Nepal has scrapped a contract with a state-owned Chinese construction company contract to build a 1200-MW hydroelectric dam. The abrupt move from its next-door neighbor is seen as a setback for China, which has been trying to convince countries across the globe to accept construction works under its Belt and Road Initiative (BRI). The $2.5-billion dam on the Budhi Gandaki river, the biggest project undertaken in the Himalayan kingdom, was approved by Nepal’s previous government.
Kamal Thapa, Nepal’s deputy prime minister, took, announced the cancellation via Twitter, accusing the Chinese company of committing irregularities. “The agreement, marred by irregularities with the Chinese company Gejuwa Group regarding the construction of Budhi Gandaki hydropower project, has been scrapped in a cabinet meeting as directed by the parliamentary committee," he tweeted. Thapa, who is also the energy minister, said that the agreement had been signed with the Chinese company “illegally and haphazardly.”
Nepal’s contract rejection came as a surprise to the Chinese foreign ministry. “I am not aware of this information,” Geng Shuang, foreign ministry spokesman, said at a media briefing. “China and Nepal have sound relations and bilateral cooperation covers a wide range of areas.”
The Nepali cabinet of ministers followed the recommendation of two parliamentary committees — the finance and agriculture committee and the water resources committee — which said the contract violated provisions of the Public Procurement Act by ignoring competitive bidding.
The Budhi Gandaki River impoundment in the central and western regions of Nepal was intended to alleviate the country’s chronic electricity shortages.
Nepal signed a memorandum of understanding last June to allow Gezhouba to build the project in the Gorkha and Dhading districts under a engineering, procurement, construction and finance (EPCF) model. The agreement was signed in the presence of the then-Prime Minister Pushpa Kamal Dahal and Yu Hong, the Chinese Ambassador to Nepal.
Gezhouba offered a sweetener promising to arrange soft or commercial loans from Chinese financial institutions to build the project under terms and conditions acceptable to the Nepal government.
Kathmandu has made it clear that it has problems with the contract and not the project, which has been described by some politicians as a matter of national pride. The government said it will go ahead with the project preparation through the Investment Board of Nepal.
The announcement signals Nepal’s willingness to invite international bidders to compete for both construction and financing. Foreign companies, including those in neighboring India, are prepared to compete with Chinese firms on both pricing and soft financing.
This is the second major setback for Gezhouba Water and Power (Group)—the builder of the giant Three Gorges dam in China. Three years ago, the government of Myanmar halted work on the $3.5-billion Myitsone hydroelectricity dam project. The Wuhan-based megabuilder has also signed project contracts in Pakistan and Kazakhstan.
The decision to scrap the project has thrown up a political controversy in Nepal with the former Prime Minister K.P. Sharma Oli accusing the ruling National Congress government of cancelling the project in order to get money from a competing firm for his party, according to a report in Kathmandu Post.
The Nepali industry also expressed its displeasure at the way things have been done.
“It is unfortunate that we have not been able to establish rule of law in the country.... It appears the Chinese company was selected and later sacked without following due legal processes,” said Hari Bhakta Sharma, president of the Confederation of Nepalese Industries, one of the biggest private sector lobby organizations. “These types of decisions create policy uncertainty, and an unpredictable situation for investors.”
On another level, the World Bank is worried about building major projects in the region. "I think we have to approach hydropower development, particularly in the Himalayas, with the utmost humility," said the bank’s regional energy expert Salman Zaheer in a report. "These are young mountains. As we face climate change it is causing glaciers to melt faster and more unpredictably. So it is bringing down a lot more silt, boulders and other things than before." Such disruptions diminish the capacity of the dams and power generation capability besides adding to financial risks, he said.
The Nepal project was recently listed as a component of China’s Belt and Road Initiative and Beijing is likely to be worried about a loss in reputation. Chinese diplomats are already working overtime offering to revise the terms of the contract in order to salvage it, informed sources said.
A similar situation took place in Sri Lanka when the new government halted the China-backed Colombo Port City project two years back, and later agreed to resume work after China agreed to change the terms of the agreement. The original contract gave the Chinese company sovereign rights to a piece of land in the national capital before the offending clause was removed in the revision, Sri Lanka’s opposition leaders said.