VZCZCXRO4132
PP RUEHCI
DE RUEHKT #0704/01 1721030
ZNR UUUUU ZZH
P 201030Z JUN 08
FM AMEMBASSY KATHMANDU
TO RUEHC/SECSTATE WASHDC PRIORITY 8708
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UNCLAS SECTION 01 OF 02 KATHMANDU 000704 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: CASC EINV KIDE OPIC PGOV NP
SUBJECT: NEPAL: 2008 REPORT ON INVESTMENT DISPUTES AND 
EXPROPRIATION CLAIMS 
 
REF: SECSTATE 43784 
 
¶1. Post's submission of its 2008 "Report on Investment 
Disputes and Expropriation Claims" follows: 
 
Begin Text. 
 
NEPAL 
 
The United States Government is aware of two (2) claims of 
United States citizens that may be outstanding against the 
Government of Nepal (GON). 
 
¶1. a.  Claimant A 
 
   b.  2006 
 
   c.  Claimant A performed services for the Nepal Electric 
Authority (NEA) under a consulting contract agreement for 
construction design and supervision related to the Kali 
Gandaki "A" hydroelectric project.  The Kali Gandaki project 
has been operational since June 2002 and was formally 
inaugurated on January 22, 2004, by then King Gyanendra. 
 
On March 7, 2006 Claimant A sent a letter to NEA, requesting 
the contract be closed and the final retention moneys paid. 
Claimant A asserts that all of its contract obligations have 
been fulfilled, including the submission of a final report 
and as-built drawings.  The amount due is USD 234,366.58. 
Since October of 2006, Claimant A has sent six follow-ups 
requesting the final retention payment.  The last request was 
dated May 7, 2008. 
 
Since 2006, the NEA has asserted that Claimant A was not 
entitled to full payment because Claimant A had failed to 
fulfill all of its contract obligations.  However, in 
response to Post's inquiries in June of 2008, NEA stated that 
payment of the retention amount had been approved.  However, 
due to financial problems, NEA would be able to release the 
funds until its new budget is approved.  (Note: The NEA has 
reportedly included provisions for the payment to Claimant A 
in its budget for the next fiscal year which will begin July 
15, 2008. End Note)  Claimant A has reportedly been notified 
through informal channels of the NEA's intentions to send 
payment at the start of the next fiscal year. 
 
¶2. a.  Claimant B 
 
   b.  2001 
 
   c.  On July 21, 1996, Claimant B and the Nepal Electricity 
Authority (NEA) entered into a project for a 36 MW hydropower 
generation project on the Bhote Koshi river in Nepal's 
Sindhupalchowk District.  Claimant B was to build and operate 
the facility, while the NEA was to purchase all 36 MW of 
generated power.  In May 2001, Claimant B issued an invoice 
to NEA for the period of May 14-June 14, 2001.  NEA did not 
pay the invoice in full and provided no justification for the 
reduced payment.  Claimant B protested the short payment but 
received no formal written response.  According to Claimant 
B, NEA has continued to underpay for the generated power ever 
since.  As of March 2007, the amount due was reportedly over 
USD 5.4 million. 
 
Since 2001, Embassy representatives have met periodically 
with the Managing Director of NEA and the Secretary of Water 
Resources to urge resolution of the dispute and in late 2002 
and early 2003, Embassy representatives and the Ambassador, 
at the request of Claimant B, asked the Prime Minister, the 
Finance Minister, the Foreign Minister, and the Water 
Resources Minister to address the payment dispute.  In 
response to the Embassy's efforts, the Department of Energy 
Development (DED), under the Ministry of Water Resources 
(MoWR), issued a letter in early May 2003 addressed to both 
Claimant B and the NEA urging them to resolve their dispute. 
In late May 2003, Claimant B and NEA sent separate letters to 
the MoWR and the DED asking them to clarify their request. 
The Charge then discussed the dispute with the Water Resource 
Minister, again urging an amicable settlement.  During the 
rest of 2003, Claimant B tried to settle the dispute; 
however, the NEA rejected all efforts to do so. 
 
 
KATHMANDU 00000704  002 OF 002 
 
 
Throughout late 2003 and 2004, the Embassy remained in close 
regular contact with Claimant B's local office and with the 
hydropower plant itself.  Embassy representatives, the 
Ambassador and Charge, as well as visiting State Department 
officials, raised this dispute whenever possible at high 
levels within the Government of Nepal.  In late April 2004, 
Claimant B requested that the Embassy alert the Government of 
Nepal that it planned to make one last attempt to reach an 
agreement with NEA prior to activating the dispute resolution 
clause in the project agreement. 
 
In March 2005, the MoWR formed a subcommittee comprised of 
representatives from the MoWR and the NEA.  The subcommittee 
submitted a recommendation to the NEA Board with a divided 
opinion (two in favor of Claimant B and two in favor of NEA). 
 In response, the NEA Board, in May 2005, constituted an 
independent committee, including the Water and Energy 
Commission Secretariat Executive Director, the Joint 
Secretary from the Ministry of Law and Justice and the Joint 
Secretary of the Ministry of Finance, to investigate the 
dispute.  The committee met several times and set a June 13, 
2005 deadline, but that was disbanded when one of the senior 
members retired. 
 
On March 24, 2006, a private Nepalese energy company, which 
owned 10 percent of the shares, purchased an additional 75 
percent from the original U.S. investor.  A year later on 
March 28, 2007, the Nepalese company further increased its 
ownership with the acquisition of an additional 10 percent 
from the International Finance Corporation (IFC), a member of 
the World Bank Group.  (Note: An American engineering company 
owns the remaining 5 percent.) 
 
In May 2007, after the Nepalese energy company had acquired a 
95 percent ownership interest, Claimant B re-started 
negotiating with the Nepal Electricity Authority and the 
Ministry of Water Resources to work out an amicable 
settlement of the payment dispute, with the aim of avoiding 
litigation. 
 
On June 11, 2008, Claimant B and the NEA reached an agreement 
to settle the seven-year-old dispute over the purchase of 
what was characterized as "excess power."  Claimant B agreed 
to renounce its claim for past payments for the "excess 
power" and NEA agreed to purchase all of the "excess power" 
generated at a new agreed upon rate.  The party's original 
Power Purchase Agreement (PPA) was for 36 MW of electricity, 
yet when at full capacity Claimant B produces 45 MW of 
electricity.  To date, NEA has refused to purchase the 
additional watt hours under the original PPA. The new 
agreement will reportedly be finalized after Claimant B 
renews its license and signs a new Power Purchase Agreement 
(PPA) reflecting the full generating capacity of the plant. 
 
END TEXT 
POWELL