Benefit Sharing in Hydropower

The management of water resource requires cooperation of various stakeholders including that of the community living in the areas where the hydro resource occurs. It is natural that members of the public from that area would like to have some share in the benefits to be accrued from the development of the project. The successful benefit sharing in water basin can be a tool for poverty reduction, sustainable development and long-term political stability in the country.

After the promulgation of a new constitution, Nepal is going to be a federal state with local, provincial and a central government. Though the demarcation of federal provinces has not been done till now, the issue of benefit sharing in hydropower will be very contentious as there are no clear cut provision of sharing benefits in terms of revenue, royalties, fees, preferential electricity rates between states, and it is very likely that mega hydropower projects will lie in more than one state. It will become more cumbersome and time taking to develop infrastructural projects as it will be necessary to take permission from different states.

POSSIBLE CONFLICT

Water conflicts may arise over rivers with upstream hydropower use and downstream irrigation use. This could occur because upstream water release may not coincide with irrigation needs of the lower riparian areas. Additionally, if there is overgrazing and deforestation in the watershed area, it may bring floods in the downstream plain area. It is the potential cause of conflict between hydropower in an upstream and other economic interests in the downstream.

BOON OR BANE?

Furthermore, benefit sharing between developer and local people is also a very crucial issue in construction of hydropower projects in Nepal as local people feel that they have primary right over natural resources occurring in their surroundings. The ILO Convention No 169 has also given special rights to use natural resources for indigenous and tribal people, though; it has not been defined clearly. On the basis of this legally binding instrument, local people demand a higher stake in hydropower and other beneficial projects. It creates a conflict over right to natural capital which leads to increase in cost of production of hydroelectricity by extending the time period. There are a number of projects in which smooth operation has been disturbed by the issue of benefit sharing.

Upper Tamakoshi (456 MW), which is the largest hydropower project under construction, is being developed using domestic resources. The local people have demanded higher a percentage of share for people who are residing in Dolakha district given the past evidence of successful projects like Chilime, Butwal Power Company and so on. For ensuring investment in the project, this hydro electric project has also given shares to employees of institutions such as Provident Fund, Citizen Investment Trust, Rastriya Beema Sansthan, Nepal Telecom, and Nepal Electricity Authority (NEA) who have no direct link to the project.

Due to this reason as well as attractive rate of return of the project, the labourers who have been working in the project also demanded shares, which is very unique as there is no such practice in other parts of the world. As there is no certain principle to allocate share for workers, the board of directors of the company remained indecisive for several weeks, which led to the halt of regular work. Though the project was disturbed for a month or so due to this reason, the construction period has increased by almost a year because of difficulties in construction work in the rivers during monsoon.

SENSE OF OWNERSHIP

Several other projects, namely Khimti (60 MW), Bhotekoshi (45 MW), Buddhigandaki (1200 MW), Upper Balefi (50 MW), have been facing problem associated with benefit sharing. The local residents have demanded shares in Khimti and Bhotekoshi, which are completed and have been operational for several years. People of affected village development committees (VDC) have not allowed the construction of transmission lines which were damaged by the Jure landslide for evacuating power from Bhotekoshi. The Upper Balefi project (50 MW) could not go into construction smoothly due to the the demand for benefit sharing by local villagers.

The first hydroelectric project which solved the issue of benefit sharing successfully in Nepal is Chilime, which has a total capacity of 22 MW. This is the first project developed with domestic investment and manpower and has faced a similar fate as the local people demanded 10 per cent share after the completion of the project. It means the local people who demanded the shares are free from sharing risk as the construction period was already over. In this scenario also, a 10 per cent share was given to the people of affected VDC and residents of Rasuwa district. The process of awarding local people with shares has helped to develop other subsidiary projects of Chilime namely Sanjen (42.5 MW), Upper Sanjen (14.8 MW) and Rasuwagadhi (111 MW) in a smooth way as the local people have taken ownership of the projects. It proves that the local level obstacles related to hydropower development can be minimised if some portion of ownership of the project is transferred to local residents in a way that they are getting benefits from their resources.

MEGA DISPUTES

Despite successful resolution of conflict in small hydropower projects, it is still a disputable issue in case of a mega hydropower projects as a large number of people are affected by it while building dams, access road, power house and transmission lines. Moreover, the established system of providing 10 per cent share to local people is not pragmatic as this level of investment in large project is too huge. Therefore, government, developers, investors and other stakeholders, including local people should come with mutually agreeable solutions to hasten the pace of hydropower development in Nepal.

(This article was originally published in The Himalayan Times on 2 August 2015)

License Raj in Hydropower Development

The approaching winter promises to be colder and darker this year as the nation continues to reel under energy crisis. The government’s promise to keep load-shedding below 12 hours per day has fallen into soup after India’s northern grid collapsed in July.

The energy emergency may have forced ministry to push through few acts and get few projects running in the last few years, but any mega hydropower project requires at least five years for completion. The contingency plan of running diesel plants or importing 200 MW from India is an expensive, not to mention unsustainable plan. So, there is little alternative but to cope with long hours of load shedding in the meantime. 

What is more worrisome for the people is the lack of sense of urgency with which the projects are being dealt with at the ministry. The reasons range from simple bureaucratic obstacles to more serious policy bottlenecks in issuing license to the building companies.

According to hydropower act, it is mandatory to obtain hydropower development license from the Department of Electricity Development (DOED) for survey and generation of projects with more than 1 MW installed capacity. The DOED provides license for the period of five years. This provision may be suitable for projects which are of medium scale, but it is impractical for projects with high capacity. The longer time required to manage investment, conduct various feasibility and impact assessment studies including Environment Impact Assessment (EIA) and Social Impact Assessment (SIA), etc and the construction of infrastructures for such projects, make present license provisions unfeasible.  

Few months back, the Energy Ministry scrapped survey license of Nepal Water and Energy Development Company (NWEDC) for not submitting its Environment Impact Assessment (EIA) report and not completing Power Purchase Agreements (PPA) with the Nepal Electricity Authority (NEA) on time. The 216-MW Upper Trishuli-I is a mega hydropower project which requires lot of time, energy and resources to conduct environmental assessments and make other necessary preparations including financial closure, which the project has recently completed. The government clearly failed to take these into account while taking its decision. The major stakeholders of the project are Korea South East Electric Company (50%), Kyeryong Construction (10%) and Nepali Investors (10%), Daelim Industrial Company (15%) and International Finance Corporation (15 %). 

To be sure, license holding culture among the developers has also been a major challenge for hydropower development in the country. The department of electricity development had issued license of generation for 188 companies in the category of 1-25 MW with total generation capacity of 1178.549 MW. Among these, the validity period of 165 companies expired last year. The tenure of remaining 23 companies will expire in next year. Most of these licenses were issued between 2007-2008 without adequate study. As a result, the real developers are forced to buy the same license from these holders at high costs. 

The ministry must assess the work progress of the remaining license holders and immediately revoke the license of those developers who have not made satisfactory progress. 

One reason why fake developers were able to hoard the license is because the survey license fee for small hydropower in the past was only Rs. 150, which was purchased by officials from the ministry, department and NEA, and their relatives. The license fee has now been raised to Rs. 50,000 which has solved the problem to some extent, but not entirely. Realizing this, the government has amended rules 24 and 25 of electricity regulation of 1993, and increased the price of survey and generation license many folds so that only real developers can buy it. However, some of the hydropower entrepreneurs believe that the new system is impractical because all hydropower projects will not be found feasible to develop. So, the concept of charging high price is not wise idea as it hampers in smooth development of this sector. 

To make the regulation more effective, the one size fits all approach to license distribution must be amended. The licensing provision for large and small projects, storage and run of the river projects, export oriented and projects made for domestic consumption should be different as time, cost and technology used in the projects vary from one to another. 

Some projects like Upper Karnali, Tamakoshi III, Upper Marshyangdi are large hydropower projects and they are constructed for exporting power to India. Similarly, there are other large and medium size projects constructed for domestic consumption. The latter takes relatively less time as construction of transmission lines, power purchasing agreement and other necessary dealings are internally managed as per the local acts. The export based projects are more complicated because they involve foreign governments (and their State governments in case of India).  

If the government formulates a policy where licensing period is determined on the basis of the size, type (storage and R-O-R), orientation (export and domestic consumption) and level of investment, then it will save both the companies and the government from unnecessary hassle, as in the case of Upper Trishuli-I. Moreover, it will bring in more money into hydropower development as entrepreneurs will feel more secure about investing in this sector.

Overcoming Darkness

There is unanimous agreement about the need to expedite hydropower development to meet the nation’s energy demand and fuel growth. However, there is lack of political will and policymaking to back that vision because both are products of a healthy political process, and with national politics scrambled as it is, it is all doom and gloom for the economy.

To make things worse, seasoned governments in the last two decades have tailored priorities to suit their own political ambition, leaving energy development in disarray. What is often understated is, that when energy development suffers, all sectors of the economy suffer.

Call for commitment

There has been no dearth of encouraging initiatives to revive Nepal’s stunted economy but inevitably, policies and programmes are either poorly funded, suffer from lack of effective implementation or remain suspended once the government that initiated them makes an exit. This has left stakeholders, including national and overseas investors, frustrated and discouraged. Hence, Nepal’s economy, which had begun to recuperate after the end of a decade-long conflict, is sliding back into depression. National productivity is at an all-time low and the exodus of skilled and unskilled manpower has accelerated.

To reverse this trend, major political stakeholders must urgently express their unconditional commitment not to hold business and industry hostage to their political agenda and agree on a long-term development pla

ns and programmes for each of the priority sectors,

including energy, with pre-defined budgetary commitment. If this requires revisiting periodic plans, political parties and the incumbent government must not seek an easy way out.

For hydropower development, this means revisiting the framework where all stakeholders can identify and own their roles at all stages of its development. It also means exercising a bottom-up approach to planning and policymaking and ensuring local support for the programmes by guaranteeing local people’s participation in implementation and the decision-making of the projects.

Lessons to learn

Policy formulation alone will not guarantee results. It has to be followed by effective execution and management of resources. The government should learn from its success-ful ventures in hydroelectric projects in Lamjung, Sindupalchowk, Dolakha and Myagdi.

The political parties had expressed unanimous commitment not to hold economy hostage by resorting to bandhs and strikes during Nepal Tourism Year 2011, but the year saw string of strikes and political violence that put off tourists and hit other sectors of the economy hard.

Hydropower development faced its share of difficulties due to such strikes and obstruction — some with valid underlying reasons, but disputable mode in which protests and demands were expressed. Having said that, it must be acknowledged that unless the projects are able to secure confidence and ownership of the local community, development of infrastructure projects in Nepal will remain a challenge. One way to do it is to allocate certain portion of a project’s royalty to Village Development Committees in form of shares, offer public shares to the locals and adopt a bottom-up approach by taking them into confidence in all aspects of the project. This will not only secure valuable local support and confidence, but also make the project more equitable.

Sense in stability

It is unfortunate that despite repeated expression of concern from stakeholders, government has failed to ensure political or policy stability needed for creating a conducive investment climate. Lack of clear vision in developing export-oriented hydropower projects is a case in point, with political parties standing in favour or against a particular project based on their own political arithmetic rather than their principled position on export-oriented projects.

Similarly, bureaucrats and political actors are divided on the idea of accepting foreign direct investment (FDI) in run-of-river projects and consider them expensive (like Khimti and Bhotekoshi) and an ineffective solution to load shedding problem in the dry season. They also argue that there is no guarantee those companies will reinvest in Nepal or create chain effect in the economy.

On the other hand, foreign investors are reluctant to invest in storage type of projects because of its high cost, difficulty in financing and cumbersome resettlement issues. Furthermore, they are worried about political hazards and risks that such projects have to endure due to elastic commitments of political parties who have a long tradition of signing morally binding documents and not implementing them in practice.

But more importantly, Nepal needs a stable and long-term energy development plan, negotiated, owned and supported by all stakeholders, including investors, developers, locals and more importantly all major political groups. Such plan then has to be implemented and executed with coordination among various line agencies and ministries such as Ministry of Finance, Ministry of Energy, Ministry of Local Development, Ministry of Forest and National Planning Commission, irrespective of change in government.

Way forward

Undoubtedly Nepal’s hydropower sector offers a lucrative investment opportunity and international financial and donor agencies such as the World Bank, Asian Development Bank, EXIM bank of China, as well as national and foreign private sectors have expressed interest and commitment in investing in developing mega projects here. FDI will bring in much needed capital and best practices in terms of technology and management. Besides slashing Nepal’s petroleum imports, mega projects will spur domestic industries with more jobs that can substantially reduce poverty and raise living standards.

When domestic demands for energy is met, Nepal can earn valuable foreign currency by exporting electricity to energy hungry neighbouring economies like India and Bangladesh. Nepal has a historic opportunity not just to propel itself to economic prosperity but also to contribute to energy security in the entire South Asian region.