Nepal's sweetheart deal with China may hit India

NEW DELHI: China is trying to extract significant concessions from Nepal in a bilateral investment protection agreement, which is being negotiated. If it goes through, sources said, it would put a similar agreement signed between India and Nepal in the shade. The India-Nepal BIPPA was signed almost a year ago.

For instance, the Chinese agreement seeks to protect government bonds and debt, by designating them as "investment". Investments by Chinese companies in Nepal or other Nepalese companies, even third country companies owned or controlled by Chinese are sought to be similarly covered. Nepal has objected to these clauses, but given the prospect of huge Chinese investments, it may not be able to withstand.

The Indian agreement is prospective in its application, but China wants all previous investments to be covered. The Chinese pact has asked for full protection and police security for investors and investment. If Kathmandu agrees to it, Nepal would have to spend a lot more on physical protection of Chinese investments. Indian investments are not similarly covered, and in the recent past Indian-owned companies have come under attack by Maoist cadres etc.

Nepal has recently signed its biggest investment with China — the $0.6 billion West Seti Hydropower Project in western Nepal that was earlier supposed to sell power to India. Indian-owned power projects in Nepal are not progressing. Both Upper Karnali and Arun III are still stalled. Maoist cadres have also attacked the GMR-owned hydropower project in Nepal.

Almost a year after the Nepal-India BIPPA pact, foreign investment in Nepal is down by over 30%. Security concerns, political instability have added to investor shyness. There is a clear distinction between Indian and Chinese investments in Nepal. While Indian investors are private sector players, who all need a stable, predictable political-security atmosphere, Chinese companies are all state-owned enterprises and are naturally free of such considerations. This puts Indian private enterprises at a disadvantage.

Nepal is in the middle of a full-blown political crisis and all indications are that elections would have to be held before the end of this year.

Nepal is the head of SAARC this year, and the next SAARC summit was supposed to be held in Kathmandu in April, 2013. However, the Nepalese government will formally notify the delay, and the next summit is unlikely to be held before September, 2013.