Nepal and the China-EU Lending Race

One morning in the summer of 2016, Chandra Mishra, a farmer from Udipur town in Nepal’s Lamjung district, discovered that a tree on his property had gone missing. It was a large Albizia tree, which Mishra had hoped to one day harvest for wood for making furniture. But during the night, someone had cut the tree and it fell down a steep bank into the Marsyangdi River, which courses below Mishra’s rice fields. Mishra soon learned that workers for a new electricity project – the 132 kilovolt (kV) Bhulbhule power line, which transports electricity from a Chinese-built 50 megawatt hydro-electric power plant upriver to Nepal’s national grid – had cut his tree to make way for their development.

Mishra was angry that the project had cut the tree without notifying him, but he accepted their compensation for it – 43,000 rupees (about $360). Ultimately, however, he refused the project’s compensation for his land taken for the power line, feeling that the amount offered – a fraction of the land’s market value – was insufficient. Along with other affected community members, he joined a group called the Free, Prior Informed Consent and Rights Forum (FPIC & Rights Forum). The FPIC & Rights Forum lobbied the government and the construction company involved for better compensation and measures to reduce the project’s environmental impact. Ultimately, however, their efforts failed, and the project was completed as planned.

Then, in 2017, the Nepali government began initial studies for a second power line through the same area. The new Marsyangdi Corridor line will be even larger than the previous project – it is 220 kV – with similarly minimalist provisions planned for communities and the environment. This time, FPIC & Rights Forum was prepared, and quickly organized public protests. Now, they are appealing to the project’s funder – the European Investment Bank (EIB), which is the European Union’s policy bank, based in Luxembourg – to make adjustments before construction gets underway.

“Even if we were tricked regarding the 132 kV line, our hope is to not be tricked with the 220 kV line,” says Mishra, who now serves as FPIC & Rights Forum’s secretary. “The noose is around our necks.”

In September, the European Commission announced a new “connectivity strategy” for Asia that will likely increase lending for infrastructure by over a hundred billion euros over the next decade. Some analysts have suggested that this represents a strategic response to the Chinese Belt and Road Initiative (BRI), which has emerged as a primary source of development finance in Asia. Although Western-backed development banks like the EIB are often seen as more vigilant than the Chinese regarding social, environmental, and transparency issues, their projects also sometimes face pushback from activists and local people. How the EIB chooses to deal with the complaints of affected communities in Nepal could be indicative of the future trajectory of the Bank’s Asia connectivity strategy. Specifically, it may help answer the question: will the EU maintain its relatively higher social, environmental, and anti-corruption standards amid a push to lend more?

The Nepali Hydropower Context

While Nepal’s rivers serve a variety of human uses like irrigation, fishing, and tourism, the government has long harbored hopes of enriching the nation through large-scale hydropower development. However, progress has been slow due to political instability, a lack of funding, and social and environmental concerns. To date, the country has developed only around 1,000 MW of hydroelectric capacity, compared to an estimated total potential of 40,000 MW.

The Marsyangdi River is one among several priority rivers that the government plans to further develop for hydropower. It flows south from the famed Annapurna mountain region, through a lush but steep river valley, toward the Gangetic plain. In order to transport electricity from the Marsyangdi and other remote rivers to population centers in Nepal and India, the government is enhancing its power grid across the country. The 220 kV line built by the Marsyangdi Corridor Project — with a 95 million euro loan from the EIB — can evacuate an additional 1,000 MW from the valley.

However, land is in short supply. Most farmers in mountainous Nepal own small plots, typically less than one hectare, and often depend on local forests for firewood, fodder, and other resources. When the government uses or expropriates agricultural or forest land for a project, it can have a major impact on local livelihoods. As a result, disputes frequently occur between local people and the government or other project promoters.

A draft study by the Asia Foundation and Niti Foundation, a Nepali NGO, notes a systemic lack of communication between communities and infrastructure developers in Nepal. Developers “are found to be withholding due information from the communities for various reasons — sometimes they want to bypass community demands; other times with the fear of being entangled in disputes. At the same time, they claim that local people have too high, maximalist demands for compensation and community projects.” In some cases, hydropower projects have developed mechanisms for sharing royalties or shares with local communities, although these are usually absent for transmission line projects.