Kathmandu: Kathmandu on Friday signed a long-delayed agreement with New Delhi to build Nepal’s biggest hydropower plant in a bid to kickstart economic growth and ease crippling electricity shortages in both countries.

A vast network of fast-flowing rivers through the Himalayas leaves huge untapped hydropower resources at Nepal’s disposal, but disagreements over perceived threats to Nepalese sovereignty have stalled earlier agreements to develop joint ventures with India.

The deal will see Indian infrastructure giant GMR construct a 900-megawatt hydropower project on Nepal’s Karnali river that is forecast to generate electricity from 2021 onwards.

“This is a historic moment for Nepal and India as Nepal is signing a great agreement with GMR,” India’s Home Minister, Rajnath Singh, said at the signing.

According to GMR, 12 per cent of the power generated by the $1.5 billion (Dh5.51 billion) Karnali project will be given to Kathmandu free of cost, with the remainder exported to India and possibly Bangladesh.

“India is very happy with this deal,” said Singh, who was in Kathmandu for talks with his counterparts from the eight-nation South Asian Association for Regional Cooperation summit.

The deal will provide Nepal with a 27 per cent share of the equity, with GMR agreeing to transfer complete ownership of the project to Kathmandu 25 years after the plant begins generating electricity.

“This agreement has opened doors for future plans to utilise Nepal’s natural resources for the benefit of its people,” said Nepalese Home Minister Bamdev Gautam.

Kathmandu has also approved a power trade agreement with New Delhi, according to Nepal’s Information Minister Minendra Rijal but this will be signed at a later date.

Nepal’s total installed power generation capacity currently lags at just 750 megawatts — less than two per cent of its potential.

That is insufficient even to meet Nepal’s own energy needs, forcing the country to endure power cuts of up to 12 hours a day and purchase fuel from India, itself an importer of petroleum products.

India’s new Prime Minister Narendra Modi has sought to deepen energy ties between the two neighbours, securing a commitment to fast-track the Karnali project during his visit to Kathmandu last month.

Although New Delhi has traditionally exerted huge influence in Nepal, Beijing has recently intensified its engagement with the Himalayan nation, pumping billions of dollars into infrastructure projects ranging from roads to hydropower plants.

Nepal has endured prolonged political limbo over plans to draft a new constitution since 2006 when former rebel Maoists laid down arms and signed a peace deal, paving the way for constituent assembly polls two years later.