[Congressional Record Volume 140, Number 109 (Tuesday, August 9, 1994)]
[Extensions of Remarks]
[Page E]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: August 9, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
                     ARUN III DAM PROJECT IN NEPAL

                                 ______


                          HON. LEE H. HAMILTON

                               of indiana

                    in the house of representatives

                        Tuesday, August 9, 1994

  Mr. HAMILTON. Mr. Speaker, recently issues have been raised regarding 
a proposed World Bank loan for a dam project to develop the power 
sector in Nepal. Among them are environmental, social, economic, and 
equity aspects of the project. The over-arching concern is the long-
term sustainability of the project and development of Nepal.
  I wrote to the World Bank president, Lewis Preston, regarding these 
issues. A copy of my letter and Mr. Preston's response follow.
  The project has both supporters and opponents within Nepal. A vote on 
the proposed loan, previously scheduled for July, has been postponed by 
the Bank to give time for further analysis and consideration of the 
project.

                                         House of Representatives,


                                 Committee on Foreign Affairs,

                                    Washington, DC, July 18, 1994.
     Mr. Lewis Preston,
     President, The World Bank, Washington, DC.
       Dear Lew: I write regarding the proposed World Bank loan 
     for the Arun III Dam Project in Nepal.
       Several environmental, social, economic, and equity issues 
     have been raised with respect to the project. I believe these 
     issues warrant further scrutiny and consideration to ensure 
     the long term sustainability of the project if it goes 
     forward. Among the concerns are: The magnitude of this single 
     project ($764 million), which exceeds the annual budget of 
     Nepal, raises doubt about its sustainability. The proposed 
     funding would finance phase one of the two-stage Arun III 
     project; the scope of the Arun project would divert limited 
     resources from Nepal's social sector which is already 
     underfunded; the dam would result to an inequitable 
     distribution of benefits because it would serve principally 
     the urban capital, rather than the rural poor who comprise 90 
     percent of Nepal's population; environmental concerns have 
     been raised about a proposed 120 kilometers road to be built. 
     The road would cut through a virgin forest, considered a 
     biodiversity ``hot-spot,'' biologically rich, and containing 
     at least a dozen species unique to the Arun valley. The road 
     could induce migration to the valley and result in erosion, 
     floods, and landslides; alternatives to a large dam may not 
     have been fully addressed. Nepalese groups have recommended 
     that small and medium hydro-power projects be pursued. Small 
     and medium sized projects could be less costly, less 
     environmentally damaging, bring benefit to rural populations, 
     and utilize and strengthen local expertise and capacity.
       Recent events in Nepal provide an important opportunity to 
     reassess this project and consider its many and complex 
     ramifications. I urge you to ensure that thorough and 
     thoughtful analysis of the social, environmental, and 
     economical viability of the Arun project and its alternatives 
     be developed. At stake are both the long-term development of 
     Nepal, and the credibility of the Bank's invigorated efforts 
     to promote environmental considerations and sustainable 
     development.
       I appreciate your consideration of this matter.
       With best regards,
           Sincerely,
                                                  Lee H. Hamilton,
                                                         Chairman.
                                  ____



                                               The World Bank,

                                    Washington, DC, July 28, 1994.
     Hon. Lee H. Hamilton,
     Chairman, Committee of Foreign Affairs, House of 
         Representatives, Washington, DC.
       Dear Lee: Thank you for your letter of July 18, 1994 on the 
     approved Arun III Hydroelectric Project (AHP). I appreciate 
     the interest you have taken in this project and welcome the 
     opportunity to respond to some of the concerns raised.
       While it is true that the Arun project is large in relation 
     to the size of Nepal's economy, it will be implemented over 
     several years. During the peak years the total power 
     investment program will absorb an average of 36% of total 
     development resources, a proportion which is not excessive 
     for a country that is at Nepal's stage of development and 
     that is working its way out from a severe shortage of power. 
     Our analysis shows that Nepal can afford Arun as well as 
     critically needed investments in health, education, family 
     planning and rural infrastructure. Both are needed for a 
     sound overall development strategy.
       You will be interested to know that the AHP is a run-of-
     the-river project without a large storage facility and with 
     most of its facilities underground. The project would divert 
     part of the natural flow of the river through a tunnel to 
     generate electricity before returning the water to a lower 
     point in the river's natural course. An advantage of this 
     design is that it does not require a large dam to generate 
     power and thus does not involve any significant flooding or 
     resettlement.
       The alternative investment program which is being advocated 
     by the critics of Arun has been given serious consideration 
     by the Bank. The detailed assumptions used in our analysis 
     are contained in a multi-volume report which we made public 
     in early June. The key conclusion is that the alternative 
     approach would, under most plausible assumptions about the 
     future, actually be more costly to Nepal. The difference in 
     cost is modest, however, and the critics advocate overriding 
     the results of the analysis in the interest of promoting a 
     more small-scale and diversified pattern of hydropower 
     development.
       In point of fact, the Government of Nepal is already 
     promoting small-scale hydropower investment. The Arun project 
     itself contains funds for strengthening this effort by 
     encouraging the private sector. The small hydro projects 
     advocated by Arun's critics are complementary rather than 
     competitive with Arun. The real alternative to Arun is 
     offered by other medium and large-scale projects which our 
     analysis shows to be more costly, more risky environmentally, 
     and much less advanced in terms of readiness for 
     implementation.
       A recent report that I commissioned on project 
     implementation has rightly stressed the crucial importance of 
     ownership and commitment to successful implementation. On 
     this count, we have had repeated reaffirmations of the 
     commitment of the democratically elected government of Nepal 
     to this project. Moreover, evidence from a number of meetings 
     in the Arun Valley is that the local population is 
     overwhelmingly in favor of the project because of the 
     potential benefits of the access road. The World Bank is 
     trying to be as sensitive as possible to the views of the 
     inhabitants of the Arun Valley so it was reassuring to me to 
     receive, on the same day as I received your letter, a 
     strongly supportive letter from the President of the District 
     Development Committee of the Sunkhuwa Sabha district in which 
     the project is located. A copy of that letter is attached.
       While there are certainly environmental and social risks in 
     the Arun project, they have been exhaustively analyzed in 
     another multi-volume study which was published over a year 
     ago. A comprehensive plan for mitigation of these risks has 
     been developed and incorporated as an integral part of the 
     project. Progress in road construction will be linked to the 
     pace of implementation of these measures.
       I hope these comments are responsive to your concerns. If 
     you or your staff would like additional information or 
     further elaboration of the points made, staff in the South 
     Asia Region would be happy to respond. Attached is a note 
     prepared by our staff which addresses in greater detail, the 
     topics raised in your letter.
           Sincerely,
                                                 Lewis T. Preston,
                                                        President.


               the arun iii hydroelectric project--notes

       Nepal's economic growth has been hampered by its remote 
     land-locked location and limited natural resources. However, 
     the country possesses abundant, unused hydroelectric power 
     resources estimated at 25,000 MW. At present, it has 
     developed only 241 MW of this potential, which is accessible 
     to barely 10% of the population. To help overcome acute power 
     shortages which impede economic and social development, an 
     increase in the supply of power is crucial. Almost a decade 
     of review indicates that a sequence of power investments 
     including nine projects over the next ten years, is the way 
     to address this at least cost. Because Nepal is one of the 
     world's poorest countries, concerns have been raised about 
     the affordability of the proposed investment program. To 
     minimize the risk that these investments will crowd out high-
     priority investments in other sectors of the economy, 
     especially the social sectors, the Government of Nepal has 
     embarked on a macro-fiscal reform program under which it will 
     increase revenues through fiscal measures, and adopt a three-
     year rolling investment program, including a core program 
     which will protect investments in other high-priority 
     sectors. Although it is sometimes claimed that the cost of 
     the Arun project (US$797 million) exceeds Nepal's annual 
     budget of (both around US$800 million equivalent), this is 
     misleading. Project expenditures will be spread out over 
     eight years and will be financed largely through concessional 
     and grant assistance. Once in operation, the project is 
     expected to generate around US$100 million in revenue 
     annually for fifty years.
       The benefits of the AHP will be distributed equitably both 
     in Nepal and the Arun valley. In the broadest context, the 
     AHP is part of the strategy to increase power supply which is 
     necessary for accelerated growth which, in turn, will reduce 
     poverty. The AHP itself includes a rural electrification 
     program for the Arun valley and the establishment of a 
     private sector hydro facility which will study, finance, and 
     implement viable micro/mini hydroelectric schemes. The AHP 
     also includes a Regional Action Plan which has been designed 
     to maximize the economic benefits of the project through 
     complementary investments in agriculture, livestock 
     development, tourism, and small business. The rural poor of 
     the Arun Valley will be the direct beneficiaries of these 
     projects.
       The AHP will bring about far-reaching changes to the Arun 
     Valley. The World Bank and the Government of Nepal have 
     extensively studied the environmental and socio-economic 
     issues and impacts associated with the AHP, and this has 
     culminated in a comprehensive Environmental Action Plan. This 
     plan includes an Environmental Mitigation Plan which deals 
     with the direct impact of construction activities, and the 
     aforementioned Regional Action Plan (RAP) which addresses the 
     induced impacts. The RAP covers the following program areas: 
     conservation, income generation, institutional strengthening, 
     extension and training, infrastructure and energy 
     development, and environmental monitoring. The key objectives 
     of the RAP, which is an integral part of the project, are to 
     generate sustainable economic development within the Arun 
     basin and enhance the otherwise deteriorating environmental 
     and socio-economic conditions presently found there. The 
     access road has been located to reduce unnecessary direct 
     environmental and socio-economic effects, and would not 
     affect forest ``hot spots'' such as the Chichila Forest, an 
     area of high biodiversity value. A new conservation area, 
     Milke Danda, will also be set up under the project. The road 
     was also designed, and the alignment chosen, to minimize 
     landslides and erosion. However, the risks of landslides and 
     erosion can never be entirely eliminated from any road in 
     Nepal due to indigenous geography. The risk of increased 
     migration to the valley is minimal as it is a marginal food 
     deficit area. Out-migration is a much more likely 
     possibility.
       The World Bank has seriously considered smaller scale 
     hydropower alternatives. After the AHP and several other 
     hydropower projects were identified as part of the least cost 
     generation expansion plan, concerns about the risks 
     associated with the AHP led to an analysis of an alternative 
     development strategy. This strategy relies on a series of 
     smaller hydropower projects, primarily in the 30-80 MW range. 
     The conclusions reached from a comparison of the plans 
     indicate relatively little difference in costs between them. 
     Several considerations, other than cost, were also important 
     to the section of the least cost plan. It entails for Nepal, 
     less environmental risk, both because fewer sites need to be 
     developed, and because its plans for mitigating environmental 
     and socio-economic impacts are relatively well developed. The 
     alternative plan would require managing the construction and 
     implementation of a large number of projects in parallel. 
     While these implementation risks could be managed with 
     substantial expatriate technical skills, the objective of 
     developing institutional capacity in Nepal would not be 
     advanced. It is not even obvious that all of the alternative 
     projects are technically feasible, due to the preliminary 
     nature of the information available on them. Developing this 
     information will proceed over time, of course, as the 
     Government has done with some 19 projects for which 
     engineering studies have been prepared.

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