Challenges on Investments in Small and Medium Sized Hydroelectric Project in Nepal

by Subash Baral, Nepal (ELP 2016)

While working as a Civil Engineer for the last 15 years in the development of hydroelectric projects in Nepal, I have noticed many challenges and opportunities in this sector. Nepal is now suffering from a huge power crisis which adversely impacts the overall development of the nation. Hydropower has been a bottleneck in our social transformation from agrarian economy to an industrial economy, as we have been able to produce less than 1000 MW electricity in the past 100 years against having total potential of about 100,000MW. There are important studies yet to be done. Our estimate of 1100 MW demand per year ignores the substitution of pattern among users who currently use non electric energy to fulfill their demand. No study has been done to find out how much of the current use is substitutable and cross electricity of consumption between different end use sectors. There are major challenges in identifying demand and laying out infrastructure for all transmission and distribution sectors as well. Due to the topographical variation and huge source of water from the Himalayas, small, medium and large size hydroelectric projects are both technically and financially feasible. However, small and medium size projects can be designed and developed with Nepalese experiences, knowledge and funds, as per my experiences we need to deal with current challenges effectively to cope with the future problems. 

Major impediments for any financing institute set up to invest in the hydropower sector in Nepal, however, are manifold. The first one is related to moral hazard: firms borrowing money from the banks cannot be perfectly monitored and hence incidences of project cost overrun, untimely completion and illegal allocation of money on other, non-hydroelectric project related fields by hydropower developers is rampant. 

Nepal's private sector developers also suffer from ad-hoc management setup. It does not have a good technical set up to begin with. Most of the organizations are small and owned by people who do not have prior experience in hydropower development. Individual developers are reluctant to work transparently, and their account keeping is not up to date. This leads to a situation of asymmetric information between outside investors and the developers as much information are only known to the developers and outside investors are naturally unsure about the veracity of this information.

Evaluating a project is a non-trivial task in Nepal. Part of the problem lies in our late beginning; we don't have proper hydrological data in our administrative repertoire, nor do we have related existing studies such as sedimentation studies or geotechnical studies which invariably will increase uncertainties in performance during the operation phase of the project. 

Furthermore, lack of professionalism is also reflected in the way banks perform due diligence. Banks normally do not have engineers or other related technical staff, and almost all banks rely on consultants to do the job. This is not a problem per se, but generally, both the consultants and the banks make decisions on the credit worthiness of the projects mostly on the basis of their personal relationship. This system has led to the evaluaion of individuals rather than projects in funding but the project financing has limited liability and in case the project fails, the risk to financial institutes is very high.

The power sector generally suffers from many disadvantages in our country. Lack of access to roads and transmission lines are key elements of these disadvantages. India, for example, makes dams and powerhouses at a lot cheaper price than Nepal however the availability of roads and transmission lines is most of their project sites. Transmission line development has increasingly become a key bottleneck in the hydropower development sector as most of the hydropower projects in pipeline suffer from this problem. Transmission System is inadequate and not updated. Électricité de France (EDF) estimates $4 billion needed to upgrade and extend our transmission sector in the next 20 years in a recent study. Government is mulling to unbundle Nepal Electricity Authority (NEA), and Rashtriya Prasharan Grid Company (RPGridCo) has been set up.

Government's ability to complete power projects is also dubious in Nepal. All of the production projections envisaged in previous numbers of five year plans and three year plans have not been met. This has repercussions in other planning and designing of incentives for private sectors. If the government knew its shortcomings, its plans for the private sector would be designed differently. Distribution of licenses to the private sector also begs for proper matching. Sometimes capable developers are issued licenses in locations that are far off and where making transmission lines may take years. On the other hand, less capable developers hold the license of the projects which are topographically suitably placed and are also within the reasonable distance of existing transmission lines. Since they are not capable of developing the projects themselves and often want to hold the project area to swap them with the lucrative offers from the promising investors, this rent seeking behavior due to wrong matching of developers and projects leads to less than optimal development of projects by the private sector.

Apart from these issues, both private and government sectors are now suffering from manpower related issues. Due to the burgeoning hydropower sector, relevant manpower is in demand. Since enforcement of contract is lax in Nepal, technical and financial staff are hard to retain. Institutions are not producing enough skilled manpower to be used in these possible projects. 

The Government of Nepal should take lead in the development of the small and medium sized hydroelectric project and coordinate with other existing players in Nepal including private sector developers and banks.