Construction work on the Middle Marsyangdi hydropower project that began three years ago has ground to a halt after the contractor unilaterally stopped the work, citing Maoist threats.

The Rs 14 billion project in Lamjung is being built with a German grant covering 85 percent of the cost and the government is paying for the rest. But the contract stipulates that Nepal Electricity Authority (NEA)will have to bear any cost overruns due to delays.

Now, the contractor, consultant and donor have all brought the project to a standstill, citing the insurgency. The only people who benefit from this are the foreign parties involved. Nepali taxpayers will have to pay Rs 2 million for every day that the project is delayed.

The contract NEA signed with the civil contractor, Diwidag Dragados-CWE JV (DDC JV) has no provisions for contingency in case the project was affected by the insurgency. "The problem was not foreseen then," says an NEA official, defending the lapse. "We did not know that it would have reached this scale." By the time construction on the 70MW scheme began in June 2001, Lamjung was already a Maoist stronghold.

Independent analysts, some NEA insiders and ex-project managers smell a rat, and say this was a deliberate lapse to make money on cost overruns. "This is Kali Gandaki all over again, only it is going to cost us much more," says one official. DDC JV has been claiming between Rs 1.5-2 million for every day that the project is delayed under the open-ended FIDIC contract which allows the contractor to claim 'variation'. NEA should have learnt its lesson from the FIDIC contract on Kali Gandaki, for which Nepali taxpayers ended up paying the Italian contractor up to $50 million in overruns, which is technically illegal.

"We have already told the contractor that they stopped the work unilaterally and so they will have to bear the consequences," said one NEA official. But the same official did not rule out the Authority ultimately having no legal recourse.

DDC JV has made it a habit to claim overruns citing security conditions. Last year, it revoked the contract unilaterally and stopped work after it did not receive the claimed amount. A compromise was finally struck between NEA officials, DDC JV and the German development bank, KfW, at a meeting in Frankfurt and work resumed in February.

But the dispute was far from settled. DDC JV's original bid for civil works was E 77 million, but extra claims have already topped E 60 million. Now, the contractor is sure to claim for the past month that the project has been at a standstill.

NEA says the claims are not justified by the contract, and it is up to the consultant to approve or reject the claim. Eyebrows have also been raised at the time the consultant, Fischtner Joint Venture, is taking to give its verdict. Minister of State for Water Resources, Thakur Prasad Sharma is livid. He told us: "The delay is because the consultant is incompetent."

While the confusion continues, every day that the project is delayed it will benefit the contractor and will mean additional losses for the country. A top NEA official told us on condition of anonymity that in late 2002, NEA intecepted a message that was passing between the foreign parties involved, which indicated that their strategy was to prolong the project as long as possible.

Both the contractor's representative and the consultant refused to answer our queries despite numerous attempts to reach them. An official of the KfW in Germany said his office was not based in the project site, and so they would refrain from making public statements. Officials at the German Embassy in Kathmandu said they did not want to make any comment at present.

One former manager of the project told us that the Maoists had assured that they would not disrupt the project. "The construction was not affected even when 24 security people were killed in a Maoist attack near Besi Sahar two years ago. German officials made an inspection said the security situation was under control at the project site." He says there are grounds to believe that the contractor is playing the insurgency card to jack up costs. "Having seen the Italians getting away with it on Kali Gandaki, they feel they can do the same in Mid-Marsyangdi," the official added.

The Public Accounts Committee of the dissolved parliament had investigated the cost overrun claims on Kali Gandaki and said a similar FIDIC contract would allow contractors to illicitly raise costs to make up for a low initial bid. It had recommended the government set up a committee to monitor the Middle Marsyangdi contract. No such committee was ever formed.