PPP Model of Investment in Hydropower

The Electricity Act of 1992 paved the way for participation of the private sector in  electricity generation. The privatisation of Butwal Power Company in January 2003 further augmented the domestic private sector’s role in hydro-power development and established Himal Hydro and General Construction Company and Nepal Hydro and Electric Ltd as Nepal’s indigenous hydropower companies with international reputation. However, the role and capacity of the private sector in Nepal’s energy development so far has, at best, only been supplementary.

Role of FDI

Eighty-one different firms have taken approval to invest in Nepal’s hydropower sector, of which 23 projects that generate 174 Megawatt (MW) have been completed — only 27 per cent of the total generation capacity. 

Besides, the private sector has not developed a single storage type of project as it needs high cost and effective resettlement policy. The two largest projects in the country — Khimti and Bhotekoshi that contribute 96 MW — have been constructed with substantial 

foreign direct investment (FDI).

Nepal’s gross domestic savings is not high and nearly three-fourth of all development expenditure is met by foreign aid. Therefore, to harness 42,000 MW of technically and economically feasible hydroelectricity, which requires billions of dollars, there is no other alternative but to mobilise FDI.

However, except for Khimti and Bhotekoshi, there has been no major investment. The reason is Nepal’s volatile politics, bureaucratic hassles and chaotic labour unions, which frightens investors.

Government Policies

In the last few years, the government came up with a series of hydropower-friendly policies to attract domestic investment in the energy sector through tax rebates, availability of loans at concession, increased power purchase agreement (PPA) rate, and waived value added tax on construction materials. All hydropower projects being developed by Independent Power 

Producers (IPP), who have signed PPA with the Nepal Electricity Authority (NEA) and are yet to start construction, are entitled 

to these benefits.

The government raised the PPA rate by 20 per cent. Under the new agreed rates, the projects will get Rs 8.4 and Rs 4.8 per units in winter and summer respectively. The NEA signed PPAs worth 714.77 MW during 2010-11. This is almost double the total capacity of PPA signed in the past. But the approach overlooked local component, because of which various

issues including those related to land acquisition and compensation, local participation and ownership have stalled many projects. This proves that besides capital investment, project proponents require strong cooperation from the locals to utilise local resources.

The PPP Model 

The Chilime Hydropower Project, which has been developed under PPP model, is an example of how local participation and 

ownership can facilitate timely completion of the projects. In the project developed by Chilime Hydropower Company Limited, majority of shares (51 per cent) belong to the NEA, 10 per cent is owned by locals of the area, 25 per cent by its staff and the remaining 14 per cent shares were floated in the market for general public.

Chilime is a perfect example of how to develop a capital-intensive hydropower project in a country where there is inadequacy of 

resources and a spectrum of local issues. Giving people living in the project area ownership in the project not only puts legal claims at rest, it also facilitates acquisition and compensation issues.

Additional Benefits

The PPP model also channelises scattered capital in the form of remittances or other means, putting them to productive use. Another advantage of this model is that since the risk is equitably shared by all parties including locals, there is a greater transference of responsibility which enhances efficiency and guarantees higher returns. Besides, local participation in the project in the form of investment and labour creates multiplier effects in the local economy, with higher levels of employment, increased labour productivity and higher consumption levels. Research also confirms that the durability and sustain-ability of projects increase with meaningful participation of local communities.

Besides the above mentioned benefits, the PPP model helps in poverty reduction by bringing socio-economic growth with 

higher level of empowerment of local people. So, while both domestic and FDI is crucial to address Nepal’s energy crisis, the government must ensure a win-win situation by creating a conducive investment climate that benefits national as well as local economy.

(This article was published in The Himalayan Times on 17th June, 2012 and can be seen in following link

http://www.thehimalayantimes.com/perspectives/fullnews.php?headline=PPP+model+of+investment+in+hydropower&newsid=MTI3NQ==)