Nepal and the China-EU Lending Race

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Nepal and the China-EU Lending Race

As the EU seeks to expand lending for infrastructure in Asia, will it maintain high standards?

Nepal and the China-EU Lending Race

A poultry farmer in Belawati Bisaune village, Som Bahadur Rimal, says his chickens have been laying fewer eggs recently – a problem he attributes to the buzzing and snapping noises from the power lines, scaring the chickens.

Credit: Peter Gill

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 kilo-volt (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.”

Last month, 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 push-back 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.

A power line tower for the 132 kV project in Lamjung. Photo by Peter Gill.

The Marsyangdi Corridor Project

In Belawati Bisaune, a village in Lamjung that falls along the planned route for the Marysangdi Corridor’s 220 kV line, villagers remain deeply dissatisfied with the previous 132 kV project. Its power lines, erected two years ago, now loom over their homes and gardens.

Although scientific research has not shown that power lines’ electromagnetic fields pose significant risks to humans, some people worry about the power lines’ potential health effects. A local poultry farmer, Som Bahadur Rimal, says his chickens have been laying fewer eggs recently — a problem he attributes to the buzzing and snapping noises from the power lines, scaring the chickens.

But most of all, people are upset about land compensation. Although the project provided landowners with 100 percent of the determined market value for land used to build towers to hold up the power lines, they provided only 10 percent for the land in between.  This includes an 18 meter swath of land underneath the power lines known as the “right-of-way.” While villagers maintain ownership of the right-of-way, they are not allowed to grow trees or construct buildings on it, and they say that most banks no longer accept the land as collateral for loans. As a result, the value of their landholdings has dropped by far more than 10 percent, they say.

Om Bahadur Rimal, a retired soldier, says he refused the 10 percent compensation in protest. “I pay taxes on this land based on its valuation, at 20 lakh [approximately $17,000].  But with the power line, it is worth less. I’m not satisfied with the compensation.”

FPIC & Rights Forum argue that the Marsyangdi Corridor project will similarly fail to compensate affected people. The new project will have an even wider right-of-way than the 132 kV project, but only a small portion of its budget — roughly 7 percent of costs — is devoted to “social impact mitigation” measures like land compensation. While the Nepali government typically provides only 10 percent compensation to owners of rights-of-way, the activists argue that it should provide more — and they point out that it has done so in the past, for specific communities that sustained long protest movements.

Compounding the land compensation issue, FPIC & Rights Forum claim that the new project has withheld important information from affected communities and not sufficiently involved them in decision-making processes. Khem Jung Gurung, the organization’s president, says that that the Nepal Electricity Authority — the government body that is the project’s promoter — failed to invite landowners to public consultations or provide them with necessary project reports.

In addition, FPIC & Rights Forum argue that the project’s environmental assessments conducted thus far have been insufficient, given that part of the power line falls within a protected area. So far, the government has conducted only a partial environmental impact assessment (known as an “Initial Environmental Exploration”) for the lower segment of the project. An independent expert who reviewed the assessment noted that it contained factual inaccuracies; for example, it misstated the location of the project. FPIC & Rights Forum maintains that alternative routes for the power line, which could potentially save trees and animal habitat, have not been adequately considered.

In response to these complaints, the Nepal Electricity Authority’s project chief, Chirantan Bikram Rana, recently told The Kathmandu Post: “We are in the preliminary phase of the project implementation where we are finalizing the alignment of the power line. We will make sure that project affected locals are given adequate compensation for their land and other assets if they are acquired by the project.”

However, FPIC & Rights Forum has appealed to the European Investment Bank (EIB) to hold the Nepali government to its word.  With support from the Lawyers’ Association for Human Rights of Nepalese Indigenous Peoples, a Nepali NGO, and the San Francisco-based organization Accountability Counsel, the group officially filed a complaint on October 8 to the EIB’s Complaints Mechanism. The Complaints Mechanism is an independent office charged with ensuring that projects funded by the Bank comply with the Bank’s own standards, including environmental and social safeguards. In the complaint, local activists have charged the Marsyangdi Corridor project with breaking Nepali law, international conventions that Nepal has signed, and the EIB’s own standards. They have called upon the Complaints Mechanism to initiate mediation between the affected communities and the Nepal Electricity Authority.

If the bank determines the complaint is admissible, it will initiate mediation. According to procedure, if the mediation is carried out but FPIC & Rights Forum is left unsatisfied, the Complaint Mechanism will conduct a full “compliance review” to determine if the project has in fact flouted EIB standards. If the activists are still not satisfied with the results of the review, they may take their case to the European Union’s Ombudsman.

Complaints Mechanisms

Independent accountability mechanisms like the EIB’s Complaints Mechanism exist today in most international financial institutions and multilateral development banks. In general, they operate independently of the banks, and thus maintain a degree of impartiality. While the decisions made by accountability mechanisms are not legally binding, they nonetheless influence banks’ operations and have successfully mediated conflicts arising from funded projects.

The first independent accountability mechanism — the World Bank’s Inspection Panel — was created in 1994 amid concerns about the Bank’s accountability to people affected by its policies. At the time, international activist groups were protesting the World Bank and International Monetary Fund’s growing influence over developing countries’ governments through structural readjustment reforms. Likewise, worries were spreading about the negative social and environmental impacts of big infrastructure projects, like the Sardar Sarovar Dam in Gujarat, India. Before the Inspection Panel was created, people affected by projects had little recourse to complain or get banks to change their activities. (Even today, most international financial institutions cannot be sued by project-affected people, although a case before the U.S. Supreme Court later this month could test the World Bank’s legal immunity).

While accountability mechanisms provide an important outlet for project-affected people, they have certain limitations. Some mechanisms mediate disputes, whereas others are only authorized to check for compliance. Regarding the latter, the mechanisms can only determine if projects comply with bank standards, which may not be as stringent as complainants would hope. Because the Marsyangdi Corridor Project will affect many people from Nepali indigenous groups, the FPIC & Rights Forum has appealed to the EIB’s robust policies regarding indigenous peoples. The bank calls for indigenous peoples’ free, prior, informed consent when acquiring their land and displacing them.  However, other institutions such as the World Bank do not adhere to this high standard for indigenous peoples.

An International Lending Competition?

While Western-aligned multilateral development banks like the World Bank and the Asian Development Bank (ADB) have traditionally dominated development finance in the Asia-Pacific region, today China has become a centrally important player. After the 2008 international financial crisis hit the West, financing for developing countries began to shrink. But the Chinese stepped in with loans for a variety of infrastructure and energy-related projects. They have continued to expand funding through the Belt and Road Initiative, announced in 2013. Two Chinese state banks that provide development assistance, the Export-Import Bank of China and the China Development Bank, now hold assets greater than the combined assets of all Western-backed multilateral banks (although only about 30 percent of those assets are international). China also helps fund a variety of regional multilateral institutions that it created, like the Asian Infrastructure Investment Bank (AIIB).

However, Western lending institutions appear to be responding to China’s ascendancy. In September, the European Commission announced plans for a new connectivity strategy to increase funding for Asian infrastructure projects by over a hundred billion dollars between 2021 and 2027.  To many analysts, the new strategy appears to be a response to Chinese lending and the Belt and Road Initiative, coming as the United States’ economic leadership in the region is shrinking, especially after the Trump administration’s withdrawal from the Trans-Pacific Partnership.

For the Nepali government, the increased availability of loans from both China and Europe is a welcome development. After winning 2017 elections in a landslide, the new Nepal Communist Party government has decided to focus on infrastructure development. Although the government has announced several “national pride projects” that will be self-funded, including a fast-track highway between Kathmandu and the Terai plains, international finance will be necessary for many of the more ambitious projects.

“The country’s fiscal and external positions are deteriorating fast, with a large fiscal deficit and current account deficit,” says Chandan Sapkota, an economist and Senior Fellow at the think-tank Nepal Economic Forum. As a result, “Demand for external financing is higher than ever.”

Discussions about foreign relations in Nepal often center around balancing the interests and influences of the country’s two giant neighbors, India and China. But as both China and the European Union poise to loan more for infrastructure in Nepal, the country will also have to decide whose loans to take, and for which types of projects.

Although Nepal has not yet commenced any projects under the the Belt and Road Initiative (which it joined in May 2017), it has received a variety of Chinese funding for infrastructure projects. For example, a new international airport in the city of Pokhara is being built with a Chinese Export-Import Bank loan.

Compared to Western-backed international development banks, Chinese banks are widely seen as paying less attention to issues like financial transparency and the social and environmental impacts of projects they fund. Unlike banks based in liberal democracies, Chinese banks have faced little historical pressure from civil society at home to develop higher standards or enforcement mechanisms. For example, neither the China Development Bank nor the Export-Import Bank have created independent accountability mechanisms for complaints. The China-backed AIIB is in the process of setting up a Compliance, Effectiveness and Integrity Unit, although the office does not appear to be active yet. The lack of strong oversight associated with Chinese loans may appear attractive to the Nepali government as it seeks to carry out projects as fast as possible with few questions asked.

On the other hand, Chinese loans bring risks for the Nepali government. Chinese-financed projects — which are usually built by Chinese developers — frequently face delays and cost overruns. Likewise, Chinese government-to-government investments carry relatively high interest rates over short maturity periods, according to Sapkota, the economist. Many Nepali political commentators have also raised concerns about the risk of falling into debt traps that could compromise Nepali sovereignty, similar to what happened with Sri Lanka’s Chinese-built Hambantota seaport.

The EIB currently has loans out to the Nepali government for three projects in the energy sector, including the Marsyangdi Corridor, totaling roughly 180 million euros ($210 million). In addition, the European Commission is providing Nepal over 360 million euros in aid grants over the period 2014-2020, some of which is blended with loans for use in infrastructure development. The impact of the EU’s new Asia connectivity strategy in Nepal remains to be seen, but European financing for energy, transmission lines, and roads is likely to increase over the coming decade.

Veronica Cody, the European Commission Ambassador to Nepal, told The Diplomat regarding the connectivity strategy, “We want this to be done in a sustainable way, in a manner which brings development and prosperity to people, which is rules-based, and uses a transparent approach.”

But in the eyes of Nepal’s political leaders, stipulations regarding rules and standards may make European loans appear less attractive. When asked whether the EIB might rethink its requirements in order to better compete with Chinese banks in countries like Nepal, Richard Willis, a spokesperson for the EIB based in Luxembourg, said, “There’s no question of us relaxing, or somehow diluting our standards — both on the social and environmental side, and also on the procurement side — on any project.”

However, the EIB could change the policies of its Complaints Mechanism in such a way as to streamline loan disbursement. On October 9, the EIB’s board of directors met to discuss a new policy that some civil society groups say would drastically curtail the Mechanism’s independence from the rest of the Bank. Among other things, the bank’s inspector general would be allowed to ask for revisions of the complaint mechanism’s conclusions before they are finalized. The board meeting proved inconclusive, and the policy will be discussed again in November, according to Willis.

Dil Maya Rimal and her sister, Bal Kumari. Photo by Peter Gill.

Back to Belawati

Back in Belawati Bisaune, people await decisions that will be made nearly half a world away, at the EIB’s headquarters in Luxembourg. The EIB Complaints Mechanism will most likely determine the admissibility of FPIC & Rights Forum’s complaint against the Nepal Electricity Authority within 10 days. If the complaint is deemed admissible, a mediation process could result in substantial changes to the project’s land compensation policy, as well other social and environmental practices. If the complaint is inadmissible, locals fear they will be further marginalized by the government.

“Our sky is becoming crisscrossed with wires,” says Dil Maya Rimal, a mother of five, sitting inside one of two shops along the main road. “Before, everyone lit their homes with kerosone lanterns. We thought that as the country developed, and we had electricity, things would be better.  But for us, development has meant destruction.”

Peter Gill is a Kathmandu-based journalist.  He tweets at @pitaarji (www.twitter.com/pitaarji)