New Business Age

Attracting FDI in HEP and Executing PPA in Foreign Currency

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Attracting FDI in HEP and Executing PPA in Foreign Currency

Through uni-dimensional perspectives, investment in Nepal's hydropower sounds lucrative enough for both foreign investors and the Nepal government.


Promoting growth through foreign direct investment (FDI) and export of white gold has been reiterated time and again in Nepali national plans and various policy documents. Hydropower projects have been identified as the major attractive ventures for FDI given the export potential of hydroelectricity in the sub-continent and constricted investment capacity of Nepali public and private sectors. Through uni-dimensional perspectives, investment in Nepal's hydropower sounds lucrative enough for both foreign investors and the Nepal government: foreign investors can tap into the supply-deficient energy markets of the sub-continent, and the government can have a bountiful source of revenue, royalties and free energy with spillovers and multiplier effects on the national economy. But attracting foreign investment in the hydro sector has been a far cry and Nepal is reeling under a persistent energy crisis.

Why has Nepal failed to attract FDI into the hydro sector even after enacting volumes of national plans, hydro and FDI policies and governmental white papers on curbing the energy crisis of the nation? One of the answers lies in the truncated power market of Nepal, Nepal’s sole power monopoly, the NEA –virtually bankrupt, mismanaged, overstaffed, and is an inefficient juggernaut controlling the trio of power markets form generation, transmission and distribution like the trimurti of the Hindu beliefs- has distorted energy markets in such a way that it has resulted in a toxic environment for the private energy investors to thrive in. 

NEA does not have the capacity to invest in medium and large hydro projects for domestic consumption. Neither has it been able to fix a quick and efficient evacuation mechanism for power projects, nor does it have effective distribution channels and pricing mechanism for domestic consumers. At the height of its inefficiency, while the country reeled under 12 hours of daily power cuts, the juggernaut was compelled to waste its generated energy (due to the lack of transmission lines), shy away from purchasing power produced by private producers for its inability to sell the energy at market clearing prices, and was unable to recoup its outstanding dues while remaining cash-strapped despite being the sole monopoly in the market!

Despite going through an acute power crisis for the past decades, attracting foreign capital in hydro projects is still apparently a near ‘mission impossible’. NEA’s apprehension about conducting PPA in foreign currencies has discouraged many of the lucrative power projects targeted by foreign investors. It took almost four years for Upper Trishuli-I investors (Korean investments) to crack PDA with NEA, while the negotiations are still ongoing about PPA. Foreign private energy investors are demanding that PPA be done in foreign currency, but the NEA’s ever ballooning, non-service rendering, and politically sheltered trade union is bullying NEA against it. So, should the PPA be done in local or foreign currencies?

Yes, it should be done in foreign currency!
It may sound rhetorical but business theories suggest higher risks yield higher returns. Isn't it time to take calculative risks rather than staying in the status quo? It is irrational to expect FDI in USD and paying back the investors in Nepali Rupees. It seems the argumentative officials lack common business sense. Nepal will receive investment, royalties, taxes and certain amounts of free energy. Businesses, industries and the young entrepreneurial spirit will rediscover its lost strength. Returns will fill up fiscal deficit and could be used for reforming the health and education sectors. What's more, we'll be relieved of incessant power cuts and the curse of living under darkness forever.

No, it shouldn’t be!
NEA currently is suffering huge losses and cannot afford to purchase power in foreign currencies to add to its financial woes. Notorious Khimti and Bhotekoshi HEP are two major sources for NEA’s loss, where the PPA for the two HEPs, was done when exchange rates were below USD 60, but now the NEA is paying almost double rates for the same amount of energy from the two projects. Half of NEA’s revenue goes into paying the two projects.
Yes, it should be.
Khimti and Bhotekoshi HEP, which gives around 100 MW power to the Nepali market, are cited as anti-national projects. But are there any studies that depict our current economic situation had these projects not materialised? Nepal would have been reeling under 20+ hours of power shortage by now. Critics should look at NEA’s internal inefficiency and mismanagement rather than solely accusing Bhotekoshi and Khimti HEP for the loss. Wouldn’t the actual financial position of NEA be sound if it really curbs its leakage, mismanagement, inefficiency, corruption, overstaffing and how about if it timely focused on applying standard but harsh measures to collect its dues?

No, it shouldn’t be!
PPA in USD will compel NEA to increase power tariffs which will have profound effects on domestic household and industrial consumers. What will then be the spillover effects on the national economy?

Yes, it should be.
Power tariffs can be regulated by NEA by executing other ways. For instance, the logic of increased power tariff burdens on households in the future can be mitigated by proportionately pricing the unit cost of power based on local production and free energy received from USD driven projects. Any ways, the economy is about trade-offs. It is up to NEA and the authorities concerned to determine the balancing factors for trade-offs between investment, power tariffs and foreign exchange risks.  

What is more important here is to understand the effect of adequate availability of energy in industrial productivity and the national GDP. Have the costs of industrial output been accounted for, for the burning of imported diesel? Any industrialist can be asked for the marginal price of their output. What are the social costs of continuously reeling under darkness for decades? What is the effect of the energy crisis on our national productivity and human capital development? Just a few months ago, children and students prepared for their tests under the flickering lights of tukis and main battis? Has there been any economic summing up to determine the total loss arising in not only economic sectors but also on the social front?

No, it shouldn’t be!
Would it be rational to buy electricity generated in our own backyard at foreign rates and sold to us in the same rates?

Yes, it should be.
Without welcoming FDI, can Nepal itself invest in energy with its own resources? No! Are Nepali financial sectors able to generate enough capital to invest in massive capital-intensive projects? No! Will alternative energy sources be a reliable and cheap supplier of energy to domestic and industrial demands? No! The conclusion is- there are no possible alternatives to inviting foreign capital and assuring security to their investments. 

As far as buying electricity in the context of PPA financed projects is concerned, lessons can be learnt from the Nepal Oil Corporation (NOC). Just until a few years ago, the whole nation queued up at fuel stations whenever the Indian Oil Corporation cut down its fuel supply after NOC failed to repay its dues. The problem totally disappeared once the NOC decided to fix prices based on the international rate. Previously, the decision was hotly debated with the argument being that it would badly hit household consumers. In fact, NOC now extracts additional costs above the international rate from consumers to recoup its previous losses and fund its future projects. It was acceptable to Nepali consumers only because it minimised one of the sources of daily stress for them and loss of their productive hours that went in queuing at fuel stations. On the other hand, being self-reliant in hydro-power would be a matter of pride and an opportunity to switch to electricity-powered appliances and vehicles.

No, it shouldn’t be!
PPA in foreign exchange wouldn’t be been much of a problem, but buying electricity in USD for domestic consumption cannot be good for the financial health of NEA and the national economy. Why should we spend our precious foreign exchange reserves to buy energy at insanely high rates and sell it at low prices? Will the Nepali economy be able to purchase all power generated in USD for a long time? What if when remittance income declines and Nepal does not have enough foreign exchange reserve to buy power?

Yes, it should be.
Should the economy continue to reel under imported diesel, power generators, inverters and batteries (these particulars are also imported in USD or at least in IC)? Doesn’t it drain our foreign exchange reserves? In fact, it is one of the exorbitant economic costs that Nepal has been paying for lacking adequate power. Should Nepal also ban the migration of students and gold, oil and food imports which incur huge losses to the foreign exchange reserve?

Delaying or rejecting PPAs in USD can have an adverse impact on other FDI opportunities and discourage foreign investors. How would Nepal appear in the international market and to the global investors? Immediate adequate supply of power can entice other FDIs in export-oriented avenues which can strengthen our foreign exchange reserves. In hindsight, Nepal could have lessened its trade deficit had it produced enough energy for domestic consumption. 

No, it shouldn’t be!
Why do PPA in foreign exchange when it cannot immediately resolve the power crisis? Current hydro projects under construction will be completed soon providing enough power to meet our domestic demands. What will the NEA do with the expensive energy purchased in USD? Shut down its own operational power plants to create a demand for energy?

Yes, it should be.
As the economic theory goes on that supply creates its own demand, future demand will boost substantially once the domestic supply gradually normalises. Household and industrial demand will not remain constant in the face of changing consumption patterns that is gradually shifting towards sustainable energy. Creators of the market should promote the use of power in regular household chores and swap the use of other sources of energy with electricity. By inviting foreign investment, Nepal will secure itself in meeting the changing face of future power demand. It would also be foolish to think that outdoor markets are absent or unwilling. India’s ambition for economic growth is well known. Nepal borders and shares close proximity with some of the heavily populated and industrial bases of India. Its ambition and growing demand will push it to seek power imports from Nepal. 

Hydro electricity is meant to be a sustainable and sovereign energy source for Nepal’s growth and prosperity, not another resource-gobbling, unsustainable and dependency creating fossil-based energy source. Since Nepal has remained cash-strapped with huge budget deficits, it is necessary to depend on global capital to realise our hydro-potential. There is also need to realise that global capital comes at certain costs, those that actually can be mitigated by devising bankable contracts with the right combination of risk and return. 

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