SAP has drastically changed the infrastructure sector financing modality specifically in the hydropower sector. It required loan recipient countries to undertake an economic reform programme under SAP to be eligible for loans from international financing agencies.

--BY KAMAL RAJ DHUNGEL

Nepal’s development history, particularly hydropower, is long. Nepal developed its first hydropower project more than a century ago compared to other development initiatives. Hydropower has long been a coveted sector, and thus a target of foreign aid. Starting with the Pharping project in 1911, built with British assistance, Nepal’s hydropower sector has attempted to harness these interested investments to unleash what most believe could be an extremely profitable and beneficial industry for Nepal and the region alike.  

This realisation, however, was not coming into action until the plan development initiative was started in 1956. Grant played an important role in the construction of some hydropower projects. India, China, and the former USSR were at the forefront to provide technical and financial assistance to construct some notable hydropower projects. Pardi (1 MW), Trishuli (21 MW) and Devighat (14.1 MW) were built through Indian technical and financial assistance. Similarly, the former USSR built the Panauti hydropower project having a power generation capacity of 2.4 MW. Likewise, two hydropower projects, Sunkoshi (10.5 MW) and Seti (1.5 MW), were built with financial and technical assistance from China. These projects were the outcomes of the competition between India and China to put Nepal into their folder.

The mode of hydropower development has changed from grants to loans over time. Kulekhani hydropower project (92 MW), the first reservoir project in the country, was built with loans from Japan and Kuwait. Marsyangdi (69 MW) and Middle Marsyandi (70 MW), Kaligandaki ‘A’ (144 MW) and Upper Trishuli 3A (60 MW) were built from the loans of KfW Development Bank, Asian Development Bank (ADB), Japan International Cooperation Agency (JICA)  and the World Bank (WB), and China, respectively.

Financing in hydropower projects has taken another mode over time. In the decades of the 1980s and the 1990s, the WB, International Monetary Fund (IMF) and International Finance Corporation (IFC) designed and implemented Structural Adjustment Programmes (SAP). SAP has drastically changed the infrastructure sector financing modality specifically in the hydropower sector. It required loan recipient countries to undertake an economic reform programme under SAP to be eligible for loans from international financing agencies. These reforms were intended to allow the free market to have a larger role in supporting a recipient nation’s economy. Economic reforms were being undertaken to focus on foreign direct investment (FDI) in Nepal, particularly in the development of the hydropower sector.  

Large international companies such as GMR and Sutlej (India) and parastatal companies such as Statcraft (Norway) are eligible for collaboration with international financial institutions (IFIs) to provide necessary funding for larger hydropower projects. In this line, the US tied up with some IFIs and invested in Bhotekoshi (45 MW) and Norway helped to finance Khimti (60 MW). Both these projects have received not only finance but also technical assistance from both countries. The early success of Bhotekosi and Khimti promised a successful future for FDIs in Nepal. But the political instability that has prevailed since 1996 has slowed the inflow of funding. It can be hoped that projects like Upper Karnali and West Seti will show foreign investment groups that Nepal can again be considered a worthwhile investment setting.

While considering the hydropower development financing modality through domestic capital, Jhimruk Hydropower Project (12 MW) built by the Butwal Power Company (BPC) is an example of a Nepali-funded endeavour. Chilime Hydropower Project (12 MW) was constructed through a combination of internal capital and technical expertise. Upper Tamakoshi (456 MW) was built by mobilising domestic resources. In a similar manner, Maikhola Hydropower Project (20 MW) is being constructed with the funds from Non-resident Nepalis.

Now that we have sorted the various funding categories of Nepali hydropower, FDI will be the dominant mode of hydropower financing in the future. Since Nepal has limited in-country capital, it is impossible for the country to develop large scale hydropower projects that will fulfil the shared goals of 1) electrification, 2) support of industry, and 3) power trade to India.  

Mr. Dhungel is a professor of Economics at Central Department of Economics, Tribhuvan University