Energy Companies Raise Concerns Over Conflict-of-Interest Clause in Draft of New Directive

Energy sector companies have expressed strong concerns over a provision in a new draft directive aimed at strengthening corporate governance, warning it could drive up project costs and complicate implementation.

The draft of the Directive on Corporate Governance Related Standards for the Electricity Sector, 2082, published by the Electricity Regulatory Commission last Monday, includes a clause prohibiting companies from procuring construction, consultancy services, or supplies from other firms in which they have a direct or indirect interest.

If enacted, the provision would immediately impact several sector players. NEA Engineering Company, a subsidiary of Nepal Electricity Authority (NEA), currently serves as a consultant for the NEA's Phukot-Betan-Dododhara 400 kV transmission line project. The draft directive would likely bar NEA Engineering from continuing in this role.

Similarly, under the proposed rules, Hydro Solutions Pvt Ltd, led by energy entrepreneur Gyanendra Lal Pradhan, would be unable to provide consultancy services to hydropower projects within its own group. Hydro Consult Engineering Ltd, an associate of Butwal Power Company (BPC), would also be prohibited from offering consultancy to hydropower companies under the BPC umbrella.

Read: Electricity Regulatory Commission Seeks to Curb Conflict of Interest in Hydropower Companies

The Commission has included the provision to ensure cost transparency and guarantee that affiliated companies receive goods and services at competitive prices, according to Gautam Dangol, a member of the Commission. He previously stated that related-party transactions often lack transparent pricing.

However, promoters in the hydropower sector argue that the provision fails to consider ground realities.

Gyanendra Lal Pradhan stated that developers currently receive cost-effective and convenient technical services from their own sister concerns. He argued that mandating the use of external consultants would force them to pay higher market rates. "This will increase the overall project cost," Pradhan said. "It also raises the risk of construction delays due to coordination difficulties with external parties."

The Commission, for its part, maintains that using outside firms would foster competition and help reduce costs.

The draft directive also proposes significant changes to board structures. It stipulates that no more than one member from the same family may serve on a board of directors and mandates the inclusion of at least one female director.

Industry representatives argue these provisions fail to distinguish between public and private limited companies. Ganesh Karki, President of the Independent Power Producers' Association, Nepal (IPPAN), and Prakash Dulal, IPPAN's Assistant General Secretary, expressed concerns that the directive does not account for this distinction.

"Imposing such strict rules on private limited companies is impractical and will discourage investment," said Dulal. He noted that provisions restricting family members on boards and requiring a female director would particularly impact private limited companies, which are typically established by families or a limited group of investors. The draft directive currently does not differentiate between public and private limited entities.

Dulal also voiced dissatisfaction with proposed procurement rules, which he said attempt to enforce provisions similar to the Public Procurement Act. The draft requires licensees to formulate and implement procurement regulations based on the fundamental principles of public procurement to ensure transparency and competitiveness. The private sector views this as an attempt at bureaucratization, arguing that subjecting privately financed projects to such government-style processes will hamper performance.

Commission Chairman Ram Prasad Dhital, however, clarified that the intention is not to enforce the Public Procurement Act, but to encourage open, competitive procurement practices, particularly for public limited hydropower companies.

Dulal further argued that releasing such a crucial draft on the eve of elections was inappropriate, suggesting the process should proceed only after the new government's policies are clear. He warned that failing to adopt private-sector-friendly policies would make it difficult to achieve desired investment and job creation in the energy sector.

The draft directive's implications also extend to state-owned entities like the NEA. The provision could prevent the NEA from procuring goods and services from its own subsidiaries. However, NEA's Managing Director, Hitendra Dev Shakya, offered a different interpretation, stating his understanding was that the directive would apply only to public limited companies.

"In NEA's case, this provision will not have an effect," Shakya said. "The situation would be different after NEA issues shares to the public in the future. In the current scenario, this provision does not stop us from taking services from NEA Engineering." He however noted that the Commission has not clearly differentiated between companies that have issued public shares and those that have not.