US embassy cable - 03KATHMANDU382

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, India Relations 
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" 
--------------------------------------------- ----------- 
 
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? 
---------------------------------- 
 
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 
--------------------------------------------- ---- 
 
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 
-------------------------- 
 
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