A couple of days after Nepal’s decision, Pakistan also unexpectedly decided to withdraw from the MoU it had signed with China to build US$14 Billion Diamer-Bhasha Dam in Pakistan Administered Kashmir because of difficult financing condition. Both these decisions have created some question marks over the China’s financing strategy within its Belt and Road Initiative. However, the experience from Sri Lanka tells us that China might be able to renegotiate these deals. In 2015, Sri Lanka had decided to withdraw from Colombo port deal with China which its previous government had made, but reversed that decision a year after when China agreed to change the terms of the agreement. In the case of Budhi Gandaki Project, China does not even need to renegotiate the deal, the possible change of government in Nepal in the coming election in few days might give back the project to Gezhouba Group. The leader of the opposition alliance, KP Sharma Oli has already declared that his government will overturn the decision after coming back to power.
Nepali Congress of Prime Minister Deuba is considered to be pro-India, while the left-alliance opposition is perceived to be pro-China. Immediately after Nepal’s Deputy Prime Minister’s tweet on the Cabinet’s decision to scrap deal with China, some in Indian media started to speculate that the decision was influenced by India and the deal might go to India’s National Hydroelectric Power Corporation (NHPC) instead. That has not been the case yet and Nepal is floating the idea to raise funds from its own sources to finance this project. However, if Nepal will go back to China’s Gezhouba Group or handover the Budhi Gandaki Project to India’s NHPC is closely connected to larger debate about whether the country should move closer to China or remain with India. Nepal is trying hard to maintain a balancing act.
Nepal not only hosts eight of the ten highest mountain peaks in the world, it also has three major rivers, the Kosi, Gandaki and Karnali –main tributaries of the Ganga River system. In spite of huge water resources and many suitable locations for dam building, the country is energy poor and produces hydropower of 753 MW only. Ninety percent of country’s power supply comes from its dams. When operational, the Budhi Gandaki project would be Nepal’s largest hydropower project with its own capacity of 1,200 MW. The World Bank estimates that Nepal needs to invest 3% of its GDP annually on its connectivity. Underdeveloped economy of Nepal is highly dependent upon Chinese investment through the BRI to improve its infrastructure. China is already the dominant investor in Nepal, from the total foreign direct investment in Nepal’s of $US 653 million in 2016, China's share is whopping $US 291.9 million. China intends to build several large dams in Nepal. Its Three Gorges Corporation has also got the contract to build 750 MW West Seti Dam.
Nepal has recently emerged from a decade-long bitter civil war. Considering the world around it is fast developing, a post-conflict Nepal is in the middle of a newfound drive to develop its hydropower potential to meet its own energy demand and to be able sell surplus power to its energy starved neighbors. After the World Bank decided to withdraw its promised support to Nepal’s Arun III Dam in 1995, the country has not been able to build a large dam since then. Besides, Arun III, Budhi Gandaki and West Seti, Nepal aims to build several large hydropower projects. India’s GMR has received the contract to build Upper Karnali Dam while SJVN Ltd to build the Arun III. Despite Prime Minister Narendra Modi’s promise in 2015 to his counterpart in Nepal, Indian companies have not been able to start these projects till now.
Nepal is a landlocked country, bordered by China to the north and India to the south, east and west. As the high Himalayan range forms the northern boundary with China, Nepal’s most important neighbor for all practical purposes continues to be India. Despite the close relationship between India and Nepal, both countries have had many rounds of bitter disputes relating to various dam projects. The water sharing of the major rivers originating in Nepal and flowing into India has severely strained their bilateral relations in recent years. Nepalese feel that they have not been treated equitably under the various water project agreements they have signed in the past with India. Negotiations regarding new projects on the shared river systems have been dominated by controversies due to fast decreasing mutual trust.
Nepal lacks the capital and technology required to build large dams, which are critical for the poor mountainous country to industrialize and develop. The perceived unfair treatment in its past water agreements with India and the failure of Indian companies to undertake recently planned dam projects on timely manner have pushed Nepal to explore Chinese finance and collaboration to develop its water resources for the last ten years. India’s unofficial economic blockade of Nepal after the Himalayan state’s promulgation of the new constitution on 20 September 2015, created unprecedented energy crisis in the country and the growing anger against India ignited Nepal’s desire for further closer ties with China. However, India’s opposition to China’s increasing influence in its perceived area of influence has made it difficult for Chinese companies to successfully build any large dam project in Nepal, as it can be seen in the uncertainties concerning Budhi Gandaki project.
The construction of large dam projects and for that matter the overall economic development of Nepal have become hostage to the power rivalry between India and China. In spite of its overt and covert opposition, India has not been successful in resisting or even delaying immensely cash-rich China’s increasing economic influence in Nepal. India’s strategy of bullying and political maneuvering is becoming more and more counterproductive, failing to produce anything positive, except a series of self-goals. For its own interest, India needs Nepal to develop its economy and strengthen its political institutions. A developed democratic Nepal is more likely to choose India not China as its ally. Thus, it will be smarter for India to adopt a policy of cooperation with China in helping Nepal to harness its huge hydropower resource and develop its economy. Large hydropower dams in Nepal not only will provide India the possibility to buy surplus cheaper and cleaner energy, it will also help to control devastating floods in the Indo-Gangetic Plain and increasing air pollution in northern India. Moreover, India’s cooperation with China in Nepal might also pave the way for a comprehensive shared water development framework in the Ganges-Brahmaputra basin. India needs to think in long-term and big.
The writer is professor of Peace and Conflict Research at Uppsala University, Sweden.