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FDI in Nepal’s Hydropower Sector: A Focus on the Product

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KUNDAN POKHREL MAJAGAIYA examines the challenges of FDI in Nepal’s Hydro power sector. Focus on selling electricity not on the water sharing, he says.

We have talked a lot about Nepal’s immense potential in hydropower. Unless it is utilized, talks alone are not enough. To develop the hydropower sector, we need foreign direct investment (FDI) because Nepal’s own resources both in the public and private sector cannot meet the financial investment needed to do that. A large investment is required from foreign development agencies and private sector entrepreneurs. However, FDI in itself is not a development but may act as a catalyst for the needed progress in the sector.

The country has an estimated 83,000 megawatts (MW) of hydroelectric potential. If Nepal more effectively harnessed its full potential, the country could meet its domestic demand for electricity as well as export electricity, thus boosting the national economy. Although though hydropower generation received priority in every five-year national plan for many decades, the plans were poorly implemented. Lack of electricity remained a major constraint to economic development and poverty alleviation. Currently, Nepal is harnessing less than 1 percent of its potential hydropower energy and the country depends on bio-fuels, mainly wood, to meet its energy needs. It also spends a lot funds on petroleum products. This has had serious consequences for Nepal’s environment.

Lack of investment is a major problem. The country’s own resources both in the public and private sector cannot meet the financial investment needed for hydropower development. A large investment is required from foreign development agencies and private sector entrepreneurs. Although significant foreign investment has been attracted in recent years, much still remains to be invested for meeting both internal demand and the significant potential for the export of power.

With that backdrop in mind, in this paper, I try to examine the trends, constraints, benefits and challenged regarding FDI in Nepal’s hydropower sector.

Trends & Alternatives
What is needed for Nepal to emerge itself as one of the richest countries in the region is to develop water and human resources simultaneously. In Bhutan, for example, a country of about half a million people, the development of hydropower has been dramatically advanced by the construction of just two hydropower plants with a combined capacity of 1,380 MW. As a result, it is expected that the per capita income will go up from USD 760 to 1,320. In Nepal, the impact of hydropower development may not be that dramatic, but it has been established that it could be the driving sector in economic development and a major resource to alleviate poverty.

A macro-economic study has concluded that in order to eradicate absolute poverty in households, the country needs to register 8% economic growth rate. This will help to bring the level of percentage of population below poverty line to 10% and by 2027 there will be no household in absolute poverty. No other sector of economy other than hydropower is in a position to help achieve this goal. Thus, the solution of poverty alleviation is closely linked with hydropower development in Nepal.

Water is an important natural resource of Nepal. The immense quantity of water available in the country and its potentiality to generate hydro-based power provide us the opportunity of overcoming the barriers of economic development as well as improve the environment. Nepal has some of the world’s largest potential for hydropower generation. The availability of abundant water resources and favorable geo-political features provide ample opportunities for the development of hydropower.

So far, the volume of FDI in hydropower of Nepal has been small with a level of electrification of 29% and FDI in hydropower has not been an important source of aggregate investment finance and its impact on economic development has also been minimal. A comparison with selected high and low performing countries brings out the underperformance of Nepal in terms of FDI inflows in hydropower. The country has an estimated 83,000 megawatts (MW) of hydroelectric potential, with 43,000 MW having been identified as potentially economically feasible. Currently the country is generating only 561 MW, less than 1.0% of its total potential.

According to Nepal Electricity Authority (NEA), the installed capacity of hydropower by ownership currently amounts to 561.231 MW (389.150 MW in public major projects, 69.34 % of total capacity, 133.113 MW in private power projects; 23.72% of total capacity, 200.00 MW in public-private joint ventures, 3.56 % of total capacity; and 189.68 MW in small hydropower projects, 3.38% of total capacity).
Even with this massive potential, Nepal has not been able to develop its hydro resources effectively and widespread hydroelectric potential is not effectively utilized. This has caused financial loss to the country. Hydropower projects can be developed by the NEA, local independent promoters and foreign direct investments (FDIs). FDI may be in the form of loan, contract, or as a grant aid. The purpose of FDI may take a number of different forms, such as for the establishment of new enterprises in other countries- either as a branch or as a subsidiary, for the expansion of an existing overseas branch or subsidiary, and for the acquisition of overseas business enterprises or its assets.

More than 500 hydropower projects of different capacity have been identified in the country. Both national and international developers have been engaged in developing hydropower projects.

FDI in hydropower have a history of 97 years from 1911 and have increased rapidly since 1970 with the availability of bilateral and multilateral funding sources. Prior to 1960, all the hydropower stations were constructed through grant aid from friendly countries like the USSR, India and China. Since 1970, hydropower development took a new turn with the availability of bilateral and multilateral funding sources. The major donor countries in the period were Japan, Germany, Norway, South Korea, Canada, Finland, Denmark, Sweden and USA. The financial lending agencies were the World Bank, Asian Development Bank (ADB), Japanese Bank for International Cooperation (JBIC), Saudi Fund for Development, Kuwait Fund, and others.

The most recent private hydropower development projects are almost all proposed by Indian or Indian-Nepali joint investors. This is an interesting change and merits a careful review. The Indian companies are perhaps best suited to operate in Nepal due to their proximity, cultural and economic understanding of the Nepali situation, and relatively low cost of their professional and other costs.

FDI in Nepal began in 1911 with construction of Pharping Hydroelectric Plant (500 KW). I has increased rapidly since 1970 with the availability of bilateral and multilateral funding sources. From the 1990s, after the adoption of the policy of economic liberalization, hydropower development took yet another turn with the private sector entering the arena. Besides, the government can partner with private investors or there can be international partners involved with Nepali private sector, or the public sector like Chilime.

The government of Nepal has been prioritizing hydropower sector in its national plans for decades, and the recent budget has enlisted an even more ambitious plan of generating 10, 000 MW in ten years. But if the past is any indication, the government and foreign-aided hydropower development have not been that successful, both due to large per unit cost (construction inefficiencies, graft), and problems of maintenance. Since 1992, the private sector development of the hydropower was seen as the best approach to utilize Nepal's most important economic potential while utilizing the private sector efficiency. Although the previous few private power development were carried out by the US, Australian, Chinese and a few other companies, the most successful ventures have been the ones organized by the Nepali investors.

The development of hydropower in Nepal is a very complex task as it faces numerous challenges and obstacles. Some of the factors attributed to the low level of hydropower development are: lack of capital, high cost of technology, lower load factor due to lower level of productive end-use of electricity and high technical and non–technical losses.

There is a lack of commitment, priority and vision on hydropower development at the political level and also lack of transparency in hydropower planning and project preparation at the bureaucratic level. Political instability, inadequate institutional capacity and lack of a competent and transparent regulatory mechanism are other factors.

Although the Government of Nepal (GON) is open to foreign direct investment, implementation of its policies is often distorted by bureaucratic delays and inefficiency. Red tapes and policy ambiguities also serve as hindrances. For instance, the government has designated the Department of Electricity Development as the single window for power development. But it has not been able to function as a single window because of capacity constraints, which delay the whole process. This policy needs to be reviewed on the basis of past experiences, new technology, possibility of local and foreign investments, and the availability of a market to sell hydropower in neighboring countries. The new policy should be clear, transparent, practical and friendly to both local and foreign investment.

The policy should aid hydropower development, not personal development of politicians and bureaucrats. Too often, government officials and investors make surveys, licenses and taxes a means to their personal development. Also, policy should be followed strictly. Though it is hard to obtain a survey license from the GON, once received the license is rarely cancelled. We have bitter examples like Mukti Shree Pvt. Ltd. (an unknown company) which was awarded the license for the largest multipurpose project of Nepal (Karnali Chisapani 10,800 MW) and West Seti Storage Project, and also Power Purchase Agreements (PPA) for Upper Modi, Daram Khola, Langtangkhola and Madi. Their licenses have not been cancelled yet although they are unknown company. Such companies get involved in “Tender Bids” and get some money from other companies by taking out their tenders. Because of poor policy and corruption, there is no any incentive to revoke their licenses. However, recently, the government seems to be making some progress in penalizing such companies.

The construction of hydroelectric projects contributes not only to the economy of a region, but also its environmental and social development. The establishment of such projects also promotes local people’s access roads, schools, health centers, jobs and trade opportunities. They can also buy some percentage of shares in the hydropower project.

In the long run, the project will help improve their living standards. Moreover, due to fast-rising prices of petroleum products, the hydropower is becoming even more relevant to our lives. Hydro-electricity also offers clean energy. As result, it reduces the green house gas emission and provides a long term alternative.

There are other benefits relating to human resource development, transfer of technology, power export, etc. Some facts:

 Recipients of FDI often gain employee training in the course of operating the new businesses, which contributes to human capital development in the host country. If we harness 10,000MW hydropower, in the process, every year 132,000 people (13000 persons on construction phase and 32000 in operation phase, assuming 2000 person for 750 MW) can get employment.

 FDI allows transfer of technology— particularly in the form of new varieties of capital inputs— that cannot be achieved through financial investments or trade in goods and services. FDI can also promote competition in the domestic input market.

 Profits generated by FDI contribute to corporate tax revenues in the country.

 India’s demand for power would grow to 200,000 MW by 2018. If Nepal could fast-track projects to generate just 10,000 MW in ten years, consume 2,000 MW itself and export the rest to India, it could earn $2.7 billion a year.

 According to Nepal Oil Corporation (NOC), in the fiscal year 2005/06, NRs 2.45 billions has been spent to import petroleum products. If the same amount of money were spent for developing hydropower, we could generate 29.9 MW hydropower electricity (for instance, in Chilme Hydropower Project, 1 KW production cost = $1550 = NRs.108500).

Nepal must now expedite the process of hydropower development. It must now correct past mistakes. First, policy stability and political stability should be maintained. Second, long-term national strategies for export-oriented hydropower development and genuine mutually beneficial partnership should be developed.

Bhutan’s model may be useful in the case of Nepal, too. Project agreements should be based on selling electricity not on the sharing of water. India and Bangladesh are two major markets for hydropower. It’s true that without India's cooperation, Nepal cannot develop its hydropower. India is the only possible viable market for Nepal: even we produces electricity with foreign aid, without India opening its market for us, there is nothing much we can do. The role of India is therefore critical. Nepal should adopt a two-tier approach for the development of hydropower. First, it should cater to domestic needs and second, export power for meeting regional markets. Emphasis should be on implementation of the projects based on the concept of Build, Operate, Own and Transfer (BOOT). And the hydroelectric power generated and produced in Nepal should be developed as an item of export.

Now individual aid-funded projects are being replaced by projects that enhance our own technical and financial capacity to meet energy needs. In recent years, three Nepali power projects like Chilime (20 MW) in Rasuwa, Piluwa (3 MW) in Sankhuwasabha and Jhimruk (12 MW) in Pyuthan proved that Nepal can now generate cheap electricity with locally-built and locally-financed hydropower schemes. Construction of smaller projects using local resources has been neglected and minimized by the politicians and policy makers because of the high-budget, glamorous, aid-funded projects.

The cost of the construction of hydropower projects in Nepal mostly depends on the financing modalities. Past experiences show that the per KW construction costs of locally financed projects are lower than either large donor-funded projects or those funded by the International Independent Power Producers (IPPs). The donor-funded projects come with strings attached, they have to be designed and managed by international consultants and built by other contractors. Thus, a large amount of money goes back to the donors.

Nepali engineers, economists and members of the civil society have concluded that only through locally-financed, locally-built and locally-managed smaller projects we can generate electricity with minimum cost. The local focus also provides for people’s ownership of the projects. Critics have charged that development in Nepal has miserably failed so far because of various factors, such as over-dependence on foreign aid, failure of donors to ensure the proper use of their funds and effective coordination of their activities, centralization, widespread corruption and abuse of authority by bureaucrats and politicians. They argue that effective and positive roles for the private sector can be learned from the experience of countries like Sri Lanka also.

To conclude, generating resources is an important factor in reducing poverty in developing countries, which underscores the need for efficient investment. Nepal's own resources both in the public and private sector cannot meet the financial investment needed for hydropower development. A large investment is required from foreign development agencies and private sector entrepreneurs but the investment will be most effective if it is used to support both NEA in the public sector, and private Nepali sector companies to increase their capability to build low-cost and high quality projects. The hydropower sector in Nepal needs technical and financial support to carry out such projects

Kundan Pokhrel Majagaiya is a doctoral candidate at Glorious Sun School of Management, Donghua University, China.



why the government of nepal do not take very very strong action for the crime of electricity theft. why other neighbouring country like China isnlt possible to buy electricity. why there is no any strong rule and act for the electricity. why don't the government couldn't give maximum security to hydropower and its station. why government don't praise to worker in electricity so they cound do their best? why the government can't invest along in hydropower. why maximun electricity is taken to india and we have to buy same in high price? why government can't use the thousands of nepali youth in development feild like electricity? why government talk only about electricity not do pratical? All of my queries to the NEA Officers and to the minister of electricity & to Government as well as to all concerned departmentbeing a true nepali student. I would like to get the answer soon.

Its really heart breaking that with the such giant capability we are not able to take benefit from it.
May be in future we can achieve this.
But whenever I read any article about Nepal development their is always name of INDIA.Are we totally depend on INDIA? their is big question.As it is Nepal is owned by INDIA.I think NEPAL has highly qualified manpower in this field only we need is to combined that all skilled manpower who are scattered all over this globe.
And about the budget if you have motivation and dignity there is always another way.

so far....i'd like to know why the government is overlooking the maintenance of the early installed hydropower plant, like Pharping? Is it that the project can not be re-innovated or there's lack of interest for its maintenance? how you reveal this fact??

wotever other say,,, it was worthy for me to read all .... got alot of information... grt job !.. thanku very mcuh ...keep on..

Thanks Subodh Jee for your comment.

As for your interest, I would like to give answer.
Joining hands with other countries like China for the production of the electricity is good for us and we have to well come them, but we should be care full about the production cost & period and other factors and also we have better examples of other countries. India; due to their proximity, cultural and economic understanding of the Nepalese situation, relatively low cost of their professional and other costs, is considered.

Obviously not only India is the consumer country for electricity sells but selling is doing business and to do business we have to care about the market demand & place, extra cost and other factors to get the relatively more profit. India; based on market demand with low cost supply and geographical condition, is considered consumer for selling electricity

Kundan Pokhrel Majagaiya has give much information on present and potential hydro power in Nepal.
I am wondering is India only the consumer country for the nation's electricity sells? What about China and other countries? What about joining hands with other countries like China for the production of the electricity?

I am wondering is India only the country for our electricity sells? what about China and other countries?

An indepth and articulate article on the potentiality, utilization and development of Nepal's hydroelectricity!!!!

I hope the NEA officers and the government officials read this.

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