Submit your Article

 An old debate continues to fester in Nepal: Do we need foreign investment in hydro­power? There has always been a ten­dency in the country to please foreign inves­tors. The past experience of foreign invest­ment in hydropower had proven costly. But thanks to lucrative commission high-level state officials pocket from them, we are surrender­ing one after another hydropower project to foreigners—and for questionable returns.

The former CPN-UML contributed to the cancellation of Arun III. Instead, we signed dollar agreements for Khimti and Bhote Koshi, and the country will continue to pay for these projects in dollars for at least another decade. All major political parties were united in this open loot. There was a lot of hullaballoo over building Budhi Gandaki with Nepal’s own money, and even a petrol tax was raised for the purpose (with the total coming to Rs 37 bil­lion). Yet the project was ultimately awarded to a foreign company via unscrupulous mid­dlemen. Even if political parties disagree on many things, they are one when it comes to pocketing big commissions. The same hap­pened with Budhi Gandaki. Nearly all the projects undertaken with foreign money have been made deliberately expensive. When the World Bank’s IFC entered Khimti, even the PPA rate was revised. These projects given to foreigners generate only a third of the installed power capacity, and yet the state will continue to pay them for 30-35 years.

In this context, a few weeks ago, there was a financial agreement on Trishuli-1. The project would reportedly generate 1,00MW during the winter, and 216MW in the rainy season. Initially estimated at Rs 35 billion, the final project cost ballooned to Rs 65 billion.

Of that money, around 80 percent will be repatriated. Some construction materials and semi-skilled laborers will be Nepali, and some electricity would be added to the grid. But this project has also hindered the entry of Nepali investors into the sector. The PPA of Nepal’s private sector has been stopped after the proj­ect’s ‘connection agreement’. The problem of adjustment of its monsoon-time electricity will be a headache, as NEA has to pay in dollars for spill energy. Interestingly, in this project, the longer the electricity is sold, the more costly it will get.

Certainly, there can be no investment with­out guaranteed return. But we need the kind of investment that benefits both the investors and the country. Here, all benefits accrue to foreign investors. The state is forced to guar­antee investment, provide services, and limit its investment in other neighbors.

Yet domestic investors cannot repay their loans even after generating much electricity. If only 10 percent of the facilities provided to for­eign investors are given to our own investors, plenty of investment can be generated from within the country itself. Yet no such conces­sion is made to potential domestic investors. For instance, the stated government policy goal of getting domestic investment to reduce energy emergency has not been implemented even after it was passed by the parliament. This double standard is at the heart of our hydropower crisis.

Whenever the private sector tries to enter hydropower, the government functionaries rise up to thwart it. A cabinet decision is needed just to cut down a few trees. It takes years to conduct Environment Integrity Index (EII) or Environmental Impact Assessment (EIA). There are hurdles every step of the way, from land acquisition to custom clearance. Generally, there are no such hurdles in the case of foreign investment.

Where we really need foreign investment is in reservoir-based projects. But seldom do the private sector enter these projects as there is no profit. (For instance, Budhi Gandaki’s pay­back period is assumed to be around 18 years.) The private sector cannot pay for West Seti: There is again a long process of payback and the market is uncertain. So why are foreign companies investing in Nepal?

As a Chinese company is interested in Tamor (667MW), Nepalis are excited. But the kind of conditions the Three Gorges forwarded in the case of West Seti will also be replicated in this case, as there is no fixed market for it. Will the Nepal Electricity Authority buy its power tomorrow? At a time the Three Gorges did not trust the NEA with West Seti, in which the NEA itself was a partner, how can it trust the NEA in other projects? This only risks hold-up of licenses.

As it is confident that nobody will come for­ward to build Tamor easily, the BPC has been sitting on Kabeli A (37 MW)—which could be sunk by the building of Tamor—as it expects compensations even without building it. The government has just sold Tamor to a Chi­nese company, with an MoU signed between Nepal’s Hydroelectric Investment Develop­ment Company Ltd. (HIDCL) and Power China Corporation. But the project’s future remains mired in uncertainty.

In Tamakoshi III (650 MW), Norway’s SN Power could have come. This world-famous company had no shortage of equity. But why didn’t it? How can a company backed by a dubious broker named ‘Hey Narayan’ enter a project when the SN Power dared not? Our rulers know foreign investors are not attracted to Nepal’s hydropower. If a PPA is to be opened in the models of Khimti, Bhotekoshi, Upper Marshyangdi, and Chilime, there will be a surfeit of investment.

If there is an agreement on division of spoils among political parties, such agreements will continue to be struck. But where will the power they generate be sold? The political leaders who give orders don’t even need to sign anywhere to be eligible for such commis­sions; they can just verbally instruct the offi­cials of the Investment Board or the Ministry of Energy. Unless there is a mandatory provision of signatures of the leaders who issue such diktats, they will continue to sell our rivers.

Again, we need investment in reser­voir-based projects. But these are not finan­cially attractive. When the private sector does not step forward, the government should step in. We import electricity worth Rs 24 billion, send out even more money in the import of petroleum, and yet we don’t have many ave­nues to increase our exports and reduce our trade deficit. Reducing imports is tantamount to increasing exports. Yet we have no policy to replace imported energy and petroleum with our home-generated power.

Our political leaders seem to have little time to think about the country’s long-term and strategic interests. If they did, the mighty two-third government with a finance minister with a sterling resume would have started construction of reservoir-based projects with state investment. Yet we are forced to continue to indulge in gimmicks like re-exporting palm oil to India to reduce our trade deficit.

There is neither energy security, nor have domestic investors gotten justice. There is a kind of prohibition on the domestic private sector from investing in common (run-of-the-river) projects. Yet foreign investment in such projects is welcomed. We need foreign invest­ment only when our domestic resources are inadequate. If the government has a policy of building reservoir-based projects with the help of private sector, we need not always look up to foreigners. Only then will the country be self-sufficient in energy.

When will the NEA make Upper Arun and Sunkoshi, and when will they start produc­ing power? We also don’t know about the future power demand when they finally come on stream. Thus a kind of darkness has descended on Nepal’s power sector as there is no fixed goal, or imagination. We con­tinue to import electricity despite our huge production potential, we cannot consume the generated power, and we continue to rejoice at foreign investment. How long will this trend continue?

The state does not want to invest in reser­voir-based projects as the ruling parties have to dole out money for its leaders and cadres by entrusting other kinds of projects to for­eign companies. When will our leaders learn to think beyond their immediate interests?

The author, Editor with Annapurna Post, is a veteran hydropower analyst

Last month, India made two important Nepal-related pol­icy decisions. The first was on investment in cross-border hydro­power. It paved the way for India to purchase hydroelectricity pro­duced by third-country investors in Nepal. The second decision was on energy banking. Now India can import electricity from Nepal when we have a surplus and export it to us when we have a shortage. Nepal had first adopted a policy of export­ing electricity in 1991. But all these years, instead of exporting electric­ity, Nepal has been importing it. Proper implementation of the two Indian policies will make Nepal the biggest exporter of electricity in the whole of Asia. From the Panchayat era to the present day, the Nepali state hasn’t accorded due importance to hydropower development. Whereas hydropower projects were developed with aid money in the past, now they are devel­oped with loans. The ailing hydropower sector couldn’t even meet domestic demand.

India had always been an obstacle to Nepal’s hydropower development. It signed a power trade agreement with Nepal but, against its spirit, issued a cross-bor­der trade directive that prohib­ited the purchase of electricity produced by non-Indian compa­nies. It didn’t open its market when foreign investors showed an interest in Nepal’s hydropower. It agreed to build transmission lines, but made Nepal pay the inherent ‘wheeling charge’.

Such ill intention and un-co­operation on India’s part were compounded by Nepal’s own disinclination to be self-reli­ant on hydropower. Our leaders never thought seriously about hydropower development and con­sequently the country ended up being impoverished.

Now, India has modified its policy in line with Nepal’s interests, paving the way for investment in Nepal’s hydropower from all countries. From the very beginning, Nepal had asked India to amend its earlier directive, which essentially placed our rivers under Indian control. For two years since that directive was issued, it had been criticized not just by Nepal but even within India.

An Indian court has instructed the Indian government to shut down its polluting power plants. The Indian government has also introduced a policy to diversify its energy sources, two-thirds of which are fossil-fueled at present, by promoting renewable energy. It needs to do so for a couple of reasons. One, the price of coal has gone up. And two, during peak hours, other energy sources like solar and fossil fuel aren’t as reliable as hydropower.

Yet another reason is political. India is going to general elections in a few months, and the ruling BJP is introducing ‘reforms’. The party was severely criticized for imposing a blockade on Nepal in 2015-16, and a new Nepal-friendly hydro-energy policy is seen as part of the BJP’s move to improve relations with neighboring coun­tries. This policy will have long-term impact in Nepal, provided it is sin­cerely implemented.

Otherwise, it will suffer the same fate as the Mahakali Treaty—a treaty that was approved by a two-third parliamentary majority in Nepal. It was signed over two decades ago, but there has been no progress in its implementation. The provisions specified in other treaties like Koshi and Gandaki haven’t been imple­mented either. As such, excessive enthusiasm about the latest Indian policy is unwarranted, but its sin­cere implementation will transform Nepal’s economy.

A limited market is primarily why Nepal’s hydropower sector doesn’t attract foreign investment. Even then, investors would show an inter­est if they could sell electricity in dollars. Our economy is in ruins because of the severe impact of ‘dol­lar electricity’ (high payment to investors in dollars).

Nepal doesn’t have a consider­able source of dollars besides remit­tances. While our exports are worth Rs 1 billion, our imports are worth Rs 100 billion. The dollars we earn from remittances and tourism are spent on the purchase of essen­tials like food, fuel and medicine. Whereas our revenue target is Rs 835 billion, we spend Rs 845 bil­lion just on the emoluments of our public servants. We have to rely on foreign loans for other capital expenditures. Loans come with strings attached; they don’t serve the nation’s interest.

Nepal’s hydropower sector couldn’t develop because of a scar­city of both investment and market. A sector with apparently boundless potential has thus been crimped. Norwegian company SN Power car­ried out a survey and other nec­essary tasks for signing a contract for Tamakoshi III, a peaking-run-of-the-river project estimated to generate 650 MW energy, but pulled out when India refused to purchase the electricity. It would have built Tamakoshi III had the Nepal Elec­tricity Authority (NEA) signed a dol­lar-denominated Power Purchase Agreement (PPA), as in the case of the Khimti project. SN Power’s fail­ure to see a market for its electricity was also a disincentive.

Let’s talk about domestic inves­tors. Nepal’s private sector is prepar­ing to produce 5,000 MW energy. Although the NEA says that the quota for PPAs has been filled, the number of PPAs has been increas­ing because of political pressure. The NEA is apprehensive; it esti­mates an annual loss of Rs 179 billion resulting from the wastage of 2,250 MW from run-of-the-river projects, which operate to capacity during monsoons but only generate a third of their capacity during winters, and 2500 MW from peaking-run-of-the-river projects.

These stats reveal the NEA’s lim­itations on signing PPAs. But the energy ministry is issuing license after license. Issuing licenses cannot be stopped under the law. While the NEA is overstretched, the energy minister says the country will gen­erate 15,000 MW electricity within 10 years. A former energy minis­ter from the Nepali Congress had even claimed that we will generate 25,000 MW within 20 years. The way the government is functioning, it seems the country won’t even be able to consume 2,000 MW energy in the next 10 years—comparable to the government’s inability to spend the capital budget. Two years ago, the national demand for electricity was 1,247 MW. It was 1,151 MW last year. The demand, instead of going up, is going down. How can we sign more PPAs without ample demand? How can we attract investment with­out PPAs? And how can the gov­ernment collect adequate revenue without investment? How can the country prosper?

Against this backdrop, India’s new policies on cross-border hydro­power and energy banking will con­tribute greatly to Nepal’s hydro­electricity development, provided they are implemented. But Nepal cannot afford complacency. Run-of-the-river projects should be top on the government’s priority list. The NEA and the private investors should not build projects in a hap­hazard manner. Transparency and competitiveness should be sacro­sanct. Only inexpensive electricity can be competitive. The government should be well-prepared to reduce artificial costs. Only by eliminating the pervasive tendency of project investors getting wealthier at the expense of shareholders and con­sumers can our electricity compete in the Indian market.

Bikas Thapa is a hydropower expert and editor of Annapurnapost.com