Upper Arun Hydropower Project

29 Pages·2016·1.01 MB·English

Affirmative Investigation -
Nepal - Upper Arun Hydropower Project

Site visit: April-May 2016
Report prepared by: LJohnston, USAID/E3

Project: Upper Arun Hydropower Project

Safeguard Category: A

Projected Cost: To Be Determined (TBD)

Proposed Bard Date: TBD

Current Status: The 335 MW Upper Arun hydropower project is in its early stages
of development by the Government of Nepal (GoN) and the Nepal Electricity
Authority (NEA). In 2015, the World Bank provided financing to NEA to hire: a)
international consultants to conduct the project feasibility study and the environmental

and social impact assessment (ESIA); and b) environmental and social experts to serve
on an independent oversight panel for the Upper Arun and Ikhuwa Khola hydropower
projects. At the time of USAID’s visit (April-May 2016), NEA was in the process of
selecting the international consultants. NEA is also developing the 30 MW Ikhuwa

Khola hydropower project as part of the benefit-sharing arrangement with community
members. Due to relatively recent landslides, it was not possible to gain access to the
Ikhuwa Khola hydropower project site. Therefore, the focus of this report is only on

the Upper Arun hydropower project.

1
Executive Summary

The International Financial Institutions Act (IFIA), Title XIII, Section 1303(a)(1), requires the
United States Agency for International Development (USAID) to review multilateral
development bank (MDB) project proposals to determine whether the proposals will
contribute to a country's sustainable development. Proposals that are particularly likely to have
substantial adverse environmental and social impacts are candidates for an affirmative
investigation under Section 1303(a)(3) of the IFIA. Projects subject to an affirmative
investigation are identified based on reviews that look for potential impacts on the
environment, natural resources, public health and indigenous peoples. USAID’s Bureau for
Economic Growth, Education, and Environment (USAID/E3) leads the affirmative investigation
process in consultation with the Department of the Treasury, the Department of State, and
other relevant federal agencies. USAID’s intent is to conduct these visits early in the process of
project preparation to provide recommendations aimed at improving the environmental and
social aspects of the project prior to presentation and vote at the respective MDB Executive
Board of Directors meetings. USAID discusses its observations and proposed
recommendations with the U.S. interagency and the MDB supporting the project. If not
classified, the information collected during the affirmative investigation is made available to the
public.

The Upper Arun and Ikhuwa Khola hydropower projects are being developed by the
Government of Nepal (GoN) and the Nepal Electricity Authority (NEA). In 2015, the World
Bank provided financing to NEA to hire: a) international consultants to conduct the project
feasibility study and the ESIA; and b) environmental and social experts to serve on an
independent oversight panel of experts for both projects. At the time of USAID’s visit (April-
May 2016), NEA was in the process of selecting the international consultants.

This affirmative investigation builds upon and complements an earlier affirmative investigation to
the Upper Arun hydropower project conducted by USAID in 2014. 1 Due to weather
conditions during the 2014 affirmative investigation, the area of the proposed dam site,2
headrace tunnel, and upstream reaches of the Arun Valley were not visited. Given the
remoteness of the Upper Arun hydropower project area, a follow-up visit was conducted
specifically to the project areas not visited during the earlier trip. This report provides
additional findings and proposed recommendations, including proposed mitigation measures,
specific to the Upper Arun hydropower project areas to address potentially significant
environmental and social impacts. Due to relatively recent landslides, it was not possible to gain
access to the Ikhuwa Khola hydropower project site.

1 The 2014 Upper Arun Hydropower Project trip report is provided in Annex I.
2 The proposed dam site is located in a narrow gorge about 350 m upstream of the confluence with Chepuwa
Khola near Chepuwa Village.
2
When additional information becomes available, USAID will review and revise
recommendations, as warranted, and issue an updated report.
Summary of Findings
1. A number of indigenous peoples (ethnic groups) live in remote areas in the
Arun Basin with limited development opportunities and limited GoN support.
Indigenous peoples living within the area include the Tamang, Gurung, Rai, and Bhodi, each
with their own local culture and languages. The relative size of each indigenous peoples
group varies within villages. Livelihoods are primarily subsistence, based on agriculture (rice,
maize, millet, potato) and livestock. Recently, some communities have been expanding
cardamom production for sale at the expense of traditionally grown food crops. The sale of
cardamom has contributed to improved livelihoods with the additional cash income. The
Arun River and its tributaries are used for subsistence fishing by some of the indigenous
peoples.
2. Community members are supportive of the national strategic road3 that will
connect Nepal to India at Biratnagar and Nepal to China at Kimathangka when
finished. The national strategic road currently ends at Num, although the stretch between
Chichila and Num is only consistently passable outside of the rainy season. The bridge for
vehicle traffic has not been built over the Arun River and road construction up to
Gadhidanda is in its early stages. Reportedly, 8-12 km of road is completed from the
Chinese border starting from Kimathangka. Communities visited did not know the exact
route, but the Chepuwa community is looking forward to their area being served by a road.
The national strategic road will connect to the Upper Arun project’s access roads and
project areas. Currently, people and goods move from Num into the Arun Valley by foot or
mule.
3. Most communities above Hatiya village4 were either unaware or had limited
knowledge of the Upper Arun hydropower project. Communities aware of the
Upper Arun hydropower project view the project as a means for providing development
opportunities. Local villagers and local government are waiting for economic opportunities
and social services which they believe the national strategic road and the hydropower
project will provide. However, many of the project’s benefits will likely be years in the
future, given that compensation and associated development activities cannot commence
until the project reaches financial closure. This delay broadly restricts investment,
development programs and economic growth while villagers and government wait in limbo
for the benefits of the hydropower project to materialize.
4. Project-affected community households will be provided with both financial
compensation and the option to acquire project shares in Ikhuwa Khola
hydropower project as part of the benefit-sharing arrangements.5 Additionally,

3 The GoN Department of Roads is constructing six roads across Nepal connecting Nepal, India and China.
4 Hatiya village is below the dam site. Map of project area is in Annex II.
5 Communities located on the Arun River, upstream from the Ikhuwa Khola hydropower project, will not be
impacted by the Ikhuwa Khola hydropower project. Location of Ikhuwa Khola in relation to Upper Arun
hydropower project is in Annex III.
3
electricity generated by the Ikhuwa Khola hydropower project will be provided to the
project-affected communities.
5. Community members report changes in the environment. Some community
members stated that they have seen an increase in the flow of the Arun River, which they
attributed to rapid snow melt. Community members stated that they used to see snow all
over the hills 20-30 years ago, but now only find snow primarily on the high mountains.
They reported that mosquitos are more prevalent than in years past, attributing it to
increased temperatures. Communities also reported increased deforestation due to home
construction and continued reliance on wood fires. In one area, several springs are
reported to have dried up.
Summary of Recommendations
Based on the project area site visits, stakeholder discussions, and available documentation,
USAID proposes the following environmental and social recommendations for the Upper Arun
Hydropower Project. In some cases, recommendations are directed to a specific stakeholder.

1. Institute an interim development program for project-affected communities as
soon as feasible. Due to the long lag time between project planning, construction and
operation, project-affected communities are in a state of limbo since they are not receiving
benefits from the project and only limited basic services from the GoN. The affirmative
investigation team recommends working with the affected communities to develop an
interim development program that would more immediately enhance livelihoods. Depending
on communities' priorities, the program could: support the education system (including
adult education); provide health services and electricity (via solar or micro-hydro); and
improve market access through transportation improvements (Annex IV). The interim
development program would be implemented as soon as feasible and, at the latest, within
one-year of signing the Memorandum of Understanding between the GoN and project
sponsor.
2. Ensure that there is effective communication and realistic information provided
to project-affected communities on the timeline for project development. This
recommendation is based on findings from other hydropower projects visited in Nepal that
are further along in the project development process. When project consultations are
initiated, NEA needs to ensure that there is effective communication and that realistic
information is provided to stakeholders on the potential positive and negative
environmental and social impacts of the project, as well as the project timeline.
3. Ensure the meaningful participation of impacted indigenous peoples in the
design, implementation, monitoring and evaluation of the projects. The
government should develop, in cooperation with indigenous peoples, robust and meaningful
consultation and community procedures and guidelines, in alignment with International
Labour Organization Convention 169 which was ratified by the Government of Nepal in
2007. Communities should receive analytical, technical, financial and capacity-building
support so they can engage in river-basin and project planning, thus helping to ensure that
infrastructure development will cause no harm and that livelihoods are culturally and
environmentally sustainable.
4
4. Assess the differential impacts of when and how project-affected communities
acquire project shares. Project-affected communities will be provided with both financial
compensation and the option to acquire project shares in the Ikhuwa Khola hydropower
project as part of the benefit-sharing arrangements. Research has suggested that the
economic value of project share offerings has the potential to warp local incentives, water
resource governance, and the due process of stakeholder engagement. Project sponsors –
GoN, NEA and WB – need to fully assess when and how project shares will be offered to
project-affected communities and to understand the associated risks so they are better
positioned to inform project-affected communities.
5. Provide information and training sessions on financial management and project
shares. Given the potential for change in livelihoods and increased reliance on and access
to the market economy, the project-affected communities will need to strengthen their
abilities to manage their finances for the long-term. Project shares can be a means for both
cost-sharing and risk-sharing of the project development by communities, depending on
how and when shares are acquired in relation to the project development stage.
Information and training on financial/risk management would help to ensure economic
incentives do not eclipse the process of stakeholder engagement and negotiations.
6. Include a provision for increases in compensation due to delayed project
activities. Given the delay in starting project construction, compensation, when finally
agreed, should be adjusted for inflation and include penalties to reflect delays. This is
relevant for assets like land but should be equally applicable to any “lost livelihood”
amounts.
7. Ensure downstream impacts are robustly assessed and avoided/mitigated. Local
stakeholders whose livelihoods are dependent on the Arun River ecosystem will be
impacted. Project-affected groups will need to be identified; the impacts of project
construction and operation assessed, and included as part of the alternatives analysis and
cumulative impact analysis in the ESIA.
8. Coordinate with river basin planning process. The project sponsor should coordinate
with the World Bank-supported Power Sector Reform and Sustainable Hydropower
Development Program's plans to conduct a basin-wide planning process for the Arun Basin.
This would include conducting and integrating a Strategic Environmental Assessment into
the decision making process to help prioritize key areas and processes in the river system
that need to be protected and maintained. There is at least one proposed hydropower
project upstream of Upper Arun and five hydropower projects proposed north of the
Nepal border in the Tibet Autonomous Region (China). Additionally, a number of
hydropower projects are proposed on tributaries of the Arun River.
9. Ensure that the stretch of the National Strategic Road that is required for the
Upper Arun hydropower project is built following international best practices.
The Upper Arun hydropower project will need the national strategic road built so it can
move equipment and access the project's roads and sites. The access roads to the various
dam components will be developed using WB safeguards, which take into account
international best practices. It will be important that the strategic priority road is developed
in a manner consistent with safeguards being proposed for Upper Arun, Ikhuwa Khola and
Arun 3 hydropower projects.
10. NEA and the WB need to ensure coordination and consistency in the
development between Arun 3 hydropower project, Upper Arun hydropower
5
project, Ikhuwa Khola hydropower project and other proposed/planned
hydropower projects in the Basin. To ensure coordination and consistency in Arun
Basin hydropower development, a workshop is recommended to bring developers,
consultants and impacted community representatives together to lay the foundation for
robust and consistent methodology for: a) baseline data collection for the various ESIAs; b)
subsequent monitoring during construction and operation; and c) information sharing
among the developers. Regular communication between Upper Arun, Ikhuwa Khola and
Arun 3 projects’ environmental and social experts is recommended.
11. Additional environmental issues. At this point, USAID technical experts are not in a
position to make any firm recommendations on the environmental impacts beyond the
previous 2014 recommendations until more information becomes available. USAID’s review
will assess whether the following issues, among others including earlier recommendations,
have been considered and addressed:
o The cumulative impact assessment should include the proposed hydropower
projects in the Tibet Autonomous Region (China) and other developments that will
impact the same receptors (e.g., fisheries) and integrated into the ESIA process.
o The ESIA consultations should be conducted in a culturally-appropriate manner and
WB safeguards for indigenous peoples followed.
o Baseline data collection covers: a) community members’ health status; b) natural
resources gathered and used by the communities; c) which products are locally
sourced and which are imported; d) migration patterns and critical habitat of key
aquatic species; e) changes in sedimentation on productivity of agricultural
productivity and natural habitat in the Terai and f) ecosystem services.

6
Purpose of the Affirmative Investigation
The International Financial Institutions Act (IFIA), Title XIII, Section 1303(a)(1), USAID to
review MDB project proposals to determine whether the proposals will contribute to the
country's sustainable development. Proposals that are particularly likely to have substantial
adverse environmental and social impacts are candidates for an affirmative investigation under
Section 1303(a)(3) of the IFIA. Projects subject to an affirmative investigation are identified
based on reviews that look for potential impacts on the environment, natural resources, public
health and indigenous peoples. USAID/E3 leads the affirmative investigation process in
consultation with the Department of the Treasury, the Department of State, and other relevant
federal agencies. USAID’s intent is to conduct these site visits early in the process of project
preparation to provide recommendations aimed at improving the environmental and social
aspects of the project prior to presentation and vote at the respective MDB Executive Board of
Directors meetings. USAID discusses its observations and proposed recommendations with the
U.S. interagency and the MDB supporting the project. If not classified, the information collected
during the affirmative investigation is made available to the public.

The Upper Arun and Ikhuwa Khola hydropower projects are being developed by the GoN and
the NEA. In 2015, the World Bank provided financing to NEA to hire: a) international
consultants to conduct the project feasibility and the ESIA; and b) environmental and social
experts to serve on an independent oversight panel for both projects. At the time of USAID’s
visit (April-May 2016), NEA was in the process of selecting the international consultants.

This affirmative investigation builds upon and complements an earlier affirmative investigation to
the Upper Arun hydropower project conducted by USAID in 2014. 6 Due to weather
conditions during the 2014 affirmative investigation, the area of the proposed dam site,7
headrace tunnel, and upstream reaches of the Arun Valley were not visited. Given the
remoteness of the project area, a follow-up visit was conducted specifically to these areas not
visited during the earlier trip. This report provides additional findings and proposed
recommendations specific to the Upper Arun hydropower project areas to address potentially
significant environmental and social impacts, including mitigation measures or project
alternatives. Due to relatively recent landslides, it was not possible to gain access to the Ikhuwa
Khola hydropower project site.

Methodology

The methodology for affirmative investigations is a three-step process involving information
collection, analysis, and development of recommendations. Typically, USAID/E3 gathers
information based on available literature, observations made during a site visit to various

6 The 2014 Upper Arun Hydropowr Project trip report is provided in Annex 1.
7 The proposed dam site is located in a narrow gorge about 350 m upstream of the confluence with Chepuwa
Khola near Chepuwa Village.
7
project areas, and semi-structured interviews with stakeholders and project-affected
communities.
As part of this affirmative investigation, USAID/E3 staff, accompanied by USAID's Indigenous
Peoples Advisor, local guide and official translator, walked from Num to Guthigumba (Annex II).
Informal meetings were held with project-affected community members in the following villages:
Hatiya (downstream); Chepuwa (site of dam); Linggam, Guthigumba (above the dam site);
Rukuma, Namse, Sibrung (area of the headrace tunnel); and one local political leader. The
team's official translator and local guide translated the discussions from either Nepali or local
languages to English. In Kathmandu, the team met with NEA staff, World Bank (WB), Asian
Development Bank (ADB), civil society organizations (CSOs), and researchers.
Meetings followed a semi-structured format, after the affirmative investigation team (“AI team”)
introduced its purpose and members of the team. The semi-structured format allows the team
the ability for follow-on inquiry during the meeting, and also gives flexibility based on the
expertise of the people in the meeting. The team met with both men and women. The AI team
was in the field for 12 days.
The comments in this report reflect the views of those interviewed. USAID has not
substantiated these views. In all cases, the names and affiliations of stakeholders are withheld.
Recommendations are a synthesis of site visit observations, discussions and available
environmental and social documentation available at the time of the visit. When additional
information becomes available, USAID will review and revise recommendations, as warranted
and issue an updated report.
USAID conducted an affirmative investigation of three hydropower projects in 2014 (Upper
Trishuli 1, Upper Marsyangdi 2 and Upper Arun). General recommendations that were
provided in that review are salient for Upper Arun and should also be considered as project
development moves forward. These recommendations are provided in Annex V.

General Background

Given Nepal’s extensive water resources,8 hydropower development is perceived by the GoN
as key to alleviating poverty and promoting social and economic development through
increased domestic electricity supply and through generation of revenue by exporting power.
Nepal faces chronic power shortages, particularly during the dry season, as a result of
insufficient domestic generation. Therefore, part of the strategy is the development of a power
exchange relationship with India to provide electricity to Nepal during the dry season.

The peak power demand of the Integrated Nepal Power System (INPS) in Fiscal Year 2014-
2015 was estimated to be 1,291.80 MW, with 585 MW load shedding.9 Of the power supplied:

8 With about 6,000 rivers and a drainage area of 191,000 km2, there are four main river systems in Nepal running
from east to west: Koshi, Gandaki, Karnali and Mahakali, all originating from glacial and snow-fed lakes (WECS,
2011).
9 Load shedding is the deliberate shutdown of electric power in a part or parts of a power-distribution system,
generally to prevent the failure of the entire system when the demand strains the capacity of the system.
8
375.68 MW was supplied from NEA hydropower; 124.71 MW by Independent Power
Producers (IPP)s with hydropower; and 224.41 MW was imported from India (NEA, 2015).10

Political instability has been a defining feature of Nepal during the last two decades. Since the
introduction of democracy in 1990, Nepal has had more than 20 governments. Following the
April 2015 earthquake,11 Nepal’s parliament passed a new constitution in September 2015,
replacing the interim constitution that had governed the country since 2007. The absence of
the constitution was widely blamed for the delay in mobilizing rescue efforts after the
earthquake, prompting the country’s three leading political stakeholders — the formerly anti-
government Maoists, the main communist party UML and the Nepali Congress — to draft and
pass the constitution.12

Although Nepal now has a constitution, the country continues to experience political instability
and governance failures at both the national and local levels. There has been no elected local
government since 200213 and no local elections since 1997. This contributes to governance
failures and a lack of government accountability at the local level. Under these circumstances,
development has been sparse in remote watersheds. Consequently, the hydropower sector is
seen by government and local communities as the means by which development and basic
services (e.g., education, health services, economic opportunities) can be provided in remote
areas.14

Upper Arun Hydropower Project

Nepal's Electricity Authority prioritized the development of a suite of proposed hydropower
projects to meet increasing energy demand across the country. The Upper Arun hydropower
project was selected as a high priority due to its expected low generation cost and high
availability of firm power.15 The project site was identified during the master plan study of Koshi
River Water Resources Development in 1985. The Upper Arun hydropower project is
intended to supply power to the domestic grid, although surplus energy may be exported.

The Upper Arun project is expected to be a river diversion hydropower project with 335 MW
capacity, located on the Arun River in the Sankhuwasabha District of eastern Nepal, about 15
km south of the international border with Tibet and 220 km east of Kathmandu. The Arun
River borders the Makalu Barun National Park, the eastern extension of the Sagarmatha

10 http://www.nea.org.np/images/supportive_docs/year-review-2014-15.pdf
11 Nepal is still recovering from the April 2015 earthquake which killed almost 9,000 people, injuring 22,000, and
damaging or destroying nearly 800,000 homes. A year later, very little reconstruction has taken place and more
than 600,000 Nepalese still live in temporary or unsafe housing.
12 http://time.com/4037788/nepal-constitution-sushil-koirala-protests-madhesi-tharu/;
http://time.com/3837805/nepal-earthquake-government-resources/; http://time.com/4305225/nepal-earthquake-
anniversary-disaster/
13 The year former King Gyanendra prohibited new local elections during the Maoist conflict.
14 For additional research and discussion, please see Lord (2016). Citizens of a hydropower nation: Territory and
agency at the frontiers of hydropower development in Nepal. Economic Anthropology (3) 125-160.
15 Firm power refers to the power level that is always available, even at times of low flow.
9
National Park. Makalu-Barun National Park is included in the Sacred Himalayan Landscape16
which extends across the Arun River into the Kanchenjunga Conservation Area in Nepal and
extends into India and Bhutan. The Arun River is part of the Sapta Koshi River Basin in eastern
Nepal.

The Upper Arun diversion dam would be 37 m high, located in close proximity to Chepuwa
village with Rukuma, Namse, Sibrung villages located in the vicinity of the 7.8 km headrace
tunnel. A 1.8 km road tunnel is also planned to be routed in the proximity of the headrace
tunnel. Communities will have access to this road. The powerhouse is located 2 km
downstream of the Barun River’s confluence with the Arun River.

The GoN Department of Roads is continuing construction on the national strategic road that
will connect Nepal to India at Biratnagar and Nepal to China at Kimathangka when finished
(Annex III). The 21.6 km access road to the dam site and other project areas will originate from
the national strategic highway.

In addition to the Upper Arun hydropower project, NEA is developing the 30 MW Ikhuwa
Khola hydropower project as part of the benefit-sharing arrangement with community
members.17 The project is located in the Pawa Khola Village Development Committee (VDC) of
the Sankhuwasabha District, approximately 8 km from the proposed location of the Upper
Arun powerhouse. It is proposed that electricity from Ikhuwa Khola hydropower project will
be used for electrical needs during the construction of the Upper Arun hydropower project
and provide electricity to surrounding villages.

Both hydropower projects are being developed by the GoN and NEA. In September 2015, the
World Bank approved a $20 million IDA Credit for the Power Sector Reform and Sustainable
Hydropower Development Project18 which includes technical assistance for the preparation of
the Upper Arun and Ikhuwa Khola hydropower projects. The technical assistance provides for
a feasibility study and the preparation of basic design, route survey, ESIAs including a cumulative
impact assessment and mitigation studies, and the hiring of a dam safety panel of experts and an
environmental and social panel of experts.

16 In 2006, the GoN adopted the transboundary Sacred Himalayan Landscape, encompassing 39,021km2, of which
about 73.5 percent falls in Nepal and the rest in India and Bhutan. The Sacred Himalayan Landscape extends from
the Langtang National Park in central Nepal through India’s Kangchenjunga Complex to the Toorsa Strict Nature
Reserve in western Bhutan.
17 Local communities’ expect that they will have a 10 percent share investment in the hydropower project. The
model for this project is the Chilime hydropower project, which provides benefit-sharing opportunities for the
local communities and is considered a success story. Lord (2016). Citizens of a hydropower nation: Territory and
agency at the frontiers of hydropower development in Nepal. Economic Anthropology (3) 125-160.
18 Power Sector Reform and Sustainable Hydropower Development Project - To help strengthen the capacity of
power sector agencies in Nepal to plan and prepare hydropower generation and transmission line projects along
international standards and best practice. http://www.worldbank.org/projects/P150066?lang=en
10