KATHMANDU: The construction of the Upper Arun Hydropower Project on Nepal’s Arun River has come to a standstill due to interference from the country’s former Prime Minister, as well as concerns raised by neighboring India and international lenders.
Former Prime Minister and Maoist Center Chairman Pushpa Kamal Dahal ‘Prachanda’, the World Bank—an international financial institution that provides loans and grants to low- and middle-income countries—and Nepal’s southern neighbor, India, have all contributed to a complex situation, hindering Nepal’s efforts to develop the project on its own river.
The semi-reservoir Upper Arun Project, located in Bhotkhola Rural Municipality of Sankhuwasabha, is designed to generate 1,063.36 megawatts.
Currently, the project promoter, Upper Arun Hydro Electric Limited, is focused on constructing a 21-kilometer access road.
In addition, 4,563.06 ropanis (approximately 232.14 hectares) of private land in Bhotkhola have been acquired for the project.
Nepal has already spent over two and a half billion rupees on land acquisition, which is nearing completion.
However, the project has encountered significant obstacles after both the World Bank—rumored to be the primary lender—and India raised concerns that delayed progress.
At the investment conference, it refused to sign the agreement, halting the proposal for Upper Arun that had been slated for submission to the board of directors last June.
The main catalyst for this situation appears to be Pushpa Kamal Dahal ‘Prachanda’, who is accused of leveraging economic diplomacy and neighborly relations for personal and party gain.
Understanding Nepal’s geographical location and its rivers before discussing the floods in Arun
Before delving into the domestic and external challenges surrounding the Arun River, it’s important to first understand the geographical context of Nepal and its rivers.
Nepal is situated in the heart of the Himalayan mountain range, which stretches approximately 2,400 kilometers from the Indus River in the west to the Brahmaputra River in the east.
Over 6,000 rivers flow through the central Himalayan region, from the Mahakali River in the west to the Mechi River in the east.
Although Nepal is a landlocked country with no direct access to the sea, its rivers ultimately drain into the Bay of Bengal through India.
Nepal’s diverse topography features the towering Himalayan mountains to the north, with 76 percent of the country’s landmass covered by high mountains and hills.
Thousands of rivers originate from this mountainous region and flow southward into the plains.
As one travels eastward, the Greater Himalayas rise even higher, and rivers from China, such as the Arun, enter Nepal.
The rivers from the north have divided the Greater Himalayas of Nepal into 28 distinct sections.
The Arun River, for instance, separates the Kumbhakarna Range (the fourth highest mountain range in the Greater Himalayas) from the Mahalangur Range.
In addition to the Arun, several other rivers originating in Tibet cross the Himalayan mountains to enter Nepal.
For example, the Humla Karnali enters Nepal’s Humla district after crossing the Border Himalayas from Tibet.
The Border Himalayas, which form the boundary between Nepal and China to the west of the Trishuli River, serve as a watershed divide.
Water flowing south from this range enters Nepal, while water flowing north goes to Tibet.
In the Greater Himalayas, which extend from the Mahakali River in the west to the Trishuli River in the east, the waters of Tibet also flow towards Nepal.
These rivers from Tibet traverse all three major landforms of Nepal—the Himalayan, hilly, and Terai regions—on their way south.
Nepal is home to over 6,000 rivers, with a total length of about 45,000 kilometers.
These rivers carry an annual flow of between 175 billion and 252 billion cubic meters of water, depending on the season.
A recent study conducted by Nepal’s Water and Energy Commission explored the electricity generation potential from the country’s rivers.
According to the study, Nepal could generate up to 48,000 megawatts of electricity from reservoir-based projects.
However, the total potential reaches 120,000 megawatts when considering all rivers.
The report further states that, by modifying project types, it is possible to generate over 200,000 megawatts of electricity if the projects are designed to operate at full capacity for only 91.25 days each year.
Now, let’s focus on the Arun River.
Nepal’s rivers are categorized into three grades based on their origin and significance.
First-grade rivers are those that originate in the Himalayan region of Nepal, either from melting snow or from Tibet, and flow southward through the Himalayan region.
These rivers have abundant water throughout the year due to the melting of Himalayan snows.
Second-grade rivers are those originating in the Mahabharata mountain range in the mid-hills of Nepal.
Third-grade rivers, typically originating from rainfall in the Chure range, often experience flash floods during the rainy season. Some of these rivers also encounter flooding during the winter months.
The Arun River: A Key Tributary of the Saptakoshi
The easternmost first-grade river in Nepal is the Saptakoshi. Its largest tributary is the Arun River, which originates not in Nepal but in the autonomous region of Tibet, China.
The Sanskrit name for the Arun River, known as Fungchu in Tibet, is Mahaprabha.
The Arun River is significant not only for its water flow but also for other reasons.
It is the largest tributary of the Saptakoshi and flows from one of the highest elevations in the world, at 27,690 feet.
The Arun River is said to travel about 500 kilometers in Tibet from its source.
However, the Public Service Commission exam preparation books used by the Nepal government for recruitment state that the total length of the Arun River is 513 kilometers, with 361 kilometers in Tibet and 152 kilometers in Nepal.
The Arun River enters Nepal from the mountainous region of Sankhuwasabha.
Its main source is the Sisapang Glacier in Tibet. The Arun forms part of the Nepal-China border, stretching from Kanga village in Tibet to Kimathanka in Bhotkhola Rural Municipality-1, Sankhuwasabha.
Upon entering Nepal at Kimathanka, the Arun River carves out the deepest valley in the world—the Arun Valley—along the border of Sankhuwasabha and Bhojpur.
This valley is home to the unique cultures of the Rai, Limbu, and Sherpa communities in the hilly and mountainous regions of Nepal.
The Arun Valley is renowned for its biodiversity, housing the largest number of bird species in the world. More than 83 species of fish are found in the Arun River alone.
The Arun River, along with its tributaries, merges with the Sunkoshi River at Chhintang in Dhankuta.
The confluence of the Arun and Sunkoshi Rivers is followed by the merging of the Tamor River, located 500 meters downstream, forming what is known as the Saptakoshi Sangam. This confluence area is considered the Triveni of the east.
The Saptakoshi River, the largest river system in Nepal, is formed by the convergence of seven rivers: Arun, Tamor, Sunkoshi, Bhotekoshi, Likhu, Tamakoshi, and Indravati.
The Sunkoshi River, which joins the Arun and Tamor, cuts through the weak terrain of the Mahabharata mountain range before entering the Barah region from the north.
About six years ago, the government estimated that approximately seven hundred billion rupees would be required for the preparation of these projects, both from domestic and foreign sources.
Originating in China, the Sunkoshi River flows through Nepal’s Chatara and eventually reaches India.
In India, the Koshi River is known as the Damodar River. This river, with its powerful flow, causes significant flooding in Bihar during the rainy season, earning it the title of the ‘sorrow of Bihar.’
The Koshi eventually merges with the Ganges River in Bhagalpur, Bihar, before reaching the Bay of Bengal.
This marks the beginning and end of the Arun River.
Now, let’s discuss the Arun Project.
The proposed generation capacity for the Upper Arun Picking Run of River (PROR) project is 1,063.36 MW.
This type of project is referred to as a semi-reservoir project in Nepal.
Located 15 kilometers south of the Nepal-China border at Kimathanka, the project is about 200 kilometers from Kathmandu.
The proposed generation capacity of the project is 4,531 gigawatt-hours, with an additional 18 gigawatt-hours of electricity to be generated from the eco-flow turbine.
The powerhouse of the Upper Arun project will be located in Chongyrang, near the confluence of the Arun and Lexuwa rivers.
There are plans to connect the generated electricity to the 400-kilovolt capacity Arun Hub Substation in Haitar, Sankhuwasabha, by constructing a 5.79-kilometer-long 400-kilovolt capacity double-circuit transmission line.
The Upper Arun project is a key initiative under the government’s Nepal Pani, People’s Investment program in the hydropower sector.
This program, part of Nepal’s 15th Periodic Plan, was launched by the government in the year 2075 BS. It is considered a “game changer” for the country’s hydropower development.
Under this program, the government selected 19 hydropower projects across the major river corridors in all seven provinces.
The target is to generate 3,789 megawatts of electricity from these projects, with 49 percent of the shares allocated to the general public and 51 percent to promoters.
About six years ago, the government estimated that approximately seven hundred billion rupees would be required for the preparation of these projects, both from domestic and foreign sources.
The production capacity of Upper Arun was initially estimated at 725 megawatts, but this was later increased to 1,063 megawatts.
Kulman Ghising, the Managing Director of Nepal Electricity Authority (NEA), serves as the Chairman of the Board of Directors of Upper Arun-Hydro Electric Limited, the promoter company behind the Upper Arun project.
Currently, the NEA is leading the construction of a 21.19-kilometer-long access road from the project’s powerhouse to the dam site.
A 2.03-kilometer tunnel is also required for the access road. The Koshi Highway has already reached Chhongrang, where the power plant will be located.
The NEA conducted a pre-feasibility study of the Upper Arun project in 1991 and revisited the study in 2011.
The project’s updated feasibility, environmental, and social studies, along with energy sector reform and sustainable hydropower development, were completed in December 2022 with support from the World Bank.
The World Bank provided a loan of US$ 6 million for the Project Pre-Preparation Facility (PPF).
The construction of the access road is scheduled to be completed by 2026, with project construction beginning in the same year and expected to be completed by December 2023.
The total estimated cost of the project, including interest, is US$ 1.75 billion (Rs 214 billion).
Entry of the World Bank
It has been over 30 years since the World Bank, which had previously failed in both the Upper Arun and Nepal’s energy sector, first engaged with the Arun III project.
After backing out for various reasons, the World Bank has now shown renewed interest in the Upper Arun after 31 years.
In the third week of Asoj 2080 BS, then-Finance Minister Dr. Prakash Sharan Mahat attended the World Bank’s annual meeting in Morocco, where the bank agreed to invest in the Upper Arun project.
After returning to Nepal, Minister Mahat confirmed that the World Bank was ready to invest in the project.
In Kartik, World Bank Managing Director Anna Bearde visited Kathmandu and traveled to Bhotkhola, Sankhuwasabha, the construction site of the Upper Arun, along with Minister Mahat.
Barsaman Pun, who became the Finance Minister after Mahat, with the World Bank’s Vice President for South Asia, reached an agreement in principle for investment in the Upper Arun project in 2081 Baisakh.
These include three projects on the Karnali River in the west, such as the 1902 MW Mugu Karnali, 480 MW Phukot Karnali, and 900 MW Upper Karnali projects.
The same month, an investment conference was held in Nepal. During the conference, Nepal sought to sign a concessional loan agreement with the World Bank to fund the Upper Arun project.
The World Bank, which had previously played a significant role in shaping Nepal’s development policies, demonstrated its influence once again after 30 years.
At the investment conference, it refused to sign the agreement, halting the proposal for Upper Arun that had been slated for submission to the board of directors last June.
The proposal was postponed once more, with a promise that it would be revisited in August, impacting Nepal’s timeline for securing the finances needed to develop the project by October.
India-World Bank Alliance
Even when Nepal sought a loan to build the Arun III project, the World Bank had interfered by siding with India’s lobbying efforts, creating further challenges for Nepal.
To force Nepal, which was already at the contracting stage, to comply with Indian interests, the World Bank set a condition that any loan for Arun III would require prior World Bank approval for any projects over 10 MW.
The World Bank continued to act as a guardian of Indian interests in Nepal’s hydropower sector, especially with regard to the Upper Arun.
It imposed the condition that consent from both China (the source country of the Arun) and India (the downstream country) would be required for the construction of the project.
The World Bank’s President of Indian origin, assumed office in June 2023, further raising questions about the institution’s role in Nepal’s hydropower sector.
China, the upstream country of the Arun, did not raise any objections to Nepal’s plans for the project.
However, India responded by insisting that “further discussions” were needed.
The World Bank had already instructed Nepal to send a letter to India seeking consent for the lower bank of the Arun in accordance with its guidelines.
World Bank officials visited Nepal’s Ministry of Energy, urging India to send the letter requesting consent for the lower bank.
When Nepal’s Ministry of Energy rejected this request, World Bank officials escalated the issue to the Finance Ministry.
After further consultations, the Finance Ministry also refused to send a letter to India.
As a result, the World Bank sent its own letter to India, asking for consent to develop Nepal’s hydropower project.
India responded by requesting that the World Bank not grant Nepal permission to proceed with the Upper Arun project, asserting its rights over the lower riparian zone, as per the World Bank’s guidelines.
Indian Interests
As of October 2024, India’s clean energy share stood at only 46.3%, with the remaining energy needs met by polluting biological sources.
India is the world’s most polluted country and the second-largest emitter of harmful carbon, which disrupts the global climate balance.
To address this, India has committed to making 45% of its economy carbon-free by 2030 and aims to achieve net-zero emissions by 2070.
The Upper Arun project is crucial because it can generate electricity at full capacity for six hours daily during the winter season, which is the peak demand period for electricity.
To meet these ambitious targets, India needs to transition to renewable clean energy instead of relying on coal.
Nepal’s rivers, with their ability to generate electricity at a low cost, present a reliable source of energy.
As a result, India has increasingly focused on investing in Nepal’s prime rivers, offering a share of the energy in exchange for development rights.
Indian companies have already started construction or received permits for several hydropower projects in Nepal.
The total proposed installed capacity of these projects has already exceeded 8,000 MW.
These include three projects on the Karnali River in the west, such as the 1902 MW Mugu Karnali, 480 MW Phukot Karnali, and 900 MW Upper Karnali projects.
Additionally, India has secured licenses for the 750 MW West Seti and 450 MW Seti projects.
In the eastern Arun River, Indian companies have claimed rights to four projects.
The Indian company Satluj has already obtained licenses for the 490 MW Arun-4, 900 MW Arun-3, and 679 MW Lower Arun projects.
The 900 MW Arun-3, a project the World Bank withdrew from 30 years ago, is now under construction by Satluj. India has also requested a license for the 662 MW Tamor project.
Under the development agreements for these projects, Nepal will receive 21.9% of the total generation capacity, or 197.1 MW, of electricity free of charge from the Arun-3 project.
However, the agreement stipulates that Nepal will have to pay a lump sum of NPR 4.5 billion to the Indian company once the project is completed.
The Indian company will also receive a 100% income tax exemption for the first 10 years of electricity production, followed by a 50% exemption for an additional five years.
Nepal has granted a 50% customs exemption on goods brought in by Indian companies for project construction and agreed to compensate for any labor strikes that last more than 21 days.
The Exploitation of the Arun River
India, benefiting from these favorable terms, has focused its efforts on harnessing the energy potential of the Arun River.
India has begun a strategy of generating reliable electricity from the first-grade Arun River and exporting it to its own country.
If this goal cannot be achieved through loans on its terms, India has used its influence to prevent the construction of projects like Upper Arun.
In the case of the Arun River, India secured the first option, having obtained licenses to build three projects on the river.
India then intensified its lobbying efforts in Nepal to gain control of the Upper Arun project at any cost.
Even if the World Bank insists on providing a loan for the project, Nepal may still end up advancing the Upper Arun project under India’s influence, particularly in the context of securing financial backing.
The Upper Arun project is crucial because it can generate electricity at full capacity for six hours daily during the winter season, which is the peak demand period for electricity.
The project is designed to generate 30% of its energy during the winter months.
Since 2079 BS, India has been persistently lobbying Sutlej to acquire the license for the Upper Arun.
However, Nepali officials were reluctant to hand over the fourth project in the Arun basin to India.
Former Prime Minister Prachanda, who has increasingly relied on economic diplomacy for both political and personal gain, became a key proponent of India’s plan in Nepal.
According to departmental ministry officials, Dahal made significant efforts to “appease” various interests by attempting to hand over the Upper Arun project to India, despite Nepal’s ongoing efforts to develop the project as part of its periodic development plan.
Before departing for India on 17th Jestha, 2080 BS, Prime Minister Dahal convened a meeting of the Investment Board, of which he was chairman, on 14th Jestha.
The meeting decided to enter into a Project Development Agreement (PDA) with India for the 679 MW Lower Arun project.
This decision followed a similar one made by then-Prime Minister KP Sharma Oli, who, in the 46th meeting of the Investment Board on 16th Magh 2077, had approved the handing over of the Lower Arun project to the Indian company Sutlej. Dahal continued Oli’s decision.
During his four-day visit to India, Dahal signed several agreements with the Indian government, covering energy trade, cargo rail, transit, and digital payment systems.
He also reached an initial agreement on long-term electricity trade with India.
In the second week of last Poush, when Dahal was Prime Minister, Indian External Affairs Minister Subrahmanyam Jaishankar visited Nepal and signed a 25-year electricity trade agreement between Nepal and India.
The agreement included India’s commitment to importing 10,000 MW of electricity from Nepal over the next decade.
It also stipulated that India would promote electricity trade through mutually beneficial investments.
Following this agreement, India became more aggressive in its lobbying efforts to gain control of the Upper Arun project.
According to a source in the Ministry of Energy, had Prime Minister Dahal remained in office for another two months after Asad, India might have succeeded in securing the project. However, after the collapse of the Dahal-led government in the last week of Asad, India continued its lobbying efforts.
Kulman Ghising, who visited the project site last Monday, reiterated that if the World Bank is unwilling to invest, the Upper Arun project will follow the same investment model as Upper Tamakoshi.
Despite this, Nepal’s plans to develop the Upper Arun project were hindered by the World Bank, which had been influencing the project’s financing.
What’s next?
Even if the World Bank insists on providing a loan for the project, Nepal may still end up advancing the Upper Arun project under India’s influence, particularly in the context of securing financial backing.
For now, the World Bank has not made a formal decision but has informally informed India that it will not invest in the project development.
Nepal, however, remains open to working with the World Bank on hydropower development free from external pressure from India.
If the World Bank declines to offer a loan, Nepal has other options for financing the project, including bilateral and multilateral lenders.
The Asian Development Bank (ADB), for instance, has already initiated the process to develop the Dudhkoshi (570 MW) project in eastern Nepal.
Previously, it was thought that ADB would also finance the Upper Arun project.
However, at the 28th COP conference in the UAE in 2080 Mangsir, it was agreed that ADB would lead the investment in Dudhkoshi, while the World Bank would take the lead in Upper Arun. Given recent developments, the option of assigning the Upper Arun project to ADB, which is already involved with Dudhkoshi, remains open.
Additionally, China has proposed building the 545 MW Kimathanka Arun Hydropower Project on the Arun River.
Informal discussions have begun within Nepal’s departmental ministries regarding the possibility of Chinese investment in the Upper Arun project.
A Memorandum of Understanding (MoU) has been signed with the Hydro Electricity Investment and Development Company to secure a loan of Rs 53 billion, which constitutes 70% of the total project cost of Rs 214 billion.
The funding will be raised through co-financing with domestic banks and financial institutions.
Pre-construction activities are progressing with the aim of starting construction in 2026, and the project is expected to be completed by 2031.
The World Bank, which initially expressed interest in the project, stated it is in discussions with the ADB and Japan International Cooperation Agency (JICA) to provide a loan of Rs 200 billion for the Upper Arun project.
Kulman Ghising, Chairman of the Board of Directors of Upper Arun Hydro Electric Limited, the promoter company of the Upper Arun project, and Managing Director of Nepal Electricity Authority (NEA), has stated that if the World Bank does not invest in the construction of Upper Arun, the project will proceed with funding from domestic banks, financial institutions, and Nepalis both within the country and abroad.
The NEA had previously completed the 456 MW Upper Tamakoshi project with domestic investment.
Kulman Ghising, who visited the project site last Monday, reiterated that if the World Bank is unwilling to invest, the Upper Arun project will follow the same investment model as Upper Tamakoshi.
During discussions with officials from the rural municipality and the Upper Arun Hydropower Project Tribal and Ethnic Advisory Council, Ghising emphasized that Nepal needs to develop an attractive project capable of transforming both the energy sector and the overall economy.
He made it clear that if the World Bank does not invest, Upper Arun will be built using the investment of banks, financial institutions, and Nepalis both in Nepal and abroad.
The project will have promoter shares from the provincial government, local levels of Sankhuwasabha district (where the project is located), and the Nepal Electricity Authority.
Additionally, 49% of the shares will be allocated to project-affected residents, the general public across the country, and other stakeholders.
According to the authority, a consultant has already been appointed to oversee the construction of the project.
Work is currently underway to review the design and prepare bidding documents.
Pre-construction activities are progressing with the aim of starting construction in 2026, and the project is expected to be completed by 2031.
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