Hydropower trade and cooperation between Nepal and India, which had been stalled for several years, suddenly saw new hopes emerge last year. Relative political stability in Nepal, committed efforts from Nepal’s Investment Board, and the recent visits of Indian Prime Minister Narendra Modi to Nepal along with his initiatives to enhance bilateral cooperation seem to have created an enabling environment for hydropower development in Nepal and export of electricity to India and beyond. This could also be a step towards resolving the continuing power crisis in both countries while stimulating the stagnant Nepali economy.

Doubts to cooperation

Electricity is an essential requirement to improve the quality of life of the people of Nepal and a reliable supply is necessary to foster industrial and commercial development. Coopera-tion between the two countries shall provide hopes to address the average 12-hour-a-day power cuts in Nepal and the electricity needs of India to fuel its economic growth.

After decades of on-again and off-again discussions, Nepal and India signed the Power Trade Agreement (PTA) in October last year. A similar agreement was signed in 1997 but was never ratified. Hydropower has been one of the top agendas in recent years whenever there are talks on friendship between the two countries. However, Nepali political parties have persistently felt that the Indian proposal and all the agreements were simply to gain monopoly over Nepal’s water resources. So, the Project Development Agreement (PDA) of the export-oriented 900 MW Upper Karnali Hydropower Project, between the Investment Board of Nepal and GMR, the project promoter, was also not signed during Modi’s official visit to Nepal as planned because of concerns over the implications of the project on the Nepali side.

In spite of this, the Indian prime minister announced a credit line of $1 billion to Nepal during his first official visit, which the Nepal government plans to use for hydropower, irrigation, and roads. Commitments have also been made to speed up the pace of hydropower development. There is enough room for optimism, as additionally indicated by the revitalisation of the Pancheshwar Multipurpose Project of 1996, which has the potential to generate 6,720MW electricity from the Mahakali River along the Nepal-India border. The recent project meeting was the first after a decade. The resurrection of the Arun III Hydropower Project as an export-oriented project to India with private sector investments—after the project was scrapped in 1990s when the World Bank declined to finance it—is another positive move.

Cautious optimism

Until now, Nepal and India trade electricity only at government-to-government levels. The signing of the PTA provides a broader framework for power traders and investors to invest in, import, and export electricity between the two countries. Several foreign companies have already received licences to develop new hydropower projects that will, in a long run, help Nepal do away with the electricity woes it has been facing for years now and to export electricity to India and beyond.

This progress not only mark historical achievements in bilateral cooperation between Nepal and other countries, but also the initiation of the largest Foreign Direct Investment (FDI) inflow to Nepal, for example, from the Upper Karnali Project.

Amidst all of this, there are reasons to be cautiously optimistic. History shows that lack of trust has often led to the absence of cooperation in bilateral projects in Nepal. Hence, the projects that gain momentum should be managed effectively to produce timely results. While the Bhutan model may not be replicable in Nepal, policymakers should take a head start to reap economic benefits from hydropower development and export like Bhutan. Nepal should work to put in more efforts to cooperate with India and at the same time, broaden its prospects of mutual cooperation to bring in more FDI, more projects, and thereby, more development. Furthermore, the prospects of cooperation with India in hydropower can also be of regional benefits since the Saarc Summit in November 2014 approved of a regional power grid.

Pradhan is a master’s level student at the Lee Kuan Yew School of Public Policy, Singapore