Hydro shares for locals

The provision of mandatory shares for affected locals in hydro projects introduced the concept of equity investment in rural communities. As a result there is a frenzy of sorts—and often one gets a sense that buying shares is akin to winning a lottery. Until recently long queues were often seen outside banks facilitat­ing the purchase of shares. While the introduction of automated process of late has eased the pro­cess somewhat, the questions about risks and returns—wheth­er or not applicants understand market risks—remains. Do these shares actually offer value for money in the long run? How do poorer and marginal­ized households manage funds required to buy these shares? What can government and developers do to ensure that locals—who have very little finan­cial literacy—are not exposed to market risks that can wipe out their entire savings?

 

A new comprehensive study conducted by the International Financial Cooperation (IFC), a pri­vate sector arm of the World Bank Group, seeks to answer some of these questions.

 

Nepal has taken an innovative approach in tackling complex issues in project development, particularly benefits sharing and ensuring cooperation of affect­ed-locals. This idea of offering local shares gives locals a sense of ownership and thus prevents any potential disruption to the projects. As Nepal government seeks to develop over 10,000 MW of hydropower in the next decade, IFC estimates that the value of local equity alone could be around half a billion dollar.

 

That is a significant amount of capital to be raised from poorer, rural and marginalized house­holds. This could in turn have serious implications on house­holds’ debts levels in rural com­munities. As the IFC study and other anecdotal reporting sug­gest, households have disposed of assets or borrowed money at high interest rates to invest in these seemingly ‘lucrative projects’. But the internal rate of return for these projects remains uncertain as delays and costs overruns hit the initial estimate.

 

Take for example the Upper Tamakoshi, hailed as a model project built with domestic cap­ital. The initial project cost was estimated to be around Rs. 35 billion ($ 330 million approxi­mately). But according to revised estimates, the final price tag could nearly double—costing over Rs. 60 billion. Then there is the issue of falling price of the shares. Since 2014, the value of hydro shares has fallen by almost one-third. Even so the share-buying frenzy for hydropower companies con­tinues unabated. This is clearly irrational and shows the failure of communicating market risks to prospective investors.

 

While allocating local shares offer a unique way to share the benefits of development with communities, particularly the vulnerable ones, protecting them from market risks—as well as creating a sustainable financ­ing mechanism—is critical if this innovative policy is to have the desired result.

 

The IFC study is timely and its recommendations, particular­ly for creating a dedicated fund to enable access to finance in favorable terms, makes real sense; locals, who meet certain eligibility criteria, can be giv­en concessional loans with the provision of shares as collateral. The study further recommends a mix modality of grant and loans in the case of mega proj­ects—where the dividends can be used for servicing the loans. The government also seems to be taking some steps to put in place additional safeguards.

 

The Ministry of Energy is in the process of formulating a new guideline whereby the public can buy shares during IPO by making just a 10 percent down payment, and linking the rest of payment to the progress in project implementation.

 

In promoting local shares, one also needs to be mindful of the license period for hydropower plants—at the end of which the entire ownership is transferred to the government. Some projects may not pay off enough dividends to cover the interest plus inflation within that period. For house­holds with cash to spare, this may be a fair gamble. But for poorer households, won’t the money be better spent elsewhere?