INDO-NEPAL CROSS-BORDER ENERGY TRADE STAGNATES

C O N F I D E N T I A L SECTION 01 OF 02 KATHMANDU 000382

SIPDIS

STATE FOR SA DAS DON CAMP, SA/INS, AND SA/RA
STATE PLEASE PASS AID/ANE - D MCCLUSKEY, C LOWRY, G
WEYNAND, J WILSON
LONDON FOR POL/RIEDEL
NSC FOR E MILLARD

E.O. 12958: DECL: 03/03/2008
TAGS: EAID ECIN ENRG PREL
SUBJECT: INDO-NEPAL CROSS-BORDER ENERGY TRADE STAGNATES

REF: KATHMANDU 314

Classified By: DCM Robert K. Boggs, for reasons 1.5(b) and (d).


1. (C) SUMMARY: Nepal's Minister for Water Resources Dipak
Gyawali is sharply critical of India's policies on
cross-border energy trade. He told us that he believes New
Delhi focuses on the strategic aspects of water and energy to
the exclusion of economics. Despite Nepal's current power
surplus, Gyawali understands that Nepal will need to develop
storage capacity in the future, in addition to slated
run-of-the-river projects, in order to compensate for the
high seasonal variability of water flows. He believes that
joint venture models have the greatest potential for tapping
Nepal's huge hydroelectric potential. In our view, India's
resistance to joining South Asian regional initiatives is
holding back the economic development of both countries and
will impede national as well as donor-funded efforts to
alleviate South Asia's poverty. Please see action request
for Department and Embassy New Delhi in final paragraph. End
Summary.

Water Resources Minister: India "Resistant to Economics"
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2. (C) In the context of the recent SARI/E-sponsored Energy
Information Administration (EIA) regional workshop in
Kathmandu, SARI/Energy regional Coordinator, SARI/E Nepal
coordinator, and Kathmandu-based Regional Environment Officer
(REO) had a private dialogue with Water Resources Minister
Dipak Gyawali and Secretary for Water Resources Keshab Chand.
Gyawali (in typically outspoken fashion) sharply criticized
India's policy on regional energy trading, saying that India
was not just resistant to cross-border cooperation, but
"resistant to economics." Gyawali stated that as long as
India continued to view water and energy in purely strategic
(and not economic) terms, there would be little progress in
bilateral energy trading, and hence little opportunity for
Nepal to develop its energy exports.


3. (C) When asked about Nepal supplying India's enormous
future power needs, Gyawali pointed out that many Indian
states provide free (or nearly free) power to certain favored
customers, such as farmers. "If the price is zero, then
obviously the demand will be infinite." The Minister cited a
recent example where India had cut back on minuscule
purchases of a few kilowatts of power in border areas. "So
if they don't need five kilowatts, then don't tell me they
need 40,000 megawatts."


4. (SBU) Gyawali conceded that although Nepal currently
enjoys a surplus of supply for its grid, he expects the
situation to turn around in 2-3 years. Nepal will need more
run-of-the river projects in the 100-MW range, but also
storage capacity to deal with seasonal variations. Joint
ventures have the greatest potential for mobilizing the
necessary capital, he thought. He said that Nepal needs to
know more about both the irrigation and power systems of
Uttar Pradesh and Bihar in order to estimate the scope for
future cooperation with India. (The Minister left soon
thereafter for an official visit to Patna, capital of Bihar.)

MEA Mandarins Circling the Wagons?
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5. (C) In a subsequent conversation, managing Director
General Janak Lal Karmacharya of the Nepal Electricity
Authority (NEA, which comes under Gyawali's Water resources
Ministry) told SARI representatives that Nepalese officials
were still upset over the treatment meted out to the Nepali
delegation at an aborted U.S.-Nepal-India hydropower
partnership meeting in New Delhi in November 2002. (Note:
the event was aimed at technical management improvement, not
power trade. India boycotted the meeting, even though the
Nepalis had already arrived.) However, he felt that we
should take a long-term view, preparing the ground for future
cooperation, but not expecting early breakthroughs.


6. (C) Department of Electricity Development Director
General Lekh Man Singh told us that progress on the Arun III
cascade project, expected to provide a total of 402 MW, was
glacial. The GOI still had to agree in order for Nepal to
activate a USD 10 million Asian Development Bank credit to
update technical and engineering studies which could
eventually lead to ADB financing of the project. Further,
Indian MEA officials had attempted to block the Australian
West Seti project (750 MW) on the grounds that India should
not pay foreign exchange for Nepali power when there were
still possible hydro sites to develop in India. According to
Singh, only a high-level intervention by Nepali officials
with Indian ForMin Yashwant Sinha succeeded in getting this
decision reversed. He believed that the MEA mandarins might
try again to short-circuit the project when it gets to the
Power Purchase Agreement (PPA) stage.

Divide and Conquer Strategy Appears Anachronistic
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7. (C) COMMENT: India's preference for dealing with its
neighbors on a bilateral basis extends well beyond the issue
of energy, and certainly beyond USAID's regional energy
program. There will be little immediate impact on the
prospects for a regional power pool or bilateral work in the
hydropower sector, since India has participated minimally in
SARI/E programs aimed at this aspect to date. If one of
SARI's objectives is, however, to engender a more productive
atmosphere for energy trading negotiations between India and
Nepal, much more clearly needs to be done. Fortunately,
there is much more to SARI. From Nepal's perspective, SARI
provides numerous other benefits in training and technical
information sharing with regional counterparts with or
without India. Further, such activities supplement our
bilateral efforts. We therefore support SARI/E's
continuation, although the focus on regional energy trading
may need to be revamped in favor of sector reform
initiatives. The door must be left open for India to
re-think its bilateral-only approach.

The Emperor Has No Clothes
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8. (C) COMMENT CONTINUED: However, we remain deeply
concerned over India's apparent unwillingness to collaborate
fully in regional efforts which stand to bring much-needed,
long-term benefit to poverty-stricken Nepal. Indeed,
indications are multiplying that India will resist
participating in any forum organized by the U.S. that has
only South Asian countries as participants. The hamstringing
of Nepal's efforts to realize its enormous hydroelectric
potential by its only market is a major obstacle to Nepal's
development prospects. This is particularly costly at a time
when low standards of living and lack of economic opportunity
in the countryside are fueling an insurrection that is
sending Nepal backward.


9. (C) ACTION REQUEST FOR DEPARTMENT AND NEW DELHI: There is
a considerable U.S. investment to protect in this regional
initiative. We believe the U.S. has a strong interest in
promoting regional cohesion and alleviating South Asia's
crushing poverty. It would therefore be in the U.S. interest
to try to wean the GOI, especially the MEA, from its
anachronistic insistence on bilateral approaches to regional
problems -- which has long been a source of irritation to
India's smaller neighbors, such as Nepal. Department and
Embassy New Delhi may wish to consider how best to further
the objectives of SARI and other USG-sponsored regional
initiatives through a discreet but consistent dialogue with
decision-makers in MEA and other GOI power centers.
MALINOWSKI