The Government Should Play A Proactive And Facilitating Role
Pradeep Gangol is the Executive Manager of the Independent Power Producers Association, Nepal (IPPAN). IPPAN has been consistently advocating and lobbying for investor friendly environment in Nepalese power development. Gangol is also a senior hydropower engineer and has more than two decades of experience to his credit in planning, surveying and designing of hydropower projects. During his long career, he was also involved in the reconnaissance and feasibility level design of micro and small hydropower projects, river training projects and slope stabilisation projects. In an interview with New Business Age, Gangol shared his views on prospects and constraints of developing hydropower based on private sector investment.
What is the prospect of private sector investment in Nepalese hydropower sector?
The prospect of private sector investment in Nepaleses hydropower sector is indeed great. The enormous power potential in Nepal and the huge market for it, both domestically and in neighbouring countries make Nepal a lucrative destination for domestic and international investors. The private investment is all the more important in poor countries like Nepal, which have limited resources to invest in infrastructural sectors like power, telecommunication and transportation. If the private sector can invest in hydropower, the government can allocate more funds for sensitive sectors like health and education. However, the government of Nepal has to do a lot to improve the investment climate in Nepal so as to lure investors to invest in Nepalese hydropower sector.
Hydroelectricity sector has been attracting some private investors for developing projects. How can the private sector investors be encouraged to invest further in this sector?
The Government of Nepal has to think in a more liberal way and announce a series of incentives that will make Nepalese power sector the most lucrative for investment in the world. Such measures/incentives will eventually lead to the construction of numerous small, medium and large hydropower projects all over Nepal, and help create employment for millions of people. It will also generate billions of rupees, through royalties, for the government and local DDCs and VDCs and help local people become prosperous through purchase of shares. Besides, it can accelerate local development through CSR activities like access roads, heath posts, schools, trails, irrigation canals, vocational and technical training etc. The government should keep in mind that investment will flow where there is an opportunity for profit.
Is it the issue of returns or are there any other reasons for private sector being hesitant to invest in infrastructure?
In spite of enormous potential for hydropower development in Nepal and possibility of huge power market in India, investors are still shying away from investing into Nepalese power sector. Besides rate of return issues, Nepal has to make sure that it has open access to the Indian market through a government-to-government agreement.
And the government has to assure that there will be policy stability at least for a reasonable period of time, say 10 years. Last year, for example, the department of electricity development (DoED) made changes in its rules and regulations four times within a year. Such frequent changes in rules and regulations and policies do not help in enthusing investors to invest in Nepalese power sector. Furthermore, it is a very time consuming process to acquire documents related to forest clearance, EIA, procurement and use of explosives. Land acquisition for projects is also equally difficult. Now-a -days, it is becoming increasingly difficult to manage local expectations.
Do you see the possibility of developing projects independently by private companies?
Nepali power companies can develop small power projects (up to 25 MW) independently. For bigger projects, however, they have to enter into joint ventures with foreign power companies or investors. The government should encourage more and more domestic investors to invest in hydropower, by way of equity investment.
Why do you think commercial banks are hesitating to invest in this sector?
It is a very strange situation that though Nepal is facing an unprecedented 19 hoursa- day of load shedding, the commercial banks are reluctant to invest in the power sector. The main reason is that the power purchase agreement (PPA) rates have remained virtually stagnant over the last 10 years. During the same period, the prices of construction materials like cement, steel rods, copper wire, fuel costs, and labour charges have increased exponentially.
To make matters worse, the bank interest rates have also increased from 10 per cent to 15 per cent. The government is still hesitant to make suitable adjustments in PPA rates and thats why the PPA rates reflect market conditions. For example, if a farmer finds that the cost of producing potatoes is Rs 20 per kg as against the market price of Rs 16 per kg, s/ he will rather invest in producing other crops that ensure better rates of return. This is the reason for which the commercial banks are reluctant to invest in the power sector.
What are the challenges for investors after developing a project?
The challenges for investors to invest in Nepalese power sector are many. The tariff rates do not reflect market conditions while the bank interest rates are still high. It is difficult and time consuming to overcome bureaucratic hassles to acquire documents related to forest clearance, EIA report, procurement and use of explosives etc. Land acquisition is another problem that the investor is finding increasingly difficult to cope with. Policy changes are frequent, more often to discourage the investors. And lastly, it is becoming increasingly difficult to cope with the management of local expectations.
How do you expect the government to play a role so as to invite more private investors in this sector?
The government has to make appropriate changes in the electricity act and policies so as to instil confidence in investors. There should be an electricity regulatory commission that will create a level playing field for both private and public sectors. The government should make adjustment in power tariff so as to ensure reasonable rate of return. If needed, it should think about VAT exemption to make the power sector most lucrative in Nepal. The objective of the whole exercise should be to lure general public (through shares), investors, and banks to invest enthusiastically in the power sector. There should be policy stability for at least 10 years. Furthermore, a new department of clearance can be established under the energy ministry to ensure that all documents are processed within a month. The government should play a proactive and facilitating role in acquiring land for projects and managing local expectations.
How do you find the government's role in ending the energy crisis at the earliest and accelerate power development in Nepal?
Nepal is facing unprecedented load shedding of 19 hours a day which is a serious problem. But the government does not seem to be as serious as the grave situation demands. The measures announced by the government seem to be piecemeal, rather than announcing all the needed measures at once. The present power crisis, if continued any longer, will eventually put our entire economy to a grinding halt. Therefore, the politicians have to become more serious in solving Nepalese power problems.