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Ordinary Nepalis are recoiling with disappointment and disillusionment as the ruling Nepal Communist Party plunges into another public power struggle.

This should come as no surprise. After all, Nepal’s political evolution is still far from complete. Recent developments are merely part of that evolutionary process.

The Maoist uprising unseated the monarchy, shook up the social order a bit, and ushered in a new constitution. But it failed to fundamentally break the socio-economic nexus centered on Kathmandu. In the years since, Nepal has sunk into an election-only democracy, with weak supporting institutions. Federalism and decentralization remain token ideas. Central power has become even more central and even more powerful.

The next phase of Nepal’s revolution is right on track and draws closer. This article discusses the three ingredients that will fuse to enable that evolution. Whether that revolution—or evolution—will occur by design or accident, I leave for you to determine.

Discrediting the system

The striking feature of the feud within the ruling party is not that there is a feud. Rather, it is that the feud has been so public.

Politicians around the world squabble all the time. Senior Nepali politicians are reasonably experienced. They can manage their press, messages, and public persona. Yet every element about this ongoing feud within the ruling party is publicly relayed with all its details, as if it were some national TV drama. Surely, much of it can be conducted behind closed doors with the curtains drawn.

Turning the row within the ruling party, and other similar events, into public spectacles is both intentional and strategic. It is part of a broader pattern that undermines public confidence and adds to the disillusionment with government. The disillusionment is not just with specific individuals or a party but with the entire system. As ordinary citizens, our response to such events is to sigh, throw up our hands, resign to defeat, and say in frustration, “They are all the same, nothing will change.”

The next phase of Nepal’s revolution isn’t going to be fought with guns and bullets. It will be fought on public perception. Disillusionment with the system will be the weapon.

Financing the revolution

No revolution can progress without money. Nepal’s previous uprisings were financed by forced domestic contributions—in effect, extortions from individuals, households, and businesses.

The next phase relies on siphoning from the State. Nepal’s overall fiscal position is strong, with ample space to increase borrowing significantly. As a post-conflict young democracy with a large need for infrastructure investment and adequate repayment capacity, Nepal is attractive to development-focused lenders.

Nepal has taken advantage of its position and developed a large pipeline of State-led capital-intensive projects. International development financing has responded to meet those requirements. Leakage from these capital-intensive projects, along with the sale of concession rights, is now helping build the war-chest for the next phase of Nepal’s revolution.

This may in part explain why there is much tussle to get access to the State machinery—the ones who control it control the fiscal hose.

Appeal of leadership

Many Nepalis wistfully long for able leadership that can overcome the shortcomings our current political leaders appear to exhibit. Alternative political parties have emerged in part to address the public demand for able political leadership. Their appeal isn’t any distinctive ideology or governance model—it is simply that they offer to lead better and more honestly than everyone else.

With a new constitution now in place, most Nepalis have convinced themselves that the problem of governance is not institutional but entirely about leadership. Longing for able leadership without adequate institutional safeguards against the erosion of democratic rights is often a prelude to soft dictatorship. Nepal lacks those institutional safeguards; nor are there any real efforts to build them.

In due course, a strong leader will emerge in Nepal, promising all the things that we perceive as missing—national pride, economic growth, stability, employment. And why not? If a leader offers all that, would you not take them, even if it threatens a few democratic values?     

Disillusioned by the system and enamored by a leader who promises, we will be led into the next phase of Nepal’s unfinished political revolution—a journey that will have been financed by the generosity of taxpayers from around the world.

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The concept of change being driven by leaders leading and followers following is so 16^th-century—utterly outdated. The 21^st century promises a new order where no one and everyone is a leader, both at the same time.

If you ever felt God had let you down, you could choose not to believe in God. There is even a word for it, atheist, defined as “a person who denies or disbelieves the existence of a supreme being or beings” (dictionary.com).

The same thing cannot be said about leadership. You cannot stop believing in leadership even if you were disillusioned with your leaders. You get a new leader, if only to switch from one leader to another (and likely branding yourself “disloyal” in the process). What would you even call someone who doesn’t believe in leadership? There’s isn’t a word for it yet.  

The entire human construct—families and communities, economic and political systems—is based around the concept of leaders leading and followers following. At the same time, a crisis of leadership is sweeping the world.

From rich to poor countries, democracies to dictatorships, global issues to local ones, leadership has failed to provide solutions. Instead, there is disillusionment, discontent, despair, and conflict.

With its marvels of information technology, the 21^st century offers the promise of a new order without the need for leadership.

Information about the availability of the Covid vaccine, when one is finally ready, will reach people far more quickly than the vaccine itself. The continuous generation, availability, and speed of information is only one aspect. Symmetry of information is the other; participants are now closer to a situation where they all have the same information at the same time.

The information platform isn’t perfect yet. There is, for instance, misinformation, disinformation, fake news, and barriers to access. Even with these imperfections, increased availability and symmetry of information have already had pronounced impacts around the world.

Change is now possible without the need for a charismatic leader, or a leader at all. The series of spontaneous anti-government uprisings that spread through 18 Arab states between 2010 and 2013, for example, resulted from collective activism rather than any single leader. The recent Black Lives Matter movement that has swept through the US and inspired similar calls for equality in other parts of the world is fuelled by a convergence in values, enabled, in part, by the availability and access to information.

Intellect, consciousness, empathy

The availability of information—often delivered in real time from across borders, cultures, and history—is allowing us to get closer to our core human instincts of intellect, consciousness, and empathy.

Technology is enabling our intellect to process more information, and faster, than ever before. Information allows our consciousness to recognize the impact of our individual behaviour. The picture of a plastic bag spotted in the deepest point of the ocean pinches us every time we discard one. From thousands of miles away, sometimes even across time, we are touched by pictures, sounds and stories of poverty, hunger, brutality, and injustice. We can see, feel, and empathize, if we choose to, with those struggling for their rights, equality, or simply a decent life.

Information, and 21^st-century technology, has reduced the complexity around us to a digital sensory world that we can see, feel, and hear. Our individual intellect, consciousness, and empathy are responding to this sensory world. Are we in or are we out? Do we agree or disagree? These are decisions we are now armed to make, and increasingly making on our own, without the need for leadership to show us the way.

Enabled by the marvels of information technology, the greatest achievement of the 21^st century thus far has been to demonstrate that change is possible without the glorification of leadership. Change is being driven by the convergence of ideas and values, not the appeal of leadership.

Relevance to Nepal

Within this emerging paradigm about the end of leadership is a message for those in Nepal who believe it is important to be in power to change the system. Maybe we don’t need to become the president, or prime minister, or someone with formal authority to change the system. We can produce lasting change if we are the system.

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Are you disillusioned by the naked pursuit of political power in Nepal? Have you lost faith in our institutional bodies, like the Commission for the Investigation of Abuse of Authority (CIAA), or even the judicial system? Do you feel hopeless with the corruption in government systems and the brazen impunity with which it is conducted?

If you answered “Yes” to these questions, fear not, you are at the right juncture in Nepal’s history. You may not know it yet, but your disillusionment, loss of faith, and sense of hopelessness are the weapons that will help complete Nepal’s unfinished revolution.

This September, Nepal celebrated the fifth anniversary of its constitution. With its federal structure, devolution of power, and the embodiment of rights, the constitution offers a vision of an inclusive nation. But can it deliver on our aspirations?

Nepal’s constitution is young. Many laws are yet to be written. Sensitive issues, like citizenship, equal rights for women, and institutional discrimination against Madhesis, are still far from resolved—even the pathway to resolution remains unclear for now. But these are still early days. It is important, perhaps, to let the constitution run its course.

At the same time, efforts to consolidate democracy around Nepal’s young constitution is being undermined by the erosion of public trust in institutions, widespread disillusionment, and despair.

What erodes public trust?

Nepal’s transitional justice process underpinned both the Comprehensive Peace Agreement that ended the civil war in 2006 as well as the constitution that followed. Despite the establishment of the Truth and Reconciliation Commission and Supreme Court judgements, Nepal’s transitional justice process is in shambles. The commission has investigated approximately 6,000 cases. But no charges have been filed. There is no sign of justice, no visible effort towards reconciliation.

Nepal’s constitution has been written in blood. Unless the wounds are healed, it is hard to imagine it can confer the legitimacy that Nepal needs to move forward.

Nepal’s constitution devolves authority from the center to the provinces and local governments. These early years, however, have helped centralize political authority. Constitutional bodies, and institutional authorities, like the Army, President, parliament, and judiciary, have failed to push back against an increasingly belligerent executive branch. The safeguards against the concentration of political power through opposition parties and civil society has failed to coalesce.

Governance failure is discrediting institutions, not individuals. As government falters, the Prime Minister is not to blame. He is still considered successful for having outwitted everyone else to retain power. Instead, we blame, and lose faith in, government institutions.

Over the past decade, Nepalis have been routinely bombarded with daily instances of failures in governance, corruption, and abuse of power. All of this has added to the feeling of disillusionment and hopelessness. In despair, we put our hands on our heads and say, “if only we had better leadership”.

That is exactly when the next phase of Nepal’s revolution begins.

To utopia

The disillusionment, despair and hopeless may not be accidental. They result from an orchestrated campaign to discredit existing institutions and undermine the constitution. The next phase of Nepal’s revolution will not be fought with guns and bullets. Our disillusionment and hopelessness will naturally draw us to leadership that can deliver, even if that means some rules must be amended and rights infringed.

That may sound absurd. But consider this. In the middle of the pandemic, top leaders of the ruling communist party descended into a long-drawn publicly visible tussle for power. This feud is imposing a huge national cost—distracting the government and undermining the effectiveness of its response to the crisis.

Even the most vulgar political opportunist would know that the pandemic would be a bad time for a publicly visible battle for political power. These leaders represent some of the sharpest political minds in the country. They have decades of political experience. Did they really engage in the fight only for political power at such a time?  

If like most Nepalis you believe they did, that leaders really squabbled for nothing more than political power while ignoring the national damage it was doing, then you have questioned the value of this constitution.

As we celebrate five years of the constitution, the challenge for us is on how to retain faith in our institutions and constitution even as we remain disillusioned with the political leadership it produces.

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Nepali business leaders must urgently construct a new narrative for the private sector that offers an alternative path to shared prosperity for all and, in the process, helps restore confidence of ordinary Nepalis in government institutions.

Fading relevance

The “Ease of Doing Business,” a widely quoted index developed by the World Bank that measures the regulatory environment for businesses and the strength of private property rights, tells only half the story. To complete the story, the other half must look into the relevance of private sector businesses. A lousy rating on the index means nothing if the private sector is irrelevant in the first place.

Long before the pandemic, the relevance of private businesses in Nepal was eroding. Nepalis were singularly and overwhelming reliant on the government for social services, employment, investments, security, growth—just about everything. Buoyed by revenues from consumption taxes and generous donor assistance, the government’s growing balance sheet was crowding out private investments. This only reinforced public reliance on government.

In Nepal, the underlying justification for private property, enterprise, and business success increasingly derives not from fundamental rights enshrined in the constitution, but from government entitlements. Entitlements can be a government-granted contract, right, privilege, dispensation, or property. They are different from rules and policies, as they are one-off and zero-sum. One-off because they are not routinely provided. Zero-sum because if someone gets that entitlement, no one else can.

When the justification for private sector stems from an undeniable, fundamental constitutional right to property, enterprise and employment, the government is forced to develop regulations and policies that create a rule-based economy.

Nepal’s private sector, unfortunately, has allowed its existence to be justified by government entitlements. As a result, Nepal is transforming rapidly from a rule-based to an entitlement-based economy.

Nepal’s business associations have failed to respond. First, they are too fractured, making it extremely difficult to converge on any meaningful agenda of change. Second, they have remained extremely myopic, focusing narrowly on short-term tax adjustments, government spending, and subsidies. They have done little to identify, build consensus, and motivate more important and deeper structural changes.

Nepal’s Ease of Doing Business index never radically improves as there is no real demand or genuine internal pressure to improve the ease of doing business.

Business responsibility

Should Nepali businesses have broader social, political, and economic responsibilities even as they seek to deliver profits?

In Nepal, continued failure of successive governments is eroding people’s confidence in the State. Corruption is endemic, sanctioned by the State and executed with impunity. Other State institutions—for example, the army, the president, the judiciary—are being equally discredited. They appear to have little ability (or interest) to stem the decline in governance or restore public confidence. This absence of institutional, legal, or moral accountability in governance is reducing people’s confidence, trust, and legitimacy in State institutions.

Nepali businesses have the power to reverse this decline. They must lead the responsibility to restore people’s confidence in government and State institutions.

Business narrative

Nepali businesses must craft a new narrative with action towards two goals. One, enhance political governance. Two, restore people’s confidence in the political, social, and economic institutions of the State. There are many options for such a narrative. Here is one simple suggestion.  

The Political. All large businesses, and business leaders, voluntarily provide annual audited statements disclosing how much of the firm’s revenues, including individual wealth of owners, resulted from government entitlements.

The Social. All large businesses voluntarily conduct and disclose annual social audits measuring the human development indicators (e.g., access to education, health, sanitation, empowerment, environmental impact, inclusion, and upward economic mobility) across all employees and supply chain partners.

The Economic. All large businesses voluntarily agree to ensure that at least 70 percent of their supply chain comes from non-related businesses not owned by friends, family, or associates (preferably small and medium enterprises, or women-led). Further, large businesses voluntarily agree to structure these supply chain arrangements into long-term bankable contracts which could then serve as collateral to raise investments for new firms or grow existing ones.

Of course, businesses could do nothing and retain the status quo of the entitlement economy. But remember this: in an entitlement economy, what the government giveth, the government can taketh. In many corners of Nepal, the fires of a second-generation revolution have begun to be lit. Businesses are directly in that line of fire.  

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The blind push for government-led capital expenditures without adequate concern over the quality of those investments is limiting Nepal’s growth and could derail the economy. Development partners, who in effect finance the capital expenditures, must demonstrate greater honesty in the due diligence of their investments.

Despite the projected decline in economic growth, Nepal’s broader economic indicators remain robust. Foreign exchange reserves are now bordering on the excess, having surged to be sufficient for 12 months of imports. Budget deficits, external current account, inflation, and other key markers remain stable.

A recent analysis by the International Monetary Fund (IMF) concluded that Nepal has strong borrowing capacity. The current public debt to GDP ratio, at approximately 30 percent, is less than half of what IMF estimated as the benchmark debt carrying capacity. There is similar space in debt servicing capacity. These ratios are projected to remain comfortably below the benchmarks in the future.

There are growing calls for Nepal to accelerate public capital expenditures. The Asian Development Bank (ADB), for example, believes Nepal must significantly increase infrastructure investments. It calls for tripling the public capital spending to GDP ratio from current 3.5 percent to between 8-12 percent.

This is the simple narrative in Nepal: investments are needed for growth, and there is ample room to borrow. So, hurry up government!

This, however, fails to examine the quality of public capital expenditures—how the projects were chosen, their broader economic returns, and who really benefits from these investments.

Public capital expenditures failing

While Nepal does have adequate space for borrowing to finance capital investments, it also has an almost infinite need for infrastructure. From that perspective, public capital investments are zero sum. An investment on a project erodes the equivalent debt space. Government-led capital investments, therefore, must be viewed through the lens of budgetary constraints.

In Nepal, every capital investment—whether a simple community tap or a magnificent new airport—is needed. But in the context of budgetary constraints and the many competing projects, how are public capital expenditure projects prioritized and rationalized?

Government-led capital expenditure projects are overwhelmingly selected by patronage and corruption, and based on who will execute them, rather than on their broader economic returns. This is the reason public capital expenditure programs disproportionately favor projects with frequent procurements.

The failure of government-led capital expenditures in Nepal is already visible. These projects are not providing economic returns fast enough: their impact on broader economic growth is negligible, and they have failed to improve domestic capacity or enhance investor confidence.

Consumption based taxes (value-added, customs, and excise duty) currently account for approximately 60 percent government revenues. When public capital expenditures fail to produce growth, government revenue base will remain limited. Consumption-based taxes will need to continue to finance these expenditures. This means higher taxes on consumption products.    

Government capital expenditures aren’t enhancing the confidence of international investors. In project selection, design, and execution, investors see a messy network of intertwined short-term interests. These projects are also not increasing the technical, financial, or managerial capacity of domestic firms at the rate public capital expenditures suggests they should.

Absence of institutional filters

Nepal lacks the institutional filters to screen government prioritization and rationalizing of public capital expenditures. The National Planning Commission (NPC), and the civil service in the ministries, should be playing that role. Unfortunately, they have folded into the patronage economy.

Business associations are too vested in the patronage economy to serve as meaningful filters. Civil society lacks the organization and resources.

This where Nepal’s donors could do more to plug the gap for an honest filter of government prioritization and rationalization of public capital expenditures. Donors must employ more comprehensive due diligence on their proposed investments—listen carefully to stakeholders, and critically examine the process for rationalizing and prioritizing projects. They must partner with, and help empower, independent civil society organizations in this process.

Financing a poor public capital expenditure project does more to relegate Nepalis to a future of poverty and debt servitude, than not financing it at all.   

An alternative narrative

The continued emphasis on accelerating public capital expenditures for growth is overshadowing the underutilized productive capacity and pent-up growth potential bottled within the economy. Unlocking this potential requires interventions not with public capital expenditures but painful reforms.

For the patronage economy, that’s simply not profitable enough.

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A draft bill that will allow Nepal Army to invest in commercial projects has raised concerns about the bill’s potential impact on Nepal’s democracy, politics, and economy.

The Army Welfare Fund is estimated to have cash reserves of approximately Rs 46 billion, with another Rs 6 billion in investments. The army wants to invest directly in projects (such as hydro power, textile) that will provide higher returns than fixed deposits in commercial banks.

The army has a legitimate right to a higher rate of return on its funds. But how should it balance that against its potentially corrosive impact on Nepal’s democracy?

There are many reasons the army should not invest directly in specific projects. It undermines the army’s political neutrality, creates conflict of interest, and leads to distortionary effects on the economy. Instead of investments in specific projects, derivatives linked to domestic indices—for example, Nepal Stock Exchange, base lending rate, exchange rates—would be far better at providing a higher return without the corrosive effect of project-specific investments.

But there is an even bigger reason why the army should reconsider its proposal to invest directly in commercial activities: it may be called upon to save Nepal’s democracy.

Declining public trust

Around this time two years, I argued (Republica, 24 July 2018) that the army should not get embroiled in the business of building national infrastructure projects as it is a honey trap intended to tarnish its image. A lot has happened in the past two years. 

Charges of corruption, and entanglements in infrastructure and other procurement exercises have eroded public trust and confidence in the institution of army.

In June this year, the army had to issue a public statement denying charges of corruption in the medical purchases related to Covid-19. Earlier in May, two senior officials of the Army Welfare Directorate were detained for financial irregularities. In February, a taskforce commissioned by the State Affairs Committee of the House of Representatives alleged significant financial irregularities during the term of the previous army chief.

Then there is the Kathmandu-Tarai Expressway, the infrastructure project the army has been tasked to build at an approximate cost of Rs 200 billion.

Last week, the army chief reportedly met with the Prime Minister to express his concern about the lack of political support on the project. The army is already investigating corruption on the project. Its selection of design and supervision consultants has been challenged for lacking transparency and disregarding procurement guidelines.

There are growing calls for the Commission for the Investigation of Abuse of Authority (CIAA) to look into the army’s public finances. But CIAA holds no jurisdiction over the army.

Public sentiment is increasingly that national projects, whether related to infrastructure or emergency medical procurement, is being assigned to the army as it is outside meaningful accountability.

Savior of last resort

The army will need public trust, not money, to rescue Nepal’s democracy.

Cracks in Nepal’s young democracy have become visible. Frustration is mounting as political leadership continues to fail, flagrantly and without concern. Corruption is deepening. Impunity is pervasive. The judiciary is tarnished. The President offers no hope. Geopolitical influences are more visible and increasingly polarizing.

Nepal’s young constitution is struggling to take root. Civil institutions that safeguard democratic principles have failed to emerge.

Against the odds, Nepal’s democracy functions because it is financed. The state has enough money to push through the system. Its ability to borrow remains strong. International donors and development partners continue to pump money. The State still has enough to feed its patronage network.

But money cannot indefinitely prop a constitution that lacks deeper institutional roots. Eventually it will run out and the network of patronage will need to feed off something else. That moment of reckoning may be closer than we imagine.

It is at that point, as the last remaining institution left to protect what remains, that Nepal Army will be tested. And at that point, will the army have retained enough public confidence and trust to revive a dying democracy?

As Nepal Army looks to earn more from the cash it has, it must examine how it will regain and retain public trust and confidence. No one will call on the army to protect Nepal’s border. But it may be called on to protect Nepal’s democracy.

Twelve candidates from a wide range of sectors and backgrounds have formally expressed interest in serving as the Chief Executive Officer (CEO) of the Investment Board of Nepal (IBN). The new CEO will face a daunting challenge in revitalizing investments in Nepal.

To energize investment growth, the IBN must move away from government-led projects and focus entirely on securing investments for private sector-led projects.

Government projects don’t need IBN

The IBN isn’t short on projects. At its recent board meeting in June, seven projects totalling Rs 186 billion were approved. At the investment summit in March, the board showcased 77 projects with investment requirements of Rs 3,500 billion ($32 billion).

The narrative for investments in Nepal hasn’t been on the difficulty of identifying projects—clearly there is enough of them. The challenge has rather been describing who drives investments in Nepal.

One of the biggest challenges to foreign investments in Nepal is the growing role of the government. Across the sector, particularly on energy and infrastructure, the government is eagerly taking the lead with project identification, development, and investment. This has eroded and crowded out space for private sector.

We should not confuse investments in government-led projects with foreign investments. Foreign investors on government-led projects in Nepal typically come from non-commercial sources, i.e., foreign governments, development agencies, or funds backed by foreign governments. Such investments are often driven by government relations and rarely reflect “project economic considerations” alone.

Government-led projects financed by non-commercial investments alone do little to enhance the attractiveness of Nepal as an investment destination. Such projects also do little to reduce the complexity of domestic regulatory approvals—a key bottleneck to investments. Although government-led projects must adhere to the same set of domestic regulatory approvals, they are treated separately. If all else fails, the government can change its own rules or offer a special dispensation. Government projects, therefore, fail to create pressure for simplifying domestic regulatory complexity.  

The IBN must emerge from the shadow of the government. One way to do this is not to take on any project development that is majority owned by the government (or where the government exercises decision making-authority in operation).  

Let private sector lead

A new era of government ownership is unfolding in Nepal. The country’s political leaders, many of them with real authority for the first time under Nepal’s new democratic system, are eager to fulfil their development commitments. How else do you showcase development except by building roads, hospitals, airports, power plants—anything that can be built and showcased? The bigger the project, the better.

Nepal’s investment story is now straightforward. Eager to showcase development, the government wants to lead the development of large projects, even in areas where private sector may be better placed to lead.

Large projects will remain out of reach for the private sector for the next decade or so as Nepal’s new political leaders rush to make their mark on development. The government doesn’t need the IBN’s help to develop and finance its projects. The IBN must, therefore, pivot and become an institution dedicated solely to promoting private sector investments.

Below the layer of government-led projects, there are many exciting projects being led and developed by the private sector. These projects may be smaller on average but collectively offer large portfolios.

New regulation on public-private partnership now allows the board to take on projects above Rs 6 billion. The IBN must try to push this minimum requirement further down, for example, by creatively aggregating smaller private sector projects into portfolios.  

For the private sector, structuring and accessing international capital is the most difficult and expensive part of project development. This is where the IBN must support, not just as facilitators but as active partners that can take Nepali private sector led projects to global investors.

Securing financing and structuring investment deals is where the private sector needs the most assistance and where the IBN can really help. Once the investment deal is done, private sector promoters will be far better at navigating the regulatory complexities than the board ever will.

The Public-Private Partnership and Investment Bill approved in March 2019 provides the IBN scope to realign its vision, strategy, and approach. To revitalize foreign investments in Nepal, it must do more than playing the role of the government’s investment promotion bureau. It must rather become an investment broker to Nepal’s private sector.

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A fierce public debate has erupted about the $500 million grant offered by the United States Millennium Challenge Corporation (MCC) to Nepal for construction of power transmission lines and strategic roads.

Every person in Nepal now has a story on the MCC. This is mine.

It begins in 2007. At the time, Nepal had just signed an agreement with an Indian infrastructure investment firm to build four cross-border transmission lines. The electricity crisis (load-shedding) in Nepal was deepening. Cross-border lines would enable Indian electricity imports and provide much needed relief.

Nepal was pursuing these lines with urgency. The first line (Dhalkebar-Muzaffarpur) was to be ready by 2010. Shortly after the agreement was signed, India changed its rules, calling for majority state-ownership in the project. Further complications came when Nepal had to sign an agreement to purchase electricity from India on that line for 25 years. The line finally came into operation in 2016, thus ending Nepal’s load-shedding.

Cross-border transmission lines integrate power markets. Once integrated, Nepal will have to compete against Indian power markets. This would mean, I argued at the Nepal Power Summit in 2007, that cheaper Indian power would displace newly added Nepali hydropower in the long run.

New hydropower may not be able to compete in the Indian power market in a way that allows Nepali hydro plants to secure long-term power purchase agreements. Without this security, new Nepali hydro plants cannot be commercially financed only with short-term trading contracts.  

Nepal’s strategy of using cross-border lines for imports in the short term and exports in the long term was a high-stakes gamble. That gamble is now a bedrock of Nepal’s power sector strategy.

A precondition to the MCC grant was that Nepal sign an agreement with India for the Butwal-Gorakhpur cross-border line. It was an odd condition, I thought, requiring Nepal to sign an agreement with India without Nepal having any real control on building the lines on India’s side of the border.   

For over 10 years, Nepal had been trying to secure an agreement on that line. India hadn’t agreed. But as in love, nothing is impossible in bilateral government relations.

In October 2019, India suddenly dropped its objections without explanation. It agreed to finance the cross-border line on Nepal’s terms, on a government-to- government basis. This meant there would be no consideration for the financial viability of the transmission line; it would simply be built.

India’s decision to reverse course was a dramatic shift, contrary to the spirit of its power market that is pushing for financially viable, commercially-led investments. MCC in Nepal became real at that point.    

A few months later, a fierce debate on the MCC swept across Nepal like an inferno, scorching everything in its path, tearing apart friends from friends, husbands from wives, brothers from sisters, and two key political personalities clearly vying for power.   

The funny thing is that none of this may matter anymore.

Earlier this week, in keeping with the India-Nepal understanding on the Butwal-Gorakhpur line, Nepal Electricity Authority (NEA) and Power Grid Corporation of India (India’s state-owned transmission utility) agreed to move things forward. With or without the MCC, Nepal will be building the cross-border line.

Without a single penny from the MCC, Nepal is rapidly integrating with Indian power markets. When the cross-border line will be built doesn’t matter. Government announcements have already shaped expectations and market fundamentals.   

Only one of two outcomes is now possible.

Possibility 1: Cheaper electricity prices in India will displace new hydro capacity of Nepal. We remain reliant on Indian electricity imports.

Possibility 2: Nepal will generate thousands of megawatts in new hydro and sell all its excess generation to India, earning enormous revenues in the process.

I worry this high-stake gamble is one we have not fully thought through.

In those moments of worry, I return to the reassuring comfort of what the US ambassador to Nepal promised to the people of Nepal in his 3 October 2019 article in Republica.

“The MCC project focuses on constructing lines that will bring Nepal’s power to the consumers who will pay Nepal good money for it.  It is a simple fact of geography and economics that means India.”    

I shudder to think, what if it isn’t “simple” or if it isn’t a “fact.”

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