The government of Nepal has given a green light to plans of Indian energy firm GMR to build a 900MW hydroelectric power plant in the northwest of the country.
The plan to build the $1.4bn (£860m) plant has been in negotiations since 2008 but has been considerably delayed due to political instability in Nepal.
The GMR power plant, the biggest foreign investment scheme in the Himalayan republic, is hoped to open up further influx of foreign capital to Nepal, one of the world’s ten poorest countries.
Nepal has the potential to generate up to 83,000MW of hydro-power from rivers cascading down the Himalayan hillsides but a lack of funds and technical know-how have been hindering the development. So far, only 1 per cent of the potential has been tapped.
"This approval will open the way for different foreign investment projects that are in the pipeline to move ahead," Nepal’s Law Minister Narahari Acharya told Reuters after a cabinet meeting.
However, the project has been criticised as most of the electricity it would produce is bound for export to India while Nepal is struggling with perpetual electricity shortages. The country is currently experiencing up to 16 hours of daily power cuts during the dry season when its rivers flow slowly.
The deal, negotiated by Nepal’s government, guarantees the plant, to be completed in 2021, will provide 12 per cent of the produced energy to Nepal for free. Nepal will also receive a 27 per cent stake in the project. However, the benefits of the agreement have been disputed by a group of former Maoist rebels who said the offer is not adequate.
The signing was already delayed by a month after some political parties demanded a guarantee that irrigation canals in the region, taking water from the same river, won’t be affected by the dam.
Officials said Investment Board Nepal will now sign a Project Development Agreement (PDA) with GMR, which will construct transmission lines across the border to transmit the remaining electricity to India.
GMR will build a separate power plant to generate two megawatts of electricity to be supplied to villagers in Achham, Surkhet and Dailekh districts where the project will be located, officials said.
GMR, together with another Indian firm, Satluj Vidyut Nigam, is in talks with the Nepalese government about constructing additional hydroelectric plants in Nepal with a potential to generate up to 42,000MW of electricity.
China's Three Gorges International is also negotiating with the Investment Board Nepal to build a $1.6bn dam to generate 750MW of electricity on the West Seti River in the same area, as Beijing competes with New Delhi for influence in Nepal.
Despite the promising investments, Nepal's economy is expected to grow only by 4.6 per cent in 2014-15, 0.8 per cent less than the government target of 5.2 per cent.