves the way for further formal agreement/s on the planning and implementation of the project. While the project development agreement/s based on the MoU are yet to be inked, the Government is expected to do serious homework about the details and the course to be pursued by the project in the future. Some discussion was undertaken about this project in the Cabinet on May 23, 2017 as well. At that time as well, the intention of the government to hand over the construction contract of the Budhigandaki project to CGGC was clearly ventilated. The project has been in the GovernmentтАЩs considerations for the last four decades. However, the Detailed Project Report (DPR) for the storage project was completed only in 2015. It did not take any position on the development modality for the project at that time. A resettlement plan for families that would be displaced by the reservoir to be constructed in due course had also not taken any shape at that time. The project was estimated to cost USD 2.59 billion, including the cost of land acquisition for storage purposes.
Janardan Sharma, the Minister for Energy signed the MoU with the Chinese company to build the project under the Engineering, Procurement, Construction and Finance (EPC & F) model. The project site is located between Gorkha and Dhading districts, and once constructed, it will be the largest hydropower project in the country as well as the largest storage project ever. The MoU was signed by President Lv Zexiang on behalf of CGGC at the residence and in the presence of Prime Minister Pushpa Kamal Dahal and the Chinese Ambassador to Nepal, Ms Yu Hong.
Budhigandaki Project
Under EPC & F model, the Chinese company will help arrange funding to develop the project and undertake the overall responsibility for executing it. Finances will be mobilized in the form of soft or commercial loans from Chinese financial institutions under terms and conditions acceptable to the Government of Nepal. The MoU sets forth the modality for the exercise of this power.
The objective of this paper is to summarize the legal issues surrounding the project and draw a general conclusion on the state of affairs in this regard. It concludes that all controversies regarding the Budhigandaki project could be reasonably resolved, and it could still be implemented as an exemplary power project within the MoU framework, building on the trust that led to .
Features of the MOU
The CGGC, which is renowned for construction in the areas of power plants, dams, roads, bridges and civil engineering, and has invested and constructed highways; developed real estate; generated hydropower; and manufactured cement and civil explosives, has agreed to carry out the following activities under Article 4 of the MoU:
Facilitate and arrange required financing (soft loan/commercial loan or any other means mutually discussed and agreed upon) from Chinese financial institutions on the terms and conditions acceptable to GoN;
Assist GoN in the development and execution of the Project and undertake the overall responsibility of an executor of the project;
Perform and execute additional studies and investigations if required by CGGC;
Agree to work together with GoN in good faith, through joint and concerted cooperation in accordance with the provisions of this MOU, in order to implement the project on time;
Cooperate and collaborate with Chinese financial institutions to design an appropriate financing structure for the project with the GoN’s assistance where permitting Chinese financial institutions, representatives to visit the Project site, and CGGC will bear the cost and fees as required, on their own;
Execute the Project on the EPC & F basis with an appropriate contract mode under the agreed contract arrangement once the financial requirement is acquired through soft/commercial loan or any other means mutually discussed and agreed upon between and among the concerning parties;
Ensure that all the procurement process during the project development period will be done in a competitive and transparent manner; and
Suggest or intimate related information regarding the progress of work under this MoU to GoN in quarterly basis or earlier as the case may be.
Under Article 5, the MoU provides for a Steering Committee of ten representatives – five from each MoU party. The Committee will ensure the proper implementation of the MoU and will evaluate and determine the priority areas to successfully carry out the project works and possible financial structures for its timely implementation. Once constituted, the Committee will have to meet at least once in a two month time.
Dhading
Additionally, one principal feature of the MOU is that it does not allow any party for the duration of the MOU work with any other third party in pursuit of a contract agreement for the project.
Any party may terminate this MOU, with reason, at any time, by giving thirty days written notice to the other party.
Finally, it is boldly accepted by Article 6.3 that the implementation of the project and related contractual arrangements will depend on the availability of required financial resources.
Belt and Road Initiative
Meanwhile, on the recommendation of the Nepalese side, China has listed the Budhigandaki Hydropower Project as one of the projects to be taken under its Belt and Road Initiative (BRI).1 Nepal signed a MoU with China to this effect on May 12, 2017, four years after the Intiative was launched by Chinese President Xi Jinping as part of his ambitious plan to expand links between Asia, Africa, Europe and beyond through billions of dollars in infrastructure investment. BRI is a priority for Nepal as well. The reason is – it has possibilities for Nepal to open up to the world through the Chinese territories, and easy funding for the infrastructure projects. The volume of the soft loan to be taken for the project is expected to increase following its inclusion in the BRI, which has strong backing of the Chinese government.
Nepal’s energy compulsions
Budhigandaki comes with certain clear possibilities. Energy crisis and heavy load
Tool box
shedding has been a regular problem in Nepal for many years. This owes to lack of investment in energy sector, and limited growth in what has already been invested in this area. The problem became intense when neighboring India imposed an undeclared blockade in 2015, creating supply shortages of cooking gas and petroleum products, in the aftermath of the promulgation of the new Constitution of Nepal. The blockade was IndiaтАЩs response to the supposed failure of the new Constitution to respond to IndiaтАЩs demands communicated to the GoN diplomatically on the issue of constitutional reform. Given the two large earthquakes and the subsequent aftershocks that Nepal faced right before the blockade in early 2015, the effect of the blockade on India locked NepalтАЩs economy was enormous.
As a landlocked nation, Nepal imports all of its petroleum supplies from neighboring India. Moreover, India had also stopped Nepalese trucks at the Kolkata harbor, NepalтАЩs principle transit and trade point with India. The blockade choked imports of not only petroleum but also medicines and earthquake relief material. The blockade caused NepalтАЩs only international airport, Tribhuvan International Airport in Kathmandu, to deny foreign carriers fuel, contributing to further isolation from the outside world and worsening the effects of the ongoing landslides blocking border trade with China. Nearly all sectors of the economy had taken a severe hit, from tourism to transport to domestic factories to agriculture and construction industry. The tactics of blockade is a regular feature of Indian diplomacy in Nepal.
In March 2016, Prime Minister KP Sharma Oli, who led the country in difficult days, signed 10 separate agreements with China, including the trade and transit treaty that ensured NepalтАЩs right to access sea as a landlocked nation through the Chinese land. Nepal had never sought this access through Chinese territory before. Thirteen months later, on May 12, 2017, Nepal and China signed the MoU on the Belt and Road Initiative.
Nepal understands that two reservoir projects – Budhigandaki and West Seti are important to meet Nepalese energy crisis. They also particularly help addressing the gap in energy supply between dry months and wet months. In January 2017, Nepal Electricity Authority (NEA) and China Three Gorges Corporation (CTGC) put the initials on a joint venture (JV) agreement to build West Seti Hydropower Project. The government had handed over the project to it in 2012. The Budhigandaki comes as a second major project.
Budhigandaki Project Location and Catchment Area
The project site lies in the adjoining parts of Dhading district of Province No 3 and Gorkha district of Province Number 4. The project site is accessible through Benighat (at about a distance of 80 km from Kathmandu) on Prithvi Highway from Kathmandu to Pokhara. From Benighat, a motorable composite bridge can be used to cross the Trishuli River and access the Dam and Powerhouse site both of which are at a distance of about 1.5 km from the road head.
Catchment Area
Dam site
Dam site
Gorkha: 2,700 km2
Dhading: 900 km2
Nuwakot: 35 km2
China: 1,365 km2
Total: 5,000 km2
About 2 km u/s of the
confluence between
Budhigandaki and
Trhshuli at Benighat
Ghyalchok (Gorkha)
Salang (Dhading)
The salient features of the project have been summarized for the public at the official website of the project.2
Earlier efforts
Until recently, the Government thought of developing the Budhigandaki Hydropower Project in a тАШcompany modelтАЩ, in place of its development committee modality accepted later. It was argued that the company modality will be more efficient, independent, and less susceptible to influence from political intervention.3 Ultimately, however, the development committee approach was chosen. The MoU signed with CGGC, which gives new possibilities, have already been noted above.
Land Expropriation
Land expropriation and compensation is a major issue in the Budhigandaki undertaking. The project is presently acquiring land in the catchment area of Dhading and Gorkha districts. The district administration offices of Dhading and Gorkha are currently extending compensation to owners of the land required for the construction of the project. Around 58,000 ropanies of land need to be acquired for this purpose. The number of the affected households are said to be more than 8,000. The reservoir of the storage project will submerge 3,560 houses and the occupants will need to be resettled with proper compensation. Likewise, 4,557 households will be partially affected by the project and need appropriate compensation.4
The government has given due priority to the Budhigandaki project in the budget for fiscal year 2017-18 as well, with allocation of Rs 10.17 billion for distribution of land compensation. The process has been rather slow, although all concerned stakeholders believe that it should be expedited.
Stakeholders’ claims
The stakeholoders of Budhigandaki have several concerns on the governmental initiative. Some stakeholders have clearly pointed out that the deal with CGGC has been reached without carrying out competitive bidding. The importance of bidding process in a huge project like this cannot be underscored. Surprisingly, though, contracts for projects below 100 MW capacity such as Kabeli A had been awarded only after carrying out competitive bidding in the past. This certainly has raised eyebrows in Nepal.
Some stakeholders have also questioned the Chinese companyтАЩs capacity to develop the project, given BudhigandakiтАЩs enormity. The contract given to it to construct the 22 MW Chilime power project was abrogated after it completed only 10 per cent of works during the contract period in fiscal year 1997-98.5
In the fiscal year of 2012-13, the company landed the contract to carry out civil works of 42.5 MW Lower Sanjen hydropower project – a subsidiary of Chilime – but its performance was dismal. As a result, its security deposit was forfeited.6
Some think the EPCF MOU with CGGC is against the constitutional provision in Article 59 (5) of the Constitution, which ensures certain investment to the local communities in development of natural resources.
Agriculture and Water Resources Committee (AWRC)
The Budhigandaki Project has also been an issue at Agriculture and Water Resources Committee in the parliament.
The Parliamentary Committee on Agriculture and Water Resources has recently questioned why the decision to award the project to China Gezhouba Group Corporation was taken, going against the CommitteeтАЩs past direction to build the project by utilizing domestic resources. Lawmakers also accused the government of handing over the national pride project to the Chinese firm without any competition and breaching the countryтАЩs public procurement laws. Earlier, after holding multiple discussions with Employees Provident Fund (EPF), CitizenтАЩs Investment Trust (CIT) and Nepal Telecom (NT) as well as the projectтАЩs officials and experts, the house panel, had concluded that the mega project could be developed by utilizing domestic resources.
The validity of the decision has also been questioned stating that the agreement has been signed without getting it endorsed by the cabinet.
China Gezhouba Group Corporation (CGGC)
The concerns regarding CGGC must also be noted here. CGGC is currently building the 30MW Chameliya Hydropower Project in the far west and the 60MW Upper Trishuli 3A Hydropower Project in the central region in Nepal. The company could not construct both these projects in slated time. This raises the issue whether the CGGC can perform efficiently in the case of the Buddhigandaki.
CGGC has faced criticism time and again for inflating the cost of the project by citing various excuses and political hiccups. The construction cost of the Chameliya project has gone up to Rs 550 million per megawatt, while normally, the construction cost of a project is Rs 150 million to 200 million per megawatt. Moreover, the project, which was supposed to have concluded in May 2011, is yet to be completed.7 Nepal Electricity Authority has been bearing huge losses not only in terms of revenue but also due to increase in foreign exchange rate owing to the project construction delays, according to NEA officials. Besides, a case related to the company about tax evasion over fake VAT bill of over billion rupees is sub-judice at the Revenue Tribunal Office.8
A local newspaper has claimed that CGGC’s subsidiaries had been blacklisted by the World Bank on May 29, 2015. The World BankтАЩs move was based on тАШacknowledgement of misconduct by these entities in three World Bank-funded projects in China in relation to water conservation, earthquake recovery and flood managementтАЩ. This meant that the company and its subsidiaries were ineligible to participate in any contract of the World Bank for 18 months. The claim has been refuted by the Company. It is said that the company had never landed in controversy. It is said that тАЬCGGC is just one of the over 150 subsidiaries of China Energy Engineering Corporation (CEEC). It was some other subsidiary company of CEEC that had landed in controversy, not CGGC.тАЭ9
Press Release of Former Prime Minister
The Budhigandaki deal has come under criticism of former prime minister and coordinator of Naya Shakti Party Nepal Baburam Bhattarai as well. He criticised the governmentтАЩs decision to award the construction contract for the Budhigandaki without a competitive bidding process.10 He emphasized that the government should build large infrastructural projects like Budhigandaki itself. His party has accused the government for signing the MoU with the company without formulating proper policies and executing directives on EPCF model. According to Om Astha Rai, “the fact that ex-Prime Minister Baburam Bhattarai, viewed by many as pro-India, demanded the contract be scrapped fueled speculation that New Delhi indeed did not want the Chinese involved in such a large reservoir project upstream.”11
Issues that need to be addressed
Article 35 of Nepal Electricity Act 2049 states:
Government of Nepal may enter into contract for Generation, Transmission or Distribution of Electricity: Notwithstanding anything written elsewhere in this Act, Government of Nepal, by entering into a contract with any person or corporate body, may do or cause to do the generation, transmission or distribution of electricity subject to the terms and conditions as mentioned in such contract.
There is no doubt that Article 35 clearly gives power to the Government of Nepal to sign any contract with any person or body corporate for the purpose of generation, transmission or distribution of electricity. Its power to sign any MOU with China Gezhouba Water & Power (Group) Co Ltd (CGGC) is therefore legally sanctioned as long as the power is exercised in the interest of the country and without defeating the purpose of the law.
An open bidding process, had it been resorted to, may have given clear choice to the government in the matter of selection of the party, the cost of the project, the construction time, the amount of foreign currency involved and its interest, and also the overall national liability. The project cost of USD 2.59 billion itself is a huge issue. This amount is an estimated cost. According to Ratna Sansar Shrestha, a financial analyst in the energy sector, it obviously includes a handsome profit to the contractor, overhead expenditure, contingency expenditure as well as commissions that go to politicians, senior bureaucracy, brokers and so on. The real project cost will come up only after there is transparent competition between willing contractors.12 The signing of the MoU has certainly denied the people of Nepal an opportunity to see the transparency in the dealing.
As far as Nepal is concerned, there are already some good examples of projects completed in smaller amounts than the estimated amounts. For example, the hydropower project Kaligandaki – A had a declared estimated cost of USD 45 crore. It was completed using USD 35 crore. On the civil side, the project cost Rs 12,00,00,000 instead of the projected cost of Rs 7,00,00,000. Even with this variation, Kaligandaki – A was completed in less than the estimated amount. This means the real cost was 22 percent less than the projected cost. Similarly, while the estimated cost of Marshyangdi hydropower project was USD 32,33,00,000, the real cost was only USD 24,98,00,000. It was a difference of approximately 25 percent. The project was built by Nepal Electricity Authority itself.13
One additional example is Bhotekoshi Hydropower Project. It was carried out by the private sector. Its estimated cost was USD 10,00,00,000. Based on international competitive bidding, the contract was signed for USD 4,80,00,000 only. This amount is less by 52 percent of the estimated cost. This project was contracted out to CGGC. It is clear that estimated cost are liberally projected and there is always an effort to show high cost in order to work out an inflated power purchase agreement before the projected is kick started. It is thus clear that the Budhigandaki Project could not get the advantage of international competitive bidding process. It is thus the opinion of the financial analyst that the project could have possibly been contracted out for less than USD 200 billion had a transparent process been followed.14
Another issue involved here is the issue of cost increment. The MoU does not state anywhere what fixed cost the executor has to execute this project as proposed. This simply means that the regular cost increment is going to be the recurring feature of this project as well. A case in point is Mid-marshyangdi Hydropower Project. The project was contracted out for Rs 13,00,00,000. The contractor has already received Rs 27,00.00.000. It continues to claim further payment on various grounds. It is indeed clear that most of the projects operationalized by the Nepal Electricity Authority are based on inflated estimated cost. The main reason is the power contract management capacity of the NEA. The Kulekhani storage project is yet another case in point. Its estimated cost was USD 6,80,000. The real expenditure claimed was USD 12,36,000. Given this scenario, there is no reason why this situation does not repeat in the case of Budhigandaki. While the MOU does not fix the project cost, it does not give any clue as to how the cost will be maintained under certain standards. The more the cost increment, the more profit to the executor. It is the country which will have to bear the loss.15
Yet another startling issue about Budhigandaki is the project period. The MoU does not state by what deadline the project will have to be completed. The project delay is mostly a gain on the part of the contractor and loss on the part of the Government. The delay causes increase in the cost including additional interest in the project debt. If the project is late by one year, for example, the loss of electricity revenue will be 4,25,00,000 units. If the electricity tariff is fixed at Rs 5 per unit, the loss will be US 22,25,00,00,000. When Kulekhani was 21 month late, the Government lost USD 1,50,00,000. When Marshyangdi was late by 7 months, the country lost USD 1,7,00,000. When Kaligandaki A was 18 month late the loss was USD 10,00,00,000. In the case of Mid-marshyangdi, the delay of 50 months caused the loss of USD 13,00,00,000. Chilime was delayed by 40 months because of this same contractor. The fates of Chameliya and Trishuli which have still been struggling are still unsure. They are definitely causing huge losses to the Government.16
The financial management is yet another important issue. Under the MOU, the responsibility to garner necessary finance has been given to the contractor itself. While the contractor is a Chinese entity, the entities it is exploring for finance are also supposed to be Chinese. In that case – does this scenario affect the quality of negotiation? is an open question. The importance of financial arrangement under transparent conditions from the open financial market cannot be minimized. It has implications for interest rate. It is not clear how the government is going to check the unfair dealings between parties in the matter of loan negotiation and payment back period.
It appears that the loan lent out to Nepal will be in Chinese currency. Although there is no specific mention about this, since the financial entities will be Chinese, the currency released will be in Chinese. Nepalese currency is a weak currency. Even though the interest rate is so low, the principal amount itself is going to be always heavier. For example, 1 USD in 1995 was equivalent Rs 50. Now after 22 years the convertible rate is more than RS 100. In other words, had the Government taken USD 1 crore (i.e. 50,00,00,000) as a loan in 1995, and the amount remained unpaid, the principal amount now will be more than USD 100,00,000. The interest is quite an additional issue.17
As the project is to be worked out under the Engineering, Procurement, Construction and Finance (EPC & F) model, the project company will enter into a contract with the EPC & F contractor which will then enter into various subcontracts with its sub-contractors for performance of discrete portions of work. The EPC & F contractor provides the project company with a single point of responsibility to ensure that the project is completed on time and meets the performance requirements. The necessity of demanding a “performance guarantee” is therefore an important issue. In this type of contract, the contract price may be inflated as the EPC & F contractor is assuming most of the risk. Often there is limited ability of project company to be involved in the performance of the works. Inefficient use of resources is a possibility because there is no pooling of knowledge and skills. Risks may be placed on those unable to influence or manage them.
Conclusion
The MOU signed on 4 June 2017 is a skeleton document. As it is a skeleton, there is room for debate and also for doubts about the arrangement. Given Nepal’s experience with hydropower projects, the questions raised here, or the concerned expressed in this analysis, do not seem exaggerated.
One significant strength of the MoU is the provision in Article 5. The Steering Committee of ten representatives that it has created is based on the concept of joint management and collective decision making. The Committee has five representatives from each MoU party. It is the responsibility of the Committee to ensure that the MoU is properly implemented. It will also evaluate and determine the priority areas to successfully carry out the project works and possible financial structures for its timely implementation. This provision enables the Committee to create a win-win situation for both the parties.
All issues about law and finance as discussed above could be effectively handled by this joint management. Except the fact that the Budhigandaki project cannot be given to any other company under the existing arrangement, all other issues could be negotiated within the framework of the MoU and according to the recognized legal and business principles. For example, the MoU does not obstruct the joint management to work out a feasible range of investment opportunities to the locals, or the other Nepalese people. There is no reason why Article 59(2) cannot be implemented. Similarly, the Committee may also effectively help implement the public procurement laws that apply as there is a clear provision in the MoU to this effect. This is not a major issue. What is more important is to make the best use of joint management created under the MoU. This is a unique way to make sure that the project creates a win win situation for both the parties.
Again, the Budhigandaki project is a remarkable case. One must keep in mind that both the governments of Nepal and China have undertaken this project because of their understanding with each other, the ongoing energy crisis in Nepal, and a clear effort to establish a model for their future investments in Nepal (despite existing issues in the projects with Chinese companies). The Nepalese drive to seek reliable solution to the energy crisis in the country, and excessive dependence on Indian supply, and the Chinese willingness to establish itself as a dependable business partner in Nepal’s development, both demonstrate the move towards a new scenario. It is now their responsibility to make it happen.
All complications that have been discussed must be solved. The MOU does not deal with any of these complications, but it does not constrain fair and efficient, yet mutually agreed arrangement to work out this MoU. There is a room for model project arrangement even now. As far as China Gezhouba Water & Power (Group) Co Ltd (CGGC) is concerned, it is important that it completes all its projects in Nepal before giving hope to the Nepalese stakeholders that Budhigandaki is going to be different as far as its efficiency is concerned. There is also a media note that “CGGC seems desperate to rebrand its image in Nepal, and there is hope in some quarters that the company will deliver this time because the Chinese government is also keen to see this project completed in eight years.”18
This positive note notwithstanding, a petition has already been filed at the Supreme Court seeking termination of the MOU. The Company is waiting for the court verdict before starting the project.
1See “Project selection for BRI funding goes on” in The Kathmandu Post, September 11, 2017 available at http://kathmandupost.ekantipur.com/news/2017-09-11/project-selection-for-bri-funding-goes-on.html 2http://www.bghep.gov.np/salient-features.php 3See “‘Company modelтАЩ for Budhigandaki Hydropower project: Energy Minister” in Republica, October 4, 2016. 4http://kathmandupost.ekantipur.com/news/2017-04-16/dhading-locals-finally-receive-compensation.html 5See “CGGC contract for Budhigandaki in controversy” in The Himalayanm Times, May 31, 2017 6See “CGGC contract for Budhigandaki in controversy” in The Himalayanm Times, May 31, 2017 7See “CGGC contract for Budhigandaki in controversy” in The Himalayanm Times, May 31, 2017 8See “CGGC contract for Budhigandaki in controversy” in The Himalayanm Times, May 31, 2017 9See “CGGC contract for Budhigandaki in controversy” in The Himalayanm Times, May 31, 2017 10See “No-bid contract flays award draws flak,” in The Kathmandu Post, June 9, 2017. Available at http://kathmandupost.ekantipur.com/printedition/news/2017-06-09/no-bid-contract-award-draws-flak.html 11“Reservoirs of suspicion Nepal is blessed with water resources, but cursed by geopolitics” in Nepali Times, 20-26 October 2017 available at http://nepalitimes.com/article/nation/reservoirs-of-suspicion/hydropower-geopolitics%20,3991 12See Ratna Sansar Shrestha, “Budhigandaki – Kalankit Rastriya Gaurav” in Nagarik Daily, Bhadau 6, 2074. Available at http://www.ratnasansar.com 13Ibid 14See Ratna Sansar Shrestha, “Budhigandaki – Kalankit Rastriya Gaurav” in Nagarik Daily, Bhadau 6, 2074. Available at http://www.ratnasansar.com 15Ibid 16Ibid 17Ibid 18See “Building Budhi Gandaki” in Nepali Times, August 6, 2017.
October 2017
Lecture Notes: Masters by Research in Energy and Infrastructure Law
Kathmandu University
