The Arun III Tragedy: Probably We Could Have Escaped Load Shedding!


Arun, a mighty river that flows from the eastern Himalayas of Nepal has a story to offer. This story reveals about that one incident which changed the course of Nepal’s pursuit of harnessing energy, shifting the nation’s paradigm to an unknown period of darkness. Perhaps no single development issue attracted as much attention, controversy, and debate in the early nineties as the Arun III Hydro Project located in Sankhuwasabha district.

Fed by mountain glaciers and aquafiers, the most attractive feature of this project was the firm energy it produced throughout the year. Unlike other projects developed and identified for the future that generated very low firm energy, ranging from 15 to 60 percent of the installed capacity in lean seasons, Arun III provided about 85 percent of the firm installed capacity even in the dry season of December-April, when the need for load-shedding normally becomes acute in Nepal. In 1987, a Least Cost Generation Expansion Plan (LCGEP) was prepared with the help of a Canadian firm called Canadian International Water and Energy Consultants. The Plan had concluded that the most economic generation sequence to meet the forecasted demand through 2005 would be a combination of load management, thermal power, and a two stage Arun III project. The study had considered various options including both thermal and hydro projects and an update of LCGEP in 1990 had reconfirmed that Arun III was part of the least cost plan.

The total generation capacity of the project was 404 mw of electricity .The total estimated cost of the project, as of 1994, was US $ 1.08 billion, of which about two third was committed by external agencies, entirely in the form of grants and soft loans. The Japanese had committed soft loans convertible into grants and thar1e World Bank and ADB loans represented soft credit payable over a period of 30-40 years at less than one percent service charge. Others were grant-cum-credit. A rough calculation showed that the foreign assistance package had a seventy percent subsidy element in it and the annual power generation from the project at the prevailing power tariff at that time would yield approximately five billion rupees. The debt servicing obligation and operational costs of the project would take about one fifth of this revenue, leaving approximately four billion rupees as net revenue to the Government for investment in other priority sectors.

One important component of the project was the 122-kilometre access road to be completed at the cost of $ 124 million. The road was important from social and regional development standpoints and it further made possible the development of second phase Arun III plus the Upper and Lower Arun. The combined power capacity of these projects was an estimated 844 mw, making the overall power generation among the cheapest in Nepal.  If one were to further take into account the use of the access road and transmission lines for other projects including the Lower and Upper Arun, with total the generation capacity of 643 MW, the energy generation cost would come down to be among the cheapest in the world. The country had already spent US $20 million for pre- feasibility, feasibility, and the engineering designs. Various other studies concerning the environment, seismology, hydrology, resettlement, and GLOF had also been completed, and their appropriate prescriptions incorporated into the project design.

Unfortunately, the project attracted unprecedented debate and controversy both within and outside the country by a powerful network of international non-governmental organizations. However, the staunchest anti-Arun campaign was launched by international NGOs and their local counterparts in various financial capitals including Washinton D.C., Manila, Tokyo, and Bonn. The controversy took a political turn when the Communist Party of Nepal criticized the G.P. Koirala-led Nepali Congress government for promoting the project without creating a national consensus and studying alternative scenarios. They were also suspicious of the role of ‘commission money’ behind the project

And then that one incident happened which changed the course of Nepal’s pursuit of harnessing power. Situation reached its climax when the General Secretary of Nepal Communist Party (UML) Madhav Kumar Nepal shot a letter dated 18 October 1994 to the World Bank President expressing “serious reservations about the way the project has been designed and proposed”. He also wrote that he would undertake a fresh review of the cost-benefit and the environmental side of the project before taking any final decision, “if elected to form a new government in Nepal.” The letter also questioned the mandate of the then ‘caretaker’ government to make a decision on such a vital project. The timing of this letter could not have been more critical, Nepal was preparing for mid-term elections, and the World Bank Board was scheduled to give final approval to the project on the 3rd November 1994. Naturally, the World Bank took the content of the letter seriously, as it came from the leader of the major opposition party which stood a chance of winning the election. Consequently, it deferred the final project decision on the project. The mid-term elections in November produced a hung parliament with no party winning majority seats. The CPN (UML) which emerged as the single largest party formed a Minority government.

The anti-Arun campaign was gaining strength. A new management had assumed office in the World Bank and they did not share the same commitment to the project as their predecessors. The World Bank was not convinced of the Government’s commitment to the project. On 3rd August 1995, the new World Bank President James Wolfensohn cancelled the project “in agreement with the Government of Nepal”. Referring to his telephone conversation with Prime Minister Manmohan Adhikari, he said priority would now be given in “devising and implementing alternative strategy of meeting its needs for electric power”. Asian Development Bank and the Government of Japan were successfully persuaded to jointly support this project. This support was irrespective and independent of Arun III and therefore, there was no transfer of funds committed to Arun. Only the funds committed to Arun III by Germany was transferred to Mid Marshyangdi Hydro Project, and that too after a lot of persuasion.

It then took 20 long years for government to finally bring back Arun III on ground. On November 25, 2014 a day before the 18th SAARC Summit, a public sector company of India SJVN Limited signed a Project Development Agreement for the implementation of 900 MW Arun-3 Hydro Electric Project with the Government of Nepal. The agreement was signed at Kathmandu in the presence of Hon’ble Prime Minister of India, Shri Narendra Modi and Hon’ble Prime Minister of Nepal Shri Sushil Koirala.

One has to accept some tradeoffs between environment and modern development. Construction of infrastructure projects like hydropower, roads, and irrigation create negative environmental ar4impacts, but such projects are also vital to improve the living conditions of the people. Otherwise poverty itself will destroy the ecological balance. What is important is a proper mitigation plan to minimize the negative environmental impact from such projects to maintain a balance between environment and development.

The debacle of Arun III has a lesson, if only we are prepared to learn it. Project preparation and investment for the scale of Arun III takes many years of time, money, and effort, even when goodwill and congenial atmosphere for development assistance prevail. But it takes a few months of determined activism to destroy it in this world of instant global communications. Opposition to such project can always be expected from the global network of organizations for ideological and other reasons, but when national policy makers themselves fall prey to wrong and motivated advice, the nation suffers.

Once undone, recovery cannot happen early and easily.


-Dr. Ram Sharan Mahat’s Report “In Defence of Democracy”

-The World Bank Staff Appraisal Report, Arun Three Hydro Electric Project 29 August 1994.

-The World Bank News Release No.96/Soo8. August 3, 1995.

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