The World Bank has agreed “in principle” to lead the consortium of international financiers for the development of the 1,063 MW Upper Arun hydropower project in Sankhuwasabha, the Finance Ministry said on Friday.

The project on the Arun River in eastern Nepal is estimated to cost $1.71 billion.

The development comes following a meeting between Finance Minister Barsha Man Pun with Martin Raiser, World Bank’s vice president for the South Asia region, in Washington DC, the United States.

Pun is currently in the US to participate in the joint spring meeting of the World Bank and the International Monetary Fund.

In a statement, Shree Krishna Nepal, joint secretary at the Finance Ministry, who is accompanying Pun, said that the World Bank has agreed “in principle” to lead the project.

The agreement will be formalised once it receives the Cabinet’s approval.

“There will be an agreement regarding financial management with the World Bank,” said Nepal, who heads the International Economic Cooperation Coordination Division of the Finance Ministry.

The Cabinet meeting on September 18, 2018, decided to develop the project through the Upper Arun Hydropower Limited, a subsidiary company of the Nepal Electricity Authority, established in January 2017. The survey licence was granted to the company in September 2019.

The feasibility study of the project was approved in June 2021. The construction period of the project is 68 months.

Nepal has touted the Upper Arun as a game changer project among hydroelectric projects due to its relatively low cost of generation and availability of abundant firm energy. Firm energy refers to the actual energy guaranteed to be available. The project can generate electricity in full capacity for six hours daily during the dry season. The average for hydropower projects in Nepal is four hours.

Nepal has been seeking an investment of around $1 billion from the World Bank and other international financial institutions to develop the project. The global lender is set to return to an Arun River project after a gap of 28 years.

Earlier, in 1995, the global lender shelved its plan to invest in the Arun III Hydropower Project amid controversies.

The World Bank, however, is not expected to provide all of $1 billion for the Upper Arun Hydropower Project.

“The World Bank could inject as much as $550 million,” Kul Man Ghising, managing director of Nepal Electricity Authority, the project developer, told the Post in a recent interview.

“The multilateral agency is expected to attract international financial institutions such as the European Investment Bank and others to inject more funds to take the total international financing to $1 billion.”

According to the power monopoly, the project will be implemented under a 70:30 debt-to-equity ratio.

This means the project to be developed in the upper reaches of the Arun River in Bhotekhola Rural Municipality of Sankhuwasabha district will be funded with Rs150 billion in loans.

The World Bank will lead the international financiers while the Hydroelectricity Investment and Development Company Limited, a government entity, will lead the domestic financiers including Nepali banks and financial institutions, according to the power utility.

In September 2022, the Nepal Electricity Authority, the Upper Arun Hydroelectric Company and the Hydroelectricity Investment and Development Company Limited signed an investment agreement to generate resources for the project from domestic financers.

The Nepal Electricity Authority said it has targeted the financial closure of the project soon, which will ensure funds to develop the project.

This is the first time the World Bank is prepared to fund the Nepal Electricity Authority-led hydropower project. In 2014, the global lending agency approved $84.6 million to finance the Kabeli-A Hydroelectric Project developed by the private sector.

In 2019, its private sector arm—the International Finance Corporation (IFC)—had led international creditors to invest $453 million in the 216MW Upper Trishuli 1 Hydropower Project. A South Korean consortium is developing this project.

The World Bank has been helping Nepal build transmission lines.

Nepal faced long hours of power rationing in 2008. Experts point to the bank’s exit from the Arun III project in August 1995 as the main reason behind several years of load-shedding in the country. The outages officially ended only after 10 years, in May 2018.

On August 1, 1995, then World Bank President James Wolfensohn cancelled the Arun III project “in agreement with the government of Nepal” citing concerns regarding Nepal’s management capability to meet the demands and long list of actions which the project of that size and complexity would involve; difficulty gaining support to implementing many measures including power tariff, and difficulty mobilising an additional $30-40 million cost overrun in case of project delays.

SJVN Limited, India’s state-owned company, is now developing the Arun III project.

Officials say that the bank’s reentry into Nepal’s hydropower generation could attract more foreign investors as the country has envisioned producing 30,000 MW by 2035.

Works on a 2-km tunnel road and 21-km access road have already started at the project site.

Officials added that the land acquisition and compensation distribution works have almost been completed.

The project aims to produce an annual electricity output of 3.44 billion units—1.36 billion during the dry season and 2.08 billion units during the wet season.