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August 2015 Economy and Policy

Published on: 2015-08-23 13:23:30     1416 times read    0  Comments
Social Issues in Hydropower Development

For the first time, this policy came up with the concept of Build, Operate, Own and Transfer (BOOT) to fulfill these objectives. The developer builds, operates, and owns the project for a given period and then transfers it to the government in good condition for free.

--By Prof Kamal Raj Dhungel

Maintaining and developing water resources requires significant public and private investment. Since resources are scarce, right investment decisions should be made from an economic point of view. Setting up policies and programmes along with their implementation strategies is a prerequisite to also properly address the social costs and benefits. Initializing water resource development, among other sectors, needs efficient technology and effective management to minimize costs and to maximize social benefits. 

Careful consideration must also be given to which part of the population will be the ultimate beneficiaries of the investment. Investors invest their capital when they have adequate certainty of reasonable profit margins together with the recovery of fixed costs in a reasonable period of time. 

Hydropower is one promising sector which can make Nepal prosperous, thereby enhancing economic growth and sustaining poverty reduction. This hinges on developing the country’s water resources properly. An open and liberal policy formulated after there storation of democracy in 1990 had started giving positive results in hydropower development.

Conducive Policy
The government of Nepal has recognized the role of the private sector in harnessing water resources. Subsequent to the adoption of the policy of economic liberalization in the 1990s, hydropower development took a new turn. The private sector directly and indirectly is involved in generating hydroelectricity. The government has had a hydropower policy since 1992 in order to attract private investment. The major objective of this policy was to meet the electricity demands of urban and rural areas and meet the needs for industrial development. 

The rationale behind this policy was to (a) make alternative arrangement to meet interim demand, (b) meet demand of hilly and remote Himalayan regions deprived of electricity from the national grid and (c) extend distribution system to rural areas. The policy intended to limit private sector participation in hydropower projects up to 100 MW and favoured public sector for projects bigger than 100 MW. 

The Electricity Act of 1992 along with the policy was, to some extent, very progressive providing excellent incentives to develop hydropower in Nepal.  Power developers could get a generation license valid for 50 years, income tax holiday for 15 years, income tax when applicable after 15 years at the rate of 10 percent below prevailing rates, energy prices at rates to allow a 25 percent return on invested share capital, only one percent customs duty when importing goods for the projects, and exemption on import license and sales tax. The immediate reaction to the policy of economic liberalization has shown positive results in installing new hydropower projects in the country.

In 2001, the government promulgated a new Hydropower Development Policy with necessary amendments to attract private sector investors for the development of hydropower. The objectives of this policy were to (a) generate electricity at low cost, (b) link electrification with economic activities, (c) provide adequate and reliable electricity at a reasonable price, (d) extend rural electrification, and (e) develop hydropower as an export commodity. 

For the first time, this policy came up with the concept of Build, Operate, Own and Transfer (BOOT) to fulfill these objectives. The developer builds, operates, and owns the project for a given period and then transfers it to the government in good condition for free after the completion of the license period. This policy also guarantees that none of the hydropower projects, transmission and distribution constructed by the private sector will be nationalized. The policy provides a number of concessions to the private sector developer. 

Despite having such policy arrangements, a policy lacuna exists when it comes to the possible participation of the private sector in the development of hydropower. In every successive government, policies are subject to change. Frequent changes in policy put investors in a dilemma. It can put their investment into the bigger risk zone. The unstable administrative procedures,along with extensive malpractice prevent the free interplay of policies favourable to private investment. 

Power Purchase Agreement
“A power purchase agreement (PPA) is a legal contract between an electricity generator (provider) and a power purchaser (buyer, typically a utility or large power buyer/trader). Contractual terms may last anywhere between 5 and 20 years, during which time the power purchaser buys energy, and sometimes also capacity and/or ancillary services, from the electricity generator. Such agreements play a key role in the financing of independently owned (i.e. not owned by a utility) electricity generating assets. The seller under the PPA is typically an independent power producer (IPP)," (Wikipedia). 

In the Nepalese context, the sole buyer of power is NEA. For the hydropower projects up to 100 MW developed by the private sector, a flat energy buying rate of Rs 8.40 and Rs 4.80 per unit during the dry and wet season respectively is fixed. This rate could be varied in case of hydropower projects which are small in size, say below 25 MW, implying that this rate is applicable to those power projects whose generating capacity ranges from 25-100 MW. It indicates that the energy buying rate depends on the electricity generation capacity.  The buying rate of electricity differs as the size of the hydropower project differs. 

The specific flat energy buying rate as mentioned is applicable for both the domestic and foreign developers.  NEA has concluded a PPA with the respective companies (developer). Hydropower projects, numbering 62 with electricity generation capacity of 1206 MW are under construction as the consequence of this agreement. The number of under construction hydropower projects is given in the table below.

Social Concerns
Social issues are crucial and critical for a hydropower project to kick off. Investment in hydropower, if attempted without addressing them, will end up self-defeated.  Project sites can impact the livelihood of locals including a) arable pasture and forest, b) residential settlements, c) fisheries, d) health hazards, e) educational transition. These issues need careful attention. Local people expect much from hydropower projects. They expect the gains to outweigh the impact on their livelihoods.

Independent Power Producers (IPPs) are unlikely to address the demands of local residents on social issues. Adequately addressing these demands changes the equation for the return on investment. Expected revenue likely to be obtained from electricity sales may also be delayed which causes profits to narrow in the short and the long term. Operating costs for the power producer will increase based on continuing costs to address social concerns.

One avenue for the power producers to offset the increase in operating costs is to seek further subsidies from the government. Leaving these issues unaddressed is also not an option as local opposition may cause the projects to be not approved at all. The roles and responsibilities of addressing these issues by either the IPPs or the government or a combination need to be outlined. The government should have a road map on how social issues are addressed prior to the start of any hydropower project.  

A number of hydropower projects are currently under construction through private sector investment. Some are funded by Foreign Direct Investment (FDI) while others by domestic private investment. The developers of these projects have agreed to develop these hydropower projects under the BOOT system. Under this system, the developers are responsible for meeting the demand of the local people for the proposed hydropower project. Thus, developers have to consider meeting the local demands prior to starting the construction work. Locals may create an unfavourable environment for the proposed hydropower project if their demands remain unfulfilled. Developers will face several problems including vandalism of the physical property on the project site. 

The author is retired Professor of Economics, Tribhuvan University.


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