Nepal Just Lost Rs. 80 Billion

(Courtesy: Sujit Acharya)

The website of the Department of Electricity Development states that survey licenses for potential hydro projects totaling more than 40,000 MW in capacity are being processed, and that the average fee to be paid to the department is Rs. 10,000 per MW. This translates into approximately Rs 400 million in license fees. Most of the companies that have applied for licenses are either Indian or Nepali with low or no financial and technical capacity to develop these projects.

The reason why many Indian companies have applied is because the license fee is extremely low in Nepal compared to India's price of Indian Rs. 1-2 million per MW. Most of the Nepali applicants are “hydropower brokers” or entities that do not have the capacity to build the projects. Their real intention is to unload the licenses in the resale market with a hefty markup. So joining the queue is a profitable business.

This very reason will continue to delay the development of hydropower projects because the conditions and intentions of most of the applicants are to try and find “parties” who can buy their licenses at a higher price and a “free equity” portion in the projects.

This means that the Nepali people are losing big money in potential revenue because the government is ignorant of the current energy market. The estimated income from applications for 40,000 MW would be Rs. 80 billion (8,000 crores). This amount is greater than all the revenue that the government received from other resources in 2007. According to the CIA World Fact Book, the government earned US$ 1.153 billion in 2007.

This load of cash will allow us to pay for our oil imports and free the people from having to stand in line for hours to buy gasoline. It is also enough to build roads and transmission lines so that more hydro developers (Nepali and foreign) can exploit more hydropower resources and generate more revenue.

Currently, as most Nepali companies do not have the capacity to build projects larger than 20 MW, project licenses above this capacity are going to be sold to foreign companies. This means that the cost of the license for a hydropower project in Nepal is directly influenced by the cost of the license in India (which is also the power evacuation market for most of our larger hydro projects).

Today, Indian state governments charge a minimum of Rs 2 million per MW (Nepali Rs 3.6 million) to interested developers to even just apply to bid for the license. Go to www.hpseb.com/tender/nip3.doc and check it out.

While this is just the minimum fee to apply to bid for the license, state governments make interested bidders compete to quote their highest price (paid to the government) for winning the license. Companies like GMR of India (which is building the Upper Karnali project) paid Indian Rs 9.2 million per MW for such licenses. Look it up at www.tribuneindia.com/2008/20080216/himachal.htm#8. Brakel Corporation of the Netherlands and DS Constructions paid Rs 3.6 million and Rs 5.2 million per MW respectively to the state governments. Go to economictimes.indiatimes.com/articleshow/2162265.cms for the details.

Hydropower development companies in India are more than willing to pay this high price - and India is ensuring that it maximizes its revenue collection. Simultaneously, such competitive bidding for licenses ensures the entry of actual hydro developers instead of license brokers.

On the other hand, Nepal's licensing policy is handing out these precious licenses for almost free to companies who have seen this huge “discount” or to applicants who know they can sell these “discounted” licenses for a very high rate in the secondary market. This defunct hydropower policy is making Nepal and the people the real losers when our policies should be aimed at making them the real beneficiaries. This needs to stop right away!

If India can charge a minimum of Indian Rs 2 million per MW for a hydropower license and continuously receive much higher bids than this minimum, Nepal can safely charge Nepali Rs 2 million per MW which is still 37.5 percent lower than in India. The Electricity Department and the Ministry of Water Resources need to wake up immediately and plan to introduce this current market fee because of the following reasons:

• Nepal's rate is much lower than the going price in a country where its hydro power licenses should be directed.
• The real developers will be identified. The high cost of the license will eliminate brokers. Real developers would rather pay Rs 2 million per MW to the government than various brokers.
• Unless genuine developers come forward, hydro projects will not be built. This means electricity will not be generated and the country won't be earning money from royalties and taxes.
• Some will balk at paying Rs 2 million per MW complaining that the price is higher in India because there are more benefits to be had there. This is untrue.
  

Finally, there will be many critics who will question how Nepali developers can afford to pay Rs 2 million per MW and complain that the higher fees will discourage the development of Nepali entrepreneurs. Nepal's policymakers first need to think about the net benefits that can be received from this policy change in terms of the contribution to the country's economic progress. An increase in the rate will bring in more revenue for the government than it receives from all other sources.

There is nothing that should stand in the way of this policy change. However, it is also the moral responsibility of the government to ensure that Nepali hydro developers are encouraged. A reasonable compromise should thus be made. The price of hydropower licenses for up to 10 or 20 MW (the average capacity of Nepali developers) should be kept at its current rate of Rs 10,000 per MW. But for anything above that (in which most foreign parties will apply), the minimum rate should be set at Rs 2 million per MW.