Stalled FDI in Hydro

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Stalled FDI in Hydro

What will a rational homo Economicus do when spotting a Rs 1000 note lying on the pavement? He will not pick it up! Because, he thinks, that note is a fake. Had it been a real note, somebody else who might have happened to notice it earlier, would have already picked it up. This summarises the high promise of Nepal’s hydropower opportunities for foreign investors. What else can be a better and plausible explanation for the current situation? 

Let’s consider this:  Even after years of high profile conferences held to attract foreign investors in Nepal’s hydropower sector, the situation is still pathetic. Two decades ago, two projects signed a PPA with the Nepal Electricity Authority. Of the two the 60 MW Khimti is still operating, though the 45 MW Bhotekoshi is closed, damaged by natural disasters. The latest situation is that two projects with Chinese investment (50 MW upper Marshyangdi A and 25 MW Upper Madi) are said to be nearing completion. Progress in the 37.6 MW Kabeli A, 216 MW Upper Trishuli-1 as well as the 440 MW Tila 1 and 420 MW Tila 2 has stalled due to the PPA and/or PDA not being signed. 

If the opportunities are real, why didn’t the foreign investors of the Bhotekoshi and Khimti projects start another one? The would-be foreign investors must have contacted them and the brief they received would not have been encouraging. We all know about the complaints and criticisms made by different quarters - political, bureaucratic and technocratic – against these projects and their investors. 

The conclusion that can be drawn from this is simple: though there are lots of opportunities in Nepal’s hydropower sector for investors, both domestic and foreign, the risks too are very high. So, the PDA and PPA should have clear provisions to ensure that these risks are judiciously shared between the investor and the Nepal Electricity Authority or the government.  

To insure against those risks, all these stalled FDI projects are demanding power purchase agreements (PPA) in US Dollars and a guarantee of 17 percent or so in the Internal Rate of Return. Though the government has announced a policy of signing PPAs in dollars for a ten year period (sufficient time it says for foreign investors to repay the loans that they might have raised in US dollars), the foreign investors are still not satisfied. 

The delay in the process has been sending the country speedily down a road that leads to further severe electricity shortage. That will weaken our negotiating power. We will soon reach a situation where we will have no option other than to accept even more stringent conditions from these investors. In the process, we most likely will go on increasing the import of petroleum and/or electricity, thus further damaging the situation of our balance of payments. 

A better option right now is to get some high profile foreign investors to start implementing their projects, thereby reaching a critical mass of such projects and investors, from which we can start getting good supply levels of hydroelectricity. In this process even if we end up paying a high price per unit, it will still be cheaper than what we are importing. In a nutshell- we win the trust of foreign investors and soon reach a level where the minimum requirement starts being supplied from domestic hydropower projects, and our negotiation power improves.

Madan Lamsal
[email protected]

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