Technical Assistance Consultant’s Report
Project Number: 41025-01 November 2010
Nepal: Promoting Private Sector Participation in the Power Sector
Prepared by SOFRECO, France in association with Total Management Services, Nepal
For The Ministry of Energy, Executing Agency The Department of Electricity Development, Implementing Agency
This consultant’s report does not necessarily reflect the views of ADB or the Government concerned, and ADB and the Government cannot be held liable for its contents. (For project preparatory technical assistance: All the views expressed herein may not be incorporated into the proposed project’s design.
Asian Development Bank
TA 4997-NEP
Promoting Private Sector Participation in the Power Sector
SOCIETE FRANÇAISE DE REALISATION, D'ETUDES ET DE CONSEIL 92-98, BOULEVARD VICTOR HUGO 92115 CLICHY CEDEX - FRANCE TEL : +33 1 41 27 95 95 - FAX : +33 1 41 27 95 96 E-MAIL : [email protected] - SITE WEB : WWW.SOFRECO.COM
In association with
Financed by the Asian Development Bank
FINAL REPORT
Period covered by the report: October 2008 – November 2010
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Knowledge Summary
Nepal’s economically feasible hydropower potential is estimated to be around 43,000 MW, out of which only 2% has been developed so far. The Government’s ambitious target to develop 10,000 MW in the coming years would require US$ 2 billion annually. To achieve this goal, public resources are not enough: private developers, International Financial Institutions, foreign lenders and investors should participate. While Nepal’s power sector mostly remains vertically integrated, and dominated by the Nepal Electricity Authority (NEA) in charge of generation, transmission and distribution, the legal framework is progressively evolving to allow an increased participation of independent power producers (IPPs). The ADB has launched Technical Assistance (TA) with the objective to promote Private Sector Participation in the Power Sector in Nepal. To this end the Consultant has worked closely with the Ministry of Energy, and more particularly with its Department of Electricity Development (DOED), from October 2008 to April 2009.
During the course of the TA, Consultant has identified the main barriers that stand in the way of hydropower development. Apart from the political difficulties that have represented, and still represent, a serious issue for investors, several improvements could be brought to the legal and institutional framework: - Adoption of the pending Electricity Act (EA) and immediate creation of the Energy Regulatory Commission (NERC) - Replacement of the two-step licensing process (first survey license, then generation) by a single license with 35 years validity from COD - Streamlining of the environmental clearance processes - Set up of targeted financial incentives (tax holidays, VAT exemptions) - Clarification of resettlement provisions for affected people - Better coordination between the Ministries involved, notably through River Basin Master Planning Capacity building of DOED and other Government agencies is also required. But, most importantly, an unambiguous political support is necessary to really kick-start the participation of the private sector. While domestic financing can be available for small to medium size, domestic-oriented projects, larger, export-oriented projects require foreign investment. Nepal’s power hungry neighbors, India, and more recently China, have shown a strong interest – but this interest tends to wan due to the perceived and real insecurity within the country and political instability. Examples drawn from other Asian countries like Bhutan or Laos show how foreign investors could be attracted to finance hydropower in Nepal. Consultant recommends: - Establishment of a Nepalese Infrastructure Bank - Better risk allocation between the project developer and the Government - Set up of a sound contractual framework for efficient public-private partnerships In this view, the Consultant proposed appropriate PPP models ensuring optimum risk allocation, and established guidelines for award of projects through competitive bidding. The Consultant also recommended that DOED, in its role as facilitator for hydropower development, be granted extended mandate and appropriate means to efficiently identify, award, and monitor PPPs.
Final Report January 2011 2
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Table of Contents
1 INTRODUCTION AND BACKGROUND...... 8 1.1 PURPOSE ...... 9 1.1.1 Purpose of the present document ...... 9 1.1.2 Objectives of the TA ...... 9 1.2 ORGANISATION OF THE TA...... 10 1.2.1 Consultant’s Team...... 10 1.2.2 Timeframe of the TA...... 10 1.2.3 Collaboration with DOED and other stakeholders...... 11 1.2.4 Trainings, workshops and seminars ...... 12 1.3 NEPAL HYDROPOWER SECTOR: OPPORTUNITIES AND BARRIERS ...... 14 1.3.1 Brief Overview ...... 14 1.3.2 Main Stakeholders...... 15 1.3.3 Nepal Power Sector Strategy ...... 16 1.3.4 Hydropower Opportunities...... 18 1.3.5 Power Sector Negatives ...... 18 1.3.6 Consultant’s Strategic Recommendations ...... 19
2 IMPROVING THE FRAMEWORK...... 22 2.1 POLICIES, LEGISLATION, REGULATIONS ...... 23 2.1.1 Existing and pending laws and regulations ...... 23 2.1.2 Analysis of Hydropower Development Policy 2001...... 25 2.1.3 Proposed Electricity Act...... 26 2.1.4 The legal issues on Water Rights...... 29 2.1.5 Analysis of Land Acquisition Act, 2034 (1977) ...... 29 2.1.6 Pending Resettlement and Rehabilitation Policy, 2007...... 31 2.1.7 Financial Incentives in HPD 2001 AND EA 2007 ...... 31 2.1.8 Recommendations for Improvement ...... 32 2.2 LICENSING ISSUES ...... 35 2.2.1 Current Framework and Related Issues...... 35 2.2.2 Case Study of Kabeli-A HPP ...... 37 2.2.3 Recommendations for Pre-License Preparation ...... 40 2.2.4 Introducing Project Development Agreement (PDA)...... 41 2.2.5 Consultants Recommendations on the License Provisions ...... 41 2.3 SOCIAL AND ENVIRONMENTAL ISSUES...... 44 2.3.1 Current Legal Framework...... 44 2.3.2 Developers’ Viewpoint ...... 46 2.3.3 Local Peoples’ Viewpoint...... 48
Final Report January 2011 3
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
2.3.4 Examples of R&R for Recent Projects...... 51 2.3.5 Recommendations on Draft National Policy on Land Acquisition, Compensation and Resettlement for Development Projects (NPLACR)...... 52 2.3.6 Recommendations for a Strategic Environmental Assessment of the Power Sector ... 55 2.3.7 Recommendations for Dedicated Institutions...... 58 2.4 TRANSMISSION LINES AND ACCESS ROADS...... 60 2.4.1 Transmission System and Power Evacuation ...... 60 2.4.2 Roads and Bridges ...... 64 2.5 RIVER BASIN MANAGEMENT...... 66 2.5.1 Introducing the River Basin approach ...... 66 2.5.2 International experience for River Basin Management ...... 67 2.5.3 Application to Nepal...... 68
3 PROMOTING PRIVATE SECTOR PARTICIPATION...... 71 3.1 FINANCING HYDROPOWER IN NEPAL...... 72 3.1.1 Need for Private Sector Participation ...... 72 3.1.2 Project Finance: an Overview of Development Models...... 73 3.1.3 Examples of project structures in Nepal...... 76 3.1.4 Is Domestic Financing Available?...... 78 3.1.5 Recommended improvements for domestic financing ...... 81 3.1.6 The need for a dedicated Nepalese Financing Institution (FI) for Infrastructures ...... 83 3.1.7 How to Attract Foreign Funding?...... 86 3.1.8 The possible role of multilateral funds ...... 88 3.2 STRUCTURING OF PUBLIC-PRIVATE PARTNERSHIPS ...... 90 3.2.1 PPP Options ...... 90 3.2.2 Risk Management under PPP ...... 92 3.2.3 Major Risks Factors for Hydropower ...... 94 3.2.4 Power Purchase Agreements...... 98 3.2.5 Learning from the Bhutan/India Partnership...... 101 3.3 PROJECT DEVELOPMENT UNDER PPP...... 105 3.3.1 Typical steps of Project Development (International practice) ...... 105 3.3.2 Current practice in Nepal...... 107 3.3.3 The need for a Nepalese PPP Agency...... 108 3.4 BIDDING PROCESS ...... 110 3.4.1 Pre-Tender Preparation...... 111 3.4.2 Project Documentation and PDA...... 112 3.4.3 Bidders’ Prequalification ...... 117 3.4.4 Procedure for Request for Proposal (RFP) ...... 118 3.4.5 Selection Criteria ...... 120 3.4.6 Recommendation for a Bid Evaluation Committee...... 122
Final Report January 2011 4
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
3.5 ASSISTANCE WITH BIDDING DOCUMENTS...... 123 3.5.1 Lower Hongu, Lower Solu, Khimti-2 and other small Projects ...... 123 3.5.2 Sharada Babei ...... 124
4 EMPOWERING DOED...... 127 4.1 INSTITUTIONAL DEVELOPMENT OF DOED...... 128 4.1.1 Brief review of current mandate and organization...... 128 4.1.2 Proposed organizational adjustments ...... 129 4.1.3 Proposed Organization Chart ...... 131 4.1.4 Proposed Modernization of DOED ...... 132 4.2 A PPP AGENCY FOR NEPAL?...... 133 4.2.1 International Practice...... 133 4.2.2 Proposed functions of a PPP Agency for Nepal...... 134 4.2.3 How could DOED become the PPP Agency? ...... 135 APPENDIX 1: CONTRACTUAL TOR...... 139 APPENDIX 2: PROCEDURES FOR LICENSING...... 140 APPENDIX 3: PROCEDURES FOR ENVIRONMENTAL AND SOCIAL IMPACT ASSESSMENT ...... 141 APPENDIX 4: LIST OF RECENT / ON-GOING DEVELOPMENT BY INDEPENDENT POWER PRODUCERS ...... 142 APPENDIX 5: BIDDING GUIDELINES ...... 143 APPENDIX 6: SUMMARY OF SEMINARS, WORKSHOPS AND TRAININGS CONDUCTED DURING THE TA ...... 144 APPENDIX 7: PROPOSED TRAINING PROGRAMME FOR DOED...... 145 APPENDIX 8: LIST OF EQUIPMENT PROCURED DURING THE TA ...... 146
Final Report January 2011 5
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Table of Acronyms and Abbreviations
ADB Asian Development Bank BOO Build-Own-Operate BOOT Build-own-operate-Transfer COD Commercial Operation Date DOED Department of Electricity Development DPR Detailed Project Report EA Electricity Act EHV Extra High Voltage EIA Environmental impact assessment EOI Expression of interest EPA Environment Protection Act (1997) EPC Engineering, Procurement & Construction EPR Environment Protection Rules (1997) ESIA Environmental and Social impact assessment FC Financial Closure FI Financing Institution FNCCI Federation of Nepali Chamber of Commerce and Industry GON Government of Nepal HP Hydropower HPD Hydropower Development Policy HPP Hydro Power Project (Plant) IEE Initial Environmental Examination IFI International Financing Institution IL & FS Infrastructure Leasing and Financing Services INR Indian Rupee INPS Integrated Nepal Power System IPP Independent Power Producer IPPAN Independent Power Producers Association of Nepal IT Income Tax IWRM Integrated Water Resource Management KV Kilo-Volt MOEn Ministry of Energy (formely part of Min. Of Water Resources) MOEST Ministry of Environment, Science and Technology MOI Ministry of Irrigation
Final Report January 2011 6
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
MOPPW Ministry Of Physical Planning and Works MOWR Ministry of Water Resources MW Mega Watt MWh Mega Watt-hour NEA Nepal Electricity Authority NERC (proposed) Nepal Electricity Regulatory Commission NIB (proposed) Nepal Infrastructure Bank NRB Nepal Rastra Bank (Central Bank of Nepal) Nu Ngultrum (Currency of Bhutan) OBA Output-Based Aid PDA Project Development Agreement PF Project Finance PPA Power Purchase Agreements PPP Public-Private Partnership PSP Private Sector Participation PTCI Power Trading Corporation of India R&R Rehabilitation and Resettlement RFP Request For Proposal ROR Run of the River ROW Right of Way Rs Nepalese Rupee SB Sharada Babai (proposed hydropower project) SEA Strategic Environment Assessment SEBON Security and Exchange Board of Nepal SIA Social Impact Assessment SPPC Special Purpose Project Company TA Technical Assistance TORs Terms of reference TSO Transmission System Operator USAID United States Agency for International Development USD US Dollar VDC Village Development Committee WEC Water and Energy Commission WRA Water Resources Act
Final Report January 2011 7
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
1 Introduction and Background
Final Report January 2011 8
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
1.1 Purpose
1.1.1 Purpose of the present document
From October 2008 to April 2009, the SOFRECO/TMS Team performed Technical Assistance to review of Nepal’s hydropower (HP) sector and propose recommendations for achieving a rapid HP development emphasizing the private sector role in the development. This Final Report puts forward our final analysis, findings and recommendations to ADB, DOED and Min. of Energy.
The Report comprises of 4 sections: Section 1: Introduction and Background first gives the Technical Assistance (TA)’s objective and describes the work conducted by the Consultant, then provides the basis for a better understanding of the Consultant’s work, through an overview of the hydropower sector in Nepal Section 2: Improving the Framework describes the current situation in which HP developments take place in Nepal: legislation, policies, regulations, but also social issues and global problems of access to remote HP sites. Consultant’s recommendations for an improved framework are listed. Section 3: Promoting Private Sector Participation addresses all the major issues directly related to PSP. Financing options, Public-Private Partnership models and Developer selection process are reviewed, first presenting the international practices, then proposing specific recommendations adapted to the Nepalese context. Section 4: Empowering DOED proposes a set of capacity building actions aiming to allow the Department of Electricity Development (DOED) to play an increased role in the development of Nepal’s hydropower potential.
1.1.2 Objectives of the TA
The TA was designed by the ADB in order to foster Nepal’s hydropower development. TA beneficiary is Nepal’s Ministry of Energy (MOEn – formerly part of Ministry of Water Resources) and more particularly, its Department of Electricity Development (DOED). As stated in the Terms of Reference (TORs), the global objective is to help DOED promote private sector participation (PSP) in Nepal’s hydropower sector in order to harness the country’s significant hydropower potential. In order to do so, the Consultant was to assist in the development of a competitive bidding framework for successfully implementing PSP in the hydropower sector. The project’s TOR are given in Appendix 1.
Final Report January 2011 9
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
1.2 Organisation of the TA
1.2.1 Consultant’s Team
The Consultant’s team comprises of experts from SOFRECO, France in association with Total Management Services, Nepal. The following Experts took part in the TA: • Mr Hasso Bhatia, Team Leader and Power Sector Development Expert • Mr Ludovic Delplanque, Project Financing Expert • Mr Antonio Quitoriano, Institutional Development Expert • Mr Jeevan Raj Shrestha, National Power Sector Development Expert • Mr Sunil Devkota, National Financial Expert • Mr Murali Prasad Sharma, National Legal Expert • Mr Shree Govind Shah, National Environmental Expert
Three principal objectives were identified in the Inception Report, around which the Consultant organized his activities: Objective 1: Assess current policies, statutes and practices and identify major impediments preventing Nepal from attracting private investments deemed important to harness its vast hydropower potential, thereby denying promised HP benefits and economic well being to its citizens. Further propose a comprehensive set of mitigation steps to overcome those barriers, and recommend how to establish an enabling framework for promoting Power Sector Participation/Public-Private Partnerships (PSP/PPP) in Nepal by way of changed policies, legislation, incentive mechanism and best practices. Objective 2: Guide and assist DOED in its role as promoter of private power; assist in competitive bidding process, including: Streamlined licensing procedures, effective, transparent competitive bidding guidelines, bidding framework, and implementation practices. Objective 3: Work closely with the DOED to build capacity, training and staff skills to independently carryout its responsibilities as a primary agency charged with promoting and overseeing private hydropower development.
1.2.2 Timeframe of the TA
The TA started in October 2008, when a first mission was conducted to Kathmandu. The Inception Report, based on preliminary assessment of the HP sector, was discussed with the ADB and the Beneficiary in November/December 2008 and finalized in January 2009.
Final Report January 2011 10
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
In February 2009, the first Tripartite meeting took place in Kathmandu at the Ministry’s premises. Subsequently, a first Stakeholders Seminar was organized. In early July 2009, the second Tripartite meeting was held at ADB’s Resident mission in Kathmandu. Later that month, the Consultant organized with DOED a second Stakeholders Seminar. From Spring 2009 to Winter 2009, a series of workshop and training sessions were organized for DOED staff. An Interim Report was submitted in November 2009. In April 2010, the final Stakeholders Seminar took place in Kathmandu to present the Consultant’s conclusions and recommendations. The first version of the present Report was submitted then to ADB and DOED.
1.2.3 Collaboration with DOED and other stakeholders
TA office in DOED building
The Consultant Team established in early 2009 its office in the DOED building. Office space, power and internet connexion (when available) and vehicle for transportation inside Kathmandu, was provided by DOED. Computers, printer and other equipment were purchased for TA purpose and handed over to DOED in February 2010 (see list in Appendix 7). This presence allowed day-to-day interaction with the relevant DOED staff working on private power development. Team Leader and other team members could meet regularly with DOED Management and most particularly the Director General (DG), who provided valuable advice and guidance on the project conduct. DG was particularly helpful in organizing the Stakeholders Seminars by suggesting and arranging appropriate speakers for various topics, communicating with the MOEn staff to obtain their support.
Counterpart staff
Strong commitments were made during tripartite meeting in early 2009, that DOED shall assign 3-5 full time counterpart experts from DOED, Nepal Electricity Authority (NEA), Ministry working with Consultant’s team on fulltime basis. Unfortunately, only one person could be assigned to work with the Consultant. We understand that there is shortfall of manpower within the DOED as their workloads have significantly risen in size and complexity. We regret to say that without appropriate level of counterpart staff designated to work on fulltime basis with the Team, it was difficult to achieve the capacity building objective and hands on training and assistance on Bidding procedures and Guidelines. This issue was brought to the attention of DOED and ADB.
Collaboration with other stakeholders
The Consultant’s team has conducted meetings with the following stakeholders: • Independent Power Producers Association of Nepal (IPPAN) representatives • ‘Task Force on 10,000 MW ‘ HP Development • NEA officers
Final Report January 2011 11
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
• Financing institutions (FIs): Nabil Bank, Nepal Investment Bank, Bankers Association to gain a deeper understanding of private financing capacity, Nepal Rastra Bank (NRB) restrictions, formation of Infrastructure Bank, Barriers to HP financing, etc. • Developers of currently active projects: West Seti, Upper Karnali, Upper Tomakoshi, SN Power • Meetings with officials in the various ministries and agencies to understand interaction among various agencies on HP process, permits and clearances, etc • Visit to Bhote Koshi plant site.
The Consultant attended numerous workshops and seminars, including: • IPPAN seminar: Banker’s perspective on HP financing, bidding • IPPAN seminar: Barriers to HP Development, A Policy Perspective • IPPAN seminar: Transmission Issues • Fourth Hydropower Convention- sponsored by India-Tech. • Removing Barriers to HP in Nepal Workshop (WB tech assistance Project)
1.2.4 Trainings, workshops and seminars
Stakeholders Seminars
Three Seminars were organized during the course of the TA: 1st Stakeholders Seminar on February 10, 2009 to discuss the issues and scope of activities as identified in the Inception phase. Participants represented major stakeholders: Ministry of Water Resources (MOWR, now MOEn), DOED, private and public developers, NEA, FIs, IPPAN and others. Approx. 50 persons attended, and engaged in a serious and candid discussion of critical issues. Workshop was an important opportunity to gain insight, learn firsthand of the hydropower issues, constraints, experiences and practical difficulties faced by developers, FIs, and their suggestions. 2nd Stakeholders Seminar on July 29th, 2009, widely attended by major stakeholders: private, public and Government. Speakers included Developers, Govt. officials, Bankers and IPPAN representatives. MOEn Secretary Mr. Shankar Prasad Koirala kindly agreed to be the key- note Speaker. 3rd Stakeholders Seminar on April 29th, 2010. Consultant presentation of its final Findings and Recommendations was followed by a fruitful discussion on urgent steps to jumpstart Hydropower in Nepal.
Workshops for DOED Staff
Consultant organized short workshops for appropriate DOED professionals, as a part of the capacity building activities. In coordination with the DG, the following topics were identified: • Electricity tariff setting • Power Purchase Agreements • Project Financing
Final Report January 2011 12
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
• Project Economic Evaluation and Cost-benefit Analysis • Policy and Legislative framework • Nam Theun 2 Hydropower Project Plant (HPP) Case Study and lessons Learnt • Principles and Application of Project Financing These ½ day workshops were prepared and delivered by the Consultant’s Experts.
Other training activities
At DOED request, other training activities were conducted: A 5-day workshop ‘Economic and Financial Evaluation Of Hydropower Projects ’ (November2010). Over 30 staff from DOED, WECS and MOEn attended this course. Software training in AutoCAD and GIS was organized for 10 DOED technical staff at a local Technical Institute and was successfully completed. Certificates are issued to the DOED staff who attended the course.
Final Report January 2011 13
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
1.3 Nepal Hydropower Sector: opportunities and barriers
1.3.1 Brief Overview
Nepal is a country of high mountains and rivers, and has both a relatively large population of approximately 30 millions and a power hungry neighbour, India. Apart from biomass (including firewood, animal dung and agricultural residue) the only significant source of energy in Nepal is hydropower. Nepal’s economically feasible hydropower potential is estimated to be around 43,000 MW. Though only 2% of Nepal’s hydropower potential has been developed so far, Nepal has for decades identified the development of its vast hydropower resources as a cornerstone for economic growth and poverty alleviation. The hydropower development is viewed with twin purposes: a) Provision of on- demand electricity to households and businesses for raising living standards, and b) Nepal’s hydropower potential is large enough to become an important export revenue generator.
The Integrated Nepal Power System (INPS) has a total installed capacity of about 692 MW only, of which about 635 MW is hydropower based. Of these, only 92 MW is from seasonal storage and the rest is from run-of-river schemes, though some have daily pondage.
The Government of Nepal (GON) has recognized that its domestic financial and technical resources are inadequate to harness its hydropower potential, and that private developers, International Financial Institutions, foreign lenders and investors should play a critical role. For many years, GON has publicly stated its policy goal of encouraging private sector involvement in power development for domestic needs as well as for exports. But since the enacting of Nepal’s first policy on hydropower development in 1992, only several small private hydro projects were completed.
The envisaged large-scale hydropower development for export has remained elusive, and the various Independent Power Producer (IPP) projects currently under development are facing multiple and diverse difficulties, as described later in the report.
Final Report January 2011 14
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
1.3.2 Main Stakeholders
This paragraph gives a brief description of the major institutions playing a role in the development of HP sector in Nepal.
Ministry of Energy (MOEn)
Formerly, energy was part of the attributions of the Ministry of Water Resources. In 2009, a separate Ministry was created. As per the Work Division of GON, this Ministry is responsible for the following tasks in link with HP development: • Development of policies, plan and implementation for conservation, regulation and utilization of energy. • Construction, operation and maintenance and promotion of multipurpose electricity project. • Study, research, feasibility study, construction, operation, maintenance and development of energy development and electricity development projects. • Promotion of private parties in electricity development. • Matters related to bilateral and multilateral dialogues, agreements and understandings regarding energy and electricity. • Matters related to tax. • Coordination of institutions related to electricity.
DOED
The Department of Electricity Development (DOED), a technical support unit of the Ministry, is mandated to assist and facilitate hydropower developers in coping with all the legal requirements e.g. licensing, etc., ensuring transparency of regulatory framework, and integrating activities between the GoN and that of private investors/developers. Organizationally, the DOED is headed by a Director General and assisted by 3 Deputy Director Generals, heading the 3 Divisions having 2 Sections each as follows: Project Study Division • Survey and Feasibility Study Section • Planning Section Privatization Division • Proposal Evaluation and License Section • Project Promotion and Monitoring Section Inspection Division • Project Inspection Section • Electricity Inspection Section
Final Report January 2011 15
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
NEA
The Nepal Electricity Authority is the vertically integrated public utility company in charge of generation, transmission and distribution of electricity. Except for some smaller HP projects by independent power producers, electricity supply in Nepal has thus traditionally been undertaken and financed by a public body. As ownership has been public, the projects have also generally been financed through the public sector. Under single buyer and single seller model, NEA is often the sole buyer of electricity from IPPs under a PPA. NEA also plays a role in: • Recommendation of long and short- term plans and policies in the power • Definition of tariff structure for electricity consumption (to be approved by GON) Restructuring of the power sector, which would include functional unbundling of NEA, is envisaged, but no decision has yet been taken in that direction.
Other Institutional Players
Of the various sector institutions that that the DoED interacts with, foremost is the Ministry of Environment, Science and Technology (MoEST). The MoEST approves the Environmental Impact Assessment (EIA) report. In the case of an EIA, the MoEST determines the Scoping Document; approves the Terms of Reference; checks the legal requirements; publish 30 days public notice in a national daily newspaper; enable institutions or individuals to offer suggestions; carry out environmental auditing after 2 years of commencement of the service of the proposal. Another sector institution is the Ministry of Forest and Soil Conservation (MoFSC). MoFSC plays an important role in project implementation requiring any acquisition or encroachment of forest area. Through its District offices, it will allow the use of forest land by taking the appropriate mitigation measures under current norms and regulations. Respective district forest office and range posts provide the technical support to the proponent during project implementation regarding matters of forestry and environmental monitoring of the forest sector.
Independent Power Producers’ Association
A private sector institution is the Independent Power Producers’ Association, Nepal (IPPAN) serving as link between the private sector and government organizations. IPPAN acts as a liaison between industries and the hydropower sector. As stated in its corporate vision, it is to help mobilize private capability, both national and international, to overcome the constraints confronting hydropower development. It has 14 listed corporate members (hydropower firms) and 9 associate member firms.
1.3.3 Nepal Power Sector Strategy
Encouraging private sector – with little success
For many years, GON has publicly stated its policy goal of encouraging private sector involvement in power development for domestic needs as well as for exports. The private sector role in the hydropower strategy was first enunciated in the 1992 HP Policy document, which encouraged a few IPPs to successfully complete smaller projects. The 1992 Electricity Act codified the Policy Document.
Final Report January 2011 16
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
A broader and comprehensive policy was adopted in 2001,expanding the role of private sector in development and promotion of power exports. ‘Hydropower Development Policy 2001’ opened the door and encouraged private sector participation (PSP) in the HP development. Export potential and power trade received spur with the passage of India’s ‘2003 Electricity Act’, which granted access to private developers into the Indian Power Market. NEA and private developers of Nepal’s HP could now sale power to India. Availability based tariffs adopted in 2003 Act further enhanced the viability of hydro projects.
Hydropower Development Policy (HPD) 2001 was an important policy document encompassing wide-ranging issues in the HP sector development in a comprehensive manner: to tap private funding - local and foreign; bring in private sector participation, local community involvement, competitive bidding and risk sharing under BOOT modality. To encourage wider private financing an Infrastructure Financial Institution was proposed. Unfortunately, the HPD 2001.Policy was never supported by an enabling legislation. The policy was never codified by legislative enactment.
Although a few private hydro projects were completed, the envisaged large-scale hydropower development has remained elusive. In spite of interest shown by developers and financiers, no major IPP project has commenced in a serious way. No private developer has reached the stage to qualify to receive a construction license much less achieve financial close.
Shifting priorities
In the past Nepal alternated in its priorities. In the last decade the 1992 HP Policy emphasized smaller domestic generation plants, public and private, to meet internal demand, extending service to rural areas, improving quality and reliability of supply in urban cities, improving service reliability to industry and businesses. Several small IPPs private hydro projects were completed in this period: Khimti-1 (60MW), Upper Bhote Koshi (45 MW), Indrawati (7.5 MW). Later, the emphasis shifted to large projects and exports and large-scale injection of private sector in the power development. The concept was that by developing large export projects domestic needs would be met by way of the royalty energy (10%). Concept of free energy was introduced in the 2001 Policy. A slogan goal was: 10,000 MW in 10 years providing 1000 MW free power, would solve the domestic needs.
This well-meaning and apparently sound strategy however did not pan out. Large project concept ran into formidable obstacles due to: GON inability to fully implement and support the stated policy, practical difficulties as political environment and security deteriorated. It is a recognized fact that private investor/developers received little public support. Reliance on export projects alone to meet domestic need was imprudent planning strategy. Nepal therefore suffered and continues to suffer crippling domestic power shortages. Only approx. 125 MW of new capacity was built between 2001 and 2009. As NEA got bogged down in 70 MW Middle Marsyangdi project, few other domestic projects were initiated.
Inadequate planning?
Virtually all of Nepal’s hydro plants – current and planned – are run-of-the-river (ROR). This has exasperated capacity shortages during the dry season, as was experienced in last winter. Proper planning should include an optimal mix of ROR vs. storage projects, so as to
Final Report January 2011 17
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP) meet seasonal changes in supply and demand. Storage projects such as Budhi Gandhaki and West Seti have yet to takeoff. Cross border transmission capacity is also lagging behind. Even though Nepal’s planning strategy has rightly included beefing up and expanding cross border transmission with India, little has been achieved. Current capacity allows 50-70 MW import capability, much of which is aged, fragile and lacks redundancy. This was painfully realized during the recent Kosi dam break and transmission outage that has yet to be fully restored. Recent moves on cross- border transmission cooperation between NEA and India are very positive and encouraging, although moving slowly and running into obstacles, as noted elsewhere.
1.3.4 Hydropower Opportunities
Prima faci, Nepal has ideal market conditions for power sector development. Many favorable factors dictate that large-scale HP development is feasible and achievable, including:
Favorable domestic conditions
The growth potential in domestic economy and power demand is >10% annual clip – growth could be even higher but for the electricity capacity constraints. Nepalese investors are showing increasing interest in HP investments. Generally, Nepal has business friendly laws that protect property rights, and recourse to legal system (implementation and enforcement, however, is another matter). Nepal is the first country in world amongst least-developed countries to gain entry into WTO. It must also be noted that Nepal has a highly educated workforce who can operate advanced technological production facilities, as well as sophisticated financial systems.
Power-hungry neighbours
Having neighbours like India and China, with huge economies, and large appetite for power and energy, is definitely an opportunity. Both countries have financial wherewithal – both public and private – to support Nepal’s HP development. India has open access and relatively free- market power trading system, and stable regulatory regime since passage of Electricity Act. 2003; Nepal has well established trade relations with India in many sectors and is a reliable trading partner. Nepal-India has existing power interchange arrangements, physical connection and plans for stronger cross border ties at several points. Eventually Nepal could integrate with one or more India’s power pools, power exchange, spot market. There are particular opportunities for seasonal economy energy exchanges due to load diversity between Nepal and Northern India. Recent projects show growing interest from China as builder, in Nepal’s HP development. . Nepal may explore a deeper power trade cooperation with China.
1.3.5 Power Sector Negatives
Despite such opportunities why has Nepal not succeeded, and not attracted private investments?
Final Report January 2011 18
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Needless to say, political and social climate over past two decades has been highly unstable and continues to remain so despite few flickers of hope. Poverty driven local opposition, social unrest, protests, and violence – that is genuine in many instances but often politically inspired – is perhaps the biggest negative in the HP progress. In addition, several important factors impeding HP development, particularly large scale projects, can be broadly identified: • Ambiguity relating to hydropower development at public and government level, alternating enthusiastic statements with lack of proper support • Failure to appreciate that building a HP project is a long tortuous process, requires sustained, large-scale financial and technical capacity, lacking domestically. Once built HP remains a risk driven enterprise throughout its operating life. • Failure to recognize that investors have other places to go if the risk reward is not attractive in Nepal. Investor will not invest for shear love of Nepal • Growing mistrust of foreign investors and of export, based on the sentiment that Nepal’s water resources should be for Nepalese only. This sentiment could be understood as reflecting a mistrust in GON’s capacity to properly handle a fair relationship with foreign players. • Failure to recognize that HP resources are only valuable if properly harnessed: use it or lose it. Many poor countries have vast hydro potential that cannot be developed: Afghanistan or the Democratic Republic of Congo are good examples. In sum, Nepal does not provide an investor friendly enough environment to support large scale HP development.
1.3.6 Consultant’s Strategic Recommendations
In addition to the specific recommendations related to Private Sector Participation, which are developed later in this Report, the Consultant would like to emphasize several recommendations to improve the current state of affairs.
Consensus Building
As was discussed during the 2nd Stakeholder Seminar, there is as yet no true national consensus within the public, GON and stakeholders as to whether and how the Nepal’s HP should be developed, whether and how much should be exported to India etc. Lack of clear policies, resource commitment and local opposition to HP can be attributed to this lack of consensus. Due to this, projects have been hostage to political and local demands. All stakeholders have responsibility to assist in building a consensus. Necessary ingredients for a consensus-building are: • Provide full public information on all aspects of HP, and clarify who are the beneficiaries • Propose mechanisms for an equitable sharing of resources, tax and royalty revenues etc. • Establish on solid grounds, who has right over the water in the rivers and streams, and what is right of people to Natural resources • Clarify the legal and regulatory framework governing labour relations, compensation of Affected People (AP), and dispute resolution mechanism
Final Report January 2011 19
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Re-emphasize Domestic Projects
For the near and medium term, Nepal should re-emphasize developing smaller domestic oriented projects within both public and PPP domain. The projects under current serious development should be identified and set on fast track. There are several significant size projects under development by NEA. The more promising ones are: Upper Tamakoshi (456 MW), Chamelia (30 MW), Upper Trishuli A & B (97 MW). Most promising, Upper Tamakoshi, should be on extra fast track. Two IPPs, Rahughat (30 MW) and recently awarded Kabeli-A (30 MW) should be placed on priority list. Six small IPPs totaling 16 MW under construction should also be prioritized.
Promote and Advance Storage Projects
To attain better year round capability certain storage projects should be included in the generation mix and advanced. Smaller size storage projects where natural sites are available along a River basin should be identified and prioritized. Storage upstream gives optimum flows in dry season to downstream projects. The installed capacity with storage projects can increase considerably (up to 3 times) compared to just ROR1. Studies show that unit cost of projects and produced energy decreases dramatically when rivers are planned with storage options.
NEA has identified six projects -- Upper Seti (127 MW), Nalsyaugadh (400MW), Tamor Reservoir Project (380 MW), Trishuli (37 MW), TamaKoshi V (87 MW) and Budhi Gandaki (600 MW - which can be developed as reservoir-type projects. Japan International Cooperation Agency (JICA) has shown interest to conduct feasibility reservoir-type projects like Nalsyaugadh and Budhi Gandaki. As noted, a taskforce at the Ministry of Energy has recently given permission to develop BudhiGandaki under public-private-partnership model.
Linking Hydropower with Industrial Development
Tying up hydropower with Industrial development had been recommended in 1970s by experts in Nepal2 but never received proper attention. Such studies should be revisited. Indeed, the real value of large-scale HP production lies in its attractiveness to energy intensive industries as source of cheap electricity. Around the world, energy intensive industries such as aluminum, steel and copper production, fertilizer are located near large power projects. In this sense Nepal’s export-oriented HP development model is a flawed and not truly benefiting Nepalese citizen from its hydro potential: certain hydro project sites should be set aside for development by industrial houses – local or foreign – committing to expand or bring new industry into Nepal. Cornerstone of attracting industrial users around a Hydropower is the availability of cheap power. This means special provisions have to be made to reduce project costs by granting special privileges to users and developers. A new and relaxed set of regulation and financial facilities should be offered to industries. Nepal should consider designating Special Economic Zones (SEZ) around certain hydro sites. This is consistent with the objectives of Industrial Enterprise Act: to foster overall economic development of the country by creating conducive environment for industrial investment and increasing the productivity thereof. GON
1 See recent Kali Gandhaki River Basin Optimization study 2 See report “Possibility of Industrial Utilization of Hydro-electric Energy Resources of Nepal 1970”, Mr Padmalal Shrestha)
Final Report January 2011 20
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP) also has to do an effective marketing job to advertise its attractiveness to energy intensive industries requiring cost effective labor.
Many industrial companies could be interested. For example India has high demand for cement and deficient in production. Consultant was advised that Birla Cement has expressed interest in building cement plants in Nepal, one of the attractions being the cheaper hydro power. Paper, fertilizer production can be located if given facilities. Such opportunities should be seriously explored.
Diesel Power as Stop gap Arrangement
As noted, Nepal has severe power shortages during the dry season. This has very crippling effect on businesses, industry and homes. Such large-scale outages are unacceptable even for developing countries. Building some diesel peaking units should mitigate Nepal’s near- term power deficiency. While expensive to operate this power source can reduce severe outages during dry season. Higher operating costs would still yield positive benefit-cost ratio when compared against the outage costs. Moreover it reduces the need for individual inefficient smaller auxiliary diesel generators many businesses have to install for emergency use. This is also the environmentally more benign option for short term. Diesel generators can be owned and operated by private operators on fuel efficiency share-the- savings basis.
Final Report January 2011 21
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
2 Improving the Framework
Final Report January 2011 22
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
2.1 Policies, legislation, regulations
2.1.1 Existing and pending laws and regulations
‘HP Development Policy 2001’ is the principal operating policy document on HPP policy of Nepal. Also two important pieces of legislation are actively before the parliament since 2006. • The proposed Electricity Act is designed to liberalize power trade conditions and attract private developers and incorporates main goals enunciated in the 2001 strategy. • National Energy Regulatory Commission (NERC) Act, which is more significant, is designed to establish a strong independent regulator with sweeping mandate to evaluate power projects, investments, approve PPAs, create power market, etc. It has premiere role as tariff regulator. Stakeholders view an independent NERC as important missing step in hydropower development. Hopefully once enacted the new Agency will establish clear rules and guidelines for project evaluation, PPA review, and tariff setting.
List of existing legal provisions
Existing legal provisions in Nepal that are relevant to hydropower development include: • Hydropower Development Policy 2049 (1992) • Electricity Act 2050 (1993) • Electricity Tariff Fixation Regulation 1993 • Water Resources Act 1992 • Water Resources Regulation 1993 • Nepal Electricity Authority Act • Environment Protection Act 2053 • Foreign Investment and One-Window Policy 1992 • Foreign Investment and Technology Transfer Act 1992 • Industrial Enterprises Act 1992 • Industrial Policy 1992 • Power Development Fund Order 2003 • Privatisation Act 1994 • BOOT Act • Companies Act 1997 • Amended Income Tax Act 2001
Final Report January 2011 23
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
The Electricity Tariff Fixation Commission has been non-functional for several years. In fact, Nepal has not enacted a single legislation on hydropower or energy regulation since 1993. Nonetheless, several provisions have been made including: • An amendment to the Environment Protection Act meant to exempt hydropower projects under 50 MW from submitting an Environmental Impact Assessment (EIA), and • An amendment to the Securities Registration and Issuance Regulation 2065 which implies that a company has to float a minimum of 30 % shares of its issued capital in the following manner: 5% to company staff, 10% to locals and 15% to general public; locals cannot sell off shares for 3 years; long gestation period projects like hydropower projects can now offer shares to the public during construction phase after obtaining a sound financial close and a generation license, and approve the floating of such shares in its first AGM.
Regarding the latter, SEBON (Securities and Exchange Board of Nepal) hopes the amendment will assist in improving the investment climate in hydropower. The impact of this decision on project financing would need to be further debated with the international lending community.
Inconsistency and discrepancy
In general, laws and regulations applicable to the development of hydropower projects in Nepal are often unclear and inconsistent, and that is creating confusion for developers to properly anticipate projects’ economics and negotiate Project agreements on fair basis with GON. Example of such discrepancies among laws and regulations include: • Tax income holiday for hydropower project: 15 years in Electricity Act 93, 7 years in proposed revised Electricity Act, no exemption in Amended Income Tax 2001 • Requirement for project to obtain a Generation Licence to start construction: DOED says that Survey Licences are issued for 1 year (2 in case of larger projects) renewable every year up to 5 years, during which time developers need to complete a Detailed Project Report (DPR) (including Feasibility Study and EIA), enter into PPA with an offtaker, and complete project financing so that it can obtain a Generation Licence to start construction. In theory, the Hydropower Development Policy 2001 provides a validity period of up to five years for a Survey License. However the Policy is yet to be enacted.
Expected improvements in the near future
As of the date of this report, eight bills out of the 27 that are still under consideration in the Parliament Statutory Committee were to be tabled in the winter session (also known as Bills Session) of the Parliament. These include two bills relevant the hydropower sector namely: • the new Bill on Nepal Regulatory Commission 2065 (NERC), and • the Bill on Electricity Act 2065 (EA), the latter being an amendment to the existing Act.
Both NERC and EA have been pending in the parliament since 2006 but no estimates can be made on when these will be passed. Improvements are expected from the adoption of draft, but gaps will still remain to be addressed including: • Overlapping laws, rules, lack of harmonization
Final Report January 2011 24
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
• Non-Supremacy of Electricity law - Electricity law has been overridden by tax and other laws in the intervening period • Licensee water rights are not fully protected • Even with its imperfections, the 2001 Policy should be codified into law • No regulatory framework or independent, robust regulator • No forum for independently evaluating project economic viability and establishing fair cost- based pricing mechanism • No forum or established procedure for dispute resolution on licensee rights and obligations • Conflicting NEA mandates, which is often forced to act as builder, seller, buyer and price- setter • NEA’s poor balance sheet (largely due to GON failure to bring tariffs to cost levels) enhances domestic IPP risk and uncertainty of PPA performance
2.1.2 Analysis of Hydropower Development Policy 2001
As the operating document on HP, it is important to briefly describe provisions of the HPD Policy 2001. Hydropower Development Policy was first formulated in 1992 to encourage IPPs to build and operate power projects in Nepal. Although some small projects did successfully commence and complete (Khimti,1, Bhotekoshi, Indrawati) no major breakthrough occurred. A more comprehensive HP policy was enunciated in 2001. In addition to previous goals, the revision was aimed at developing large scale privately owned projects emphasizing electricity as export commodity. The 2001 document elaborates various provisions relating to: • Environment, Land Acquisition, R &R, • Licensee protection of permitted water rights • Investment: Attracting domestic and foreign private investment in the sector, preference for Nepali-foreign JV; creation of a infrastructure Financial Institution • Special provisions for rural electrification and small hydro, establishing an Alternate Energy Center. • Power Purchase Agreement ( PPA) for non-captive plants • Management of investment risks: This provision describes in good detail GON’s assurances regarding protection of private investment, exchange facilities for repatriation of profits, debt service, proceeds from asset sale; rights of due process, compensation for loss and damages caused by GON actions, non-nationalization of assets, • Security: if project is unable to provide for local security, GON may do so but at cost to the investor; • Application of income tax rules for infrastructure • Exemption from customs and VAT on new equipment. including for maintenance and repair. . • Compensation against adverse hydrological conditions in the form of license extension, etc.
Final Report January 2011 25
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
• Licensing regime and licensing provisions • Establish a Schedule of Royalties and fees. • Provides for compensating the loss sustained by the licensee due to non-compliance of any provision of license by the government and also provision of penalty if GoN sustains loss due to non-compliance by the Licensee
2.1.3 Proposed Electricity Act
The Act incorporates most provisions of the HPD policy 2001, including encouraging participation of private sector and export of power. Current DOED policies and procedures are largely based on these provisions. We briefly discuss and comment on major provisions in the proposed EA and discuss what further incentives may be necessary to attract private sector investment, to secure water rights, streamlining the licensing procedure, facilitate land acquisition, assist in rehabilitation and resettlement of displaced people.
Salient Features of Proposed Electricity Act
This Act will replace the existing Electricity Act 1992. A comparison of this proposed Act with the Electricity Act 1992 is shown in the following table. Table 1: Comparison of 1992 Electricity Act and Proposed Electricity Act Issues Electricity Act 1992 Proposed Electricity Act License is required to conduct License is not required to conduct survey, survey, generation, transmission generation, transmission or distribution of License or distribution of electricity electricity up to 3 MW (Article 3) exceeding 1 MW (Article 3) Economic, technical and In addition to economic, technical and environmental study reports along environmental study reports, power purchase with the application are required agreement along with the application are
for obtaining electricity generation, required for obtaining electricity generation, transmission or distribution license transmission or distribution license (Article 4.1- (Article 4.1) 4.2) Duration of electricity generation license shall be: (Article 10.4) 35 years for the projects developed for internal consumption The electricity generation plant or 30 years for the projects developed for export transmission and distribution shall 15 years for the projects using gas, coal and be under the ownership of GON petrol/diesel after the expiry of the term as prescribed in the license (Article Unlimited duration for plants based on wind, solar Ownership 10.1) or other biological base The land, building, equipment and 35 years for hydropower captive plants and structure related to electricity unlimited duration for plants using gas, coal and generation, transmission or petrol/diesel – till the industry is functioning distribution shall not be nationalized (Article 29). The licensee shall handover the plant and transmission lines after the expiry of the license to GON free of cost (Article 15) The land, building, equipment and structure related to electricity generation, transmission or distribution shall not be nationalized (Article 54).
Final Report January 2011 26
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Issues Electricity Act 1992 Proposed Electricity Act The licensee shall have to pay royalty to GON – generating more than 100 MW: (Article 21): Rs 200 for each installed kW of electricity /year + 2% of the average tariff per kW hour for a term up to 15 years for internal consumption projects from the date of electricity generation for commercial purposes - After 15 years, Rs 1,000 for each installed kW of electricity /year + 10% of the average tariff per kW hour for export projects For captive project - Rs 1,500 for each installed kW of electricity /year up to 15 years from the date of electricity generation After 15 years, Rs 3,000 for each installed kW of electricity /year for captive project The licensee shall have to pay Rs 400 for each installed kW of electricity /year + royalty to GON: (Article 11) 7.5% of the average tariff per kW hour for a term Rs 100 for each installed kW of up to 15 years for internal consumption projects electricity /year + 2% of the from the date of electricity generation for export average tariff per kW hour for a projects term up to 15 years from the date Royalty After 15 years, Rs 1,800 for each installed kW of of electricity generation for electricity /year + 12% of the average tariff per commercial purposes kW hour for export projects After 15 years, Rs 1000 for each For export oriented reservoir projects, Rs 500 for installed kW of electricity /year + each installed kW of electricity /year + 10% of the 10% of the average tariff per kW average tariff per kW hour for a term up to 15 hour years For export oriented reservoir projects, Rs 2,000 for each installed kW of electricity /year + 15% of the average tariff per kW hour after 15 years Royalty shall be paid to GON in the currency the electricity is sold. The licensee has to provide a minimum of 10% free energy to GON, if the GON has done feasibility study of the project. In case of licensee itself conducting feasibility study, the licensee has to provide some percentage of free energy to GON based on negotiation between the GON and the licensee. The land, building, equipment and structure related to electricity generation, transmission or distribution shall not be nationalized The licensee has to maintain the aquatic ecosystem of the river or stream as per GON’s rules and regulations (Article 30.1). The environmental release shall be at least 10% of the minimum monthly flow of the river or as No substantial adverse effect be Environment recommended in the EIA Report – which should made on environment by way of Management and not be lower than 10% of the normal discharge soil erosion, flood, landslide, air water rights (Article 30.2). pollution etc (Article 24) EIA shall be conducted for HEPs having more than 50 MW installed capacity and for transmission line (Article 31). The licensee shall conserve the environment as per GON’s rules and regulations (Article 32)
Final Report January 2011 27
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Issues Electricity Act 1992 Proposed Electricity Act The licensee may submit an The licensee may submit an application to GON application to GON for acquiring for acquiring private land or house (Article 33.1). private land or house (Article 33.1). GON will provide land and house as per the prevailing rules (Article 33.2). GON may make available such Land and Asset land or asset in the same manner GON will provide government land and GON acquisition and as it makes available to any managed forest land to the licensee for the compensation corporate body under the period up to the term of license on lease prevailing laws. If the land and agreement basis at fixed cost (Article 33.4). asset belongs to the GON, it will be leased to the licensee for the period up to the term of license (Article 33.2). The proponent has to manage resettlement and rehabilitation of displaced people or family (Article 34.1). Resettlement and rehabilitation should be Resettlement and implemented in integrated way. GON would None Rehabilitation provide administrative coordination And assistance to implement integrated resettlement and rehabilitation programme. The resettled family should have a higher income to maintain the family and a better living standard (Article 34.2 – 34.5). Article 35 has made the following provisions: Priority should be given to local people residing in the project area, Village Development Committee (VDC)/municipality, for employment or other opportunity on the basis of skill and capability. If displaced people or the permanent resident of project affected area at the start of the project Facility to local None construction wants to invest on share, the people licensee shall offer up to 10% of the share depending upon the capacity of the project. The licensee shall make a provision to electricity supply to residents living with a radius of 500m from the dam sites and powerhouse site. The licensee shall provide 20 units of electricity/family free of cost.
The licensee with an exception to 100% export oriented has to provide some percentage of electricity to the rural area. The quantity of Mini-hydel plants electricity is not fixed (Article 44). and rural None electrification GON shall set aside 20% of the royalty from the licensee for rural electrification (Article 45).
Article 48 makes the following provisions: GON shall provide 12% of the royalty from the Assistance to licensee to project affected DDC and 38% to the None local institutions project affected VDCs for rural electrification. GON shall provide 2% of the royalty money and 1% value of the free energy received from the licensee to directly project affected VDCs and
Final Report January 2011 28
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Issues Electricity Act 1992 Proposed Electricity Act municipality. Article 59 makes the following provisions: The licensee shall have to distribute 2% of the Bonus and annual taxable income to project staff and Residence Facility None workers. to workers The licensee shall make housing provision to project staff and workers.
2.1.4 The legal issues on Water Rights
The 2001 HP Policy protects water rights granted licensee once plant is operational. The existing Water Resources Act 2059 (WRA) on the other hand establishes priorities that do not necessarily guarantee, and can compromise water rights of a HP operator. There are also conflicting provisions between WRA and Local Self-governance Act, The WRA has vested the right over water resources to the state; however, the Local Self- Governance Act (LSGA) has empowered the local bodies to manage the water resources within their geographical jurisdiction. Under Section 28 of LSGA the Village Development Committee (VDC) is empowered to prepare, implement and operate drinking water projects, prepare projects for irrigation, dams, canals, water-channel to implement or cause to implement such projects, implement the river training (control) programs as well as to generate electricity within their areas. Section 96 of LSGA confers similar power to Municipalities. Section 189 of LSGA has given power to District Development Committee (DDC) to utilize water resources for drinking water, hydropower and irrigation within their areas. In view of this, there is no clear provision to coordinate the power conflict between the state and local bodies and protection of individuals' rights to use the water without affecting others' rights. Contrary to WRA and LSGA provisions, the Country Codes (Muluki Ain) recognizes the customary rights of user specifically in irrigation sub-sector and for cultural and religious uses and the Codes mentions that the upstream users (having land near to the intake or main source) have prior right to use the water for irrigating the land. However WRA has not made provision of the customary uses of water. The future requirement for irrigation or drinking water can put HP licensee at risk for adequate water flows unless laws are harmonized and a mechanism is developed to resolve potential conflicts.
2.1.5 Analysis of Land Acquisition Act, 2034 (1977)
General provisions for Land Acquisition
The Land Acquisition Act, 1977 (as amended) is the main legislation guiding the permanent acquisition of land and it is most widely applied. This Act empowers government to acquire any land at any place paying compensation for the land and the landed property so acquired for any public interest purpose or for a project executed by the government or the institution fully owned by the government. In case the government is required to acquire certain land or landed property for any corporate body under prevalent laws, the procedure as prescribed in the Act should be followed.
Final Report January 2011 29
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
This Act prescribes the land acquisition procedure and the formulation and functioning of “Compensation Fixation Committee” matters to be considered for fixing compensations etc. However, this Act does not have any provision for resettlement or rehabilitation of the person permanently losing land, house and other immovable property. There is provision in the Act for submission of complaint against the decision of land acquisition if the owner feels that the concerned land should have not been acquired. This Act states that the compensation shall be paid in cash, and the rate of compensation may vary between families losing most or all land and those who lose only some part of their land. Section 14 of this Act makes provision for providing in kind land to the persons when all his land is to be acquired. However such compensation depends on the availability of government land. Land compensation rates are fixed on the basis of prevailing land prices and takes in consideration losses, which the affected person would suffer as a result of shifting his/her residence or his place of business. There is no provision for compensating persons losing unregistered land, which they may have been occupying unlawfully. There is also provision to acquire land through negotiation; the government can acquire land for the purpose of public works by direct negotiation with the owner.
Application to the Hydropower Sector
The Act has made no provision for resettlement and rehabilitation, i.e. if land is acquired, the owner shall be given monetary compensation and there is no provision to provide land or house in lieu of the acquired land. The owner is compensated for the price of land or landed property acquired. However, it permits the government to issue land acquisition guidelines for projects of national interest. For instance, the Government issued Land Acquisition Guidelines in 1993 to assist the land acquisition process for the Arun III hydroelectric project (as required by the World Bank). The measures provided by the 1993 guidelines for the Arun III hydroelectric project were more progressive than the parent 1977 Act: the guidelines drafted in 1993 included the provisions relating to resettlement and rehabilitation for the displaced people. In addition, the guidelines included other programs for social and economic upliftment in project area and also providing opportunity to work in the project by conducting skill development programs for the locals who have to lose land or are affected from the project directly or indirectly Unfortunately the Arun III project was dropped after the feasibility study, therefore these guidelines were never implemented. Similarly the government has prepared and implemented similar guidelines for the Melamchi Water Supply Project. For the large projects, the existing laws are not sufficient to address all issues that may surface during acquisition of land for such projects. Due to lack of appropriate provisions in the Act, the resettlement policy and guidelines became donor or lender driven and each project has separate guidelines based on requirements of donor or lender: project specific “Land Acquisition Guidelines” are framed considering the social, economical and geographical condition of the project area. Considering all these issues, Resettlement and Rehabilitation Policy 2007 was prepared based on which the Land Acquisition Act was to be amended or new Act was to be enacted. The Policy is still pending approval (see next paragraph). However, these guidelines are applicable only to the government projects. No specific policy for private sector project is in place. Existing and proposed Electricity Acts provide that the Government may acquire land, if so requested on behalf of and paid for by the licensee. However, the issue has become intractable as the demand for land prices has been inflated ten to twenty times. The local demands for schools, hospitals, salary for teachers, construction of roads, supply of drinking
Final Report January 2011 30
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP) water, irrigation have been raised in the name of use of local resources as well as environmental effects caused to affected persons. In addition, the project typically would need more land during construction phase and can release some lands when plant operation begins. So making some land available under lease during construction phase is one option. There is no clearly defined policy or legal provision for leasing. Some states in India have provision to acquire land for HP projects and lease them to the project developer on long-term basis for nominal price as an attraction to build the project. We believe similar approach might work in Nepal.
2.1.6 Pending Resettlement and Rehabilitation Policy, 2007
Government is in the process of formulating ‘Resettlement and Rehabilitation Policy’ which would integrate Land Acquisition and Resettlement and Rehabilitation of the affected people. The main objective of this policy is to prepare legal basis and organizational arrangement for timely and fair payment of compensation as well as resettlement or rehabilitation of affected persons, ensuring living standards no less than their existing standards. The policy has been drafted and is in final stage of its adoption. The policy has set guiding principles for acquiring lands and use of acquired lands. Similarly the policy has set principles not to destruct or destroy the religious and cultural heritages. The policy also requires making every endeavor to relocate the people in places as close to existing settlement as possible. The policy has also emphasized honoring the sentimental value of the indigenous tribes and groups while resettling them. If this policy comes into force and earnestly implemented, it will take care of many of the burning issues of Rehabilitation & Ressettlement (R&R). However, despite elapse of much time since the policy was drafted, it still awaits the formal approval of government and enactment. A full analysis of the proposed Policy is given below in § 2.3.5.
2.1.7 Financial Incentives in HPD 2001 AND EA 2007
There are few real financial incentives in the 2001 policy or in the proposed Electricity Act. The 1992 Act allowed 15- year income tax exemption. Projects such as Bhote Koshi, Khimti- 1 enjoy 15-year tax holiday. The 2001 Policy did not specify but adopted the prevailing income tax policy (6.14). In 2001 however, GON amended the Income Tax (IT) Act and removed the tax holiday provision. The current projects thus do not carry explicit IT holiday. The proposed EA has reintroduced some tax holiday provisions. Under current version of the proposed EA, there are provisions for exempting certain taxes and duties. Income tax exemption is allowed for 7 years from Commercial Operation Date (COD). After expiry of income tax holiday, the tax rate shall be at the rate of 50% of applicable taxes for infrastructure enterprises for following 3 years. Further a currently proposed Finance Bill has limited the tax provisions to apply only to projects achieving COD by 2018. The proposed Act has a grandfather clause to protect current licensees from future adverse tax law changes.
In reality the Tax holiday has little value in the earlier years of operation. During the earlier years the project carries high, capitalized project costs. Depreciation and interest costs, which are higher in earlier years, are a deductible expense for income tax purposes.
Final Report January 2011 31
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Therefore there is little net income to the project. It is only in later years, after debt is paid off that substantive profits are booked. The problem is exasperated due to recent changes in the tax code. Earlier, the depreciation rates, for tax purpose, were uniformly fixed at 4% for all plant accounts. Recent changes now require accelerated depreciation rates based on plant groupings. Table 2 Depreciation Rate
Plant Grouping Depr. Rate
Civil works 5 % Major equipment: Turbine, generator etc 10 % Furniture and standing facilities 15 % Vehicles 20 % Computers, Software 25%
This change in depreciation law further reduces the tax liabilities in earlier years and pushes the income to later years when less depreciation is booked. This further erodes the attractiveness of a short tax holiday. It is therefore recommended to make this incentive really attractive by restoring the tax holiday period to 15 years as allowed in the 1992 EA, unfortunately superceded by the Tax Law. • There is some confusion on applicable VAT. It appears during the construction period (up to date of commercial operation), the developer is entitled for exemption of value added tax (VAT) on construction materials and purchase or import of equipment, machinery, and related spare parts. • Customs duties: Only one percent custom duty will be charged on imports during construction period. • Depreciation rate of 4% in 1992 Act is replaced with more liberalized rates based upon plant account groupings. There has been some reservation within the Govt. and public against special tax provisions for private HP operators.
2.1.8 Recommendations for Improvement
Enact NERC by ordinance
To be realistic, the ongoing political transition makes it difficult to expect quick passage of the two pending legislations. We recommend that in the interim, two documents could be enacted by a presidential Ordinance or Decree. Such two-step approach has been used in some countries (Moldova). A presidential Ordinance has the force of law, which a mere policy document does not. A Decree could later be ratified by the parliament. Under the Nepal’s interim Constitution the president has such powers, especially now since there is no sitting parliament. ( At the time of this writing Legal status of parliament is uncertain, whether it is non-sitting or simply non- functioning.) In fact GON passed BOOT Act 2006 legislation by a Presidential Ordinance in 2003 which was ratified by parliament in 2006.
Final Report January 2011 32
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
With legal mandate, work can begin on implementation of the new HP policies and on creation of a regulatory body. One investor concern regarding PPA is that once approved will the future regulator second- guess a PPA? Or will he be legally bound to approve pass thru of project costs in retail tariffs. This has been a main difficulty of NEA. Due to significant time lag between project approval and operations, circumstances can change often leading to regulatory afterthought. For this reason an early appointment of a Regulator is essential. Moreover the NERC should specifically address this issue by grandfathering existing PPAs from regulatory review. We should note that once the NERC statute passes, it would take considerable time to develop an organization and professional staff, draft rules (which may need Cabinet or parliamentary approval), and become fully operational agency. Nevertheless, immediate enactment of the NEA and NERC act will be a crucial confidence building measure and positive signal to the development community of Nepal’s serious commitment to its HP program.
Tax Holiday
Financial incentives as described above are a norm for infrastructure projects. They should be unambiguous, and stable. Further other laws should not supersede them. Allowing tax credits towards employing local workers, job training , R&D should also strengthen incentives. In addition to tax concessions, GON has to create other incentives to enable hydropower developers, lenders and investors to view Nepal HP favorably in comparison to neighbors.
It is therefore recommended to: • Liberalize tax laws; introduce incentives for debt and equity investments. • Restore 15 year Income Tax waiver • Expand tax shelters: Allow tax credits towards employing local workers, job training, R&D.
Upfront Fees and Equity
While it is desirable to attract financially sound players by requiring substantial upfront fees, its net effect should not raise the project cost. The upfront fee should be amortized and credited back to the developer, fully or partially depending on project size. Similarly so-called ‘free equity’ should in fact be developer‘s contribution to enable GON to acquire equity partnership. However it should be offset against developer‘s future obligations, such as capacity royalty. • Allow operator to issue tax- free bonds to lower financing costs. Tax-free bonds are issued in many infrastructure projects (irrigation water, sewer, power) by municipalities and local authorities. India has provision authorising its infrastructure funds to issue tax free bonds to public and to the financial institutions • SEBON and NRB can relax rules on HP bank financing and public share offering. Currently there are several restrictions. • Bank cannot buy more than 10% of a project company and is restricted in lending if it owns equity.
Final Report January 2011 33
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
• Public shares cannot be issued until after the COD, and only if three years of profitable operations has been demonstrated, presumably to reduce the public exposure to project risks. Also the authorized offering price does not fully reflect the market value, and reduced risk since COD has been reached. • SEBON permits no more than 5% share offered to local community. This should be opened up to allow sponsor some flexibility depending on the project size, and capacity of the local community to absorb the offering equity. Recent events in Chilime show that smaller projects may be able to absorb greater than anticipated portion of the project equity.
It is therefore recommended to: • NRB should allow issuance of tax-free bonds/notes, convertible bonds (debt to equity), zero-coupons (accrued interest paid at maturity) for certain qualified projects • Tap growing local appetite for hydropower investments by relaxing SEBON, NRB rules; encourage equity investment, for example dividends derived from HP taxed at lower rates. • SEBON adopt more realistic and HP –centric rules • Securitize royalties and plow-back into project as equity (PPP-share); GON earn dividends instead of royalties • Allow to capitalize Upfront Charges and offset against future royalty obligations. This encourages financially strong bidders yet enhances project viability. Consider front- loaded PPA to improve cash-flows in earlier years for certain priority projects • Allow some energy portion (20-30%) as merchant sale under short and medium-term contracts, retaining long-term PPAs at regulated prices.
Project Insurance
As a result of inherent risks project insurance in Nepal is very expensive. The domestic insurance market is not well developed and projects have to turn to more expensive foreign companies for plant insurance. This only adds to the costs. Ways to reduce these costs needs to be explored. Nepal also should encourage reinsurance facility.
Final Report January 2011 34
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
2.2 Licensing issues
DOED is the institution responsible for licenses. During the Inception phase we learned of some inconsistencies and confusion in licensing procedures. For example, licenses were issued on first come first serve basis, paying scant attention to bidder qualifications, performance record. Multiple licenses are awarded to same party without ensuring progress on previous projects. We also were advised that survey licenses are tradable and often the sole reason for their acquisition. Many experts commented that full site potential capacity was not realized and projects were undersized.
2.2.1 Current Framework and Related Issues
The legal framework for the issuance and maintenance of licenses is set forth in the Electricity Act 1992 and the ensuing Regulations. As has been noted, although the revised Policy 2001 has been adopted, the enabling acts and regulations remain to be enacted. Nevertheless, the licenses are awarded under hybrid provisions of 1992 Act and 2001 Policy. Licenses are awarded for various categories of activities in electric power business e.g. generation, transmission and distribution. For hydropower projects with installed capacity of more than 1 MW, it is necessary for the developer to obtain the Survey License, Production License, Transmission License, and Distribution License. DOED, assisted by the United States Agency for International Development (USAID) have developed guidelines and directives to assist the prospective developers in obtaining a survey and generation license Discussions with IPPs, pointed to a number of issues regarding the present unsatisfactory state of licensing. In general, there has been unprecedented rush and promoter interest in acquiring HPP survey license. A relatively large number of licenses have been awarded in recent years. The Ministry of Water Resources issued licenses to 15 different promoters within a period of 16 days recently for survey work on projects with total estimated capacity of 185 MW. Likewise, the ministry issued survey licenses for seven hydro projects to different promoters on August 12, 2008.
Review of current licenses
Status of license awards is publicly available on DOED website: http://www.doed.gov.np/issued_licenses.php DOED maintains relatively current information database on the number of survey licenses granted by year, date granted , number of parties who are provided licenses, etc. It is unclear however, how closely or whether DOED monitors the status of licenses in a systematic manner.
Final Report January 2011 35
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Table 3 Licenses awarded as of June 2009
Project size No of licenses Total capacity
Less than 1 MW: 158 projects 115.825 MW 1-10 MW: 211 projects 913.714 MW 10-100 MW: 68 projects 2842.55 MW >100 MW: 13 projects 3601.77 MW
A cursory review of the current licenses shows that: • Applications have been received for hydropower development even in inaccessible Himalayan districts near the Himalayas peaks like Humla Karnali, Mugu Karnali, Dolpa Bheri, Kimathanka Arun. Possibilities of NEA building transmission lines to evacuate power or motorable road access to these sites shall remain slim for the foreseeable future; • A single company has filed many applications for different projects sometimes under different names • There is almost unanimous belief that the survey licenses have not been utilized for purposes intended and many license holders retain these with the hope of finding more profitable trade-offs Some IPPs comment that every river in Nepal has an application for survey license in its trail. • The present government has taken some measures to improve the licensee performance. MOEn has annulled at least 12 project survey licenses for “lack of progress” on the part of the private licensees. The procedural steps in obtaining a Survey License and a Construction License are given in Appendix 2.
Licensees not initiating development work
GON formulated National Power Crisis Eradication 35 Point Work Plan (Pous 1, 2065) to take actions to prevent license abuse. Plan states that (i) licenses that have remained dormant without any noticeable progress will not be renewed (ii) license fees will be reviewed; and (iii) the institutional capacity of DOED will be improved and their monitoring capacities enhanced. To discourage developers from sitting on their licenses without initiating due development work, GON increased the annual survey license fee of hydropower projects in September 2007 by amending Electricity Regulations 2050. The new survey license fee has now been fixed at Rs. 50,000 (USD 670) for 1-5 MW projects, Rs. 10,000 (USD 130) per MW for 5-100 MW, Rs. one million (USD 13,300) for 100-500 MW and Rs. two million (USD 26,667) for projects larger than 500 MW. Recently DOED has adopted competitive bidding for new projects. Kabeli-A (30MW), Arun 3 (402), Upper Karnali (300) have been awarded on competitive bid basis. Eight other smaller projects (Lower Hongu, Lower solu, Khimti-2) and Upper Arun (330MW) are in various RFP (Request for Proposal) stages.
Final Report January 2011 36
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
License Period
Prevailing 1992 Act allows up to 50-year license period for generation, transmission and distribution. The 2001 Policy, current DOED practice and proposed EA allows 35-year from date of issuance of Generation license, including construction period, for domestic projects and 30 years for export projects. Projects with pondage may be extended by five years. License may be extended up to 5 years if adverse hydrological conditions are found. Generation License is not renewable. However the prior owner/ operator may be granted a management contract to continue operating the plant for up to 15 years. For the captive Plants, license period is 35 years for the electricity generated by the hydropower whether or not the industry or business continues in operation. Generally license can be sold or transferred with prior approval of the license issuing authority.
2.2.2 Case Study of Kabeli-A HPP
Awarding new projects on a competitive basis is a way of being more selective in choosing the licensee, however the process is not always going on smoothly as demonstrated below, and many bureaucratic delays come in the way.
Initial RFP
Kabeli-A HPP was studied by the government and solicited for proposals from private developers on Build, Own, Operate and transfer (BOOT) basis. The Kabeli river was first studied for hydropower development under a JICA-assisted Kosi Basin Master Plan Study over the period 1983-1985. Later, the Kabeli-A site was picked by NEA under the Small Hydropower Master Plan study conducted in 1993/1994; this study suggested a development of 11.25 MW with annual energy production of 79.3 GWh. The site was further studied by NEA who then proposed a project of 21 MW capacity. Subsequently, the study was continued to a feasibility level in 1997 by Screening and Ranking Study undertaken by NEA with assistance from the World Bank employing CIWEC (Canada) as the lead consultant. This study established the Kabeli ‘A’ Hydro Electric Project (HEP) as a run-of-river hydropower project with daily pondage with an installed capacity of 35 MW and an annual generation of 178.4 GWh. The project has an estimated cost of US$ 56 million. • The notice of 'Request for Proposal (RFP)' was published on 5 September 2006, based on tariff as the determining factor. • Last date for submission of bid in response of RFP was 31st January 2007. • Four companies were selected as pre-qualified bidders: (i) BPC JV, (ii) China Gezhouba Water and Power Group Co. Ltd, Hubei, China, (iii) Sinohydro Corporation, Beijing, China (iv) Stucky Ltd. Switzerland in JV with Farab, Iran, Pingxiang Mining Industry Group Ltd, China and Lhotse Investment Pvt. Ltd, Nepal • Two potential bidders forming consortium submitted two bids. • It took almost one year for bid evaluation. The successful bidder (after evaluation), BPC- JV, was invited for negotiation on January 8, 2008.
Final Report January 2011 37
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
• The bid was evaluated based on proposed tariff and the negotiations concentrated on tariff rate and modality of payment. As the tariff rate was to be a long-term obligation of NEA, it is obvious that the tariff rate should be acceptable to NEA. • Negotiation was concluded at Department of Electricity Development (DoED) level on April 2008 and was forwarded for GON approval. • The Project Development Agreement (PDA) has been signed with the Government (DoED) on 31 January 2010.
Financial arrangements
The project is being developed by Kabeli Energy Limited, a SPV established by the JV partners, which is led by Butwal Power Company Limited (BPC). This was mandatory since the RFP requires approval for foreign investment, company registration and obtaining survey license of the project. The JV partners from Nepal are:
• BPC (54% share) • Shangri-La Energy Ltd. (SEL) (5%) • Khudi Hydropower Ltd. (KHL) (6%). International investors include : • SCP Hydro International Inc. (SCPHI – Canada) (30%) • Asia Pacific Power Tech. (APP – China) (5%).
The project is financed on a 80:20 debt equity ratio. This was the only project to date to be funded by the World Bank through the Power Development Fund (PDF). PDF and a consortium of local Banks have agreed to finance 40% each and 20% will be equity. PDF has been set up with the initial capital of US$ 35 million by GON and the World Bank (WB) to provide partial funding to supplement private sector financing for the development of Nepal’s hydropower potential. The PDF will be available to finance long-term debt for developing hydropower project and supporting infrastructures including access road, transmission systems, etc. up to 40% of the total cost. Funding under PDF requires at least 20% equity participation by developer.
One should note that the project financing pattern will be finalized only after the financial closure by BPC-JV, which will come at the end of the detailed feasibility study. Only then will there be a final agreement regulating the investors’ exact final share. Almost three years have passed between the submission of the bid and the approval and PDA agreement.
Tariff issues
• NEA put some reservation on tariff rate since it was higher than the posted tariff adopted by NEA for 25 MW projects. This took a long time to get the final approval from the government. NEA has now consented on a tariff rate with some modifications and the bid is in final process of approval by the government. • A cost of 4.97c USD had been agreed following the initial feasibility study in 1998, but DOED did not establish any benchmark for the bid. Currently parties are in the process of signing the PPA and a PDA, but the following purchase rates (in US cents) have been agreed with NEA:
Final Report January 2011 38
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
• 6.2985 cents p.u with VAT • 5.766 cents p.u without VAT • annual escalation for FC portion: 3% • annual escalation for LC portion: 6% • escalation is allowed for 10 years from COD.
BPC is currently conducting a detailed feasibility study in which changes are expected in design and cost; DOED is agreeable to reasonable changes. BPC will enter into a PPA with NEA after the studies are finalised and fix the power purchase price. BPC will also finalise its financing plan with promoters and lenders and declare a Financial Close; BPC will then be awarded the generation license which will allow BPC to commence construction. Since the project is supported by the Power Development Fund, the World Bank must approve the final project agreement.
Next steps
• As the feasibility study of the project was done long back and needs to be reviewed, all reports are to be updated. If everything goes well, it can be expected that the updated feasibility could be completed in one year's time. • After completion of updated feasibility, it would take another six months for financial closure before construction can begin. • The project construction period is estimated to be 4 years. • It will take more than 8 years for developing a project of the size of 30 MW, and there could be further delays when the project faces real local issues. • Furthermore if any of the consortium members withdraws from the project due to long delays the whole exercise might be in danger because the RFP mentions that none of the consortium members can withdraw from consortium until the project completion. A major factor that caused delay in the process was adoption of Tariff-based bidding as it created conflict between the award tariff and the published NEA tariff for small projects. As we discuss in § 3.4.5 it is not a workable selection criteria. Power will be evacuated by NEA at the project site by a 132 kV transmission line that forms a portion of the Kabeli-Damak corridor line to be developed by NEA. Update (2010): Kabeli agreement has been completed and BPC has applied for Survey License after incorporation of Project Company.
Apart from the substantial revenue to the national exchequer, the project also brings different social and environmental mitigation program in the project area such as infrastructure development in health and sanitation, awareness programs, education support and income generating activities aimed to mitigate possible social and environmental changes.
Final Report January 2011 39
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
2.2.3 Recommendations for Pre-License Preparation
Determine the HPP’s optimum size
Many experts have complained that awarding survey license to unqualified first-come-first- serve applicants has resulted in non-optimum site selection, that many awarded projects grossly understate the project size in relation to its potential. An objective assessment of the generation potential of the hydropower sites along the river basin is necessary to avoid non- optimal allocation of sites and size along the river basin. Currently there may be cases where a licensee of a small hydro is holding up application for a larger project due to overlapping catchment area. DOED should review such sites and have the ability to negotiate canceling earlier license by providing just compensation or consolidate two licensees to maximize the site potential and enhance development
Basin-Wide Studies
To Consultant’s knowledge, currently no formal Basin wide studies are performed. Some feasibility are performed by WEC, Min. of Irrigation, NEA etc on the same basin on project site by site basis. Consultant has recommended that DOED should be the nodal agency responsible for such studies with assistance from WEC, Min. of Irrigation, Water. However largely such studies should be conducted by private consultants and Funding from Donor agencies is essential. Cost estimates for such studies should be made by DOED. This is further elaborated under § 2.5 below.
Update Technical Parameters
Currently licensing/bidding is based on extant feasibility studies, often decades old There is insufficient techno-economic and hydrology data given to prospective Bidders, to properly evaluate risks, uncertainties and economic parameters, resulting in poor or no offers. Before initiating project bids DOED must do comprehensive preparatory work. DOED should update feasibility studies in preparation for Bidding, to have better estimates on size potential, flow optimization design (Q-factor: 40% vs. 50%), hydrology, etc. Q- factor refers to the probability that the output will exceed from the minimum flow and turbine is designed in reference to this Q factor. Lower Q means higher installed capacity but running for shorter periods. Experts suggest that DOED fixes the Q at 50%, which is not in line with the currently allowed Q of 40% within Nepal (for export projects lower Q’s are accepted). This is promoting the undervaluation of hydropower resources. GMR has suggested that Q35 could be designed for Upper Marsyangadi, raising capacity from 250 to 600 MW. DOED needs to look at this crucial aspect of project development. DOED should undertake Initial Design for selected projects prior to Offering. It is money and effort well spent and will enhance bid quality, and offering terms.
Conduct comprehensive techno-economic assessment
Government (DOED) also needs to undertake a comprehensive initial techno-economic survey of new potential hydropower projects. The studies should be conducted by retaining private consultants and cover: • Infrastructure aspects such as transmission lines and access roads
Final Report January 2011 40
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
• Resettlement, rehabilitation and land acquisition • Environmental impact assessment • Global economic benefits and their repartition The DOED should supervise all the studies. Once such a study is completed, the DOED will be equipped with comprehensive project site data and parameters on which to base it’s bidding and negotiating terms.
2.2.4 Introducing Project Development Agreement (PDA)
Consultant believes that, as has been the case for Kabeli HPP, a Project Development Agreement (PDA) should systematically be entered into by the Project Company and the DOED. PDA is the most important document for entering into an agreement with the developer pursuant to a bid selection and award. Such PDA shall spell out all important aspects of the Project including: • project parameters • financial/ business partnership • completion dates • project milestones • mitigation efforts by each party • mutual rights and obligations • risk sharing among the signing parties • affirmative actions by each party in pursuit of compliance of its responsibilities. The PDA should be the governing document of all the early steps towards HPP development. The model agreement, customized to the given Project under bid consideration, should always be included in the RFP documents as template. This allows the bidders to better evaluate the project potential. Consultant has noted that some RFP documents drafted were legally inaccurate and misrepresented facts to potential bidders. It is recommended that DOED legal department review all documents for legal accuracy and full disclosure before presenting to the bidding public. The PDA approach is more and more in use now; DOED propose on their website a Model PDA: http://www.doed.gov.np/documents/Model-Project-Development-Agreement_Final.pdf
2.2.5 Consultants Recommendations on the License Provisions
Current license period is too short
Consultant believes that the 30-year license period is a strong disincentive, particularly for export projects, which typically are large and have longer lead-time. These projects have long construction phase, face formidable difficulties throughout the development process. There is no recent experience on construction duration as large projects have not been built or reached construction stage. Experience in other countries and special circumstances present in Nepal suggest that 5-7 years should be estimated as a minimum, given Nepal’s track record. It takes 10 to 12 years to payback the loans and debt service. Investor’s return
Final Report January 2011 41
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP) recovery period is reduced to final 10 or 12 years of the license term.. This is much too risky for equity investor as things can go wrong, breakdowns, plant deterioration, adverse hydrology, etc. Shorter recovery period tends to keep the tariff levels high, thus eroding the project viability. Moreover knowing that his license cannot be renewed the operator will skimp on routine maintenance, capital maintenance, and upgrades. Properly maintained, HP plants can economically operate for 60, 70, even 100 years. The provision of opportunity for Management Contract is too uncertain and depends on whims of the Govt. This Consultant’s experience has shown that Management Contracts and Concession Agreements generally do not work successfully.
Extend the period and allow renewal
Many states in India now offer 40- 45 years allotment from COD, for private HP (Uttaranchal, Himachal Pradesh; Arunachal). Law should not close the door for license renewal. There should be an evaluation towards the end of initial license period whether the GON has the ability to operate the plant or whether it is more prudent to allow the licensee to continue as owner-operator. Although the 2001 Policy allows previous operator to continue under a concession agreement the provision is absent from the proposed EA. . In fact later in the report we recommend that license should be routinely renewable for additional 15 years during which higher free energy or royalties could be charged. Current license period seems to be based on assumption that GON will acquire the plant free of charge and have the ability to economically operate it. This may prove to be illusion if plant is not returned in good running order. GON/DOED has limited skills and resources to assess this.
It is therefore recommended to: • All projects should be allotted 35 years generation license from COD • Include financial incentives such as lower royalties for projects that reach actual COD earlier than the scheduled commercial operation date (ECOD) • Renewal guaranteed up to 15 years upon satisfactory performance (including, safety, local community support, EIA), to be negotiated within five years of initial expiry. Terms of renewal operation, royalties, PPA etc to be negotiable. May raise royalty, free energy during renewal • GON retain right of first refusal for sale of asset during the license period. • Five years prior to final license termination the GON responsible for all required capital investments in joint consultation with operator, and jointly run the plant
Single License approach
For projects to be awarded through competitive bidding process, the successful bidder should be allotted the project for development through a single license issued by the MOEn and regularly monitored by DOED. The license would allow the developer to prepare the Detailed Project Report (DPR) at his own expense and then proceed with the initial Survey, PPA, Transmission Agreement, and most crucially PDA, leading to financial closure, and construction. License shall include milestones and timeframes, periodic progress reports, which shall be monitored by DOED.
Final Report January 2011 42
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
The MOEn would have the authority to review the findings of the DPR prior to the developer commencing with the construction. However, the licensee would be assured that he could proceed and complete the project and receive generation license unless specifically found to be in violation of agreed PDA terms.
It is therefore recommended to: • Adopt one-step license with one-two years for pre-construction • Remove uncertainty that generation License may be denied by adopting: Single license approach, with clearly defined milestones to monitor stage wise progress
Final Report January 2011 43
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
2.3 Social and environmental issues
2.3.1 Current Legal Framework
Environment Protection Act, Environment Protection Rules
Requirements for EIA were imposed in Nepal by multilateral agencies such as World Bank and Asian Development Bank (ADB) (e.g. Karnali Chisapani, Arun III) and bilateral agencies such as Germany (Middle Marsyangdi ) calling for EIA on hydropower projects they funded. Technical feasibility of these HPPs was done in 1980s and early 1990s. Consequently, GON stressed the need for EIA for hydropower projects through the 7th Five Year Plan (1985-90), Nepal Conservation Strategy (1988), and Nepal Environmental Policy and Action Plan (1993). Government prepared the EIA Guidelines with technical assistance from IUCN in early 1992, endorsed them in September 1992 and gazetted in July 1993. The legal basis for EIA implementation was formalized by enacting • Environment Protection Act (EPA), 1996; • Environment Protection Rules (EPR), 1997. EPA and EPR provide the legal framework for environmental protection and pollution control in development projects including hydropower. Environment assessment is mandatory for hydropower projects exceeding 1 MW capacity, transmission line proposals from 33 KV capacities and the access road, and the Section 4 of EPA 1996 states that without approval of Initial Environmental Examination (IEE) or Environmental Impact Assessment (EIA) from the relevant institution or Ministry no proposal can be implemented. The concerned Ministry will approve the proposal requiring IEE and the Ministry of Environment will approve EIA proposals, if no significant adverse impacts on environment are anticipated. The Act has outlined procedure and framework for project planning and project approval, project implementation and pollution control mechanism, and punishment and penalties for non-compliance. Section 10 has a provision to ‘maintain’ any place within the country designated as “Environmentally Protected Area” containing natural heritage and places of historical and cultural importance. Environment Protection Act 1997 (EPA) exempted <5 MW hydropower projects and transmission lines < 66 KV from EIA and only required Initial Environment Examination (IEE). Later in February 2009 GON issued regulation exempting up to 50 MW projects from EIA and the recent amendment made on 27 January 2010 exempt transmission line of any capacity from EIA. Though well meaning, this has caused confusion. Developers are uncertain if this rule will prevail, as it is contrary to the EPA. Moreover, the developers must follow their own and lenders’ guidelines on EIA in order to secure financing. Therefore relaxation may not help. Electricity Act 1992 does not require Environmental report for applying for survey license. Under the proposed Electricity Act (awaiting parliament approval), it is not clearly spelled out whether environmental report is required to obtain survey license. Such a requirement would be detrimental to the HP development.
Final Report January 2011 44
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Social Impact Assessment
Nepal’s Legal and regulatory framework does not mandate a separate Social Impact Assessment (SIA) of HPPs; the EIA includes social aspects. However, multilateral donors such as World Bank, ADB and International Finance Corporations or bilateral agencies from European countries, Japan or other countries involved in feasibility study or funding the HPP development insist on SIA; Therefore typically environmental and social impact assessment (ESIA) becomes a requirement. Medium to large hydropower projects with storage scheme or peaking Run-of-the River physically and economically displace people from their habitats and the involuntarily displaced people require proper resettlement and rehabilitation. The Hydropower Development Policy of Nepal (2001) has made provision for resettling and rehabilitating the families to be involuntarily displaced by HPP. Resettlement Action Plan has been mandatory. The multilateral agencies also require Indigenous People Development Plan and provisions to safeguard indigenous people in the project area.
Procedure
As per the EPR, the planning and approval of a hydropower project is done in three phases: a) scoping delimitation, b) report preparation, and c) approval of the report. The Schedule 6 pertaining to Rule 7 of EPR specifies matters to be mentioned while preparing an EIA report. The EIA report should mention basic information about the geo-physical, cultural, biological, and socio-economic conditions of the area to be assessed, as well as any possible change that may occur in the area, before implementation of the project. The report should identify possible positive and negative impact on environment while implementing the proposal, estimating and quantifying possible impacts according to time and work schedules. It has to provide analysis of the alternative courses of action as mitigating measures. The EIA report should mention practical measures to be adopted for all activities that could have a negative impact on the environment. Detailed procedure is given in Appendix 3. Although government has waived EIA for the projects up to 50 MW and transmission line of all capacity through amendment in EPR, EIA seems mandatory for getting debt finance from national and foreign banks. Under the present procedure the shortest possible time for EIA could be two years, if everything goes well. For a reservoir project located in remote area, EIA work from scoping delimitation to EIA approval could take at least three years. EIA procedure is so lengthy and cumbersome that it is difficult to shorten the timeframe. The EIA procedure includes the time for initial notification, public notification, approval of ToR etc at various bureaucratic levels and decision making time taken at each level is high. While time constraints are imposed on the developer, the bureaucratic decision making time is open ended. This adds to the project costs, delays and frustrations, beyond the control of developer.
Recent change in the procedure
DOED was involved in the review of EIAs until mid 2010. In response to Project Developer’s demand to shorten the time for EIA review and EIA approval process, the Ministry of Energy made an adhoc decision to place all the EIA reviewers in the Environment Section of the Ministry. Now there is one EIA review in the Ministry, which was designed to streamline the time taken. MoE and its department DOED lack the manpower to review all the EIA or IEE projects. It is obvious that just one review under the Ministry will certainly reduce the time taken for EIA approval. The Consultant Team considers this adhoc decision as a positive step and the Team recommends to re-organize and to strengthen the existing Environment Section with more manpower, appropriate training, and better review tools.
Final Report January 2011 45
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
2.3.2 Developers’ Viewpoint
Although HPP developers cannot avoid the ESIA requirements, they tend to avoid if possible or delay the implementation of EIA recommendations such as mitigation and enhancement measures particularly restoring biophysical components of the environment, socio-economic rehabilitation of physically or economically displaced people etc. In most instances, the developers show hesitance to scale down or redesign the project on the basis of concerns like sufficient flow in the downstream of the dam to maintain the river ecology including aquatic life. Usually, ESIA is done after the technical feasibility study is completed and redesigning the project is practically difficult. Even if ESIA is conducted in parallel with the project technical feasibility, economic aspects dominate the environmental decisions with even less consideration to biological and social components of the environment. Many HPP developers do not give the same weight to environmental objectives as they give to economic performance measures such as the internal rate of return. The physical environmental conditions such as landslides and high erosion risks are considered in locating and designing dam and powerhouse and related permanent structures, which relates to risk and thus economic aspects of operating a HPP. No HPP developer would like to use financial resources to conduct an ESIA, if the proposed project is not likely to go forward. In general, ESIA serves largely to suggest mitigation measures to control or reduce adverse impacts for a project already selected. Again, EIA is conducted at only one point of the entire project phases. Private developers of large HPPs believe that the ESIA program is very complicated, and complex. Conducting and implementing ESIA recommendations is difficult and threatens project viability. Many feel ESIA program as hindrance to HPP development. They find a) social aspects such as resettling and rehabilitation of displaced people, ever increasing demands from the project affected people including the indigenous ethnic groups; b) biological aspects such as forest plantation and the maintenance of terrestrial and aquatic ecosystems and life form, and c) physical aspects such as management of catchment area in much degraded Himalayan mountains a most challenging task. Moreover, obtaining environmental clearances has been painful. Private HPP developers consider these realities as environmental barriers to hydropower development in Nepal. The entire process, scoping, TOR , EIA report preparation and approval from MOE can take 33 – 44 months for a medium size project (200-400 MW capacity) from the date of field work. It is prohibitively a long time to wait for a private developer. It increases the cost factor significantly.
Delays in Clearances
The EPR does not specify time frame for each step in the approval process by the relevant agencies to delimit scoping and approving TOR for IEE/EIA. In general, scoping and TOR preparation by the proponent takes around 6 months and their approval by the concerned agency about 3-4 months for IEE, and 6-8 months or more for EIA proposals. There are many instances, where the approval of EIA scoping and TOR proposal takes up to 9-10 months from the date of submitting the report to MOEn through DOED.
Preparation of ESIA Report is even more time consuming, which depends mainly upon the size and type of the hydropower project, geographical area, accessibility to the project area, and other factors. On an average, the time between mobilization of specialists until field
Final Report January 2011 46
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP) work, data compilation, write-up by individual experts to finalization of ESIA Report would take 8-10 months for 25-100 MW capacity project, 10-12 months for mid-sized 100-400 MW project, and 2-3 years for reservoir type +1000 MW plus mega project, if the field work is not distracted by the local people or organized protests. While organized protests around a hydro project is a global phenomenon, in Nepal, there are very few hydropower sites where field work could be done without local disturbances, which substantially delays the EIA work. Currently, Arun III, Upper Karnali and Upper Marsyangdi HEPs are reportedly facing the problem of local resistance and stalled survey work. In recent years, political interferences have significantly increased in ESIA field survey work; the local politicians freely ask money or other benefits for allowing field survey.
Recommendations for a faster ESIA procedure • In view of this it seems necessary to impose approval dead line for each of the bureaucratic steps specified in the law. This should be accomplished through appropriate regulations. • An independent Review Committee should be set to examine major steps in the EIA process, streamline and eliminate overlaps. • Establish a fast track process for priority projects
Lack of Appropriate Skills
There are procedures within the MOE such as inviting public opinion, and discussion with line agencies, stakeholders, and experts which require extensive work on the part of the Staff. MOE and MOEn are the key ministries involved in environmental clearance and they are understaffed. They are not adequately trained persons to carry out the reviews, evaluation, discussions and conduct public hearings etc. The EIA report review committee meetings are delayed. Often the sponsor’s consultants are asked to rewrite parts of the report further delaying the process. During ESIA report preparation by the developer, the line agencies both at national and district level are not consulted on issues such as loss of agricultural land and crop production, loss of forest area and vegetation, loss or modification of terrestrial and aquatic habitat, the obstruction to migratory fish species and fisheries, and the catchment area management. Hydropower projects cause the major biological impacts and appropriate and practical mitigation as well as enhancement measures are required in the ESIA report. In the absence of early interaction with line agencies and/or visiting and learning from areas where the measures have been successful, the consultants write the ESIA report based on their technical capability and common knowledge. As a result approval process is delayed and it also affects implementation of mitigation measures. For example in the area of fisheries, the EIA report indicates obstruction to migratory fish species by the dam and target stocking of large number of fingerlings of indigenous species and they recommend availability of required fingerlings from the government run hatcheries. There are very few fish hatcheries producing indigenous coldwater fish fingerlings in very limited number; these hatcheries are still at investigation stage for coldwater fisheries. Most of the time they suggest restocking a large number of fingerlings without sound basis e.g. the EIA report of Kali Gandaki ‘A’ recommended restocking of 15 million fish fries or 7 million fingerlings per year but in reality the project has been restocking less than 0.5 million fingerlings each year. This creates problem for the developers and they find hard to convince advocacy groups involved in maintenance of aquatic ecosystems in Himalayan region. Fortunately, none of the environmental advocacy groups has yet raised this critical issue but it could be raised by coldwater fish ecologists in the same way as the resettlement and rehabilitation issues.
Final Report January 2011 47
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Quality of EIA reports
MOEn and MOE usually complains that the EIA reports prepared are below the standards, not prepared as needed, and therefore it takes longer time to get comments and suggestions from other concerned ministries. There is lack of orientation to consultants preparing the EIA report, and due to understaffing of ministries and lack of trained persons monitoring and interaction with consultants during EIA work are non-existent. The TOR approved by MOE is not complete and the consultants often undermine impact assessment and do not always recommend appropriate mitigation measures. However, often the proponents and the consultants preparing the report do not agree on MOEn/MOE‘s quality assessment. Some HPP developers complain that the Ministry people do not show sincerity while reviewing and evaluating the EIA report and they purposely delay approval time.
Recommendations for a better monitoring of ESIA process The present Environment Sections under the Ministry of Energy should be re-organized and strengthened: • increase the size of trained staff employing environmental and other graduates, as well as enhancing their technical capacity, • equip with better tools such as computers, application softwares, i.e., GIS, use of GOOGLE EARTH - PROFESSIONAL VERSION (with long term license agreements) and other evaluation tools, software training, • send personnel to obtain practical training and problem solving in SE Asia, and Europe etc, • develop a system of ‘environment assessment and monitoring, e.g. EIA Report review and evaluation, • orientation to developer and consultants, monitoring and consultation during EIA work, and assisting concerned line agencies for early consultation. This could be done for instance through TA sponsored by the ADB: • Estimated duration: 9 months • Estimated budget: about US $ 1.5 million. This will enhance the capacity of MOEn in review and evaluation of EIA Reports, improve the quality of EIA Report prepared by developer and significantly reduce the period of Environmental Clearance.
2.3.3 Local Peoples’ Viewpoint
Demands by affected Local People
Most of the hydropower projects are located in difficult mountain terrain without road, lack of basic community infrastructures and facilities, and most of the local people lack economic opportunities and face food shortage. They have received less attention from the government. Consequently, the local people feel project as the last chance to improve their lot. Therefore they want to exact maximum benefits for themselves by placing high demand for rendering support to the project. Obviously this creates a major conflict because the project cannot meet all their demands without raising the project costs to unreasonable level. Nevertheless, the obligation of the HPP developer is to implement EIA i.e. implementation of recommended mitigation and enhancement measures as per the approved EIA report.
Final Report January 2011 48
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Again, a developer can invest on community development only during the construction phase targeting mainly the project impact population and area. Moreover, there is tendency for regional habitants to move within the Project area when they learn of it and then stake a claim on the benefits. This has become an intractable problem and has proved a barrier for many developers wishing to invest in hydropower projects in Nepal.
Land Acquisition
Under present legislation, “the private sector obtaining the license shall be encouraged to acquire the houses and land required to construct a hydropower project on its own. Provided, however, that if the necessary houses and land could not be obtained, Government may make available such houses and land to the private sector, in the same manner as it acquires the land to any institution under the prevailing laws. The licensee has to bear all the expenditures incurred in obtaining such houses and land. If the land is government owned, the GON shall make it available on lease for a period up to the term of license in accordance with the prevailing laws.” In recent years, the farmers in the project area are demanding very high price for their farmland, which is to be permanently acquired for the project, especially when they learn that the HPP developer is a private foreign company. In Tamakoshi 3 HEP area the project affected farmers are quoting up to Rs 15.0 million per ha for farmland; the normal price would be around Rs 2 million/ha. This, along with other local issues of R&R, has threatened the economic viability of many projects. Typically, the developer will approach the landowners to negotiate a voluntary sale of their property. If unable, he can approach the Government and in that case the local District authorities get involved. A Compensation Fixation Committee is formed under the chairperson of Chief District Officer represented by district level organizations, developer, and also involving local government in the project area and concerned project members from the community. The Committee is empowered to fix the land prices, which the landowner is obliged by law to accept. In a sense, it is an exercise of Eminent Domain, an authority that the GON possesses. While good on paper, the process does not always work. For example committee members being drawn from the community will tend to tilt in favor of the local landowners. Moreover, there could be a conflict of interest since some members may themselves be affected landowners, directly or indirectly. The process does not bring comfort to the Developer. When Developer has failed in his voluntary efforts to procure land, he turns to the Government. However, by this time the project has achieved high profile and the asking land prices skyrocket. Government has no particular incentive to negotiate effectively on prices, as the cost is a pass-on to the Developer. Developer is also burdened with verification of ownership, title search, false claims, property records etc. It must be a nightmarish exercise. We believe that the GON should play a greater role in land acquisition in order to facilitate the project development...
SIA and Resettlement and Rehabilitation of Displaced people
The Hydropower Development Policy (2001) requires the licensee to rehabilitate and resettle the families to be displaced while generating, transmitting and distributing electricity in accordance with the standards specified by GON. This policy also specifies necessary assistance by the government to the HPP developers in rehabilitating and resettling displaced persons, provided, however, that the investors themselves have to bear the
Final Report January 2011 49
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP) necessary resources required therein by including it in the project cost of the project in operation. The National Policy on Land Acquisition, Compensation and Resettlement for Development Projects, 2008 (NPLACR - yet to be endorsed by GON) has recognized project affected families irrespective of having lawful ownership of land or resources to have entitlement for rehabilitation and resettlement. This will invariably increase the number of people in the project area looking for rehabilitation and even resettlement. The NPLACR suggests the vulnerable groups, indigenous community, Dalits, landless family, women-headed households, physically disabled, elderly people and poor community having entitlement to additional facilities other than compensation for the loss of their property. Resettlement and rehabilitation of project affected people has emerged as the major issue in hydropower projects, more so when the private sector implements the project. Nepal does not have a good history of involuntary resettlement; families displaced from the national parks were resettled without developing basic infrastructures and facilities. Physically displaced people from Kulekhani HEP a reservoir scheme (1982), Marsyangdi HEP (1989) and many other projects in the past did not get resettled although donor agencies were involved partly financing such projects. Even the ADB funded Kaligandaki HEP commissioned in 2002 failed to properly and timely resettle and rehabilitate the displaced indigenous community called ‘Bote’ who are traditionally fishermen families. The first organized resettlement plan for 52 physically displaced families was developed and implemented for Middle Marsyngdi HEP (commissioned in early 2009), however, it lacked natural resource mobilization and economic incentives for the resettled families. Development and implementation of comprehensive resettlement plan has been a big headache for HPP developers. Nepal has regulatory mechanism, albeit problem-ridden, for acquisition of land and property for development projects, but there is yet no national policy for the resettlement and rehabilitation of displaced persons. A large number of people would be displaced, if reservoir type mega projects are constructed such as Karnali Chisapani (10,500 MW) displacing about 85,000 people and Pancheshwar Multipurpose Project (7,650 MW) displacing about 40,000 people (PMP/WRC, 20093). Altogether 250,000 plus people would be displaced if all the techno-economic hydropower potential of about 48,000 MW (Shah, 20084; PMP/WRC, 2009) is harnessed. The West Seti HEP (750 MW) is finding hard to resettle the physically displaced people, about 18,000 (WSHL, 20085). The appropriate locations, availability of suitable land and acceptance by the recipient community or agency (forestry) etc have hindered implementation of resettlement plan. There are many other issues related to involuntary resettlement of displaced persons such as unclear and contradictory sector policies at the centre, political instability, and average people’s and organizations biased and often negative attitudes towards private developers. Private developers alone without the support of government agency cannot implement the Acquisition, Compensation, Resettlement and Rehabilitation Plan. Acquisition, Compensation, Resettlement and Rehabilitation of displaced persons is now considered as the barrier for developing large hydropower projects particularly a reservoir and P-ROR schemes in Nepal.
3 PMP/WRC (2009). Environmental Impact Assessment of Pancheshwar Multipurpose Project, EIA Draft Report. Pancheshwar Multipurpose Project (PMP), Department of Electricity Development /Water Resources Consult (WRC) Pvt Ltd, June 2009, Kathmandu, Nepal. 4 Shah, S.G. (2008). Water Resources: Untapped Potential. In Global Nepali Journal p27-35, September 2008, Kathmandu, Nepal. 5 WSHL (2008). West Seti HEP EIA Vol 3 Resettlement Plan: Reservoir Area and Downstream Project Components. West Seti Hydro Limited (WSHL), October 2008, Kathmandu, Nepal.
Final Report January 2011 50
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
There are other issues such as development of indigenous community development plan, benefit sharing by developer, government and project affected people, share in the project, water rights, and environmental flow release etc.
2.3.4 Examples of R&R for Recent Projects
It is useful to briefly describe R&R efforts in some of the recent government projects. In general, private sector IPP adheres to the GON Land Acquisition Act (1977) unless the World Bank or ADB are involved in the project design or implementation. As discussed above (2.1.5), in later cases the IPP prepared a separate Land Acquisition and R&R Guidelines in line with the World Bank directives or ADB policies. So far, only small IPPs, less than 70 MW installed capacity, have been implemented and in most cases these IPPs, not depending on WB or ADB or other funding agencies, have made direct negotiations with the landowners for land acquisition and compensation. They have not developed any specific guidelines. Middle Marsyangdi HEP prepared Resettlement Plan in response to KfW, the loan lending agency. Currently, Tamakoshi 3 HEP (880 MW installed capacity) to be partly funded by WB/IFC, is in its planning phase and the developer SN Power Singapore Holding is preparing ‘Land Acquisition Guidelines’ and ‘Resettlement and Rehabilitation Plan’ in line with the World Bank directives and requirements. There are a couple of Indian Power Producers developing large hydropower projects (e.g. Upper Karnali) and all these projects are at early stage of planning (scoping and TOR preparation for EIA work). It is not clear if they just follow the GON Land Acquisition Act and/or develop a separate Land Acquisition, and R&R Plan.
Kali Gandaki “A” Hydropower Project
There was no definite ‘Resettlement Plan’ developed for Kali Gandaki ‘A” HEP. The displaced persons were resettled on the Andhi Khola river bank slopes, close to the suspension bridge.
Middle Marsyangdi Hydropower Project
A ‘Resettlement Plan’ was developed for Middle Marsyangdi (January 1998) in response to KfW, the loan lending agency. World Bank and OECD-DAC guidelines on Involuntary Resettlement and the prevailing Nepali Rules and Regulations were the basis of the Resettlement Plan, as prepared on behalf of NEA. The seriously affected and the displaced families in Phalia Sangu received maximum benefits from the resettlement plan and the resettlement done on a sound economic and productive basis. The compensation at the replacement cost and the rehabilitation grant and package provided them a sound socio-economic development opportunity in the new settlement area. “Arable land for arable land” compensation strategy was not feasible in that locality as arable land to be acquired for compensation was not available in the vicinity of the project. Rehabilitation grant was provided to all project affected families. Special attention was paid to women- headed households and landless families. All the families who resided in the project area for more than 5 years were resettled in the New Settlement Site, which was named as New Phalia Sangu. Resettlement plan and its components were constantly monitored throughout implementation. The Resettlement and Rehabilitation Unit (RERU) worked with the local community to ensure monitoring. Post-re-location economic and social activities of displaced families were monitored and evaluated for the next five years. A counseling service was
Final Report January 2011 51
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP) provided by RERU to the affected family right from the land and property acquisition phase to establishment phase. As a result of these efforts Middle Marsyangdi was a relatively successful R&R program. Resettlement package such as fruit tree plantation scheme, intensive agriculture and poultry farming and improved agriculture practices could improve the productive base of agricultural families. The non-land based productive strategies adopted could provide the non- agricultural families the alternative employment and economic opportunities.
Melamchi Water Supply Project
Most of the large development projects follow World Bank Operational Directive on Involuntary Resettlement. Very few projects have developed involuntary resettlement and rehabilitation plan. A separate resettlement policy and program was developed called "Melamchi Water Supply Project Resettlement Policy, 2000" for the implementation of the project. This policy detailed out the directive principles and policies to be adopted in course of paying compensation for the land and landed property (immovable property) acquired for the project and resettlement as well as provision of land for those families whose entire land and building is acquired. The policy also contains entitlement matrix for compensation. However, no land compensation is given in lieu of land so far.
2.3.5 Recommendations on Draft National Policy on Land Acquisition, Compensation and Resettlement for Development Projects (NPLACR)
It is obvious that Nepal lacks a well-defined R & R Policy and program for hydro power and other development projects. The programs are adopted on ad hoc basis for the specific projects. In general, R&R plans are adopted as dictated by the donors on the projects e.g. ADB, WB, IFC, KfW etc. Government has prepared a draft Policy on Land Acquisition, Compensation, and Resettlement which has yet to be adopted and enacted. National Planning Commission with Asian Development Bank TA assistance 4412 developed a National Policy on Land Acquisition, Compensation and Resettlement for Development Projects in 2007. This national policy has been prepared in the format of Act describing preamble, definition of terms used, objectives, policy, strategy, advisory, implementation mechanism and regulatory system. NPC initiated approval process of this national policy and sent to the Cabinet for approval in late 2007. The government changed couple of times and so the Members of NPC in the last three years and there seems to be no discussion on this policy in the Cabinet.
Recommendations to improve NPLACR The National Planning Commission should revisit the draft NPLACR, make necessary changes and act to get this national policy approved by the government. The NPC should organize a strategic discussion program inviting all the key stakeholders, government and private sector, concerned ministries, and civil society to finalize the NPLACR document. The NPC should simultaneously work on NPLACR Act and Regulations.
Final Report January 2011 52
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Summary of Draft Policy and Recommendations
Definition: It has defined displaced family, marginalized landholding size, vulnerable group and project affected family/people. Vulnerable group indicate socially and economically people in a weak position who are comparatively more affected in the process of resettlement Project Affected People: People living in project area and making use of the land for their livelihood, conducting business or involved in community or personal organization as well as people living outside the project area but loosing land, houses or related structures or source of income are considered as project affected people. Directive Principles: a) The displaced people/family should be rehabilitated or resettled in a place having built-in school, health posts and other basic infrastructures and facilities, b) project affected family with or without lawful ownership of property or resources should be entitled to rehabilitation and compensation assistance, and c) vulnerable group, indigenous community, Dalits, landless family, women, woman headed household, physically disabled, poor community, and elderly people should be entitled to additional facilities other than compensation for the loss of their property. Land Acquisition Policy: land could be acquired for community and productive infrastructure and facility through a) voluntary contribution or sale, b) direct negotiation, c) exercising land development tax, and d) eminent domain – as per the prevailing law. Compensation Policy: a) If the project affected family happens to be a marginalized farmer, land take by the project shall be compensated with land having similar productivity or land price, priority should be given to ‘land for land’ compensation for vulnerable group, b) loss of permanent structures of project affected family shall be compensated by cash payment at replacement cost, c) If the loss of community infrastructures and facilities occur due to project implementation, the project will construct or re-establish such facilities better than the earlier ones or pay cash to the affected community or group to re-build them, d) Norms developed by Department of Forestry and Department of Agriculture shall be used to compensate by cash for the loss of agricultural and forest vegetation permanently or temporarily, e) squatters shall not have any rights for compensation unless they have been continuously living in the project area for the last three years and their livelihood is dependent on the unregistered land they are farming.
Recommendations for Land Acquisition and Compensation a) If suitable land is unavailable for farming, non land-based strategies should be built around opportunities for employment or activities for income generation, b) Project affected families should be compensated for their losses at full replacement cost and they should be assisted with the move and supported during the transition period in the resettlement, c) In case of temporary land acquisition, compensation should be paid for land rehabilitation before handing over the land to owner, and d) land based compensation should make provision for establishing community forests, grazing lands or other natural resource base for crop farming and rearing livestock and meeting household needs for fuel wood and others.
Resettlement and Rehabilitation Policy: a) Families displaced in a group due to hydropower project development shall be resettled in a place selected or preferred by the Government of Nepal as resettlement area, b) Resettlement of vulnerable groups should be considered as development opportunity and Vulnerable Group Development Plan should be prepared, c) a comprehensive Resettlement Plan has to be prepared for hydropower project
Final Report January 2011 53
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP) which displaces 200 or more people, and a Resettlement Plan for less than 200 people, d) involve project affected families while preparing Land Acquisition and Compensation Plan or Resettlement Plan, e) form Grievance Redress Committee at village, district and central level.
Recommendations for Resettlement and Rehabilitation a) Prepare indigenous community development plan, gender development plan b) Make clear how a comprehensive resettlement plan differs from resettlement plan, c) Involve the displaced families and project proponent while selecting resettlement area, d) Make it clear as who shall be the concerned government agency.
Organizational Arrangement: a) Organizational responsibility for the planning and implementation of land acquisition, compensation, resettlement and rehabilitation (LACRR) lies with the central level agency for national projects and with the local level agency for local level projects, b) the concerned Ministry will approve the preliminary land acquisition and compensation plan and preliminary resettlement plan, c) each government agency at Department level should establish LACRR unit, d) each project has to establish LACRR Office, and make provision for all the expenses incurred for LACRR work, e) GON or Local Government shall appoint the Head of the LACRR Office in development projects, f) GON will establish Land Acquisition, Compensation, Resettlement and Rehabilitation Commission and this Commission will lead the LACRR office of Project which displaces 200 or more people, and g) GON will establish National Monitoring Committee to review and monitor LACRR plan and its implementation. There is a provision for Compensation Determination Committee having Chief District Officer as Resettlement Commissioner and the proposed members are Parliamentary representative, chiefs of district revenue office and cadastral survey office, representative from concerned local organization, project manager, and this committee can invite project affected community and civil society as observer.
Recommendations for Organizational Arrangements • Organizational arrangement appears to be very complex and unclear. This policy suggests establishment of LACRR unit at the Department of Electricity Development which will approve the preliminary land acquisition and compensation plan and preliminary resettlement plan. It has overlooked the EPA 1997 and EPR 1997; during EIA the detailed LACRR is prepared as a component of EIA Report which is approved by the Ministry of Environment • This policy shows government interference in managing the LACRR office of the project such as appointing Head of the Project’s LACRR Office. The role of LACRR Commission is also not clear. • The national level and local level projects are not defined. HPPs are industrial enterprises and they are different from socio-economic and community infrastructure projects such as roads, irrigation or drinking water.
Final Report January 2011 54
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
2.3.6 Recommendations for a Strategic Environmental Assessment of the Power Sector
The need for Strategic Environmental Assessment (SEA) at national level
In Nepal, strategic environmental assessment for national policy, overarching strategies, plans or program are not done. National policies, plans and program are prepared by the concerned ministries while the periodic plans are prepared by National Planning Commission; all these policies are approved by the government. Disclosure of policies, plan or program during formulation is limited to the concerned agencies and few selected people participate in the discussion through seminars and workshop. Government has plans for developing coordinated series of dams for hydropower projects in Arun, Tamakoshi, Marsyangdi, Karnali, Mahakali and other river basins. Currently, EIA is conducted independently for each hydropower project in a basin. Hydropower development related policies, strategies and plan approved by GON include Hydropower Development Policy (2001), Water Resources Strategy (2002), and National Water Plan (2005) and these policies and strategies are considered to be poor in terms of addressing environmental issues and socio-economic concerns of affected people and institutions. National Planning Commission prepared a National Policy on Land Acquisition, compensation and Resettlement for Development Projects (NPLACR) in late 2007 which is yet to be approved by the government. A general review of this policy indicates need for changes/modifications in mode of compensation, involuntary resettlement and rehabilitation, and organizational arrangements for fixing compensation rates and voluntarily resettling affected people. For sustainable development of HPPs consultant recommends the following plans or program:
Integrated Basin-wide Catchment Area Development Plan (CADP) for Hydropower Projects
Storage and Peaking ROR schemes require catchment management plan to reduce the risk of high sediment load in the reservoir. The biophysical degradation in the hills and mountains result in the high sediment load in the rivers, and lack of implementation of proper catchment area program caused accumulation of silt deposits in the Kulekhani reservoir reducing the live storage capacity which adversely affected the output of the dam, consequently the electricity generation capacity of the Kulekhani HEP substantially reduced. This reduced the life of thee reservoir. The hills and mountainous regions are highly susceptible to erosion and it is of crucial importance to maintain good vegetation cover on hill slopes. Thus, a long term CADP for the ecological restoration of the catchment area has become the necessity which basically consists of environment friendly land use plan. The existing land use pattern is analysed and ecologically sustainable land-use patterns are identified. The CADP should satisfy the biological and economic requirements of the local inhabitants. An integrated approach to development in the catchment area which takes into account of ecological, economic and socio-cultural factors is required.
Basin-wide Environment Management Plan
GON has programmes for developing series of hydropower projects in major river basins such as Arun, Tamakoshi, Marsyangdi, Karnali and Mahakali, and there is need for a basin- wide environment management plan. Cumulative effects of series of dams in a river basin
Final Report January 2011 55
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP) are to be assessed and proper mitigation measures are to be worked out at programme level.
Involuntary Resettlement and Rehabilitation Plan for Hydropower Projects
Policies and legislation related to involuntary resettlement and rehabilitation are very weak and inadequate. Involuntary resettlement of physically and economically displaced people has been considered by private developers as critical issue and barrier to hydropower project development. Currently, West Seti HEP is facing serious problem of involuntary resettlement of about 18,000 project-displaced people. The GON has to revisit the draft National Policy on Land Acquisition, Compensation and Resettlement for Development Projects or develop national policy and plan for land acquisition, compensation and involuntary resettlement and rehabilitation of physically and economically displaced population due to the construction of hydropower projects. The human factor is important in such plan; the dam and the reservoir sites are located in river valleys in the hilly areas where people cultivate fertile agricultural lands and use the best riverine forests.
Basin-wide Terrestrial and Aquatic Ecosystem Management Policy and Plan
The crucial issues observed in the large hydropower projects are the loss of terrestrial ecosystem in the riverine area and aquatic ecosystems in the rivers. The Coldwater fisheries and the migration of medium - to long- range migratory species such as snow trout, Mahaseer and ell are worst affected. The GON has to develop appropriate policy and plan for the restoration and maintenance of the terrestrial ecosystem in the buffer zone of the reservoir and aquatic ecosystems of the river downstream of the dam and the reservoir.
Agriculture Enhancement Policy and Plan in Hydropower Project Area
The GON should formulate agriculture enhancement policy and plan in the catchment area of a hydropower project to compensate the loss of farm production in the river valleys. Establishment of agro-processing plants in the hydropower project area which could utilise the subsidized electricity could be the integral component of the enhancement plan. All the above plans need to be formulated and approved by the government. Strategic Environment Assessment methodologies will be required for the policy, plan or programme (P/P/P) formulation and decision-making procedures.
Proposed Guidelines for SEA Methodology and Procedures
Ministry of Energy (MOE) is the relevant authority responsible for formulating and developing policies, plan and program related to hydropower development, while the decision-makers are National Planning Commission and the Ministerial Cabinet/parliament, and the stakeholders assess the strategic consequences and raise the environmental and socio- economic issues. These are the three broad groups of actors involved in SEA process. Usually, a Consultant is used to conduct SEA of policy, plan or program and submit the SEA report to MOE similar to the EIA report of a hydropower project. The general methodology and the recommended guidelines for SEA methodology and procedures are outlined here. In general, the P/P/P formulation stages are paper stage (draft P/P/P), review and public consultation. The general SEA methodology includes:
Final Report January 2011 56
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
• Screening, scoping and definition of objectives: checklists, case comparison, literature survey, consultation of experts, formal procedures • Impact analysis: selection of indicators and networks, impact prediction, project EIA as case study, use of baseline data, aggregation • Information analysis: presentation of information – textual description, impact matrices, further aggregation • Dealing with uncertainty: different scenarios, sensitivity analysis, decision analysis The Ministry of Energy (MOE) should adopt the following approach while conducting Strategic Environment Assessment (SEA) of policies, plan or programme (P/P/P) related to hydropower projects: • The MOE should develop policy, plan or programme focusing on specific sets of objectives and constraints, and also giving options and alternatives. This will be the draft P/P/P. • The MOE should assign a Consultant to conduct SEA; the Consultant will take the service of experienced and competent specialists for reviewing the draft P/P/Ps and analyzing potential environmental impacts (including social and economic), and major stakeholders issues and concerns. • The assigned Consultant should prepare a list of international, national, regional and local level stakeholders; since the hydropower development is multi-sectoral in nature the stakeholders could be representatives from GON line agencies, multilateral organizations e.g. FAO, INGOs such as IUCN, relevant NGOs, environmental media groups, and the concerned people. • The Consultant should organize stakeholders meeting/public consultation and public debate and discuss the strategic consequences of the proposed P/P/Ps in terms of their impacts on environment and socio-economics of affected communities as well as impacts on terrestrial and aquatic life form, and options and alternatives which could minimize adverse effects and enhance positive outcomes. Environmental and social implications of P/P/Ps proposals should be thoroughly discussed. • The Consultant should select appropriate SEA procedures depending upon the P/P/P formulation, the type and circumstances of P/P/P under consideration and the context of decision-making. Methodology must be flexible; different methodologies could be required for different strategic actions. • The SEA should commence at the beginning of formulation of P/P/P and should continue throughout the evolution of strategies and policies of the plan. • The decision-makers should be persuaded to actively participate in the SEA process. This will increase their awareness towards environmental issues and concerns which will considerably help in decision-making process. • The Consultant should give emphasis on processes than on product which is the SEA Report. SEA must be seen as an overarching concept. • The Consultant should present preferred outcomes to decision makers for approval. The SEA report should also include new/alternative objectives, implementation strategies, conflict resolution mechanism, compromises, and interlinkages.
Legislation on Strategic Environmental Assessment
The Government of Nepal should formulate, approve and enforce Strategic Environment Assessment Act and Rules to ensure that environmental concerns are fully integrated by all government agencies and other private agencies and NGOs/INGOs while formulating or
Final Report January 2011 57
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP) modifying and implementing any policy, plan or program including the periodic plans such as Five Year Development Plan. This will encourage development agencies to identify environmental objectives in their plan/program and promote the design of environmentally and socio-economically sustainable proposals. The Strategic Environment Assessment Act and Rules will include purpose/objectives, scope and definitions, duty of agencies, principle of SEA, general provisions, screening, scoping, the environmental assessment, stakeholders consultation and public participation, relationship to international agreements, SEA reporting, decision, compliance, and monitoring and assessment. The following approaches are recommended: a) MOEn to draft appropriate legislation in consultation with Ministry of Environment, Forest and Soil Conservation, Agriculture, Road and other development sectors. Thoroughly discuss with the Ministry of Law while formulating the legislation. b) Hold public Hearing on the draft legislation to receive non-GON stakeholders input. c) Submit the final draft legislation to appropriate Ministry, national Planning Commission, and Parliamentary Committees for their input. d) Submit the proposed Act and Rules to GON for approval.
2.3.7 Recommendations for Dedicated Institutions
Establish a Department to implement R&R
Consultant recommends to establish a Department of Acquisition, Compensation, Resettlement and Rehabilitation within the Ministry of Energy. This Department will coordinate the ACRRP during its formulation and discuss with the concerned agencies such as Ministry of Forestry and Soil Conservation, Ministry of Land Reform, Ministry of Agriculture and Cooperatives and the Ministry of Local Development. This Department would implement the ACRRP for the projects, private or government owned, and all the expenses will be borne by the project developers. The Hydropower Policy has recommended that GON would assist projects in ACRRP. That makes some sense but it does not solve the problem in the field e.g. West Seti HEP. Government has to implement, but not just assist.
Establish a Hydro Power Development Task Force
In Nepal, the local government, community influence and political interference are already affecting the clearances and progress on land acquisition, R&R, road building etc. Situation could get much more complicated and cumbersome when a federal structure is implemented in the near future as planned. Consultant notes that for Hydro Power projects, environment and forest clearances, Land Acquisition, Rehabilitations etc, are most arduous and challenging issue for any state authority and developers in all countries- developed or developing. Consultant recommends that a high Powered Task Force on Hydro Power Development empowered with requisite authority, is warranted in Nepal which will coordinate and facilitate the environment, forest clearances, land acquisitions, R&R as well as resolutions on roads, infrastructure planning to projects, communicate with local communities, political authorities etc.
Final Report January 2011 58
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
In India for example there have been numerous cases of public interest groups blocking otherwise beneficial projects from being developed due to environment and local community affects. Moreover each state exercises its own rules and hinders the clearances for their own political reasons. To address the issues a Central Hydro Power Development Task Force has been formed.
Final Report January 2011 59
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
2.4 Transmission lines and access roads
Transmission lines and access road are a core issue to address for any HPP development. From the viewpoint of a private developer, the question is: who will bear the costs? A strong backbone transmission network is vital for reliable delivery of electricity within the country. Transmission Planning and development is critical for implementing HP policies to export power to India, enhance cross border trade and for domestic system reliability.
2.4.1 Transmission System and Power Evacuation
Nepal’s Transmission System
As the principal utility, NEA is responsible for domestic transmission planning and ensuring adequate transmission capacity to meet its domestic needs. As main buyer of IPP power (domestic or exports) it is responsible for grid planning to accept the agreed power quantities, including free power. NEA has important role to coordinate and cooperate with transmission plans of export projects to maintain system reliability and integrity. Unfortunately Nepal’s transmission system is inadequate in all these respects. While focus has been on licensing generation sites, transmission planning and implementation have received inadequate attention. In course of our discussions prospective developers identified lack of transmission facilities to evacuate power as one of the major barriers. Nepal’ backbone transmission system is essentially an obsolete, inefficient, 66KV-132 KV system. Grid (INPS) extends from east to west, Anarmani- Mahendranagar Developers have expressed serious reservations and frustrations on the lack of transmission capability as a critical barrier to private power.
Developers’ Concerns
The main concerns raised by the Developers are: • Lack of transmission line to connect the power project to the grid within a reasonable distance. The domestic projects are unreasonably burdened if they have to install long transmission lines to connect to the grid. • Constructing new transmission line is an arduous task due to mountainous geography. Environmental permits, tree clearance, right of way acquisition, etc is extremely tedious and time consuming. If built by the developer it makes project unviable. No clear tariff provision for the additional cost recovery. • NEA demands power evacuation plans from the developer before signing the PPA • Even if available, the Grid capacity may be insufficient to evacuate additional power • Lack of construction power. During construction the project requires power to operate equipment for excavation, earthmoving and other heavy equipment. Absence of grid power necessitates installing diesel plant that is very uneconomic.
Final Report January 2011 60
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
• Export projects typically plan standalone transmission but must fulfill free-power obligation. What to do if there is no evacuation ability? • Lack of access roads, bridges makes it hard to bring heavy equipment. • Too many clearances from Military for explosives; forestry for tree clearing, etc • Developers suggest that the transmission planning should be on River basin approach so that transmission can be planned along the river basin power evacuation needs. • NEA has acknowledged critical need to upgrade transmission system which is congested, and inadequate to cover future growth. But has severe budget constraints, as it is in huge deficit for the last many years. NEA, feels that the problem is exacerbated because DOED arbitrarily grants licenses without regards to the site suitability for power evacuation, that the sites should be licensed in coordination with the NEA’s transmission planning and capability..
Grid Connection of Domestic IPPs
There is a great deal of frustration among prospective developers that transmission line has become a major hurdle to HP progress. License issuance process does not adequately take this into account. According to developers main reasons for lack of transmission development are (IPPAN presentations): • Lack of central planning body, • Lack of regulatory institution, • Lack of national grid policy • Lack of reliability standards • Lack of Cost allocation / timely recovery. It is not within our TA scope to perform a detailed transmission system assessment or a full- blown TP recommendations. We focus on analyzing how poor transmission system prevents PSP participation in HP development and make some basic recommendations.
NEA is presently the single buyer of IPP generated power. Along with the Power Purchase Agreement (PPA), NEA requires the IPP to enter into an Interconnection Agreement. NEA has varied practices in providing transmission facilities to evacuate IPP power: • NEA constructed 132 kV, line to evacuate power from the 60MW Khimti I project to the NEA sub-station at Bhaktapur. • On the other hand, the 32 MW Bhote Koshi IPP constructed a 132 kV 28 km line to evacuate its output to the nearest NEA sub-station at Lamosangu. • Similarly, the National Hydropower Power Co which built 7.5 MW Indrawati III hydropower project built its own 27 kM 66 kV transmission line to evacuate its generation to the NEA take-in point at Panchthar. In both these cases the PPA probably included the transmission costs.
Final Report January 2011 61
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Recommendation on Transmission lines for domestic projects Consultant believes that Transmission access within a reasonable distance from the project should be the responsibility of the NEA. The developer has severe limitations to build transmission lines for many reasons: due to financing limitations, EIA, Right of Way (ROW) and other factors. Those who are able to overcome these and able to finance may be concerned about the recovery of costs. It is unimportant who builds the lines (subject to financing constraints) as long as the costs are fairly assigned in the PPA. This cannot work for < 25 MW projects as the PPA tariffs are publicly fixed by NEA. In this case, published tariffs should be calculated assuming that developer will build up to 10-15 Km of lines at its own costs. IPP be reimbursed if it is required to build additional line to connect to the Grid. For larger projects the transmission connection agreements should include who builds the line, who gets to operate and cost recovery. Again the maximum km IPP obligation approach should work.
Cross Border Transmission
Current cross-border capacity with India is 50-70 MW, which is aged, fragile and inefficient 66-132 KV. Cross border power exchange between India and Nepal under long-standing agreements between the two governments have been in operation at voltage levels of 11kV and 33 kV at 16 points along the border between Nepal and India since 1972. Three 132 kV connections operate as major power exchange links between Nepal and India:(i) the Duhabi-Kataiya (ii) Gandak-Ramnagar and (iii) Mahendranagar-Tanakpur. All stakeholders recognize the critical need of expanding transmission lines tie-up with India to cover Nepal’s immediate needs and promote long term cross border power trade. With better transmission lines, economy energy, and seasonal displacement power exchange is feasible. Expanded Transmission system will also act as catalyst to jump-start power sector investments in Nepal. There is on-going cooperation between NEA and Infrastructure Leasing and Financing Services (IL&FS) to significantly expand investment on both sides of the border. Initially four points have been identified for potential 220- 400 KV DC lines. There are however many technical, regulatory and commercial issues that need to be resolved. For example the INPS has weak segments that need to be strengthened to prevent bottlenecks during peak periods; Both sides must have similar grid codes, O&M schedules; there is strong electricity regulator in India but none in Nepal.; also there is need for comparable tariff mechanism on ancillary services, inadvertent flows and balancing energy, etc.
When will 220kV interconnection with India become reality?
Four 220 kV cross border links have been planned to enable power evacuation from the developers and from the NEA grid, although no concrete implementation steps have been taken: • Duhabi-Purnia 90 kM with 25.8 kM lying within Nepal between Duhabi and Jogbani; • Butwal-Gorakhpur 100 kM with 20.4 kM lying within Nepal between Butwal and Sunauli; • Dhalkebar- Muzzaffarpur 140 kM with 39 kM within Nepal. • Anarmani – Siliguri: 65 km with 25 km inside Nepal
Final Report January 2011 62
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
At present only one line Dhalekar- Muzaffarpur is under active development. Line is expected to be built as 400 KV, initially energized to 220 KV. These transmission lines are to be owned and operated by two SPVs , which are joint venture of NEA and IL&FS of India, respectively. The Power Transmission Company Nepal (Pvt) Ltd. will construct the line and oversee operations in Nepal and the Cross Border Transmission Company (Pvt) Ltd having its office in India will construct the lines and oversee operations in India. A more comprehensive Electric Power Trade Treaty, which allows for freeer trading of electricity between parties within Nepal and India was signed in June 1997 but remains to be ratified by GON. Even with the planned expansion the transmission capacity may not keep pace with generation growth and load expansion goals. In addition, despite the plans, real progress has been poor, due to inadequate planning and lack of committed investments This has exasperated the energy crisis, as was experienced in last winter which is anticipated to continue for at least next three years (October 22, 2009 , MOEN). JV agreements with IL&FS have been problem ridden, and threaten the arrangement (IPPAN news June 2009) Given the GON’s inability, large projects currently plan to build their own standalone transmission facilities, mostly North-South corridors from their plant to the bordering station and operate in isolation. While this is a practical necessity given the status of the national grid and limitations, in the long run it may prove to be highly inefficient and sub-optimal arrangement. It could threaten system integrity and load balancing if transmission operations are not coordinated. It also poses the problem of how to deliver free power to NEA. Some projects have proposed building smaller hydros near the NEA’s grid to deliver the swap power. However this reduces the NEA’s flexibility to receive higher output share, if needed. We believe the entire transmission system should be integrated to allow flow of power across border as well as strengthen the domestic load carrying capacity and reliability. This is particularly crucial when the IPP plants are transferred to the Nepalese ownership and serve domestic needs. Further even among the large IPPs, GON should require coordinated planning to avoid duplication. In fact our discussions with developers indicate that they are deeply interested in coordinated TL planning to evacuate power from multiple projects to destinations in India. Upper Karnali and West Seti for example could build just one large line.
Set up an Independent Transmission System Operator (TSO)?
National transmission system planning, development and operation should be responsibility of NEA, which is also the Transmission System Operator (TSO).. A separate entity should be established as the Independent Transmission System Operator (TSO) who has jurisdiction and control over all transmission operations of 66 KV and above regardless of ownership (eventually, 66KV should go to distribution.). The TSO should be the coordinator of all TS planning and development. Earlier TS consultants have recommended forming a Central Transmission Utility CTU, which should serve the same purpose. TSO should be regulated by NERC for wheeling charges, Grid code, non-discriminate open access, reliability and service quality, taking cross-border trade in account. With the evolving power sector in Nepal, TS planning has to take a long-term view and consider what ownership model will best serve Nepal. The ownership mode will include the state-owned TSO as primary system operator with plenary control. Also there may be private merchant TL; jointly owned cross- border lines and the dedicated lines from export-only
Final Report January 2011 63
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP) plants. This will require a complex technical and regulatory regime covering cross border issues, reliability and system integrity, equitable tariff regime, etc. Consultant believes that there should be a market based common carrier, open access transmission grid. Establish a transmission market and allow use of facilities through a wheeling charge. Under best practices, the NEA should build and or lease facilities; and operate transmission system, allow non-discriminatory use of transmission system to carry non-system power, i.e. developers, traders, aggregators who pay wheeling charges to NEA. There is no such wheeling provision in the current or proposed Elec. Act. It is advisable that the amendment to the Electricity Act and NERC include provisions for open transmission market, market rules and setting wheeling tariffs.
Recommendations for Transmission System International Financing Institutions (IFI), multilaterals need to concentrate on providing support in transmission system strengthening. In the short term: • Transmission Planning must be carefully done to avoid additional or redundant ROW as it has become one of the most painful and expensive issues to the developer. Often the cost of ROW may exceed the wires, towers and sub-station costs due to exorbitant demands of local dwellers. • Domestic IPPs should be responsible for a maximum-length transmission line to connect to the grid depending on project size (e.g 10 km for 50- mw, small; 20 km for larger). If required to build additional length then IPP should be compensated for that investment. In the longer term: • A separate entity should be established as the Independent Transmission System Operator (TSO) who has jurisdiction and control over all transmission operations of 66 Kv and above regardless of ownership (eventually, 66KV should go to distribution.). The entity’s functions should be separated between system operations and the system development (planning, construction, investments, etc). The TSO should be the coordinator of all TS planning and development. • Once established, NERC should • Regulate TSO for wheeling charges, Grid code, non-discriminate open access; • Monitor reliability and service quality, taking cross-border trade in account. • Regulate IPPs, export- projects and private companies who would to build transmission lines, sub-stations for their power evacuation or for profit. • Ensure non-discriminatory use of transmission system to carry non-system power, i.e developers, traders, aggregators who pay wheeling charges to NEA. There is no such wheeling provision in the current or proposed Elec. Act.
2.4.2 Roads and Bridges
As with the transmission lines, road access and bridges to the hydropower development site holds an equal importance that needs to be seen in terms of an equitable trade-off between national development needs and specifically that of the project under consideration. When considering the development of hydropower projects it is obvious that certain lengths of
Final Report January 2011 64
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP) access roads to the project infrastructure sites must be constructed by the developer e.g. access roads from the artery roads to project infrastructure sites like dam sites, adits, power houses etc. It is also in the interest of the state that it considers access, trade, migration, sociological and environmental implications in the context with national interests for a holistic approach to road transportation and bridge connectivity.
Roads and bridges have to be of adequate quality and strength to sustain loads from heavy equipment. It is a daunting task requiring extensive planning, huge capital, ROW etc., not within the financial and technical capability of private developers. Roads are often used as public common carriers and therefore the responsibility of the State. This has proven to be one of the most critical barriers to large scale HP. If HP development is to move forward, roads construction should be a top priority of the GON. It should be coordinated with the transmission and generation planning to optimize the benefits to all parties. For example road construction may also be prioritized along the river basin. Consultant is not convinced that the GON has fully committed resources to this effort within its ability.
There is no other option than for GON to take a massive program of road construction with assistance from donors, IFIs. Large developers may be willing to contribute towards this effort if they are assured the timely construction completion and are sized to their needs.
Final Report January 2011 65
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
2.5 River Basin Management
2.5.1 Introducing the River Basin approach
Integrated Water Resource Management
For some decades now, decision-makers (in particular governments) have unanimously acknowledged the water resource must be managed in a sustainable way, considering all water-related or using sectors, within a definite are – the River Basin. This approach has replaced sector-based management, which was limited to projects implemented largely in response to a supply-side rather than a demand-side policy. A certain number of countries have created, tested and developed tools at national and international level to perform Integrated Water Resource Management (IWRM), including governance aspects as much as planning and implementation aspects. Firstly, the spatial definition of the River Basin subject to the integrated and concerted management, is always based on water boundaries (and not administrative boundaries), whether surface water, groundwater (for the management of aquifers) or both (in the case of significant groundwater aquifers extending beyond the limits of the surface basins). Indeed, the water resources available in the rivers and aquifers are created within the River Basin, and it is here and on the natural environment that the impacts of the different usages are felt. The purpose of integrated management is to make these uses compatible with one another and ensure that their impact on the natural environment is acceptable.
Managing the River Basin: from upstream to downstream
In holistic terms, a River Basin is considered as a whole (from upstream to downstream, i.e. its outlet into the sea), but it can be divided into sub-basins, with specific management being implemented for each sub-basin in compliance with the obligations or directives pertaining to the main River Basin to which the sub-basin belongs. A river basin is always managed from upstream to downstream, but upstream management is conditioned by downstream constraints. Managing an intermediary stretch of river without integrating the upstream and the downstream would be quite unrealistic. Management constraints across the basin are dictated by the constraints on water quantity and quality reaching the outlet (downstream limit conditions). Water resource management, which mainly focuses on quantity and quality aspects, but also on related risks (in general, flooding and drought), must take account of conservation conditions and the requirements of all resource users across the basin: all of the ecosystems (particularly protected areas), energy requirements, agriculture (irrigation and cultivation practices), fishing (small-scale and/or industrial, where existing), navigation, tourism, urban development, economic activities (particularly industries), and the social, political and cultural contexts. Water resource management must also take into account economic development in the river basin (and in principle, should not impede such development).
Final Report January 2011 66
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Dedicated organizations to develop Basin Master Plans
Bodies for integrated river basin management (institutional framework and governance) have been defined as frameworks for consultation between decision-makers and users, where policies and objectives for basin management are formulated taking account of the full range of water resource-related aspects. These bodies go by different names (Basin Organisation, Basin Authority, Basin Agency or Water Agency, Basin Commission, etc.), and may be national or international depending on the expanse of the basin in question. As support tools in the proposal or decision-making processes (depending on their status), they develop further mechanisms to implement the basin’s integrated management, starting with the state of resources in the river basin (preliminary review of the state of affairs with a comprehensive inventory of uses and requirements in sectors ranging from hydrology and the economy to the social and environmental sectors). Using these data as a basis, River Basin Master Plans are drawn up, defining the major lines of intervention for implementing the chosen management policy and the main sectors of action for the basin’s development, in respect for sustainable development and the conservation of resources. Finally, on the basis of such Master Plans, Actions Plans (multiannual and annual) are developed defining the projects to be implemented (including their financing). This methodology, resulting from different countries’ experience of integrated management, is not always fully applied, and many river basins are not yet managed with these tools which are particularly difficult to implement in an international context.
2.5.2 International experience for River Basin Management
The case of the Mekong River
Integrated water resource management bodies have been set up in Asia more or less recently. This is the case at international level for the Mekong River, with the Mekong River Commission composed of four countries (Cambodia, Lao PDR, Thailand and Viet Nam), with two Dialogue Partners (China and Myanmar). The fact that the upstream countries are not fully fledged members of the Commission while representing the upstream reserve, is an obstacle to the Commission’s effectiveness, preventing it from effectively implementing certain management choices. Consequently, it is difficult for the Mekong River Commission to define a Master Plan on the scale of the basin since no strategies can be applied to the upstream part without the decision coming from the upstream countries. China’s huge energy requirements lead it to have numerous hydro-electric dam projects in the upper basin of the Mekong, without any obligation to take the needs expressed by the downstream countries into consideration.
River Basin organizations worldwide
Other bodies exist in China, but focus on purely Chinese rivers (Yang Tse and the Yellow River, for example). China is developing Master Plans for these basins, but the ultra- centralisation of power drastically limits users’ participation in the strategic choices actually made. Basin organisations have been set up in other parts of the world (Europe, Africa, America, Oceania), either for national or international basins. Europe, with countries like Spain and France, has been a forerunner in this water management approach. Indeed, the European Union adopted this approach (Basin Organisation, Basin Management Master Plan), and through the Water Framework Directive (2000), made it compulsory for all EU countries (27 countries), for national and international basins.
Final Report January 2011 67
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Many African countries have also adopted this approach, either for national basins (Morocco, Algeria) or international basins (the rivers Senegal, Gambia, Volta, Niger, Congo, Orange, Okavango, Zambezi, Limpopo and the Nile, as well as sub-basins such as lakes Chad, Victoria and Tanganyika). The Niger Basin Authority covers the nine countries of the Niger basin (Guinea, Mali, Burkina Faso, Niger, Chad, Cameroon, Nigeria, Côte d’Ivoire and Benin) based on a “Shared Vision”, which led to the development of a strategic framework including a 25-year investment funding plan with five-year action plans. The organisations’ institutional frameworks may differ, but all are based on integrated management principles, even if they were initially created to respond to far more sector based concerns (for example, management of the Senegal river dam, river transport on the Congo, etc.) resulting in their various designations: Development Office, Basin Authority, Basin Initiative, Hydraulic Agency, Basin Commission, etc.). This approach has led to the emergence of numerous projects in sectors ranging from hydro-electricity, to agriculture, fishing and navigation, funded by international funding agencies.
Improving the coordination between Ministries
It should be pointed out that IWRM involves all sectors concerning water and its use. The implementation difficulties frequently lie in the fact that the different sectors often come under the authority of numerous Ministries in the countries: Health, the Environment, Energy, the Economy, Social Affairs, Regional or Local Authorities, Justice, Industry, Transport, Fishing, Tourism and even Foreign Affairs in the case of transboundary river basins. Consequently, it is often difficult to make all these sectors work together and an institutional framework is crucial. Without this well defined framework, it would be utopian to believe in the possibility of implementing integrated management. It is within this framework that the Basin Management Master Plan, an essential tool for implementation, can be developed. Major projects, in particular for the development of hydro-power resources or of agriculture (irrigation), which are among the activities strongly impacting on the water system and that can have significant consequences on one another, must be taken into account in the Master Plan, and must themselves take account of all other basin activities and the environmental context. Rigorous impact studies must be systematically carried out for all large developments, taking into account the full range of water sector aspects (particularly environmental, social, and economic aspects), and the quantity and quality of the resources must be addressed, while keeping the downstream limit conditions as the limit on impacts.
2.5.3 Application to Nepal
All Nepalese rivers flow to the Ganges…
All of Nepal’s rivers, which take their source in the Himalayan range, belong to the Ganges River Basin (the majority of the tributaries of the left bank of the Ganges river), making this country a significant upstream reserve, providing approximately one third of the average yearly flow of the Ganges. The Ganges is therefore a transboundary river basin between India and Nepal (technically speaking the Brahmaputra, which joins the Ganges at its delta, is part of the Ganges Basin – the Ganges-Brahmaputra-Meghna Basin – but they are often considered as two rivers with a common delta). Strictly speaking there are no International Basin Authorities or Commissions covering the entire Ganges – Brahmaputra – Meghna Basin. Only bipartite agreements for the Ganges part have been signed between Nepal and India for certain tributaries (Mahakali in 1996 on the river’s integrated development, particularly regarding dams, and Kosi in 1966 and 1978
Final Report January 2011 68
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP) on canal management and the regulation of their flows. The layout of the main Nepalese rivers (flowing north to south before joining the Ganges in India), would appear to allow their management as independent sub-basins, subject to the downstream quantity and quality constraints being taken into account. It is important to underline that they remain transboundary rivers (as underlined by the international agreements already signed by both countries).
How Basin Master Planning will benefit hydropower development
First, technical reasons dictate that a basin-wise planning will optimize power sources’ utilization by identifying sites suitable for storage which serve downstream sites during dry season. This provides better year round power reliability. Combination storage and ROR projects are also more economic on per unit cost basis. Total integrated planning also allows optimizing the size of individual potential sites. Currently we are advised that licenses have been allowed where projects are undersized in the context of the basin’s optimal potential capacity. Basin wide planning would maximize the power output and reliability. Projects like Upper Tomakoshi are being re-sized upwards. Upper Karnali project has also pointed to us that the potential can be greatly increased from the current authorized 403 MW.
Second, by identifying the potential sites and performing feasibility all at once along a Basin provides more efficient development of the river and its tributaries for power generation, consistent with the requirement of drinking water, irrigation, navigation and flood control.
Third, from an environmental perspective, the Basin-wide planning brings about overall efficient development by adopting an Integrated Basin-wide Catchment Area Development Plan (CADP) and Basin-wide Environment Management Plan. Better management of environmental and social issues is key to a peaceful development of hydropower potential.
Fourth from access infrastructure perspective, transmission access and access roads can be built more efficiently and economically with development along a River Basin. As has been pointed out, access infrastructure is one of the biggest barriers to HP development.
All these factors contribute to more rapid and cost efficient power development as well as water resources and environmental management when planned along River basin.
How to develop a river basin approach
Nepal has not yet truly adopted the management by river basin approach, and no river flowing from its territory has a Basin Agency or Authority. Nevertheless, the overarching principles of integrated management are apparent in the different legislative and regulatory texts governing water management in the country (Water Resource Act 1992, Water Resource Regulation 1993, Environmental Protection Act 1993, Water Resource Strategy 2002, Water Plan 2005). Furthermore, at country level there is the “Water and Energy Commission Secretariat”, which developed, for example, the Koshi River Basin Management Plan. It would appear that Nepal is ready for an institutional reform of integrated water resource management, particularly focusing on the creation of basin organisations for each of its major rivers, enabling better participation of water stakeholders and users, and a truly integrated approach towards this resource. The main objectives should be to build capacity to develop regions and the country, with the priority going to the development of hydropower (which has significant potential), irrigated agriculture, flood management (particularly depending on downstream risk, including the Ganges valley), with full consideration for the environmental
Final Report January 2011 69
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP) and social context, and the two-pronged challenge of economic development and environmental protection. Water Management Master Plans for River Basins are important and necessary tools for integrated water resource management. However, for their establishment and implementation, a minimum framework based on four main pillars is necessary: - Regulatory framework (laws, regulations) - Institutional framework (organisation in charge of water management) - Technical framework (review of the current status, establishment of the Master Plan) - Financial framework (action programmes and funding).
Tools to be developed include the general above mentioned tools: review of the current status in the River Basin, Basin Management Master Plan, and Action Plans. These tools are essential for truly integrated water resource management.
Which role for DOED?
Once empowered the DOED could play a lead role in identifying and prioritizing the river basins for development. DOED should develop plans and provide inter-sector support for equitable allocation of water resources for agriculture, hydropower, industry, fishing and drinking water; prepare proposals with regard to institutional strengthening with technical support of actions towards River Basin and IWRM requirements; and take initiatives to harmonize legislation aimed towards IWRM and River Basin approach.. Other agencies involved in River Basin master plan will be NPC, WECS, Min. of Irrigation, MOEn, NEA, MOE, Min. of Forest and Soil conservation, MoF, and relevant VDCs and DDCs.
Final Report January 2011 70
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
3 Promoting Private Sector Participation
Final Report January 2011 71
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
3.1 Financing Hydropower in Nepal
3.1.1 Need for Private Sector Participation
Requirement is US$ 2 billion annually
The list of projects in pipeline that has been registered since 2006 with the Department of Electricity Development is summarized as follows: Table 4 Projects Pipeline
Total Generation Scale of Capacity of Projects in Projects MW
Up to 1 MW 228 1-10 MW 1,336 10-100 MW 5,826 Above 100 MW 42,545
More recently GON has embarked on a ‘Ten Year Hydropower Development Plan and Action plan for the development of 10,000 MW of hydropower within ten years. To achieve this target an estimated total of US$ 20 billion is required, or US$ 2 billion annually. In view of long construction periods, covering 5 to 7 years and a repayment period of over ten years from COD, fairly long term financing is required at fixed interest and currency rates. Project sponsors with sufficient financial muscle and extensive experience in developing and implementing hydropower projects under similar circumstances will have to be identified.
Development Models Have Evolved
Unquestionably the HP Development in Nepal has suffered from lack of financial commitment – domestic and foreign, reasons for which are rooted in many socio-political and socio-economic factors. They are discussed at various sections of this Report.
Except for some smaller HP projects by independent power producers, electricity supply in Nepal has traditionally been undertaken and financed by a vertically integrated public monopoly (NEA) that builds, generates, transmits, and distributes power to end-use customers. As ownership has been public, the projects have also generally been financed through the public sector. Under single buyer and single seller model, NEA is also often the sole buyer of electricity from IPPs under a PPA.
Final Report January 2011 72
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Figure 1: Traditional Public Ownership and Financing
Government Official Multilateral Development Borrowing and Bilateral Budget Agencies
Public Utility + Internal Funds
Project 1 Project 2 Project 3
In this model, typical sources of financing for public power projects are: • Utilities’ internal resources • Host government budgets • Soft financing through multilateral banks and donor agencies To secure the financing for such projects, the host government in the past provided sovereign guarantees. In recent years the GON has declined to furnish sovereign guarantee. Absent that and poor financial standing of the NEA, has contributed to a declining sentiment by investors. Historically, large-scale hydropower around the world has developed under state ownership and from state resources. In US the large govt. sponsored hydropower developments built Tennessee Valley Authority, Hoover Dam, Bonneville Power etc. In recent decades, hydro-projects in developing countries have been built with the support of multilaterals due to limited state budgets. Projects in Central Asia have been built with WB, ADB, KfW and other donor support. Also a significant provider of project debt for hydropower infrastructure has been major state and private pension funds, life insurance companies and other (private) contractual savings systems. Private participation in the power sector is usually associated with the application of Project Finance (PF) principles. For this reason, the sections below focus on the feasibility of PF in Nepal and provide some example of successful financing of HPP on PF basis in other developing countries.
3.1.2 Project Finance: an Overview of Development Models
Through a series of case studies, seminars and trainings, the Consultant presented the concept of PF to the Nepali counterparts and how it promotes best practice in HPP development. Consultant also discussed why the application of PF poses challenges for investors in HPP in Nepal.
As in many countries, Nepal should adopt multiple models in order to optimize successful HP outcomes and optimize risks and exposure. Typically the development model selected depends on the project size and end-use.
Final Report January 2011 73
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Public-Public Partnership
In this the GON i.e NEA has majority ownership (51%), and remaining stake are also owned by public or quasi public FIs, namely Provident Fund, Employee pension funds, Nepal Telecom, etc. In Upper Tamakosi, NEA seems to have successfully employed this model. It should be stressed however that this model, where the GON is essentially the developer, is not based on strictly PF principles. In the case of medium and large project (above 50MW) such as Upper Tamakosi (456 MW. NRs.32-35 Billion). Although Project has estimated costs at 35 Billion we believe that the actual costs would be in access of NR 50 billion. GON has guaranteed contingent capital of Rs. 12 Billion.
Public-Private Partnership (Competitively bid)
Here, project is allocated to a Special Purpose Vehicle (SPV), in which a private party joins as shareholder and lead developer, after award in a competitive bid. Minority partners may include local banks, FIs, FDIs, contractors, vendors as well as off-takers, and multilaterals. GON or local authority takes either minority (typically < 26%) or majority but passive ownership stake. PPPs are financed on PF basis. Current projects Upper Karnali, Arun 3 and Kabeli-A seem to be built around this model. This model is recommended for medium size projects (50-300 MW)
Strategic Partnership (Direct Agreement)
PPP projects may also be developed without competitive bid in cooperation with a strategic partner with proven HP experience and tangible commitment to Nepal. In such case, the partner has certain minimum equity interest (usually > 25%) and forms a development consortium. Typically these would be for larger projects (300-1000 MW) financed on PF basis. Some of the strategic partners could be large foreign power players and off-takers. Direct negotiation may also be appropriate if the competitive bidding has proven unsuccessful. Consultant believes that Budhi Gandhaki could be developed on such basis.
Bi-lateral Projects
These would usually be Mega projects (above 1,000 MW) between India and Nepal under the power and water cooperation agreements, such as Panchshewar, Chesapani etc. Typically they are funded by relevant governments, multilaterals, etc. For such mega power project to happen, direct financial incentives and relevant international policies are necessary. If socio- political situation stabilized, and mutual India- Nepal geo-political conditions improved, it is conceivable that India could be persuaded to offer Most Favoured Nations treatment to Nepal in the HP sector, such as it has offered to Bhutan.
Industrial Power Plants (Captive Power)
Certain energy intensive industries such as cement, as well as potential new industries can be attracted into Nepal by granting such industries the right to develop dedicated power project, alone or in partnership with GON under the above-described development models. Output of such projects could be shared between industries and GON, though the financing of such project would be greatly facilitated if structured solely around the captive power off taker In the report we have stressed the need for linking power sector development to the Nepal’s industrial growth. DOED may consider Sharada Babei as one such project due to its proximity to cement and other cluster industries.
Final Report January 2011 74
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Participation of local community
As of the date of this report, Consultant understands that under the proposed revised Electricity Act, local community affected by project may be eligible to become minority stakeholders in HPP. The financing of shares by local stakeholders as well as the voting rights associated to this participation would have to be clarified. Again, upfront clarity, disclosure or project liabilities and transparency shall prevail for any HPP project to be smoothly developed and financed.
Financial structure: Debt vs. Equity
Proper balancing of debt and equity is an important consideration in PF. While higher leverage i.e higher debt ratio increases the project profitability it also is perceived more risky. Increasing equity ratio on the other hand increases the financing costs (because equity is typically more expensive than debt), and thus reduces sponsor’s profitability. Lenders insist on higher equity portion to reduce project risks. A balance is required. With higher equity participation probability of project completion is enhanced since more financially sound sponsors and developers will emerge. Typically DOED has licensed current projects requiring min. 20% equity. This equity ratio was acceptable when soft loans were available from multilaterals. A private lender will not consider lending with low equity without asking for a third a party guarantee or a non-project collateral. Higher equity ratio is a measure of investor confidence in the project and a lender attraction. It also indicates better sponsor commitment. In Consultant’s opinion larger equity makes the project more bankable in general.
Consultant recommends that required equity/debt threshold should be increased to 30:70 for future competitively bid offerings. GON may also consider developing larger projects and those in which it would own a majority share to be funded with grant and soft loan from ODA. In such case, the equity/debt ratio could even be increased to 40:60.
Update (May 2010): SEBON amended the Securities Registration and Issuance Regulation 2065, liberalizing shareholder participation in HP. • Company has to offer a minimum of 30 % shares of its issued capital in the following manner: 5% to company staff, 10% to locals and 15% to general public; • Locals cannot sell off shares for 3 years; • Long gestation projects like hydropower projects can now offer shares to the public during construction phase after obtaining the financial close and generation license SEBON hopes the amendment will assist in improving the investment climate for hydropower. Consultant believes however that a more comprehensive review of the SEBON regulation is needed.
Final Report January 2011 75
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
3.1.3 Examples of project structures in Nepal
The study of several hydropower projects over the past two decades suggests that the financing structures can vary a lot from one case to the other. The technico-economic studies are generally conducted by different actors than the investors; the investors themselves can be public or private companies. A summary of the main features of a sample of hydropower projects is presented below .
UPPER TAMA FEATURES KHIMTI 1 BHOTE KOSHI KABELI A CHAMELIYA KOSHI
Operating Company Himal Power Ltd. Bhote Koshi . Kabeli Energy Ltd. Upper Tama Koshi NEA Power Co. (P) Ltd. Hydropower Co. Ltd Ownership Type Private Private Private NEA subsidiary NEA Generation JICA Techno-economic NORPOWER a.s NEA NEA NEA Metcon Studies BPC Harza (USA)/HIPC CIWEC (canada) Norconsult Hyundai/KWRC Technical Assistance NORAD US Trade & Dev. Agency World Bank NORAD SAARC Fund, KOICA Type of plant ROR ROR ROR with daily pondage peaking ROR peaking ROR Installed capacity (MW) 60 45 35 456 36 Annual energy (GWh) 350 246 174,8 2281,2 184,21 Total cost (US$ M) 140 98 56 441 75 Year of Commercial preliminary Operations Jul. 2000 Jan. 2001 NA construction est. completion 2011 SN Power 57% HIPC 100% BPC 54% NEA 40% NEA 75% BKK As 26% Shangri-La Energy 5% EPF 18% GON 25% Investors (Current) BPC 17% Khudi Hydropower 6% Nepal Telecom 6%
Citizen Investment
SCP Canada 30% Trust 2%
APP China 5% National Ins. Corp 2% General Public 15% Local natives 10% NEA & project staff 4%
Staff of Lending 3%
Final Report January 2011 76
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
UPPER TAMA FEATURES KHIMTI 1 BHOTE KOSHI KABELI A CHAMELIYA KOSHI
Lenders ADB EPF IFC Citizen Investment Trust Eksportfinans National Insurance Corp. NORAD IFC PDF Local commercial Banks NDF DEG (Germany) consortium of local banks GON support EDFC (S.Korea) for E/M Construction Statkraft, BPC Lahmayer Supervision Hydroconsult Hazra/Shah NA International Shah/Silt/ICON JV NCC Tunneling, Himal Hydro NA Alstom
Nepal Hydro and Gezhouba Construction Sino Hydro, China China Gehzouba Engineering Group Corporation, China Himal Hydro KHNP consortium Principal Contractors Debt equity ratio 70:30 70:30 80:20 70:30 NA agreed tariff at PPA (US cents) 5,94 6 6.29 with VAT PPA negotiations ongoing NA annual escaltion CPI 3-6% 3% FC; 6% LC NA NA availability 98% NA NA NA first IPP chosen through ICB entirely domestic finance PPA & finan.close pending and ownership remarks first IPP second IPP
Notes: ICB: International competitive Bidding ADB: Asain Development Bank IFC: International Finance Corp. BKK: Bergenshalvøens Kommunale Kraftselskap As: IPP: Independent Power Producer KOICA: Korean International Cooperation BPC: Butwal Power Co. Agency CPI: Consumer Product Index (NY) LC: Local Currency DEG: Deutsche Investitions- und Entwicklungsgesellschaft mbH NA: not applicable E/M: electro-mechanical NDF: Nordic Development Fund EDCF: Economic Development and Cooperation Fund NEA: Nepal Elkectricity Authority EPF: Employees Provident Fund PDF: Power Development Fund FC: Foreign currency PPA: Power Purchase Agreement HIPC: Himal International Power Co. ROR: run of river
Final Report January 2011 77
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
3.1.4 Is Domestic Financing Available?
Nepal’s economy is presently characterized by a low level of durable savings, resulting in a similarly low level of capital available for longer-term investment purposes. According to Nepal banking financial statistics 2008, the total deposit base of the banks is equivalent to ~$ 6 billion of which 70% is in instruments with less than a year tenure saving, current and call deposits. Furthermore, bond and equity markets are still very nascent.
Local Financing Institutions
Well-established Private pensions (except for civil servants, military and certain public enterprises), institutional investors, investment funds, mutual funds or other non-bank institutions are non-existent or are too small relative to size of the country and mostly at an infant stage as institutions. According to the Nepal Rastra Bank (NRB) economic survey July 2008, the total assets of the contractual savings institutions (Employees Provident Fund, Citizen Investment Trust, Insurance Companies and Postal Savings Bank) amounted to Rs 121 billion ($1.6 Billion). The commercial banking sector, despite development in recent years, is limited in its capacity and constrained by banking rules to participate substantially in financing infrastructure projects in Nepal. Nepalese banks are subject to Basel II treaty and limit their lending for single project or as a portion of its core capital. Risk -averse approach of the local financial institutions also comes into play. Since much of the HP projects involve project financing, i.e non-recourse loans, the local FIs have little experience in risk evaluations, and risk optimization among projects for such investments. The short-term liability profile of the banks prevents the banks and FIs from a long-term commitment of credit for the power projects. Relatively short average maturities of bank deposits as against a minimal requirement of 3-5 years i.e., the minimum estimated construction period bridge financing, 10- 12 years in debt recovery, and 15-30 years for the full return on investments is a mismatch in the asset profile of the financial system of Nepal vs needs of the long-lived HPP projects. To lend for long term, banks therefore must pass this risk on to the borrower i.e charge higher rates. Nevertheless, local FIs, banks, insurance trusts, pension funds and others have shown increasing interest, indeed enthusiasm, to participate in equity and debt financing of the Infrastructure projects, including domestic small to medium size Hydropower projects. Recent IPO’s for Chilime and Arun Valley hydropower received unusually strong public interest. Major banks, like Himalyan bank, CitizensTrust, Clean Energy Bank, Pension funds, Nepal Telecom have in fact committed and are willing to push the envelope, and commit significant investment funds in the Hydropower.
Nepalese commercial banks’ capacity to finance Hydropower
Despite its present limited size, total commercial bank deposits in Nepal are increasing at a fast pace. In the first eight months of 2008/09, deposit mobilization of commercial banks increased by Rs 59.9 billion (14.2 percent) amounting to Rs 481.4 billion in mid-March 2009, whereas assets accumulated to Rs 613 billion. However equity participation of the banks and FIs cannot be anticipated due to restrictions of the Central Bank that also includes a limitation to finance up to a maximum of 50% of its core capital for a single hydropower project (other than hydro only 25%).
Final Report January 2011 78
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Recent estimates by Banker’s Association suggest that up to Rs15 Billion ($200 million) could be made available annually under the right conditions, sufficient to construct 150 MW HPP each year. Nevertheless, the risk associated with an over exposure to the sole power generation sector should be carefully addressed by these institutions. If commercial banks would be willing to expose themselves to the hydropower sector for say 20 % of their assets and disregard further obstacles such as interest mismatch, up to Rs 120 billion (USD 1,600 million) could be available. Hence in view of the size and quality of their deposit structure, assuming its further growth in both depth and tenor and given the project development and finance competences available, development of a range of HPP with a combined capacity totaling up to 500- 750 MW might presently be financeable. However, as the experience in assessing major hydropower projects and in project financing has not been tested for a number of years, it may be assumed that local banks and financial institutions will temporarily be prioritized for funding the smaller projects, in order to enable them to enhance their capabilities. For the same reason, the small project priority seems the case for Nepalese investors. Thus 10-15 small 50 MW size projects seem within financing capability of local banks.
Alternative and innovative financing
NEA has recently tapped alternative and innovative financing sources, including the pension funds, insurance companies and local banks. Equity shares have been issued to public for Chilime and Arun Valley Hydro with relative success. The on-going project Upper Tamakosi is an example of the alternate and creative financing arrangement that shall be discussed later. Some steady flowing funds available in the country have not been effectively mobilized for the HP sector. Diaspora remittances into Nepal amount to nearly a billion US dollar annually from 1.2 million Nepalese. Much of these are typically used for consumption or diverted to real estate and other non-productive assets. Properly structured, these remittances can be a significant source for infrastructure funding, keeping in mind however their limited role as they are subject to ebb and flow of global economy. As NRB Governor recently remarked, NRN remittances cannot solve our infrastructure investments needs. Consultant has further observed that in Nepal there is a large – too large? – number of small finance companies, FIs, banks, savings and credit finance co-operatives, etc. While concentration of financial power among few holders is ill-advised, some consolidation might be necessary. Consolidation can be achieved by creating tax and other incentives to larger entities or by raising threshold on formation of finance companies. With consolidation, newer stronger financial institutions can emerge, strong enough to participate in infrastructure project funding. This is something for NRB and MOF to review. Update (May 2010): The above point was also made in a recent column by Mr. Dipendra Karki, CEO, Sidhartha Bank (Himalaya Times, May 5, 2010) who pointed that there is fragmentation and overbanking in Nepal. This he pointed will work to Nepal’s disadvantage when the country opens up the Financial Services Sector (FSS) under its WTO obligations.
Financing Upper Tamakoshi with Nepalese funds
NEA is developing Upper Tamakoshi Project, originally 305 Mw, ROR now upgraded to 456 MW. Tamakoshi is an important project to fulfill domestic needs. Consultant has recommended it be placed at the highest priority among competing projects. As departure from previous projects, Tamakoshi is being financed, equity and debt, with a combination of NEA funds and private and public funds managed by public institutions: Citizens Trust, National Insurance, Nepal Telecom, Provident Fund etc. GON has committed
Final Report January 2011 79
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP) upto NRs 12 Billion as contingency capital. A small portion of equity will be offered to general public and employees of sponsoring organizations. After a late start the project seems to be progressing well. Financial closure is expected in the near term. Project manager advised us that the final financing is still being negotiated. Some details, as Project manager advised us are as follows: Table 5: Upper Tamakoshi Project
Basic Information
Project size 456 Mw Est. Project cost (excl. .IDC) $446 million Debt: Equity 70:30
Equity Financing
NEA 51 % Provident Fund 20 % General Public 10 % Dolkha- Dist ( local) 10 % NEA/Thomkosi Employees 6 % Employees of Banks, PF, Citizens Trust 3 %
Debt Financing
Himalayan Bank as lead Bank (MOU) Rs. 6 Bill Provident Fund (committed) Rs. 10 Bill *Additional PF Rs. 2 Billion debentures, convertible to common shares Citizens Investment Trust (Partly GON –owned) Rs. 2 billion Nepal Telecom TBD National Insurance Corp. (under- negotiation) Rs. 2 billion GON has guaranteed NRs 12 Billion in contingency capital
*Interest rate 8.25% being negotiated to 10%
Power Purchase Agreement (PPA)
Wet season Rs.2.5 Dry season Rs. 6.00 Av. Tariff Rs. 3.5- 3.75
Final Report January 2011 80
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Estimated Schedule
Financial closing Exp.. 2010 Construction Phase Total six turbines 456 Mw, built in two phases Expected start 2010 Phase 1: 4 units (309 MW) Completed by Dec. 2013- Jan. 2014 Phase 2: 2 units (total 456 MW) May-June 2014 Access Roads: Building 68 km road, 28.5 km is new Rd.; 35 km being upgraded
Unfortunately DOED has not played role in Upper Tamakoshi development. Projects assigned to NEA for development are typically outside the DOED purview, except for perfunctory license issued by DOED. Consultant has noticed lack of coordination, if not adversarial relationships between two organizations. This became very evident during the Kabeli-A award. This needs to be addressed by the GON.
3.1.5 Recommended improvements for domestic financing
Relax SEBON rules for small HPP
Experience of recent public offerings for Chilime (22MW) and Arun Valley Hydro (3MW Piluwa Khola project) show good response from public. Arun valley reported 22% oversubscribed. Chilimi is bogged down in courts because local public wants 8% vs. 5% equity shares allowed by SEBON. The prices of currently traded shares has soared to 10- 12 times the face value, 4-5 times the offering prices. In fact while rest of the share market showed significant decline in recent days, the two HPP’s shares climbed to new levels.
We believe that projects in this category can be well supported by public offerings. This factor will weigh favorably to FIs who wish to do bridge financing or eventual project financing.
Currently SEBON allows upto 30% of project equity to be offered to public (of which 5% for locals). Assuming 30% equity ratio this amounts to 9% of project cost is invested by public. Public shares offering can be raised to at least 50% of equity.
SEBON rules also limit the timing and the price of public offering. Public share offerings cannot be made during the construction development period but only upon project completion. This is designed to minimize risk to public of an unsuccessful project. This however need not be a major hurdle if the bridge financiers are comfortable with the successful eventual public offering.
SEBON allows the premium on the face value only after successful demonstration by the project of profitable performance for three years. This delays the expensive bridge loan annihilation, and lender confidence.
Final Report January 2011 81
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Recommendation for Public Offerings Consultant recommends that MOEn, DOED should petition to SEBON to adopt targeted rules on public offerings for HPPs. SEBON rules were perhaps adopted for the entire infrastructure sector; we believe HPP should be given special consideration, because unlike say a road project where there is no revenue generation or toll guarantee upon completion, the HPPs become revenue producers upon commissioning and typically have binding contractual agreement (PPA).
Amend directives of the Central Bank for small HPP
Local FIs, pension funds, insurance companies can be backbone of funding small projects (<50MW). The local banks and financial institutions may be prioritized for debt financing small projects. The existing deposit base of the local financial institutions comprises as high as 70% in less than a year tenure- savings, current and call Deposits and 30% in fixed deposits with tenure of 3 to 5 years6.
With 30% or greater equity contribution, NEA or the Independent Power Producers (IPPs) may be in a better position to take up the projects with debt funding from the local FIs.
Recommendation for Bridge Loan and Permanent Debt for small projects Amendment in the existing directives of the Central Bank such as follows is recommended: • Designation of the hydro power as priority lending for deprived sector, and • Relaxation of the loan loss provisioning for hydro projects.
Credit Rating Agency for Nepal
One of the confidence building measures for privately operated infrastructure projects will be the presence of a private credit rating agency (CRA). A CRA analyzes financial data of a debt issuer and assigns a credit rating. The rating depends on the issuers overall strength, credit-worthiness as well as the terms and conditions of the particular debt obligation. Agency’s review and rating is an important tool for the potential lenders, FIs or individuals, to evaluate the risks involved in investing in the particular company, SPV or the specific debt instrument. Rating also is used to establish the interest rate the lender is willing to accept for that instrument. CRAs also analyze and assign country debt ratings. In US three main CRAs are: Moody’s, Standards & Poor and Fitch Services. In India well established two CRAs are: ICRA and CRISIL. They are associated with Moody’s and S&P, respectively. Recognizing the need and importance of CRAs due to growing private lending some recent efforts have been taken in Nepal. In particular Himalayan Infrastructure Fund is actively working to establish CRA and negotiating with the ICRA in India. This is very encouraging and NRB/GON should proactively support it. It is however worth mentioning that CRAs have come under criticism in recent months for failure to analyze the creditworthiness of many financial institutions- AAA ratings were assigned to companies who subsequently collapsed. One of the factors citied is that CRAs
6 Source: Nepal Banking Financial Statistics Jan 2008
Final Report January 2011 82
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP) are paid for their research by the debt issuers rather than the investors, which may lead to bias in favor of the issuers. Financial regulators are working to rectify this.
Recommendation for a Nepalese Credit Rating Agency CRA is encouraged by WTO of whom Nepal is a member. Unfortunately no CRA operates in Nepal. This leaves potential HP investors to rely on their own analysis for risk assessment. Consultant believes it will be an important HP/ PSP step to encourage CRAs to operate in Nepal.
3.1.6 The need for a dedicated Nepalese Financing Institution (FI) for Infrastructures
International practices
Many countries, around the world have established Power Development funds such as Power Finance Corporation (India), India Infrastructure Finance Company Limited, Rural Electric Financing, which are able to invest equity and/or contribute debt to power projects. As a further example, in Tamil Nadu, India, the state government along with three private financial intermediaries created a Trust -the Tamil Nadu Urban Development Fund– to develop and finance urban infrastructure projects (although not exclusively PPP projects). The Trust is managed by an Asset Management Company, which has majority private sector ownership, thus ensuring a professional approach to project appraisal and funding. Through a mix of loan and grant instruments, German Financial Cooperation is also working with this fund to further strengthen the financing capacity of the fund and to facilitate the access of project developers to the capital market via the Fund.
Establish the Nepal Infrastructure Bank
In Nepal, the capacity to structure project development and project finance on the scale required for the development of HPP could be beefed up by a centralized institution bringing together available professional expertise and capabilities that would certainly enhance further implementation. For sustainable development more integrated approach of: (i) capacity building for project developers, (ii) project development funding, (iii) transaction advice and (iv) facility to finance the required investments is necessary. Specialized public/private sector fund can provide a vehicle to achieve this. Establishment of a separate institution for infrastructure development can prove to be a milestone to achieve the GON’s HP goal. This will facilitate developing the mid-size projects, by separating the financing responsibility of the projects from the government agencies responsible for sector policy making, and placing the responsibility for financing instead with an organization dedicated to infrastructure funding. In this model, government funds, donor funds and other funds held by the pension funds, insurance companies shall be pooled and channeled through the organization and awarded on a competitive basis to project developers. This model shall be employed in an effort to depoliticize the hydropower development, attract private investors and implement priority projects.
The 2001 Policy enunciated formation of an Infrastructure Financial Institution. However, little concrete implementation action took place. In recent years increasing conceptual steps have been taken. The National Investment development Bank has been spearheading this effort.
Final Report January 2011 83
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Annual Monetary Policy for the fiscal year 2007/08 made the following pronouncement: “The private sector banks and financial institutions will be encouraged to set up and operate the proposed Nepal Infrastructure Bank for the long term project investment. For this, separate regulation relating to capital, investment, loan loss provisioning and other regulatory norms will be issued”.
Consultant believes that the establishment of a bank totally devoted for infrastructure development with the joint participation of the Government and private sector will be a positive signal for sustainable hydro development in Nepal.
Structuring NIB
To be effective in meeting its objectives the NIB has to be differentiated and relieved from some of the burdens of a commercial bank. Bank and Financial Institutions Act (“BAFIA”) could be a major hindrance due to restricting provisions of the BAFIA, which will have to be suitably amended in order to exempt Infrastructure bank. The proponents of NIB pointed out following main provisions.
Table 6 Legal provisions for NIB
Relevant Existing Provision Recommended Changes Section Classifies banks and A separate chapter should be introduced in BAFIA, financial institutions under 2006 for the proposed category of bank which A, B, C and D, which is not should, amongst others, outline the following: suitable for the proposed a) The minimum required paid up capital Section 47 institutions taking care of its functions b) The activities it can take. For instance, should it be allowed deposit taking activities, retail banking etc. c) Tailor made prudential regulation. Restricts licensed This section is required to be amended in order to institutions to invest in permit the licensed institutions under BAFIA, to Section 48 (g) share capital of class A, B make equity investment in the proposed institution. and C banks and FIs Till such time the concept of investment through SPV is ensured. Limits the maximum This section should be amended and shall permit 11 Section 12 number of directors to 9 directors for the proposed institutions. Source: Feasibility Report for setting infrastructure bank An appropriate structure will be to setup the infrastructure bank as a statutory company, governed by an enabling statute, which will free it from the existing regulations of Bank and Financial Institutions Act (“BAFIA”). The Act setting up the proposed institution can provide for separate rules for its supervision by NRB. Further the bank shall act not only to create appropriate product range but also to act as a market maker for long term financing instruments tailor-made to the requirement of appropriate tenure of Debt, Subordinate Loan, Financial Guarantee including Partial credit guarantee, Bridge finance, Securitization market etc.
Final Report January 2011 84
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Proposed Capitalization
Table 7 Proposed Capitalization for NIB Amount of Paid up Shareholders % Shareholding Capital US$ million Government of Nepal 11.00% 8.6 Nepalese Banks 20.00% 15.6 Private Equity Group 20.00% 15.6 Total Nepalese (A) 51% 39.8 Foreign Shareholding (ADB, IFC, DEG- 49.00% 38.3 KfW and some Indian FIs) Total Foreign (B) 49.00% 38.3 Total (A+B) 100% 78.1
Tax- Free Bonds
NIB could be granted the facility to issue tax-free bonds to public which are exempt from local or central income taxes on the interest proceeds. Tax-free bonds is a common feature in the US where municipality, airports, water & sewer systems, schools, are granted authority to issues such bonds. Typically maturity of such bonds is 10- 20 years. These bonds command lower interest rate due to the tax-free status and are thus a low cost financing vehicle. Interest payments are made on quarterly or bi- annual basis. Sometimes issuer may offer zero coupon bonds as cash flow measure, i.e. the principal is returned along with built-in accumulated interest. Recently India has allowed tax-free bond issuance authority to its India Infrastructure Finance Company Limited (IIFCL). Funds raised by this agency can be loaned to PFC and REC. Nepal can utilize this mode of financing debt for HP sector by granting appropriate authority to Nepal Infrastructure Bank (NIB). To test the market for such bonds, NEA may be allowed authority to issue such bonds on a limited, project specific basis.
Remittances should finance investment, not consumption
According to the Non Resident Nepali Association, workers remittances into Nepal amount to nearly one billion US dollar annually from 1.2 million Nepalis. If these remittances have a proper investment channel in terms of long term instruments, it could be a major source for investment. Current financial crisis has not seriously affected flow of remittances. However they have been reportedly utilized for consumption rather than investments due to falling domestic incomes.
The NIB, once set, should develop alliances with the Diaspora to focus investments to sustainable development benefits.
Final Report January 2011 85
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
3.1.7 How to Attract Foreign Funding?
Existing Legal Framework
The Foreign Investment and Technology Transfer Act, 1992 permits foreign investors to own up to 100 percent equity shares of energy-based industries. Further, 100% repatriation is possible on the proceeds obtained from the sale of shares; profit or dividend earned on investment, loan principal and interest, fees/royalties offsets against Technology Transfer. Several tax and duty exemptions have also been granted, albeit on intermittent basis.
Key institutional arrangements have been made to promote foreign investment in Nepal are: • Nepal is a member of the Multilateral Investment Guarantee Agency (MIGA) and the World Intellectual Property Organisation (WIPO) • Nepal has entered into Bilateral Investment Treaties (BITs) with countries such as France, Germany, Mauritius, and United Kingdom. • Nepal has entered into Double Taxation Treaties (DTTs) with 9 countries, namely, India, Norway, China, Pakistan, Sri Lanka, Austria, Thailand, Mauritius, and Republic of South Korea • Nepal is a signatory to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States and a member of the International Centre for the Settlement of Investment Disputes (ICSID), associated with the World Bank. However, foreign private investors have shown little real appetite to commit to the HP Projects. Expected financing from the neighboring countries like India has also not materialized. The unstable political and social environment prevents any prudent investor to seriously consider Nepal as investment destination. A hopeful sign had emerged in early 2009 with the political parties coming together and moving the peace process forward. Unfortunately the situation has reverted back to confrontational politics and a period of uncertainty in recent months.
The consultants believe that a lot more could be contributed by public and private investors, local and foreign, to hydropower development provided the available sources of finance are properly mobilized and structured and socio-political conditions improved. It is apparent that any financing strategy is closely intertwined with progress on other fronts such as: Political, social stability, security, clarity and transparency in laws, financial incentives, stable regulations and their application.
Are mainstream international markets a solution?
On a macro level, Nepal has a widening trade deficit with ratio of exports to imports declining to 26 % and estimates of workers’ remittances and pensions range from 8% to 20 % of GDP.. Combined with a further dependency on tourist arrivals and grants, the country is particularly vulnerable to financial and economic developments in the world. Furthermore there is no Nepalese country rating by any private rating agency, indicating that the country is not investment grade. This means that the country is not acceptable for the mainstream international investors that mostly require a minimum BBB rating. Elsewhere Consultant has recommended facilitating well-established credit rating agencies from abroad to set up such operations in Nepal
Recent developments in the international financial markets have also given setback to the issuance of higher risk / lower rated debt instruments. Especially the crisis on the American
Final Report January 2011 86
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP) mortgage market has hurt lower rated debt. At this stage it is difficult to foresee how these developments will affect on the long term position and opportunities in the international debt markets. It is conceivable that present debt crisis, shall add to uncertainty of financing infrastructure projects in Nepal. Current state of financial markets makes non-recourse financing even more difficult. Recent rise in interest rates reflects a discouraging trend towards rising developing costs for new projects
Finance Sources from India
The frequent interest expressed by India has waned due to the perceived and real insecurity within the country and political instability. A clear evidence of this is the large-scale projects successfully financed by India, already built or on-going in Bhutan. Lack of experience of Indian financiers for such Projects in Nepal is another factor. Many treaties have been signed on power and water sharing between Nepal and India but little progress made in their implementation. This is primarily attributed to a lack of confidence on both sides. Moreover, water issues have always overshadowed power sharing and cooperation. Chisapani Multipurpose Project and Integrated Mahakali Treaty were projects of mutual interest and were undertaken for implementation in the past, but these have not moved ahead due to several problems.7 However, India recently relaxed its rules for improving the lending capacity of the state- owned Power Finance Corporation Limited (PFC) and Rural Electrification Corporation Limited (REC), which are the main sources of funding for the generation projects in the country by taking a number of steps: • Permitting risk weight of 20% for state guaranteed loan from the present level of 100% for computing capital risk adequacy ratio which, even at the level of 10% allowed for REC and PFC, may reach its limit because REC and PFC have to disburse more than Rs1 lakh crore each over a period of next three years for the loans already sanctioned. • Increase in industry exposure norms for banks to power sector to 25% of the total advances. • Removal of 10% exposure limit of Life Insurance Corporation of India Limited (LIC) for on-lending to power sector and also power sector financers like PFC, REC, etc. • Refinancing by India Infrastructure Finance Company Limited (IIFCL) from the money raised through tax free bonds to power sector financers like PFC and REC or these utilities may be permitted in a similar manner to raise Rs10,000 Crore each by way of tax- free bonds. • Relaxation in external borrowing norms by permitting -commercial borrowings by PFC and REC • Exemption from withholding tax under section 195 of Income Tax Act which raises interest cost to entity by 2-3%. • Extension of the re-financing facility provided to banks by Reserve Bank India (RBI) for lending to PFC and REC from the special term repo facility allowing banks to avail liquidity support under the liquidity adjustment facility (LAF) through relaxation in the maintenance of statutory liquidity ration (SLR) to the extent of up to 15% of the net demand and liabilities (NDTL). Banks may be advised to use this facility and provide loans to PFC and REC at repo rate plus reasonable margin.
7Source: IPPAN “Nepal India Cooperation on Hydropower’
Final Report January 2011 87
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
• Credit consultation norms may be relaxed for power sector financing companies including government non- banking financial companies (NBFC) to 30% of owned funds in case of single borrower and 70% in case of group companies. • The exposure norm for lending to ultra mega power projects (UMPP) may be further relaxed to 40% of owned fund in case of single borrower and 70% in case of group borrowers.
Such evolution in India’s regulations may provide new opportunities for the funding of large export oriented HPP in Nepal.
3.1.8 The possible role of multilateral funds
Other immediate option remains continued reliance on multilateral funds and with the IFIs such as World Bank and Asian Development Bank. In July 2008, the ADB established a new fund that will use carbon credits generated beyond 2012 to provide urgently needed financing for clean energy projects in the Asia-Pacific region. The initial target size of the fund is $100 million. It may be increased to $200 million if there is sufficient demand.
Limits of the IFIs’ contribution
Even with these opportunities, providing substantial hydropower infrastructure finance from bilateral donors and the IFIs cannot be exaggerated. IFIs are capable to only participate in a minority position in a project finance structure and most probably will not finance a large number of hydropower projects on a stand-alone basis in Nepal. Consultant has found that there is a sentiment among the HP community here that the multilateral agencies have not put their best effort to promote hydropower in Nepal and in some cases may have been actually an impediment. West Seti has been cited an example of this situation.
Proposed role of IFIs
Nevertheless, the WB and/or ADB could very well assist and trigger the start up of project finance in PPP hydropower infrastructures. As mentioned in the report, the role of the IFIs could therefore concentrate upon: • Promoting private sector involvement by assisting the Nepalese Government in creating an enabling environment for private sector participation • Encouraging / supporting introduction and development of PPPs • Assist in project preparation including feasibility study, environmental and social impact assessment and mitigation plans. • Act as a catalyst to mobilize private sector resources essential for the development process • Support the build up of competence and experience in project finance, risk evaluation, development, tendering and project contract documentation negotiation • Provide technical assistance for project preparation and negotiation • Finance public investment portion (“GON equity”) • Build on long-term relationship and capacity of governments
Final Report January 2011 88
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
• Develop partnerships with private sector • Technical and Funding support for CDM applications • Provide additional risk mitigation services to foreign investors and commercial banks (political risk guarantees and partial credit guarantees)
Credit Enhancement
Generally partial risk guarantees are available in the market to enhance the credit profile of a financing facility. Especially the multilateral financing institutions apply many of these partial risks guarantees to facilitate the market and to entice a bigger number of investors and banks to provide financing to previously not creditworthy projects or countries. Furthermore credit terms can be made more acceptable, in terms of reducing interest rate and lengthening the maturity of the financing facility and thus enhancing the viability of a project. Traditionally partial risk guarantees have been used by the governments or sub national / public sector entities of developing countries to borrow on the international capital markets or to support an international bond issue. The support may include the whole debt service of a facility or the payment(s) at the end of the repayment period of a facility, risk mitigation against political and social disturbances.
Final Report January 2011 89
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
3.2 Structuring of Public-Private Partnerships
3.2.1 PPP Options
Participation of the private sector under Public-Private Partnership (PPP) can take different forms as per the local context, government objectives and constraints, risk sharing intent and level of project preparation by the host public party. But the overarching principle remains the same: the private sector brings in technical know-how, management skills, and capital from private sources, while the Public party provides a regulatory framework and legislative support, facilitates clearances and public related matters such as land acquisition, local community support, and a commercial contract for the purchase of the project services, as the case may be.
Each PPP form presents different characteristics to be assessed against the sector reform objectives. The basic PPP contract types are:
• service contracts; • management contracts; • affermage or lease contracts; • Build-Operate-Transfer (BOT) and similar arrangements; • concessions; and • joint ventures
PPP can encompass a range of arrangements between public and private entities. It may be that the Public role may be confined to merely providing enabling legal and institutional framework, attractive environment and active support. But it may also be that the Public party is an active business partner contributing risk capital, sharing proportionate financial and business risks, and deriving pro rata benefits.
Addressing social priorities through PPP development
When a primary goal of developing countries is to improve access to infrastructure (as a driver of local economic growth) or to develop such infrastructure as a mean to monetize a natural resource, and when a predominant characteristic of these countries is a high incidence of poverty, developing strategies that fit the goal of universal service with the reality of poverty is sensible. A concrete example of this shift has been the growing incorporation of output-based aid (OBA) strategies to transaction design. OBA strategies design the complementary use of donor and government financing to target social priorities specifically within the framework of a PPP transaction.
Final Report January 2011 90
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Available PPP options for hydropower development
In the case of hydropower development, the public party will usually seek a partnership where the private entity will take the responsibility to raise the funding that is required for the construction of these capital intensive projects. As such, PPP forms such as service contracts, management contracts or lease contracts are not what governments will look for, as such options are unsuitable when one of the main objective is to attract capital investment. Essentially a PPP type of arrangements for hydropower development aim to provide government with both capital, technical know how, and negotiating skills to establish the main project contracts, typically the Power Purchase Agreement (PPA) with a creditworthy offtaker, and the Engineering-Procurement-Construction (EPC) contract with a reputable and competitive contractor. To achieve such risks and responsibilities sharing objective, BOO (Build-Own-Operate) and BOOT (Build-Own-Operate-Transfer) are essentially the two PPP options that are relevant to hydropower development. In each case, the government provide a concession to a Special Purpose Project Company (SPPC) to be established under local laws to finance, built, own and operate the hydropower plant and transfer it (BOOT case) to the host Government after a period of time (usually 25 to 30 years) as the case may be.
Special Purpose Project Company
In both BOO and BOOT, the host government may opt to participate to the SPPC in joint venture with the private sponsors. Whether or not the government participates to the SPPC, the later shall operate in accordance with performance standards set by the government. The questions of ownership and the timing of the transfer are generally determined by local laws and financing conditions. The number of possible combination is large. In essence, the SPPC owns the assets for a period agreed in the concession contract. Such period shall be sufficient to allow project debt providers sufficient time to recover loans’ interests and principal, and the developer / equity investors to get paid sufficient dividends so that their equity return is satisfied. The SPPC revenues come from the sale of electricity to a creditworthy power purchaser on the basis of a long term “Take-or-Pay” Power Purchase Agreement (PPA). The PPA is essentially the core commercial contract on the basis of which the project financing is structured. Concession contract between the SPPC and the government, and PPA between the SPPC and the offtaker are the two fundamental contracts which constitute a hydropower PPP. On its side, the government gets paid tax, royalties and dividends for its participation in the SPPC (as the case may be) in exchange for the concession, and indirectly for the facilitation and coordination services it provides to the SPPC. At the end of the BOOT term, the public sector assumes ownership. It can then opt to assume operating responsibility, contract the operation responsibility to the developer, or award another form of PPP contract to a new operating partner.
Selection of the private party
In the case of a BOO, the benefit of competition is limited to the initial bidding process. As such, the tender documents and processes require careful project preparation by the government and adequate time to ensure optimum result. This preparation phase can be
Final Report January 2011 91
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP) very costly in master planning and project studies, and support from international donors should be sought to fund such upfront work. In the case of large hydropower projects’ concession in undeveloped regulatory environment, it may sometime prove more efficient for a government to negotiate on a direct basis with reputable international developers than to organize competitive bid. In such case though, the government may want to take an ownership position in the SPPC, to ensure that the SPPC itself organize competitive bids for every construction and services contracts related to the project, and to benefit from the development know-how from the private sponsor. Often, large hydropower projects PPP prove to be excellent tools for the improvement of the host country governance. Table 8: Available PPP options for hydropower development Main characteristics of hydropower PPP Scope Development, financing, construction, operation and maintenance of an hydropower plant
Asset Ownership Private
Duration 25–30 years of Transfer at the end of the concession, otherwise unlimited
O&M Responsibility Private
Capital Investment Private
Commercial Risk Private
Overall Level of Risk High Assumed by Private Sector
Compensation All or part of tariff revenues Terms
Competition One time only. Often negotiated without direct competition. SPPC is in charge of organizing competition for various project construction and service contracts
Special Features SPPC in charge of organizing the project financing on non-recourse and Benefits project finance basis. Develops local staff. Act as catalyst for overall development framework at the government level
Problems and Government needs to establish performance standards (design, Challenges environment, etc) and equip itself with monitoring tools
3.2.2 Risk Management under PPP
Risks and Returns
The private sector will not engage in PPP arrangements where perceived risks exceed perceived returns. To be of interest to the private sector, any hydropower station project must provide the potential for returns commensurate with project risk. In this respect, the private
Final Report January 2011 92
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP) sector’s required rate of return is largely a function of the perceived level of risk – the higher the perceived risk of a project, the higher the required return, as depicted in the figure below. Moreover, to be of interest to the private sector, a power project must also provide potential for returns comparable to what can be achieved on other similar projects with comparable risks, in Nepal or elsewhere in the world. For example, international power station construction companies and contractors, which often head consortiums to bid on power station projects, have numerous potential opportunities available to them around the world. They may not be able or willing to bid on all potential opportunities and will decide to bid only on those projects that offer the greatest potential return given risks. Consequently, public sector entities must compete internationally to attract bidders for a particular hydropower station.
Risk minimization
Financiers are concerned with minimizing the dangers of any events which could have a negative impact on the financial performance of the project, in particular, events which could result in: (1) the project not being completed on time, on budget, or at all; (2) the project not operating at its expected capacity; (3) the project failing to generate sufficient revenue to service the debt; or (4) the project prematurely coming to an end (5) default by the power purchaser etc. The minimization of such risks involves a three-step process: • The first step is the identification and analysis of all the risks that may bear upon the project. • The second step is the allocation of those risks among the parties, assigning appropriate risk to parties best able to bear. • The last step involves the creation of mechanisms to manage the risks by the developer/operator. If a risk to the financiers cannot be minimized, the financiers will need to build it into the interest rate margin for the loan i.e raise costs of the loan. Uncompetitive financing forces contractors and equipment suppliers to load the risks on the prices.
Risk Allocation
As partners, public sector and private sector jointly undertake assessment and assignment of risks. First, the public sector can reduce the overall level of risk of the project by assuming those risks, that are attributable to and better manageable by the public sector. Developer on the other hand should assume most commercial, operational and developmental risks. Since the private sector’s required rate of return is a function of perceived level of risk, it follows that if overall risk can be reduced, the required hurdle rate of investors (including lenders) can also be lowered, thereby increasing the attractiveness of the project, and the likelihood of project success. Conversely, the public sector should avoid adding inessential risks to a project, as these only add to project costs. In many countries, a number of incentives are offered by the government to help increase the potential returns of a hydropower project to private investor/operators. Incentives may include additional land along access road to the projected power station for commercial development, all necessary land acquisition for the power station, tax exemptions and the flexibility of the future operator for adjusting electricity tariffs.
Final Report January 2011 93
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Recommendations on Risk Sharing
Table 9: Suggested Risk Sharing Matrix (domestic projects) Risk Developer Beneficiary Hydrological Geological Risk x Seismological Risk x Force Majeure Risk Completion x Cost over run x Policy Risks Technological Risks x Market Risks x Financial Risks x
Transmission Risks x Political Risks x Revenue Risks * x *Escrow mechanism The way in which a PPP’s financial risks are anticipated, structured and managed has a major influence on the costs and viability of the project. Unless major risks are anticipated, and suitable arrangements made for their mitigation and assignment, at the time project financing is secured and approved, the sustainability of a PPP can be placed into jeopardy. The degree to which the PPP is exposed to and manages interest-rate risk, foreign exchange exposure, political risk, labor-risk, and market risk exert a major influence on the costs and returns. The public sector has a legitimate interest that costs are sufficiently contained and risks well-managed to ensure that the services provided are not prohibitively expensive, on the one hand, or commercially unviable, on the other. While responsibility for the commercial viability of the PPP belongs to the private provider, responsibility for other forms of risk (i.e. political, Social, land acquisition) should be assigned to the party best able to manage such risks. Natural disaster and catastrophic events are generally handled thru third party insurance.
Recommendation on Risk Sharing: In Nepal perhaps the best risk mitigation to promote private participation in HPP will be if the GON assume responsibility for land acquisition, R&R and security provision, while providing continuous financial guarantee to NEA for its fulfillment of PPA payment obligations. Consultant believes that risk sharing should be an integral part of Bid Offering and negotiations prior to allocating projects to developers.
3.2.3 Major Risks Factors for Hydropower
It is helpful to categorize the risks according to the phases of the HP project within which they may arise: (1) the design and construction phase; (2) the operation phase, or (3) either phase. It is useful to divide the project in this way when looking at risks because the nature
Final Report January 2011 94
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP) and the allocation of risks usually change between the construction phase and the operation phase.
Review of HPP Major Risk Factors
• Development and Financial Close Risk • Technical and Hydrology • Construction Risk • Performance risk: Equipment, workmanship • Market and Operating Risks • Off-taker risk • Financial Risk • Regulatory risk • Political Risk • Force Majeure and catastrophic events • Legal Risk • Credit Risk and Sponsor Support In every case, the parties - and those advising them - need to act creatively to meet those challenges and to effectively and efficiently minimize the risks embodied in the project in order to ensure that the project financing will be a success.
Construction Phase - Completion risk
Completion risk allocation is a vital part of the risk allocation of any project. This phase carries the greatest risk for the financier. Construction carries the danger that the project will not be completed on time, on budget or at all because of technical, labor, and other construction difficulties. A major cause of completion delay for HPP can also be linked to the failure to relocate affected people on time before reservoir impounding. Such delays or cost increases may delay loan repayments and cause interest and debt to accumulate. They may also jeopardize PPA for the sale of the project's output and supply contacts for raw materials. Commonly employed mechanisms for minimizing completion risk before financial closure (FC) takes place include: (a) obtaining completion guarantees requiring the sponsors to pay all debts and liquidated damages if completion does not occur by the required date; (b) ensuring that sponsors have a significant financial interest in the success of the project so that they remain committed to it by insisting that sponsors inject equity into the project; (c) requiring the project to be developed by reputable and financially sound contractors whose performance is secured by performance bonds or guaranteed by third parties; and (d) obtaining independent experts' reports on the design and construction of the project. Completion risks are especially significant in Nepal where political, social, and security situation often leads to work stoppages, violence and other obstructions. Sponsor should be compensated for delays caused due to failure of the beneficiary and host Govt. to provide security, EIA and other clearances, infrastructure, access-roads, etc.. This should be clearly defined in the PDA.
Final Report January 2011 95
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Recommendation on local participation Participation of local residents and people directly or indirectly affected by the project is an important risk mitigant. A mechanism needs to be developed such that the maximum level of the population is engaged for project construction at the construction phase. Further the local people should be reserved a space for employment. Due to low level of literacy in the expected areas where the HEP would be constructed the developers should be required to make reasonable provision of employing 100% of the unskilled labour from amongst the local residents and there should be formulated a policy such that the local residents are given some sort of privilege for employment even in semi- skilled and skilled manpower acquisition.
Operating risk
This is the risk that for a power project there are inadequate inputs or output that can be processed or serviced to produce an adequate return. For example, the risk, plant does not operate to full capacity due to breakdowns, that there are insufficient reserve replacement parts. Operating risks include, for example, the level of experience and resources of the operator, inefficiencies in operations or shortages in the supply of skilled labour. Operating risks are managed during the loan period by requiring the provision of detailed reports on the operations of the project and by controlling cash-flows by requiring the proceeds of the sale to be paid into a tightly monitored Reserve Funds, and establishing segregated accounts to ensure that funds are used for approved operating and maintenance costs only. Ultimately this risk is on the developer/operator under the BOOT
Market / off-take risk
Obviously, the loan can only be repaid if the product that is generated can be turned into cash. Market risk is the risk that a buyer cannot be found for the product at a price sufficient to provide adequate cash-flow to service the debt. The best mechanism for minimizing market risk before lending takes place is to sign a long term take-or-pay PPA with a financially sound purchaser. For domestic projects in Nepal NEA’s financial standing is a major risk factor.
Participant / Credit risk
These are the risks associated with the sponsors or the borrowers themselves. The question is whether they have sufficient resources to manage the construction and operation of the project and to efficiently resolve any problems that may arise. Of course, credit risk is also important for the sponsors' completion guarantees. To minimize these risks, the financiers need to satisfy themselves that the participants in the project have the necessary human resources, experience in past projects of this nature and are financially strong (e.g. so that they can inject funds into an ailing project to save it).
Technical / Hydrology Risk
This is the risk of technical difficulties in the construction and operation of the project's plant and equipment, including latent defects. Financiers usually minimize this risk by preferring tried and tested technologies to new unproven technologies. Technical risk is also minimized before lending takes place by obtaining experts reports as to the proposed technology.
Final Report January 2011 96
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Technical risks are managed during the loan period by requiring Maintenance Retention Reserve to be maintained to receive a portion of cash-flows to cover future maintenance expenditure.
In the case of HPP hydrological risks are the important technical risks. History of hydrology is critical for lenders and developers to re-assure themselves regarding these risks. Unfortunately, the number of years of reliable data is often insufficient in Nepal. GON has recognized this by permitting additional license operating period for upto 5 years. More specific obligations can be assigned to parties. Consultant believes more direct risk assignment is warranted on the part of the GON. Undertaking regular and continuous monitoring of the site hydrology during the construction and operation of the plant can also help manage the hydrology risk through the adaptive management of the reservoir and plant during operation.
In the same manner, GON should bear the geology risks beyond those identified in the original feasibility studies that are used to tender projects for development. Developers / constructors risk on geology should be limited to those that are accepted (and mitigated via the steel lining of tunnels for example) at the time of the PDA execution.
Currency risk
Currency risks include the risks that: (a) depreciation in host currencies may increase the costs of construction where significant construction items are sourced offshore; or (b) a depreciation in the revenue currencies may cause a cash-flow problem in the operating phase. Mechanisms for minimizing resource include: (a) matching the currencies of the sales contracts with the currencies of supply contracts as far as possible; (b) denominating the loan in the most relevant foreign currency; and (c) requiring suitable foreign currency hedging contracts to be entered into.
Regulatory / Approvals risk
These are risks that government licenses and approvals required to construct or operate the project will not be issued (or will only be issued subject to onerous conditions), or that the project will be subject to excessive taxation, royalty payments, or rigid requirements as to local supply or distribution. Such risks may be reduced by obtaining legal opinions confirming compliance with applicable laws and ensuring that any necessary approvals are a condition precedent to the drawdown of funds. For Nepal this points to need for a independent transparent regulator.
Political risk
This is the danger of political or financial instability in the host country caused by events such as insurrections, strikes, suspension of foreign exchange, creeping expropriation and outright nationalization. It also includes the risk that a government may be able to avoid its contractual obligations through sovereign immunity doctrines.
Common mechanisms for minimizing political risk include: (a) requiring host country agreements and assurances that project will not be interfered with; (b) obtaining legal opinions as to the applicable laws and the enforceability of contracts with government entities; (c) requiring political risk insurance to be obtained from bodies which provide such insurance (traditionally government agencies); (d) involving financiers from a number of different countries, national export credit agencies and multilateral lending institutions such
Final Report January 2011 97
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP) as a development bank; MIGA and (e) establishing accounts in stable countries for the receipt of sale proceeds from purchasers.
Force Majeure and catastrophic events
This is the risk of events, such as natural disasters, acts of god, catastrophic events that render the construction, or operation of the project impossible, either temporarily (e.g. minor floods) or permanently (e.g. complete destruction by fire, earthquake). Mechanisms for minimizing such risks include: (a) conducting due diligence as to the possibility of the relevant risks; (b) allocating such risks to other parties as far as possible (e.g. to the builder under the construction contract); and (c) requiring adequate third party insurances which note the financiers' interests to be put in place.
3.2.4 Power Purchase Agreements
PPA is a crucial element of HPP development. Private developers/ investors insist on fixed- price and long term PPAs with a reliable, financially sound power purchaser, preferably with sovereign guarantees. Although free-market advocates argue that long term PPAs are anti- competitive as the buyer and seller lock-in the power flows and prices for extended periods, thus restricting new entrants in the market, in Nepal the current reality dictates that long term PPAs will be necessary for bulk of the output at least until project’s debt obligations are fulfilled.
However, it must be noticed that until an independent electricity regulator is created, developers will remain uncertain of the validity and legitimacy of the PPA.
NEA Tariff for Domestic-Oriented Projects
Here PPA is a crucial element of the project development as it affects the retail consumers. Under international practice, price and PPA terms should be established by an independent regulator. Unfortunately there is no regulator yet, despite legislation in process for over four years. The PPA terms are negotiated between NEA and the sponsor without an independent verification whether those terms are appropriate and market reflective.
Under current provision NEA has a posted PPA tariff for projects under 25 MW. This is a good thing as it pre-declares what price small project shall receive and base decisions accordingly. NEA’s published rates for small hydro PPA is helpful to the extent that uncertainty of offered price is removed and project developer has incentives from day one that any project cost savings shall inure to its benefits. In this respect, we assume that NEA shall perform transparent tariff calculations for small hydro PPA based on realistic assumptions, and periodically updated. To foster consumer confidence, an independent board should review tariff methodology and calculations and publish in national gazette annually. NEA should also seriously consider availability-based tariffs for IPPs. Until a regulator is established the NEA should annually publish the calculation methodology and computations supporting the posted tariff.
Are NEA’s tariffs adequate?
Recently Developers have complained that offered prices set by NEA (NRs. 4.0 and NRs. 7.00 for wet and dry season, resp.) are too low under the market conditions, particularly
Final Report January 2011 98
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP) since interest rates have risen from 10-11% to 14-15% range (Developers’ Letter to IPPAN, March 2010). Consultant believes that the current PPA setting process is discouraging for the developers as there is no forum to set prices realistically. Consultant recommends that at least for the near term, the PPAs should include an automatic price adjustment clause which takes into consideration the inflation and interest costs.
Price Indexing
Sometimes incentive provisions are provided in retail rates by the regulator. Most prominent method of incentives is the British model introduced by Offreg in 1990s. In this form of regulation, prices are adjusted according to the formula, RPI-X, where RPI represents some measure of inflation directly affecting electricity operating costs, and X is the productivity factor to offset the inflation effect. The X -factor is pre-set by the regulator. The underlying principle is that supplier is entitled to some adjustment for expense items over which it has no control (inflation) while customer is entitled to benefits of rising productivity or efficiency. Prices are adjusted each year using this formula usually for a period of 3 or 5 years. At the end of the period prices are trued up to the actual costs and formula is re-set.
Recommendation for price adjustment Consultant recommends that an appropriate PPA adjustment clause may be designed and included in the PPAs between NEA and the domestic project developer using relevant index, in the form of periodic adjustment in prices to account for: • Changes in fuel prices for fossil power plants, • Changes in currency value when a large part of interest and debt service is paid in foreign currency • Price inflation affecting wages, labor and material costs • Interest rate adjustment where part of financing is on variable rates or is periodically refinanced • Expected efficiency improvements based on industry norms
Creditworthiness of NEA
As has been noted NEA’s current creditworthiness is a concern for projects signing and relying on PPA with NEA, particularly larger one > 50 MW. As long as the NEA is perceived to be (implicitly) backed by the GON, its creditor status will be closely regarded as equal to that of GON. The deteriorating financial position of NEA can be further cause for concern. As the Minister of Energy Mr. Mahat said on Oct. 22, 2009 the budget deficit of the Nepal Electricity Authority had reached Rs 14 billion because the electricity in the country was being sold at a price lower than the production cost, and hinted at a possible hike in the electricity tariff – which could help restore NEA to financial health. It is clear that NEA is currently unable to provide the necessary comfort for larger projects to be bankable. Therefore, Consultant recommends that any privately financed project in excess of 50 MW should either identify alternative off takers (such as large industrial firm) or be focused on export. This situation may prevail until the macro economic conditions mature in Nepal.
Final Report January 2011 99
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
We also note that when NEA takes equity position in a larger project and is also the sole buyer of output, an obvious conflict situation arises. Consultant recommends that in such situations an independent third party should set the offtake price and terms. This third party cannot be DOED due to its role as the project promoter, but it could be the independent regulatory commission once established. Furthermore, a limiting factor for financing hydropower projects will be the perception of the credit status of the NEA in a power purchase agreement. As anticipated when the institutional structure of the power sector changes, and NEA (or its successor) as private distribution utility stands on its own, the inherent risks will be re-evaluated. For this reason, sooner the NEA restructuring occurs, better the clarity in small private HPP development.
Export-Oriented Projects
In the case of export oriented projects the bilateral PPA is between the foreign buyer (typically Indian entity) and the project Sponsor. The GON has minimal role in establishment and enforcement of the PPA terms. However the GON can heavily influence the PPA by virtue of its HPP policies, tax laws, free energy, front-end rent and royalty structure, R&R, land acquisition and environmental and social community standards.
For energy purchased (or forgone) by NEA, outside of the free energy provisions, the PPA should be specified on commercial terms, reflecting the opportunity cost of buyer and seller. At the time of project development quantity and price terms should be specified for commercial power exchanged between NEA and the sponsor. Similarly some industrial users may be interested to participate in power generated by export projects which would typically be based on market based commercial terms. Sponsor/ Seller should also have the opportunity to sell a portion of energy and capacity under short term contracts (weekly, monthly, economy power etc.) Producers often prefer some short term power sale as it typically generates higher revenues per KWH. More importantly it also is reflective of true competition and disclosed energy price in the market: Indian market is growingly allowing short term power exchanges. A recent report shows that over 7% of the power was traded in short term market. Growing competition has put pressure on prices for short term sales, as shown by the prices on the two power exchanges in the country, Indian Energy Exchange (IEX) and Power Exchange India Limited (PXIL).
New provisions from proposed EA
The proposed EA 2007 (yet to be passed) will allows that:
• A licensed generator can trade or sell energy in the wholesale market, • Selling price shall be determined on the basis of avoided cost or average electricity tariff, or return on equity or through competitive bidding following the procedures as specified by the Commission. • After the establishment and operation of wholesale market for electricity, the purchase/sale of the electricity and rate fixing procedure shall be as specified by the Commission; • Power Purchase Agreement shall be subject to the Commission approval. Investors view these free-market provisions positively. There are certain other provisions that should be amended.
Final Report January 2011 100
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Recommendation for PPA • It has been proposed that for export projects, GON may purchase up to 10% of total electricity generated by the Licensee, to meet internal demand. We believe however that GON should retain flexibility to acquire larger share of the output depending on its needs and the type of project itself. For example, for a storage projects like Budhi Gandaki, GON may opt for larger share to build up storage-type capacity or require different shares in wet vs dry season. Limiting itself to 10% is inadequate from the GON’s interest. • While providing approval for import and export of electricity, the Government of Nepal has the right to specify the necessary terms and conditions. Without being specific what conditions can be placed, the developers and traders may feel uncomfortable. It may be more appropriate to say that NERC, once established, will approve market rules for import/export, that are non discriminatory, allow open access, free power trade etc. as elsewhere. • There is no established principle or methodology on which NEA decides its tariff offering for domestic projects <25MW. Until a regulator is established the NEA should annually publish the calculation methodology and computations supporting the posted tariff. • For projects in which the NEA is a major stakeholder the PPA should be subject to review by an independent board to avoid appearance of conflict.
3.2.5 Learning from the Bhutan/India Partnership
By far, the most stable and important partner of Bhutan for developing its overall economy and hydropower has been India. In March 2009, both countries signed a protocol to the 2006 agreements to cooperate together on meeting Bhutan’s goal of producing 10,000 MW of hydropower by 2020. With pledge of INR 100 billion by the Government of India, both countries have agreed to a final list of 10 hydropower projects with a total capacity of 11,576 MW to be constructed in Bhutan by 2020. Of these, six projects with a total power of 9,340 MW will be carried out between the two countries on the ‘inter government model’ of 40 % grant and 60 % loan. The remaining four projects with 2,236 MW will be carried out on a joint venture model, whereby public sector companies from both countries will execute the projects. Of the ten agreed projects, more than 5,000 Mw is a storage type of project, including the Sunkosh of 4,060 MW. Project execution is planned by 2012/2013. India and Bhutan are also moving rapidly to expand power transmission links. Besides India, foreign governments such as Japan, Austria, Norway, Netherlands, World Bank, Asian Development Bank and UNDP have generously contribution to the energy sector development in Bhutan. The Austrian Government is providing AST 350 million (approx. US$ 35 million) for the Basochu Scheme with 51% grant and 49% interest free loan. The Japanese government is funding the development of the Wangduephodrang scheme and Norway funding the Mangdochu scheme. As a result, Bhutan is currently producing nearly 1,500 MW of power that earns Nu 5 billion, or 45 % of the national revenue. If the 10,000 MW is achieved by 2020, Bhutan could earn gross revenues of approximately Nu 80 billion annually.
Final Report January 2011 101
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Proposed Conditions for Mega Projects
In the Bhutan/India agreements on hydropower development, the bidding process for projects over 1,000 MW, will be arranged on the basis of an upfront premium and royalty for electricity. A minimum of 12 % electricity will be provided for free to the Government for the first twelve operational years of the project and a minimum of 18 % thereafter. The project will be awarded to the bidder offering the highest royalty energy, in which the Government can choose either money or electricity. On the other side, the project developer will be exempted from paying corporate tax for the first ten years of operation, all import duties and Bhutan sales taxes on import of plant and equipment for the project. No sales tax or duty will be levied on export of electricity. If the project is completed before deadline, a rebate of 1 % reduction of royalty energy will be given for every year that the project will be implemented before scheduled date. The rebate will be given for a period of five years of operations. However on the other side, a 1% increase in royalty energy will apply for every year of delay, again applicable for a period of five years.
Guaranteeing Positive Impact for the Local People
Part of the power transaction is also to strengthen current vocational training institutes and the setting up of new training institutes in Bhutan, to train Bhutanese professionals for specific positions in the hydropower sector. Furthermore an ‘Empowerment Joint Group’ was established to fast track the mega projects. The Joint Group will give fast track approval of implementation modalities, financing mechanisms, fund flows, contingency plans and also monitor the progress of all activities related to the projects.
In order to address strong local community support, the project sponsor will have to contract as many Bhutanese workers as possible during construction and have a minimum of 75 percent of total workforce from Bhutanese background during operations. Furthermore the sponsor has to provide employment for one person to each family affected by the project. Finally the project sponsor will have to provide an amount not exceeding one percent of the total project cost for rehabilitation and resettlement of displaced persons, which amount will be implemented by the government in consultation with the local development committee.
Proposed Dagachhu Project Bhutan –PPP Model (Project Finance)
Table 10 – PPP Model of Dagachhu Project, Bhutan
PPP Model of Dagachhu Project, Bhutan
Project size 114 MW Cost $201.5 MM Debt: Equity 60:40 Equity Total $ 80 Mill RoGB 7 Govt.(ADB on-lending HT) 8 Druk Green Power Corp. 11 National Pension & Pr Fund 12
Final Report January 2011 102
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
PPP Model of Dagachhu Project, Bhutan
Tata Power (India) 21 Debt (Total) 121.5 Mil ADB 51 National Pension and Pr Fund 15 Austrian Export Cr. Agency 55.5 Ist yr tariff Rs.2.40, 2% esc./yr Tariff negotiable after 15 yrs Pre-tax IRR 12.53 % Pre-tax equity IRR 15.63 Div. payout 83% 25 yr PPA with Tata Power CDM credits underwritten by TP, go to developer Board members in proportion to equity
Also under proposal is the Bunakha HEP, to be located around 3.5 kilometers upstream to the existing 336 MW Chukha HEP. It envisages the construction of a 188 m high dam across the river Wangchu, in a gorge below the Bunakha village, to afford a live storage capacity of 105 million cubic meters (mcum). It will have a powerhouse at the toe of the dam, with three units of 60 MW each. The project is likely to provide 688 Gigawatt-hour (GWh) of energy per year, besides facilitating the generation of 101 GWh and 205 GWh, respectively, of additional power at the Chukha and Tala HEPs, located downstream.
Transmission Approval to PGCIL to evacuate power from Bhutan Projects to India
In April 2010 the Central Electricity Regulatory Commission (CERC) granted regulatory approval to Power Grid Corporation of India Limited (PGCIL) to go forward with the 3000 km EHV (Extra High Voltage) transmission line to evacuate power from the 1200 MW Punantsangchu–I HEP in Bhutan to Indian States. Further, the Commission has made it clear that the transmission charge and its sharing by the beneficiaries of the transmission system will be, eventually, determined in accordance with the applicable regulations on terms and conditions of tariff, as specified by the Commission from time to time. PGCIL plans to take-up this transmission system along with the system linked with the 2,000 MW Lower Subansiri and 600 MW Kameng HEPs, in the North-eastern region-state Arunachal Pradesh, that are scheduled for commissioning in January 2012 and December 2012, respectively, to ensure inter-operability and cost effectiveness PGCIL has proposed to build 400 KV AC HVDC Substation and 3,000 MW Converter Module at Alipirdaur pooling station and a 3,000 MW inverter at Agra. Apart from facilitating the evacuation of power from the Punantsangchu–I HEP, which is scheduled to be commissioned in 2014-15, the proposed transmission system will, eventually, also help ferry power from a number of projects that are likely to be developed in
Final Report January 2011 103
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Bhutan, including the 1,000 MW Punatsangchu-II, 600 MW Mangdechu, 180 MW Bunakha, 900 MW Wangchu and 4,080 MW Sankosh HEPs, as well as those proposed in Sikkim. Strategically located around 80 km off the Bhutanese capital of Thimphu, on the left bank of the Punathsangchu river, in Western Bhutan, the Punantsangshu–I project has been set up under a bilateral agreement between the Indian Government and the Royal Government of Bhutan. Separately, India’s Tata Power is negotiating arrangements for building 3000 MW transmission capacity between India and Bhutan on a PPP/ BOOT model basis
Reasons for Successful Power Trade Between India and Bhutan
It is interesting to compare and analyze why India- Bhutan has shown greater cooperation and success in HP sector and what can be learnt from it. Obvious factors, in our view, include Bhutan’s • Smaller size and homogeneity of population • Greater internal political stability • Longstanding positive relations with India • Clear and relatively unambiguous laws and rules, simpler bureaucracy • Openness to foreign investments leading to better investor confidence.
Final Report January 2011 104
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
3.3 Project Development under PPP
3.3.1 Typical steps of Project Development (International practice)
The present section describes the different stages through which a hydropower project is typically developed (International practice). This is not, however, the process currently followed in Nepal (see next section).
Step 1- Project Identification
Basin development master planning including all consideration of which: • Environmental and social baseline including assessment of current livelihoods, ethnic minorities consideration, biodiversity, etc • Access situation and feasibility and costing for the development of roads and bridge at the standard required for heavy machinery transportation to be used for multiple projects • Power supply and evacuation constraints including feasibility and costing for the development of high voltage lines to be used for multiple projects • Technical potential for hydropower development and identification of sites, including pre- feasibility, pre-EIA and pre-SIA for each sites including consultation process and definition of an R&R policy
Step 2- Pre development
Short listing of selected projects as per basins master plans and establishment of project regulatory and fiscal environment including: • Consider the principal power offtake arrangement (domestic or export) • Establish terms of Power Purchase Agreement including tariff for domestic offtake to be proposed to bidders • Establish bilateral relationship with a foreign government, including an understanding of electricity tariff potential in the case of an export project • Establish terms of Concession Agreement / Project Development Agreement to be proposed to bidders • Run preliminary financial model to understand project economics at +/-30% • Establish technical and selection criteria in function of the project purpose and pre- estimated projects economics (such as, but not limited to, level of free energy and/or free equity participation to the host government)
Step 3- Competitive bid
Process is several steps: • Request for Expression of Interest (EOI) and shortlist of developers
Final Report January 2011 105
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
• Request for Proposal (RFP) including technical and financial component • Tenders assessment as per the selection criteria • Selection of preferred bidder
Step 4- Contract negotiation and project financing
At this stage, both the selected developer and the government shall work hand in hand to achieve financial close. • Selected developer to undertake bankable feasibility study, establish project environmental and social safeguards document, and run bidding process for construction contracts in coordination with the Government • While working on these project fundamental technical documentation, the developer and the GON establish the Special Purpose Project Company (SPPC) and finalize the negotiation of the concession contract / Project Development Agreement (PDA), including the definition and funding of monitoring mechanisms • PDA signed between Government and SPPC • The SPPC negotiates Credit Agreements with lenders and International Finance Institutions (IFIs) while a complete project financing Due Diligence is undertaken by third party consultants on behalf of the lenders and insurers. • PPA(s) signed between offtaker(s) and SPPC • EPC contract signed between EPC contractors and SPPC • Credit Agreement signed between lenders and SPPC • Any other agreements signed • Financial close Note: BOO(T)s generally require complicated financing packages to achieve the large financing amounts and long repayment periods required. The project documentation for the Project Finance of a large hydropower PPP comprises a large number of contracts (in the range of one hundred) and their preparation means substantial upfront development cost for both the developer and the government. Such development cost, which are capitalized as project cost and reimbursed at the time of financial close, can easily be in the range of US$ 10 million or more depending on the complexity of the project and duration of its development.
Step 5- Project implementation and monitoring
Since the project is now entirely run by the SPPC, the government shall organize itself to monitor the construction and operation of the project as per the terms defined in the PDA. Independent international expertise is recommended to cover the many angles of a hydropower development including: • Dam safety • Environmental impact and watershed protection • Resettlement and management of grievance
Final Report January 2011 106
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
3.3.2 Current practice in Nepal
Project Identification, Licensing
The § 2.2 above already describes the prominent issues in th early stages of project identification and licensing: • To Consultant’s knowledge, currently no formal Basin wide studies are performed. Some feasibility studies are performed by WEC, Min. of Irrigation, NEA etc on the same basin on project site by site basis. • DOED is the institution responsible for granting licenses. Some inconsistencies and confusion appear in licensing procedures. Until recently licenses were issued on first come first serve basis; multiple licenses are awarded to same party without ensuring progress on previous projects. We also were advised that survey licenses are tradable and often the sole reason for their acquisition.
Introduction of competitive bidding
DOED came under much criticism because of its indiscriminate awarding of license, lack of developer scrutiny and monitoring of progress. For example during 2006-2008 over 300 projects of various size totaling over 9,000 MW were thus assigned to developers with little or no scrutiny of their capability, development experience etc. Many, indeed most projects simply remain on paper and have shown no progress towards development. Unfortunately there has been no monitoring or enforcement action by DOED or any other agency. None has progressed to the Construction License stage.DOED was also criticized by the Nepal’s Public Accountability Commission, for certain improprieties in choosing developers. In 2008, DOED adopted Competitive Bidding Procedure for award of new project development licenses. DOED selects winning bidders who are granted a project survey license and upon successful performance followed with Construction and Generation license. A Project Development Agreement is signed at the time of grant of the survey license which spells out terms and conditions of the license, mutual party obligations etc. Arun-3, Kabeli-A and Upper Karnali were successfully awarded under this procedure. Budhi Gandhaki (600 MW) was also put up for Bids though no responses were received. In 2009 eight smaller projects (Lower Hongu, Lower Solu, Mewa, Khimti-2) were offered for bids under the competitive procedures. At the time of writing, selection process is currently underway. Upper Arun (300 MW) is also planned for Bid offering later this year.
Barriers to successful competitive bidding in Nepal
There have been many reasons for which previous bids for HPP in Nepal have not been successful. Among these, we can list: inadequate feasibility, site quality, land acquisition and R&R issues, lack of interconnection and access roads, unclear bid terms not reflective of project reality, burdensome royalty and tax regime. • As has been noted, technical and economic data and Information available at the time of tender is often inadequate: Bidders often receive Preliminary and outdated feasibility study, and proposed contract terms (PPA, PDA) are incomplete and not endorsed by GON. • Potential bidders are aware that there is a high risk that construction of large hydro projects could get delayed because of delay in land acquisition, R&R and lack of law and order in remote areas.
Final Report January 2011 107
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
• Beyond these project specific reasons, it is important to note again that the overall poor framework in Nepal is the main hurdle to successful project development. Indeed, most serious and experienced developers are deterred by the lack of clarity in the Nepali policy, legislation and administration, and the fact that DOED, despite its announced role as a “one stop window” for the coordination among government agencies as regard HPP development, has not been empowered or is not acting as such. This situation, which is more an issue of governance than resources, is the main reason why bids for larger projects have not been successful. Clearly, the lack of interface coordination between various government departments and consistent policy and implementation has been one of many hurdles.
Contract negotiation, Project implementation
While DOED seems to have been somewhat indiscriminate in awarding licenses in the past, it has better managed the licensing process, and successfully awarded several competitive bid projects in past couple of years. However, it has fallen behind in its after-care function, i.e failed in ensuring project reporting, monitoring and project status reviews. DOED has only limited interaction with developers and offered little support during the survey and development process. This is an important and truly a critical function to ensure that licensees are indeed performing on the agreed terms and satisfactory progress is made towards financial closure and COD. Only by staying with the project and closer scrutiny can DOED understand the project complications and assist with any ensuing problems, hurdles, and facilitate their mitigation. DOED role has to expand beyond simply issuing survey licenses and collecting fees and royalties.
3.3.3 The need for a Nepalese PPP Agency
PPP agencies are common in many developed countries to facilitate and manage infrastructure investments. In the developing world, a number of countries have also begun to either establish new governmental agencies, or to further empower some existing one, to act as PPP units in response to growing investment and financing needs in infrastructure. But the impact and results of such agencies have been mixed depending on the governance of the country in which they operate, and recognition they have as overall coordinator of PPP related work.
Purpose of PPP agencies
Essentially, governments create PPP units to achieve their respective policy objectives. As discussed previously, a prime objective of PPPs is to attract private finance as a way to mitigate the lack of domestic finance. Beyond this prime objective, governments also recognise PPP’s usefulness in achieving more specific objectives including delivering improved services to the community and better value for money, primarily through optimal risk transfer, management synergies, encouraging innovation, efficient asset utilisation and integrated whole-of-life asset management. By measuring and comparing the net present value of a project delivered as a PPP against that of the services the government would otherwise provide on its own, PPP units are able to define an optimal risk sharing with the private sector while ensuring safe, reliable and cost effective services to consumers. In less elaborated host country environment though, the objective may simply be to facilitate the establishment of the PPP via the empowering of the PPP agency as a “one-stop-shop” for the private developer, and improve the overall administrative framework of the government in the process.
Final Report January 2011 108
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
In essence, PPP agencies are meant to help correcting specific government failure and shortfall for PPP projects to be effectively prepared and delivered.
Could DOED be Nepal’s PPP Agency?
DOED is the authorized body delegated by MOEn to establish bidding framework, standards, bid documents, solicitation, evaluation and selection of the bidders for the offered projects. DOED however is woefully inadequate in resources and economic- technical skills to match the requirements of these tasks. DOED has been unable or unwilling to seek outside expert assistance from private consultants. DOED renders little support and facilitation to the developer or monitoring of the project, once the bid is awarded. In addition, for those projects assigned to NEA for development, DOED only plays minor role (perfunctory issuance of license). For example DOED has no input or monitoring role in the most promising Upper Tamakoshi which is a major project on the horizon and being developed by NEA under a PPP mode.
Recommendation for DOED’s role Consultant recommends that DOED expand its activities to go beyond the granting of survey licenses and fee collections. DOED should aim to identify and select reliable partners for the development and financing of HPP projects in Nepal. Once selected, the developer should be offered full support and facilitation services, including assistance on clearances, dispute resolution etc. The sole process of granting survey license is not sufficient for DOED to successfully achieve its goals. Consultant believes that, consistent with its current responsibilities, DOED should be granted status of an Apex executing agency for Hydropower development, by authority delegated by MOEn. DOED also has important promotion and facilitation role to play. There is need to empower, strengthen and modernize DOED grant higher cadre status as premier professional Agency.
This is further elaborated in Section 4.
Final Report January 2011 109
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
3.4 Bidding Process
In light of the above, and based on examination of bidding procedures in other countries and best practices, Consultant has developed Bidding Guidelines adapted to the specificities of DOED’s mandate, Nepal governance and HPP sector. While the present section gives an overview of the proposed Bidding Process, the complete Bidding Guidelines are available in Appendix 5. There are as many different PPP bidding documents as there are cases; the standard PPP bidding documents to draft are detailed in this section and in Appendix 5, and several examples for these bidding documents (especially the Request for Proposal) can be found with the international donors.8 The aim is for DOED, through a competitive tender, to identify and engage the most experienced and relevant private companies as developers and equity investors in some carefully selected projects and maximize the chances of a success. More generally, Consultant advises that GoN should only proceed with bids for those projects which have been well studied for optimum utility and for which substantial and up-to- date information is available. In so doing, the GoN should adopt international best practices in bidding and involve multilateral lending agencies prior to the issue of bid documents so that projects are structured in a way that they can be funded.
Basic Elements in Bid Solicitation Process
Consultant believes that transparent competitive bidding process provides one of the best means for soliciting bids for power projects. Bidding procedures, bid parameters, selection criteria must be based on the applicable laws, policies, and regulations of the GON. For a successful bidding procedure, the following issues must be carefully addressed: • Pre-Tender Preparation, including: Define the project and its purpose e.g. domestic power only, hybrid or export only, multipurpose (irrigation), etc. Understand the market and list the potentially interested developers Prepare adequate project information, including updated feasibility study, hydrology data, project economic and cost studies, environmental studies including report on local stakeholders consultation, R&R plan, road accessibility, etc. Draft the Project Development Agreement, PPA and other documents as template. • Establishment of Bidding Procedures: Disclosures, definition of bid bond and subsequent project development bonds, verification of the legality of the RFP documentation and process, providing bidders the opportunity to understand and assess project risks including the organisation of site visit and the establishment of a bid clarification mechanism, evaluation criteria, etc.
8 http://web.worldbank.org/WBSITE/EXTERNAL/PROJECTS/PROCUREMENT/0,,contentMDK:20062006~menuPK:84284~page PK:84269~piPK:60001558~theSitePK:84266,00.html
Final Report January 2011 110
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
• EOI stage and Bidders Selection: Balancing technical and management experience vs. ensuring adequate number of competent participants. At this stage of Nepal’s HP development, prior proven experience and access to competent financing, reliable contractors is vital. In defining the selection criteria, choices have to be made: Near-term vs. long term benefits; end-user (i.e. lower tariffs) vs. State interests: revenue enhancement, local development, early completion, supply reliability etc. • Bid evaluation and negotiations with preferred bidder: The appointed Bid Selection Committee opens and evaluates all the validly submitted bids. A winner is declared on the basis of established parameters. In this phase there is intense negotiation between the tentative winner and the DOED to spell out clearly the terms of the PDA. PDA signing could mark the ultimate bid granting decision, while keeping the Project Financial close by a certain date as a condition subsequent.
3.4.1 Pre-Tender Preparation
Importance of Pre-Tender Preparation
In order to receive good proposals, bidders have to be made aware of the project status and context. If there are uncertainties in the framework, lack of roads etc these should be flagged. In general, the better the quality and accuracy of information disclosed on the project, the more credible GON will be and the more successful it will be in receiving quality proposals. In many cases a pre-feasibility study has been performed by the GON. In some cases, GON has prepared a full feasibility, thanks to development grant, but such feasibility studies are often old and information on environmental and social dimension is not sufficient. In many cases cost data and economic feasibility needs to be updated.
Main tasks to be completed at Pre-Tender stage
Following preliminary tasks should be undertaken by DOED/GON before launching competitive bids for project development: For small domestic projects (<50 MW) • Up-to-date feasibility study, hydrology data, project economic and cost studies • Initial design • Environmental studies including report on local stakeholders consultation, R&R plan, • Draft Project Development Agreement specifying among others that: • NEA provides construction power • NEA wheels power delivered by Project to the nearest Substation For medium domestic projects (50-300 MW) • Up-to-date feasibility study, hydrology data, project economic and cost studies, • Environmental studies including report on local community impact estimates, R&R plan
Final Report January 2011 111
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
• Initial design and power evacuation study • Well defined evaluation parameters and technical qualifications • Draft Project Development Agreement For large, export-oriented projects • Updated feasibility study, hydrology data, project economic and cost studies, • Environmental studies including , land acquisition & R&R plan • Power transmission feasibility and Road accessibility studies • Draft Project Development Agreement • Define GON participation and intended source of equity financing (option may include the securitization of a portion of Royalty payments, in-kind contribution, direct funding, etc). Option to buy more equity at later stage thru acquiring convertible bonds, contingent equity etc.. • Requirement for domestic portion (free electricity). • NEA option to purchase additional energy, or sale- back a portion of free energy, at market prices in the future. Must specify quantities and pricing mechanism. • In general projects need not be export only. They can be hybrid. i.e. NEA entitled to a certain portion of energy as part owner/investor or simply a buyer.
3.4.2 Project Documentation and PDA
The project documentation, to be prepared during Pre-Tender stage by GON/DOED and to be disclosed to bidders, should include the following components:
Technical information
Feasibility study. Ideally, comprehensive and up-to-date FS should be included in the project documentation package. Such work can be undertaken using development grant, and it is money and effort well spent and to enhance bid quality and offering terms. Description of Relocation & Resettlement (R&R) arrangements, estimated population dislocation, any requirement and methodology to involve local participation in the project ownership, construction, operations, labor, training. It is advisable that GoN, using international experience and the support of MLAs, develop an R&R policy and implementation plan package applicable throughout Nepal so that potential bidders are made aware of true risks and cost estimates. Package drawn should be equitable, and mandate rules that fairly treats potentially affected people. Where costs justifiably escalate beyond the estimates or time delays are encountered, due to no fault of developer, there should be mechanism to equitably adjust the PPA to ‘pass-through’ to the buyer, however imprudent decisions of the sponsor should be his responsibility. Description of Interconnection issues and plans. In the offering documents DOED must fully discuss the power evacuation plans in sync with the proposed project schedule; availability of transmission from busbar to the nearest sub; mutual obligations for line and sub construction, cost responsibility; GON should commit to facilitating ROW, forest clearances etc. Description of Access issues and plans. This is critical for bidders to evaluate the feasibility of bringing construction equipment and material on site. GON should be part of the plan to build roads, bridges and share costs, based on common carrier nature of the roads. GON must also cooperate and coordinate its plans for roads construction to the project schedule.
Final Report January 2011 112
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Project Development Agreement (PDA)
This is a critical document that defines the roles and responsibilities of both the GON and the Special Purpose Project Company. The PDA shall clarify the scope of work, terms and conditions and legal obligations of each party. PDA should include the following information:
Conditions of Generation License
Consultant recommend the following provisions: • Initial 35 yr from COD • Mandatory inspection in 10th/20th/30th year of operation • Termination if not found to be maintained properly • Termination Payment: NPV of state benefits foregone for 10 years • 10-15 yr extension allowed upon good performance, with negotiated larger share in free energy and increased royalty • GON pay for all capex beginning with last five years of License period • Require Lump-sum Capacity Royalty Equivalent to PV of first 15-yr of royalty , to be ploughed back as Govt. Equity
Fiscal and royalty regime
PDA must specify the fiscal and royalty regime, including requirement for “free electricity” and incentives to developer such as Tax Break; exempt from import duties and VAT, benefits from emissions credits, etc. The PDA shall clearly define the taxation and royalty regime, clarifying that the PDA will trump future adverse laws and regulation, so that the bidders are able to construct their project financial model with a degree of certainty. Proposed Incentives to the Developer • 10-y r Tax- Break; • exempt from import duties, • exempt VAT; • export sales tax; • Keeps benefits from emissions credits • Capacity Royalty reductions for early COD
Conditions for Power Purchase
PDA must state the conditions for power purchase; draft PPA may be included. Consultant recommends that projects be categorized as per their size and offtake alternatives as follow: • Small domestic projects (<50 MW): PPA with NEA may be bankable, and therefore such draft PPA should be disclosed in the tender documentation. • Medium Domestic Projects (50-300 MW): PPA with NEA alone may not be bankable and alternative domestic offtake would have to be identified through the bidding process
Final Report January 2011 113
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
• Large Export Projects: Essentially, a PPA with a foreign offtaker such as an Indian utility or power trader should be sought who may also commit to contribute equity and assist in financing on his/her strength When draft Power Purchase Agreement with NEA is included, the PPA negotiating process should be fully transparent and NEA’s guidelines should be published to better inform potential developers. For instance, the GoN should consider an interim solution whereby it provides subsidy payments to fund the difference between what developers should be paid and what NEA can currently afford. The GoN should initiate forward-looking study into the structure of tariffs in the longer-term plans for Nepal. Recommendations for PPA: • Consider front-loaded tariffs, i.e higher tariffs in initial years to improve cash flows, assuring project sponsor to meet its debt service, set asides etc. This can engender greater lender confidence • Annual escalation clause in the PPA. Often sponsor demands protection from cost escalation such as interest rise, O&M expenses.
Developer’s Obligations
PDA must state the developer (Project Company) obligations including: provision of R&R funds as quoted, use of domestic labour (say 25 during construction and 75 % during operation), provision of training for enhancing skills of local labour, etc. In general, the PDA should clearly define the risk sharing principle and provisions. For example, developers / constructors risk on geology should be limited to those that are accepted at the time of the PDA execution. It is also recommended to specify the right of first refusal to State if the Project is sold to a third party.
GON Obligations
Description of GON Obligations. The Consultant recommends that GON commits to: • Acquire land for lease to the project (Project pays nominal lease fee for the licensed period) • Share 2% royalty with VDC community; • Build main access roads, bridges etc suitable for heavy equipment transport; • Provide security as needed; • NEA provides construction power; • NEA wheels power delivered by Project to the nearest Substation; • Annual Capacity Royalty increase factor no more than 2%. • GON responsible for capital maintenance five years prior to the transfer of the project to GON.
Risk sharing
The PDA should clearly define the risk sharing principles. For example, GON should bear the geology risks beyond those identified in the original feasibility. Developers / constructors risk on geology should be limited to those that are accepted at the time of the PDA execution.
Final Report January 2011 114
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Other information to be included in Project Documentation
• If earlier bids on the project have failed the reasons for such should be summarized. • If GON intends to participate as shareholder in the Project Company, it should be mentioned and in this case, intended source of financing (option may include the securitization of a portion of Royalty payments, in-kind contribution, direct funding, etc). Option to buy more equity at later stage may also be an option thru convertible bonds, contingent equity etc.) • Support to be provided by DOED/MOEn, which could include: • DOED facilitate in local community issues • Permits and clearances for EIA, forest, ROW • Customs, VAT clearances • Explosive license and procurement
Recommendations for a Detailed Model PDA
As a practice NEA and DOED have entered into Agreements with the project companies for specific projects. Consultant has reviewed the prevailing PDAs on allocated projects, in particular the recently awarded Kabeli-A project. Consultant has also reviewed the currently adopted GON’s (April 2010) Model Project Development Agreement. Review shows that Kabeli-A project in general provides a good detailed PDA model since it is more extensive in laying down the rights and obligations of the parties. The model PDA describes the basic elements of mutual rights and obligations, and states that project specific details can be filled at the time actual PDA is negotiated. However it could be completed with more details taken from the Kabeli-A PDA for instance. It is not clear from the Model PDA which of the multiple agencies shall be the project- responsible authority. The Kabeli PDA, on the other hand, specifies that DOED is the exclusive ‘Designated Authority’ on behalf of the GON for all aspects of the project: coordinating, performance monitoring and all matters relating to the project (see box below). Consultant believes this is a good provision and should be included in the Model PDA
Final Report January 2011 115
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
“ARTICLE 3: DESIGNATED GOVERNMENTAL AUTHORITY
3.1 Purpose of Designation In order to facilitate the timely implementation of the Project and to minimize the delay and costs associated with the large number of Governmental Authorities whose responsibilities might otherwise require them to become involved in Project, the DOED (hereinafter the "Designated Governmental Authority") has been designated by GON to (i) act for and on its behalf GON on all matters related to the Project and this Agreement; (ii) exercise the rights and privileges of GON pursuant to this Agreement, and (iii) coordinate the authority, activities and actions of the other Governmental Authorities whose responsibilities and/or activities, if left uncoordinated, could delay or otherwise adversely affect the Project.” “ARTICLE 7: PRINCIPLE OBLIGATIONS, COVENANTS AND WARRANTIES OF HIS MAJESTY’S GOVERNMENT Designated Governmental Authority Representative has the authority and may take any action or give any consent on behalf of GON which may be necessary or convenient under or in connection with this Agreement and any action so taken, or consent so given, shall be binding upon the GON and any and all instrumentality or sub-division thereof, including all Governmental Authorities. GON also undertakes and warrants to the Project Company that the Designated Governmental Authority shall not interfere in any way with the development and implementation of the Project or the pursuit of Project Management on the part of the Project Company and its Shareholders.”
Kabeli-A PDA 2010
Several other features are more clearly specified in the Kabeli PDA while left general in the Model PDA, such as the ‘Article 5: Grant of Project Related Rights and Privileges’. This Article clearly describes the rights of the Project Developer (Entry upon Potential Sites, Project Benefits, Water Rights, Project Facilities, Use of Local Natural Resources, Employment of Project Personnel, Resettlement, NEA Performance on Power Purchase Agreement). However, in both models there is a lack of a proactive role for the GON. For instance, there should be a definition of specific actions the GON (or the relevant agencies, including DOED) could take to ensure the performance of its obligations, or what remedies could be applied in event(s) of its non-performance. In many cases the Model PDA states that if requested, GON shall assist in local govt. approvals, water and land acquisition etc. In the Consultant’s view, the PDA should place a more affirmative and proactive responsibility on the GON in such matters. Other comments from the Consultant on the Model PDA’s provisions: Task Force: The Model PDA allows for establishment of a Task Force within 30 days of the Agreement. This is a positive step and was in fact recommended by the Consultant. However the Consultant recommends that the composition of the Task Force should be broadened to include representatives of the third party stakeholders having interest in the particular project in addition to members of the GON or its agencies. Energy purchase; The Model PDA allows 10% energy purchase by GON in addition to the Free Energy, at negotiated prices. This is a good provision and was also recommended by the Consultants in the Draft Interim Report.
Final Report January 2011 116
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Land leasing: In the Model PDA there is a provision to lease the land at reasonable rent for the life of the project in cases the land on the project site is owned by the GON. While this is a good provision, it should be expanded to state that in most cases land acquisition is the responsibility of the GON. As has been recommended in the report this provision alone can remove a very basic obstacle to HP development. It also strengthens the PPP construction of the projects. Therefore, the Consultant recommends that the Kabeli-A PDA could be merged with the Model PDA to be used as the base template, with additional provisions such as those identified above. This PDA template should be reviewed by the legal department within DOED to ensure compliance with the Constitution and laws of Nepal and prevailing procurement and other regulations.
3.4.3 Bidders’ Prequalification
Inviting for Expressions of Interest (EOI)
Typically prior to launching the tender process DOED should issue a notice to potential developers requesting to indicate their interest in the offered project. This is particularly recommended for significant size projects. Consultant recommends that for all projects over 50 MW (mid- size to larger projects) the pre-tender EOI process should be adopted as a practice and should be so announced to the public. Brief but relevant and accurate basic information should be included in the requesting document indicating the purpose, scope, size, brief technical and economic parameters of the specific project; expected initiation, construction and COD schedule etc. Timeframes of the various stages of the tender process should be announced in this EOI phase. EOI also must include basic eligibility criterion: technical, financial and proven prior experience in the project development and operations of hydro or other infrastructure project. In recent RFPs, DOED has tended to overlook potential developer’s prior experience in favour of encouraging more competition. Consultant believes hydro projects even small ones are complex undertakings and require competent execution team. By soliciting a timely Request for EOI and careful definition of eligibility criteria, including technical and project development experience, DOED should be able to develop a sound list of interested respondents well ahead of the project RFP tendering. This ensures competent participants to proceed further in tender process. Specific project’s purpose, size, scope of work may determine the type of developers who express interest, and shall also determine the internal commercial and technical organization of the Bidders, mutual financial arrangement and risk assumptions etc, among the parties. Typically, for larger projects bidders group themselves into consortia, each member offering strength in different project area.
Pre-bid discussions
Prior to launching specific project tender, DOED should hold preliminary discussion with interested bidders on project offering, and get their views on preparing required documentations, information and data potentially useful in bidding. This will help in taking developer concerns in consideration, in formulating the tender documents.
Final Report January 2011 117
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Public list of prequalified bidders
It is advisable to establish and maintain an on-going list of potential developers who have expressed interest in or have developed hydro projects in Nepal in recent years. Potentially interested bidders may be invited to register and pre-qualify for future solicitation of projects. Criteria for qualifications should be broad, generally requiring experience, financial strength, and prior performance in infrastructure, preferably water resources projects. Criteria should be announced in soliciting pre-bid prequalification. Bidders should be advised by letter or email of their prequalification status and the list of prequalified bidders should be updated periodically. This list should be made available on DOED website. The prequalified bidders list works particularly well for smaller projects < 50 MW, where bidders can be screened from this List and advised of the upcoming project bid program. Even if RFP is limited to pre-qualified bidders it should be publicly announced for reasons of transparency.
3.4.4 Procedure for Request for Proposal (RFP)
Contents of the RFP Package
DOED should prepare and disclose the RFP Package, establishing bid purpose and rules, and setting out all the relevant and up-to-date data as discussed above to enable developers to better judge the viability of a proposed hydropower scheme. In addition to the Project Documentation (developed above), information on the bidding process itself should be disclosed to bidders. The RFP should clearly state the timeline (deadline for submission, bid validity): bidding process must allow sufficient time to formulate serious, responsive proposals. It is strongly recommended to organize pre-bid conference to clarify RFP and Project Documents. In any case, RFP Package should specify the procedure for bidders to obtain clarification and to visit the site.
Disclosure of the RFP Package
In addition to a targeted distribution to relevant parties that had previously expressed interest in the process, RFP should be announced: • As an advertisement in national newspapers (at least two) of general circulation in Nepal • In the Official Gazette of GON • Posted on the DOED/MOEn website • In international hydropower journals and specialized websites
Eligibility criteria
If no shortlist has been made, then eligibility criteria must be specified in the RFP Package. Only bidders with certain credentials should be allowed to bid. It should be permitted for respondent to form consortia to enhance technical and management experience, financial viability. For instance, size-specific criteria may include: • For small domestic projects (<50 MW), the ability by bidders to acquire land and manage R&RB issues, to arrange finance and to operate and maintain the project
Final Report January 2011 118
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
• For medium size domestic projects (50-300 MW), bidders should be asked to propose an alternative offtaker such as an industrial user for instance. Sponsor should have access to domestic financial and credit markets • For large export projects, bidders should be able to identify and negotiate with foreign offtaker. In addition to having relevant technical and financial strengths have access to international credit markets, MLAs etc.
Evaluation criteria
Traditionally, since HPP bids are usually tendered by power purchasers, least-cost power obligation mandates that the selection is made on the tariff level, i.e. among the qualified sellers, one offering the lowest price would be the winner. This redounds to the end- users’ benefit. In Nepal however, the circumstances do not allow such selection criteria to apply because most projects do not have pre-agreed PPA at the time of bidding. First, the buyer is not always the tendering entity as in the case of Kabeli-A, where it was DOED while NEA is the offtaker. Factors such as early financial close, COD, involvement of developers in the management of R&R, credentials of bidders in similar project development elsewhere, can also be included in the selection parameters. Consultant believes that in most cases a hybrid, rather than single criteria is advisable. This is elaborated further in § 3.4.5
Upfront Fee and Bid Bond
Recently bidding selection parameters have included significant upfront fee, maximum free energy, etc. Bhutan has also gone this route on Dagchhou and other projects. Many Indian states have adopted this approach. In the case when projects are well-prepared by GON (usually the smaller project), the requirement for payment of an Upfront-fee at award ensures that only qualified developers with serious and concrete intentions, financial and technical capacity will bid for projects by committing to pay such fees. This fee will blunt the intent of brokers and middlemen to simply hold the license, until opportune time to sell at higher prices to real project developers. Time taken for this transfer “blocks” the license from reaching the real developer earlier and thereby delays actual project implementation. At the same time, Consultant recognizes that upfront fee can be a discouraging factor as it creates an additional burden on the developer and lowers the project profitability especially in the case of the smaller projects. This is particularly true for Nepal where project faces multiple obstacles and risks. To mitigate this, we advise that GON credit this Fee back to the Project Company as offset against future royalties. The amount of such upfront fee should also be commensurate with the quality of the project preparation by GON. For larger projects and projects for export though, Consultant advises, in lieu of upfront fee, bid bonds and development bond should reassure GON about the commitment of bidders. A clause in the PDA may be included to require the payment of a grant contribution by project companies to GON at financial close to help finance its equity positions.Consultant recommends that the bid bond should not exceed US$ 500,000. Upon signing of the PDA, winning party would issue a Development Bond commensurate with the size of the project and bid bond would become void.
Final Report January 2011 119
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
3.4.5 Selection Criteria
Tariff-based selection not adapted to Nepal context
Since HPP bids are usually tendered by power purchasers, least-cost power obligation mandates that the selection is made on the tariff level. DOED utilized tariff based bidding for Kabeli-A, but it led to unsatisfactory results. Major conflict arose because NEA was not consulted on the tariff negotiations early in the process. Upon review of Kabeli documents and procedures Consultant advised DOED to consider upfront fee as the principal selection criteria for the upcoming eight smaller projects (see below § 3.5.1) because this will ensure that the selected developer has the financial strength and access to capital to successfully complete the project. The consultant’s suggestion was adopted for these Bids.
Hybrid selection
Consultant believes one or more of the following may be adopted as the winning criterion: • Lowest offered Tariff • Maximum Upfront Fee • Maximize fulfilling local community needs • Maximize Free Energy to state • Level of equity participation by the Buyer/state • Financial and Technical Capability of Developer/ sponsor • Required Commercial Operations Date, Financial Close • Termination Compensation • Technical assessment as described below
Selection criteria can be single or a hybrid of these parameters. Each of the above criteria may not carry the same weight in the decision process.
Table 11 Hybrid Selection, Example 1. (Quantitative, for small project) Selection criteria Weight a) Upfront Fee 51 % b) Expenditure on R &R resettlement 25 % (Total or per acre, or per house-hold, etc.) c) Date of Financial closing 24 %
Note: When parameters such as b) or c) are used, Developer must be constantly monitored. Commensurate penalties are prescribed for not meeting the commitments.
Final Report January 2011 120
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Table 12 Hybrid Selection, Example 2. (Qualitative, for large project) Selection criteria Weight a) Provide realistic off take alternative / 50 % approach to secure PPA b) Experience in environmental 25 % management and community relations c) Financing plan, including alternative 25 % option to optimize GON equity return
Technical Evaluation
In the technical proposal, the Bidder’s capability to undertake infrastructure/hydropower development, as well as the financial capability, shall be assessed. The Bidders’ Technical Proposal shall be evaluated on a "yes" or "no" basis. Pass/Fail criteria for financial strength and technical capability depend on the size of the project offered. For example, criteria for evaluation of the Technical Proposal, for a 300 + MW project may include: Table 13 Proposed Criteria for Technical Evaluation Technical Evaluation of a 300 + MW project Parameter Criteria Combined Net worth of the sponsors, exceeding 10% of the estimated project cost 1. Note: Budhi Gandhaki offer, required that lead firms be listed on the stock Yes/No exchange. This is not necessary as many large contractor firms are privately- owned, e.g Bechtel 2. Experience in Infrastructure Projects Experience as the Lead Sponsor Company in at least two (2) Infrastructure 2.1 Yes/No Projects of $ 50 Million or more each At least one major infrastructure Project costing US $ 100 Million or more 2.2 Yes/No completed or under construction At least one (1) hydropower project, with an installed capacity of 100 MW, 2.3 Yes/No implemented or for which financial closure is completed. Submission of Proof of Credit- worthiness of the Bidder/sponsors from 3. reputed financing institution with joint credit worthiness equivalent to at least Yes/No 70% of the Project cost. 4. Project sponsor must Provide Minimum Equity of 30% Yes/No
Minimum score for the technical evaluation is ‘yes’ for all parameters. Bids scoring ‘Yes’ in all criteria are ranked as Technically Qualified.
Qualitative approach
Consultant recommends that besides the commercial terms, the evaluation and selection of a preferred bidder be made along the following qualitative considerations: • Offered bidder’s reputation and credibility in power market
Final Report January 2011 121
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
• Credentials in managing large civil work projects • Experience in stakeholders’ relations as this could be critical to assure that affected population views and consideration are incorporated in project design, and R&R measures are successful • Financial strength and credit-worthiness; Quality of the letter of support from credible financial institution; access to credit markets and IFIs including Mul-laterals • Relevance and credibility of proposed power offtake option (in the case of large domestic or export projects) • Commitment to Nepal through the showing of a strong intent to establish a long term presence • Assess/compare deviations from original PDA • Evaluate exclusive benefits offered by certain bidders Consultant advises that in the case of larger projects, winning bidders should preferably be consortia of reputable companies, each contributing a particular strength to the project.
3.4.6 Recommendation for a Bid Evaluation Committee
DOED’s selection process and decisions have been criticized by stakeholders and developers. DOED was challenged in court, as in the case of Arun- 3 Project award to Sutlej. There has also been allegations that DOED has not acted independently and unbiased in its selection process. Recently the Nepal’s parliamentary Investigative Public Responsibility Commission has accused DOED of improper actions in its licensing process. It is important that the Developer community feel confidence that the Bid Selection process is fair and transparent. Consultant recommends that GON should establish an independent Bid Evaluation Committee comprising 7 to 9 members who perform the Final selection of Bid awards for Hydro Projects. Members of the Committee shall be drawn from the DOED as well as from other relevant Agencies (NRB, Min. Forest and Env.) and include private expert in project economic evaluation and Financing. Director General shall be the Chairman of this Committee. The Committee shall have an important task of Bid evaluation, verifying compliance with the terms embodied in the Bid documents; and recommending final winner’s list based on the established criteria. The Committee does not have responsibility for establishing the bid parameters or the selection criteria which is the job of the DOED, based on established guidelines.
Final Report January 2011 122
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
3.5 Assistance with Bidding Documents
As specified in TOR, the Consultant committed to assist DOED on pilot projects in developing bid parameters, offering documents, RFP issuance, evaluation and selection process etc. Consultant points out the difficulty in coordinating the assistance. There is no formal definitive schedule on bidding for projects. Once identified the project(s) have to go through MoEn or cabinet approval for each step of the process. Often this takes several weeks and even months. Consultant’s experts were not in the field, on the ground on a permanent basis. This posed a problem of synchronizing expert availability with the Bid Schedule.
3.5.1 Lower Hongu, Lower Solu, Khimti-2 and other small Projects
During the month of June 2009, we were asked to review RFPs for 8 small-scale projects in Lower Hongu and Lower Solu, including Khimti-2. Consultant provided extensive comments and recommendations on the RFP draft. Some but not all comments were adopted. In particular consultant pointed to legal inaccuracies in the drafted RPF that contained a number of misrepresentations regarding the tax provisions, etc.
Proposed RFP limited only one project to be offered to one Project Company. Consultant advised against this provision and recommended that if technically and financially qualified, upto three (or even more up to 100 MW) projects could be allotted to same bidder. Since these are small projects, 10-40 MW, it would be more cost feasible if economies of scale are realized by planning common roads, transmission, equipment leasing, labor deployment, training etc. This could reduce the overall power costs. It is also not desirable to have large number of small plant owners/operators. Ultimately, consolidation will be beneficial.
DOED has adopted Upfront Fee as the selection parameter as earlier advised to DOED by the Consultant. Consultant also noted that the drafted RFP did not require any prior demonstrated hydro or infrastructure experience from potential bidders and advised to include such requirement as he believes that proven developers are crucial at this stage in Nepal’s HP development. DOED responded that this was purposely intended, to broaden the bidders- base and promote competition.
Response from Bidders
A combined competitive RFP for this group of 8 projects has been issued. Original response deadline was November 2009 and was extended to December 2009. Bidders’ response to solicitation was lukewarm. For example no one bid for 27 MW Khimti-2, and Lower Hongu. Only one bid each for Mewa and Maya projects was received.
Final Report January 2011 123
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Table 14 Response to RFP for 8 small-scale projects in Lower Hongu and Lower Solu PF - Sainba Hydroelectric Project, -
District JV BPC BPC Danfe Kalika Sallari JV Arati Strips Himal Hydro Ankhu Khola Inf. Dev. Bank United Builders ICTC Energy JV Mahadev Khimti Excelling Excelling power, Pashupati - Clean BankEnergy Dev. Ridi Hydro, Hydro Baneswor Lama Maya, Y Sankhuwasabha Singati, Y Y Y Y Y Y Dolakha Mewa, Y Taplejung Khare, Y Y Y Dolakha Solu, Y Y Y Y Solukhumbu Lower Hongu,
Solukhumbu Khimti 2,
Ramechhap Lower Solu, Y Y Y Y Solukhumbu
3.5.2 Sharada Babei
Project Identification
Sharada Babei, a multi purpose storage project with 93 MW estimated capacity, to be developed under PPP model, was identified by DOED in July 2009 and Consultant asked to assist in preparation of RFP. We were advised that the project would be offered for competitive bid on the basis of a 16% guaranteed return. A review of feasibility (2001) suggests that the project economic viability depends largely on the irrigation component’s derived revenue. It also depends on who builds and owns the reservoir dam, whether irrigation is a primary or secondary component. If the project is flagged as a multipurpose project, the PDA needs to carefully consider the water usage for irrigation, and consider all scenarios and establish priority rules accordingly.
Lack of Coordination
Consultants had discussions with the Ministry of Irrigation (Dept of Irrigation) regarding Sharada Babei (SB). We were advised that Ministry was completely unaware of the SB project. Indeed we were advised that a proposed irrigation/power scheme was being developed downstream by Ministry of Irrigation (MOI)/ NEA on a connecting river Berri Babai,
Final Report January 2011 124
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP) with 42 MW capacity. Already an EOI has been issued on that. Sharada Babai is not under consideration by MOI. Consultant believes that before initiating RFP documents the project parameters should be clarified and well defined- whether it is irrigation cum power project or simply a storage power project. This affects the water flow available for power generation and thus revenue stream. MOI and DOED should better coordinate their efforts.
Pre-Tender Preparation
To date, the only available documentation about the Sharada Babai project is a Feasibility Study prepared in 2001 by Water Resources Consult (P.) Ltd and SILT Consultant (P.) Ltd. While stating that the project may be an economical storage project that can generate electricity at reasonable price, it also indicates that adverse effects include the “inundation of very fertile land and vegetation by the reservoir and deforestation in the project area”. This suggests that the mitigation and management of environmental and social issues will be critical for the development of the project and could even be a show-stopper. Current project description in FS needs to be confirmed. At present, main features are: • The FS dated May 2001 indicates a total project cost of ~US$ 132 million, including E&S and Owner’s development cost. It is unclear whether IDC has been included. This figure will need to be updated using current cost of construction and revised E&S budget as the case may be. • This may affect the generating cost of the project which was proposed to be US$ 1,416 / kW (excluding financing cost) at the time of the FS in 2001. • The cost estimate of the project should be updated by verifying cost of construction in 2009. Since the project is a storage project meant to be a peaking plant, its operational mode will affect the downstream area of the project in more length than in the case of a ROR project. The E&S mitigation cost may have to be updated accordingly, adding some ongoing mitigation measures during operation. • The FS dated May 2001 indicates that the entire accumulated debt (including IDC) would be converted to a 20-year loan. The feasibility of such financing arrangement is questionable as the tenor of most commercial loans rarely exceeds 8 to 10 years after the beginning of commercial operation. A review of financial terms that may be proposed by commercial lenders for this project is warranted. In general, Consultant recommend that prior to launching a bid for the development of the SB project, comprehensive studies be made regarding these matters, including stakeholders consultation and acceptable R&R measures be agreed with the local population. In the absence of such documentation, the project description is likely to be considered as incomplete by any serious bidder.
Provisions of Project Development Agreement
Several points must be clarified by MOEn/DOED before the PDA could be drafted: Taxation and royalty The PDA shall clearly define the taxation and royalty regime, while clarifying that the PDA will prevail on future regulation, so that the bidders are able to construct their preliminary project financial model. For instance, The FS dated May 2001 assumes a corporate tax rate of 20% on the income. GON may consider income tax exemption for the first 15 year.
Final Report January 2011 125
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Power Purchase The FS dated May 2001 indicates that the project revenue will come from the sale of power and operating as an intermediate peaking plant. Two tariffs were considered as follows: • Firm Energy USC 8.00 / kWh • Secondary Energy USC 4.00 / kWh • Escalation of 2.5% per annum was considered. • It also uses capacity credit of US$ 113 / kW / yr applied to the full installed capacity. • Base case was considered at discount rate of 10%. Prior to launching the bid, GON should verify with NEA that the proposed tariff and escalation are acceptable. Consultant believes that NEA will not be able to agree to give a long term PPA to the SB project until its overall financial situation improves. Further capacity credit needs to be validated. Finally NEA should consent to this project in light of the downstream irrigation project under consideration by MOI. In any case, the offtake options need to be clarified before RFP can be launched. Government participation in equity Furthermore, intended Government contribution in the project in term of equity ownership or other means has to be defined. Such participation may require a separate financing of its own. A combination of soft loan, carried interest and direct contribution from the State budget may be considered for the purpose of financing GON participation in the SPV.
EOI stage and Bidders Qualifications Criteria:
For a project of the size of Sharada Babai, it is unlikely that NEA will agree to provide a draft PPA including a suitable tariff mechanism. Bidders will therefore need to propose alternative power offtakers, including free energy to grid. Bidders can form a consortium so that it brings the technical and management experience necessary for the development of the project. Experience in stakeholders relations will be critical to assure that affected population views and consideration are incorporated in project design In addition, Consultant believes that the following parameters should be considered: • Proposed improvement to original draft PDA • Proposed financing solution for GON equity contribution • Reputation and credibility in power market (credit rating) • Commitment to Nepal
Final Report January 2011 126
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
4 Empowering DOED
Final Report January 2011 127
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
4.1 Institutional development of DOED
4.1.1 Brief review of current mandate and organization
Mandate
The Department of Electricity Development (DoED), a technical support unit of the Ministry of Water Resources (MoWR), now MOEn, is mandated to allot, assist and facilitate hydropower developers in coping with the legal requirements e.g. licensing, etc., ensuring transparency of framework, and integrating activities between the GoN and that of private investors / developers.
In addition to licensing process, is DOED responsible for monitoring HPP at various stages of development
Divisions and Sections
Organizationally, the DoED is headed by a Director General and assisted by 3 Deputy Director Generals, heading the 3 Divisions having 2 Sections each as follows: • Project Study Division • Survey and Feasibility Study Section • Planning Section • Privatization Division • Proposal Evaluation and License Section • Project Promotion and Monitoring Section • Inspection Division • Project Inspection Section • Electricity Inspection Section
Staffing
DoED has a staff complement of 63 gazetted officers and 45 non-gazetted personnel. By and large, the Divisions expressed a need for more professional manpower in view of the increasing workload. A solution adopted division-wide is to assign their personnel from one section to another within the division as the workload so demands. Staff meetings are held once a month to discuss problem areas as well as reporting and sharing of accomplishments. More detail on DOED’s organization and staffing is publicly available on their website.
Final Report January 2011 128
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
4.1.2 Proposed organizational adjustments
Consultant recommends that DOED expand its activities to go beyond the granting of survey licenses and fee collections. Consultant believes that, consistent with its current responsibilities, DOED should be granted status of an Apex executing agency for Hydropower development, by authority delegated by MOEn. DOED also has an important promotion and facilitation role to play. There is a need to empower, strengthen and modernize DOED, and grant it a higher cadre status as premier professional Agency. Here is an outline of adjustments that could be made to empower DOED. However, a special study should be undertaken to do an in-depth study of organization structure, budget and funding, recruitment, software, tools etc to help DOED handling complex techno-economic tasks.
Reinforce Project Inspection Section
As mentioned, the post- license monitoring and project oversight is lacking. Current Project Inspection Section should be expanded to assume stronger role in project specific monitoring, i.e. collection and review of developer reports, analysing status reports, comparisons against milestones; identifying trouble spots and issues, reporting these to the management, develop options, problem solving.
Create Project Facilitation Division
Consultant believes there is acute need for DOED to be closely involved with investor/developer facilitation and to guide them through the myriad of issues facing the developer. This may include advice on rules and procedures, assistance in customs and permit clearances, on local community issues, land acquisitions, ROW, RR etc. Staff should actively participate in public hearings to gain public confidence, allay local concerns, etc. In our view this is a critical role to achieve successful outcomes in HPP.
Transfer Electricity Inspection functions to a separate Office
DOED currently has an Electricity Inspection Section whose stated role is to inspect electric outages, set standards for voltage, frequency, power factors for distribution systems, incidents etc. Consultant believes this is not a proper role of the Electricity Development organization and should be eliminated from its duties. This function role properly belongs to a separate Office of National Electricity Inspector or the energy regulator.
Establish Regional Offices
To effectively perform its duties it is essential that DOED stay closer to the active project sites. It should establish Branch offices on each principal River Basin. Branch staff can assist and facilitate project developers in obtaining local clearances, guide in land acquisition and resettlement issues, working with VDC etc. DOED should periodically conduct Public Meetings at project sites to explain critical issues to local persons, project benefits, social services provisions, etc.
Final Report January 2011 129
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Expand Legal Division
DOED currently has a legal section with one legal expert As its role expands in the private power DOED is going to encounter legal challenges to its actions and decisions. As it develops bid documents, negotiate contracts, legal reviews will be necessary. Consultant recommends that a Legal Division should be established, staffed with experienced legal experts to address litigation and legislative issues, render legal opinions and interpret statutes, and ensure the legality of documents and decisions prepared by DOED/EDAN.
Advisory Council
Consultant recommends that DOED be assisted in HP strategy development, promotion and project facilitation by a high level Advisory Council. Council members should be well- recognized Nepali experts in fields of HP, economics, and law. Council may analyse and advise on project specific issues, mitigation options.
Bid Selection Committee
Consultant recommends that GON should establish an independent Bid Evaluation Committee comprising 7 to 9 members to perform the Final selection of Bid awards for Hydro Projects. Members of the Committee shall be drawn from DOED as well as from other relevant Agencies (NRB, Min. of Forest and Environment) and include private experts in project economic evaluation and financing. The Director General shall be the Chairman of this Committee. The Committee shall have an important task of Bid evaluation, verifying compliance with the terms embodied in the Bid documents; and recommending final winner’s list based on the established criteria.
Final Report January 2011 130
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
4.1.3 Proposed Organization Chart Budget: Royalties; Licensee Assessments DOED
Dir Gen
DEP DG DEP DG DEP DG Admin. Account Legal Project Study Privatization Inspection Section Section Division Div. Division Division
Survey & Project Project Litigation; Feasibility Evaluation inspection Study & License Section Legislative section Section Affairs;
Review DOED Planning Project Promotion Projects Under docs for legality section & Facilitation Development section Monitoring Section Branch Office Functions:
- Survey & Feasibility Assistance to developer - Project development monitoring and Status Review - Facilitation w/Land Acq., R & R, site access - Local Community / Local Govt. interaction
Final Report January 2011 131
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
4.1.4 Proposed Modernization of DOED
Recruitment procedures
Interviews with DOED staff have shown that getting additional manpower to support the current workforce or to fill up vacancies left by employees who leave the DOED is a lengthy process. An application goes from a Line Division to Administration to the Deputy DG to the DG to the Secretary of the MoWR to the Public Service Commission who does the recruitment and selection then it goes back the same way to the DOED section level. The current system of coursing manpower requirements through the Public Service Commission should be repealed e.g. DOED should be empowered to recruit lower level staff.
Travels and equipment
Certain administrative procedures should be improved e.g. processing of travel orders, procurement, etc. There is a lack of vehicles for official use e.g. inspection trips. To accomplish and effectively perform its complex functions, DOED should be given state of the art tools: computing software and equipment, transport and telecommunication facilities.
Develop in-house training capabilities
The DOED has no training center, although the need for staff training has been expressed. Short courses about 10 to 15 hours per course spread over 2 to 3 weeks for an Enhancement of Operative Skills Program and a Management Development Program. There is also need of a Professional Specialization Program largely conducted out of DoED, or overseas where the staff can interact with other counterparts. DOED Section Heads should see that the training needs of personnel in their respective units are addressed in a more efficient manner. It is advisable to train and involve Section Heads as in-house trainors to share their knowledge and experience with newly appointed staff. In addition, very technical courses that need special facilities (e.g. computer training) must be jobbed out to existing institutions that handle such programs. In the absence of a DoED Training Unit, the Administration Section must initially assume the responsibility for this role. More details on proposed Training program and courses is provided in the Appendix 6.
Final Report January 2011 132
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
4.2 A PPP Agency for Nepal?
4.2.1 International Practice
PPP agencies are common in many developed countries to facilitate and manage infrastructure investments. In the developing world, a number of countries have also begun to either establish new governmental agencies, or to further empower some existing one, to act as PPP units in response to growing investment and financing needs in infrastructure.
Case of India
In a multi states parliamentary system like India, the national PPP unit is effective because it is located in a strong ministry, namely the Ministry of Finance, Department of Economic Affairs. As such, India has established a series of procedures ranging from the approval of PPP projects, to the eligibility criteria for the government to provide financial support to such projects, through to the selection process of transaction advisors. India’s PPP Cell uses staff from the ministry of finance, while committees are gathering on regular basis to take decisions relating to PPP projects. The Government of India, through its PPP cell, has finalised a panel of pre-qualified Transaction Advisers to assist the agencies concerned with identifying and retaining transaction advisers for PPP projects. Such panel members have skills and experience to provide both commercial, financial and legal services in support of PPP transactions, while additional separate expertise can be hired to procure financial, legal and technical expertise in the case of large projects where the project cost is very high. State-level PPP cells have also been developed, as illustrated by the case of Uttarakhand, Himachal Pradesh and Sikkim, three Indian states with large hydropower potential. • Uttarakhand PPP Cell has been instituted mainly to provide assistance to Uttarakhand Government departments to better structure PPP Projects and improve the procurement process. Uttarakhand PPP Cell has been formed under the Department of Planning under the Technical Assistance from the ADB. The key features of the government of Uttarakhand’s policy are (a) potential hydro projects identified by the government of Uttarakhand are advertised for international competitive bids; (b) bids are invited over a minimum premium, payable upfront to the government of Uttarakhand, at the rate of Rs5 crores per project; (c) projects are allocated to bidders making the highest bid over and above the upfront minimum premium; (d) projects are allocated for an initial period of 45 years on a build-own- operate-and-transfer basis; (e) the developers of the project have the right to sell the power outside the state; no agency of the state will guarantee purchase of power; and (f) 12% of electricity generated is to be made available free of cost to the state during entire life of the project.
• Himachal Pradesh has created the Himachal Pradesh State Industrial Development Corporation (HPSIDC). HPSIDC is the nodal agency for promotion and establishment of industrial units in the state. Wholly-owned by the State Government, it functions as a state level financial institution providing long-term loans for industrial projects. Moreover,
Final Report January 2011 133
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
the state of Himachal Pradesh has a Single Window Clearance Facility, which is the nodal agency responsible for obtaining all necessary clearances for an investment proposal. This agency can be reasonably considered as the state PPP cell.
• The government of Sikkim has formed the Sikkim Power Development Corporation Ltd (SPDCL), to facilitate joint venture projects between a private power developer and the government. For SPDCL-promoted projects and as per the MOU signed between the Sikkim government and a private power developer, 12% free power would be made available to the State and the private power developer would be permitted to sell its entire balance power directly to needy states or through power trading agencies, whichever way they would like to sell. In all SPDCL-promoted joint venture projects, the government’s equity participation ranges from a minimum of 10% to a maximum of 49%.
Case of Lao PRD
The case of Laos is very different to India in the sense that most hydro generated electricity is exported, to both Thailand and potentially Vietnam. As a result, project concessions between the Government and private developers are usually negotiated on a direct agreement basis, with the government taking a participation in project companies that are established for each project. The Department of Energy Promotion and Development (EPD) has been established smoothly and progressively alongside the development of a major hydropower project (Nam Theun Hinboun, Nam Theun 2 and others). Today, EPD can reasonably be considered as Laos’ hydropower PPP agency under the Ministry of Energy and Mines (MEM) that was created in 2006. EPD is now a technical and administrative agency in charge of promoting power PPP throughout the country. Currently EPD is composed of four divisions and has 31 staff specializing in various fields ranging from engineering, economics and legal disciplines.
4.2.2 Proposed functions of a PPP Agency for Nepal
In the context of the Nepal IPP program, which has some similarity with that of Laos, the PPP institutional framework should comprehend the following functions:
1. For the Contracting authority: • Provide input into power policy development, project and basin planning, procurement processes and regulatory issues; • Promote viable projects to the investor community; • Provide information to developers on IPP project pipeline; • Provide information to developers about all laws and regulations applying to IPP projects; • Confirm investment incentives for PPP development in line with Nepal law; • Stipulate and, where appropriate, obtain on behalf of a developer the licenses, approvals and permits required under the Project Development Agreement; • Procure project components in line with procurement procedures and rules; • Lead the GON team in negotiating MOU and PDA with developers;
Final Report January 2011 134
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
• Provide support in GON participation to negotiations with foreign power purchasers; • Engage, manage and coordinate specialized financial, legal and technical advisors in the evaluation of IPP proposals and negotiation of IPP documentation including the PDA; • Negotiate with developers and sign the PDA on behalf of GON; • Administer the PDA during the construction, operating and transfer phases of a project.
2. For the Monitoring Authority: • Set procedures and rules governing procurement of IPP; • Monitor compliance of IPP procurement with Nepal law; • Recruit and manage independent assessors and advisors; • Settle disputes between developer and GON agencies.
3. For the Off-take Authority: • Negotiate PPAs providing for offtake by a GON agency; • Administer PPAs during the construction, operating and transfer phases of a project.
4. For the Investor Authority: • Hold shares in IPP projects on behalf of GON and administer GON interests under project Shareholder Agreements; • Raise capital to meet GON equity commitments; • Manage GON’s IPP share portfolio, prudently acquiring and divesting equity holdings to optimize shareholder benefits; • Manage and disburse GON receipts from dividends, re-financings, etc.
The present situation tends to allocate functions 1 and 2 to DOED, while NEA would undertake functions 3 and 4. But there is no clear-cut answer and judgment about whether or not such arrangements would be optimum.
4.2.3 How could DOED become the PPP Agency?
The need for a strong, unambiguous political support
There is no clear-cut answer as regards the establishment and design of a PPP agency within a government. However, most cases tend to demonstrate that government needs to resolve internal governance and organisational issues first, before creating a PPP unit per say. Indeed, a PPP unit is not meant to solve governance issues, nor it is supposed to act solely as an advisory body. Rather, a PPP agency is an executive institution aimed at coordinated government resources and external advisory to assist the government prepare, assess, negotiate and monitor PPPs.
Final Report January 2011 135
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
In general, it is evident that less effective governments have the less effective PPP agencies. For a PPP agency to be efficient, a high level political support is required. Moreover, it shall be empowered to do what it is expected to do. Case studies demonstrate that a PPP unit location in the government is among the most critical feature of the overall programme because of the importance of interagency coordination and political support in PPP delivery. Finally, if a PPP agency is meant to focus on a single type of project, such as large hydropower development in countries with poor governance, such agency will be expected to also correct government inefficiencies. In such case, its organisation structure and staffing will need to be tailored accordingly. Moreover, it should be given the necessary executive authority, so that it does not end up simply acting as an advisory body. This last comment is particularly valid in Nepal, where the lack of adequate coordination and constructive collaboration among governmental agencies is evident.
DOED as Nepal Hydropower PPP agency?
In Nepal, the present lack of clear mandates and/or duplication of mandates among existing institutions seem to be one main barrier to the establishing of a straightforward institutional framework for hydro PPP development. The proposed Hydropower Policy 2001 and revised Electricity Act are meant to empower DOED to effectively promote private sector participation, while coordinating the various GON agencies involved in projects implementation and thus facilitating the project approval process. DOED will then be able to properly organize itself to also represent the government’s interest in such venture, while acting as Project Companies’ counterpart and managing a committee of government agencies’ representatives capable to address the multiple project issues that hydropower projects encounter during their complex development and implementation stages.
Going further: Electricity Development Agency for Nepal
To go further, one could envisage the creation of an autonomous agency similar to the Rashtra Bank, Regulatory Agencies, Public Service Commission and the courts. A close parallel is the Central Electricity Authority of India (CEA). CEA is a statutory organization established by an act of the parliament and is the nodal premiere agency for policymaking, planning and implementing generation and transmission projects in India. In the US, the Environmental Protection Agency (EPA), the Federal Energy Regulatory Commission (FERC), etc are independent agencies established by and reporting to the Congress. Therefore the Consultant suggests the new agency takes the name of ‘Electricity Development Agency of Nepal – EDAN’, which would take up the current role of DOED, but with extended powers and duties. The Chairman of the Authority should be appointed by the parliament and only be removed by it. Being autonomous, and established by the parliament, the new agency should report to the parliament and not any particular ministry. Under such status EDAN could work with different ministries (Finance, Energy, MoE and others) in a more assertive role since it would draw its authority from the parliament. For example it could establish streamlined procedures and deadlines for review of EIA processes, ensure that reviews are conducted within the legally granted scope and authority of the agencies involved, eliminate duplicate and redundant reviews, establish appellate procedures, etc.
Final Report January 2011 136
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
A clear and broad mandate should be granted pursuant to a statute defining the role and functions of the Electricity Development Agency, outlining its relationships with other relevant ministries and agencies. As Apex agency the EDAN should have a major role in establishing the scope and tasks of the HP Task Force. The Agency, in consultation with various ministries, shall identify priority projects, river basin studies, technical and financial feasibility, financing sources. EDAN should be the central body to work with the HP Task Force; this HP Task Force should be empowered to coordinate and facilitate the environmental studies, forest clearances, land acquisitions, R&R as well as resolutions on roads, infrastructure planning for projects, communication with local communities and political authorities. The Task Force should draw authority from its own independent mandate and should not be subordinate to EDAN. However the two should work towards common goals and have complementary functions.
Learning through Action
The main lesson that can be drawn from international experience in hydropower PPP development is that an adequate institutional framework for PPP can only be put in place in a progressive manner, in response to the evolving and expanding needs triggered by the multi dimensional nature of hydropower development. Similarly, an emerging PPP Agency in Nepal could be created and structured in answer to the needs of a large project, such as Upper Seti currently supported by the ADB.
Final Report January 2011 137
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Appendices
Final Report January 2011
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Appendix 1: Contractual TOR
Final Report January 2011
A Terms of Reference 1
OUTLINE TERMS OF REFERENCE FOR CONSULTANTS
A. Introduction
1. The Department of Electricity Development (DOED) will promote private sector participation (PSP) in Nepal’s hydropower sector in order to harness the country’s significant hydropower potential. DOED will award projects through a competitive bidding process. Consultants will be engaged to develop and implement a competitive bidding framework for successfully implementing PSP in the hydropower sector.
B. Scope of Work
2. The international power sector development specialist, who will also serve as a technical expert, will be the team leader responsible for the study’s overall management. The team leader will coordinate the technical assistance (TA) among all government agencies, Asian Development Bank (ADB), and other development partners to ensure smooth implementation and non-duplication of work, and will ultimately be responsible for all deliverables. Other consultants will assist the team leader in these tasks as specified in the following paragraphs. The team leader will also closely coordinate with the consulting teams of other relevant TAs of ADB and development partners.
3. The consulting firm to be engaged under the TA will provide experts with relevant experience in developing policy for promoting PSP and public–private partnership (PPP), power sector reform, relevant legal and regulatory frameworks, financial structuring, and Nepal’s power sector.
4. In close collaboration with the Ministry of Water Resources (MOWR), DOED, other relevant agencies, and the steering committee to be established by the Government, the consultants will undertake, but not be limited to, the following tasks.
1. Power Sector Development Expert and Team Leader (international, 8 person-months)
(i) Review and analyze existing power sector policies, including the 2001 Hydropower Policy and various draft policies under discussion, the legal and regulatory environment, enforceability of legal and regulatory documents, and other issues and constraints that private investors and financiers may face. (ii) Summarize the policy and regulatory framework related to PSP and PPP in the power sector of developed countries and other developing countries in the region, conduct a comparison analysis, identify best practices, and analyze their applicability to Nepal focusing on the hydropower sector. (iii) Consult with various stakeholders, including the Government, its agencies, consumers, potential international and domestic private investors and financiers, and development partners; and examine and summarize their views and suggestions on promoting PSP and PPP in the hydropower sector. (iv) Review existing procedures and practices of the Government for processing and implementation of PPP projects to identify measures in improving their efficiency. 2
(v) Based on the above analysis, prepare recommendations for updating the 2001 Hydropower Policy, draft Electricity Act 2005, and relevant laws and regulations to promote PSP and PPP modalities in the hydropower sector. (vi) Recommend roles and responsibilities of different government departments and power sector entities as well as the organizational setup to promote PSP and implement PPP projects efficiently and effectively. (vii) Develop PPP guidelines in line with the suggested draft Electricity Act 2005 and 2001 Hydropower Policy updates to guide relevant authorities in identification, due diligence review, bidding and contract awarding, and implementation of PPP projects. Such PPP guidelines should cover, but not be limited to, the following subjects: (a) clear delineation of responsibilities between the Government and private participants under each PPP structure, (b) bidding procedures and key criteria in selecting private participants, (c) revenue or return sharing and risk allocation mechanisms between the Government and private participants, (d) basis and factors to be considered for project finance, and (e) legal issues that must be considered when drawing up various kinds of agreements and other legal documents governing the relationship. (viii) Examine and recommend suitable institutional arrangements for designing, implementing, and managing the PPPs. (ix) Recommend a coordination mechanism and implementation process, with references to the PPP guidelines, for preparing, assessing, and implementing PPP projects. (x) Organize workshops, seminars, and consultation meetings to brief stakeholders and to receive their feedback on the policy update, PPP guidelines, and the proposed PPP models in collaboration with ADB, MOWR, DOED, and other relevant agencies. (xi) Develop draft competitive bidding guidelines and bidding documents that can be adopted by DOED. (xii) Prepare a report that summarizes findings on the issues above, and act as a resource for such seminars and workshops in Kathmandu. (xiii) Assist MOWR and DOED in preparing tender documents, evaluating tenders, and negotiating contracts for specific PSP projects.
2. Project Financing Expert (international, 6 person-months)
(i) Conduct diagnostic analysis of all the independent power producers, small power plants, and PPP projects that have been planned or are operating in the power sector since 1991; summarize their scope, financial structure, and issues; and evaluate successes or failures of project design, implementation, and operation. (ii) Analyze bottlenecks and constraints at the stage of financial structuring, contract awarding, construction, and operation. (iii) Summarize international best practices in financing the structuring of PPP projects in the power sector in both developing and developed countries, including mitigation of a variety related to PPP project and contract award methodologies to avoid unnecessary interventions and improve transparency and competition. Draw any lessons that can be applicable to Nepal. 3
(iv) Analyze how products and services of development partners, including ADB, can be utilized in financial structuring for potential PPP projects. (v) Provide PPP models, which are suitable for Nepal, in the power sector. Each PPP model should include, but not be limited to, the following items: (a) clear delineation of responsibilities between the Government and private participants under each PPP structure, (b) bidding procedures and key criteria in selecting private participants, (c) revenue or return sharing and risk allocation mechanisms between the Government and private participants, (d) basis and factors to be considered for project finance, and (e) legal issues that must be considered when drawing up various kinds of agreements and other legal documents governing the relationship. (vi) In consultation with the relevant power sector entities, prepare a time-bound road map to implement these models for specific projects. (vii) Assist MOWR and DOED in preparing tender documents, evaluating tenders, and negotiating contracts for specific PSP projects.
3. Institutional Development Expert (international, 3 person-months)
(i) Describe the role and responsibilities of the various sector institutions, their relationships, and the relationship to DOED and MOWR as the Executing Agency (EA). (ii) Undertake a skills and resource audit of the EA to identify areas that need to be strengthened to implement PSP policies, and design a capacity-building program identifying components such as on-the-job training for DOED staff and stakeholder workshops involving DOED and other institutions.
4. Power Sector Development Expert (national, 8 person-months)
(i) Assist the international power sector development expert in conducting all the relevant tasks stated previously, especially in collecting relevant data and information and consultations with various domestic stakeholders; and (ii) Assist the institutional development expert in interactions with institutions and design of training programs.
5. Legal Expert (national, 3 person-months)
(i) Draft changes to be incorporated in existing policies, laws, and regulations to facilitate introduction of PPP models. (ii) Review and analyze related laws and regulations, with a perspective on the state of crucial laws and their key elements such as those related to property rights, contractual rights, law of associations, and others. (iii) Analyze costs of doing business and transactions; the capacity and quality of the public institutions responsible for planning and implementing the policy, laws, and regulations; and perspective on state of crucial laws and their key elements such as those related to property rights, contractual rights, law of associations, and others.
4
(iv) Review draft bidding documents from a legal perspective.
6. Financial Expert (national, 4 person-months)
(i) Assist the international power sector development expert in conducting all the relevant tasks stated previously, especially in collecting relevant data and information and consultations with various domestic stakeholders. (ii) Assist the international project finance expert in conducting all the relevant tasks stated previously, especially in collecting relevant data and information and consultations with various domestic stakeholders. (iii) Review draft bidding documents from a legal perspective. (iv) Examine sector-related governance issues, and prepare recommendations. (v) Assist MOWR and DOED in preparing tender documents, evaluating tenders, and negotiating contracts for specific PSP projects.
7. Environmental Expert (national, 2 person-months)
(i) Assess national energy policies and programs to improve the environment. (ii) Assess the potential environmental impacts of strategic alternatives, including the effects of dam construction on the local populace, with a special emphasis on population displacement. (iii) Review environmental standards applicable to the energy sector, and assess actual compliance and steps taken to enhance compliance. (iv) Outline a methodology for undertaking strategic environmental assessment of energy sector programs that would facilitate (a) meaningful participation of environmental authorities, nongovernment organizations, and other stakeholders in the preparation of the strategic environmental assessment; (b) identification of potential conflicts among the groups; and (c) systematic efforts to resolve potential environment conflicts relating to the strategic alternatives.
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Appendix 2: Procedures for Licensing
Final Report January 2011
PPA with bidder Negotiation Licence Award for Construction for licence Application PDA with bidder Negotiation EIA Review Review and approval and approval Award of construction Technical MLRM, and financial design studies Geology, Army Field activities Dpmt of Hydrology, & ToR EIA scoping with bidder Desk study Coordination Due diligence Award for Generation Survey Licence Project BOOT Selection negotiated for licence Application Large) to NEA Project Desk study awarded GON project (Multi-purpose Legal preparation HPP System Planning Inventory & Ranking Generation Survey Licence
Local MoEN/ Other govern DOED NEA MoEnvt GON ment Project developer PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Appendix 3: Procedures for Environmental and Social Impact Assessment
Final Report January 2011
EIA Preparation EIA Study
Review & comment on scoping/ToR documents reject accept
Review & comment on Forward letter scoping/ToR documents of approval to Developer
DOED MoEN reject accept
Min. of Dept. of DDC, VDCs, Forest and Soil Archeology, NGO, Home Min. Conservation VDC, NGO
Forest Patch Land required; Clear Fell (>5ha) Resettlement and Cultural Other GON compensation Heritage Protected Areas needed (Land Acq. Act, Affected Affected Elec. Act, HDP - 2001)
Propose Receive EIA scoping Scoping/ToR Begin EIA study and ToR approval for EIA EIA study Project Developer Award for Generation Survey Licence Project Developer Other DOED MoEN GON umte oDOED to submitted ic mid-2010 since reject I study EIA Review I umsinadapproval and submission EIA 5copies 15 accept eoemid-2010 Before reject Review niainfrcomments for invitation accept Etra Receivers), (External 0days 30 eiwCommittee Review reject meeting) Review, accept 0+6 days 60 + 30 on.Approval MoEnv. on Approval MoEnv forwarded on.Approval MoEnv. forwarded on.Approval MoEnv. forwarded plcto for Application Construction I study EIA Approval Licence PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Appendix 4: List of recent / on-going development by Independent Power Producers
Final Report January 2011
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Note: The following lists exclude projects that have been allocated for “Public” development by NEA.
1. Existing IPP projects
At present, the Integrated Nepal Power System (INPS) has a total of about 635 MW of hydropower installed capacity. Most are owned and operated by NEA, including 92 MW of seasonal storage plant cascaded between Kulekhani I and Kulekhani II. The rest is from run- of-river schemes including 144 MW Kali Gandaki A, 20 MW Chilime and 70 MW Middle Marsyangdi.
Pursuant to the 1992 Hydropower Development Policy, 19 private hydro projects have been developed and are now operational including pioneering IPPs Khimti-1 (60MW). Total IPP generation in the INPS accounts for 162 MW.
The following table provides some details about the main IPPs (>10 MW) completed in Nepal since the promulgation of the first Hydropower Development Policy in 1992.
Project name Owner Operator Status Comments and size Himal Power Norway (17% BPC, rest bilateral involvement in BOOT financing 1 60 MW Khimti-1 with Statkraft, ABB Kraft AS, PPA with NEA and Kvaerner Tamakoshi Energy AS) river basin Bhotekoshi Power (Himal 36 MW Upper BOT Multilateral involvement in 2 International Bhote Koshi financing Energy, IFC, PPA with NEA MWH) Chilime First hydropower plant Hydropower Co BOO built mobilizing solely 3 20 MW Chilime (51% NEA, rest PPA with NEA national financial with Public ) resources in Nepal Shangri-la Energy, BPC (70% through BPC is among Shangri-la the most successful 4 12 MW Jhimruk Energy, rest with PPA with NEA Nepali developer (also GON affiliates owns hydro consultant and Public) firm and engineering firm Nepal Hydro Electric)
Final Report August 2010 i PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
2. Most advanced Domestic IPP and NEA-sponsored Projects
As of April 2010, DOED had issued 45 Generation Licenses for construction and operation of power plants in Nepal (mostly hydropower) totaling 758 MW. The status of projects holding Generation Licenses is as follows:
Project in operation: 28 totaling 617 MW (including projects listed in section 1)
Project under construction: 6 totaling 54 MW
Project in pre-construction stage: 6 totaling 38 MW
Project having permitting and/or financial difficulties: 5 totaling 49 MW
In addition, the following three projects are currently under construction or in advanced development stage (PPA signed):
14 MW Kulekhani-III (storage): This is the only storage project that is under construction in Nepal at the time of this report. It is owned and financed entirely by NEA.
456 MW Upper Tamakoshi (storage): This project is by far the most advanced hydropower undertaking in Nepal at the moment. It is 51% owned by NEA and the rest is with public or quasi public domestic financial institutions. As mentioned earlier in the report, its financing – through well advanced – is controversial, it was reported that although the project has estimated costs at 35 Billion, it was reported that actual costs could be in excess of NRs 50 billion. GON has de facto guaranteed contingent capital of NRs. 12 Billion
30 MW Kabeli-A (some storage ability): This project was won by a consortium composed of BPC and Khudi Hydropower from Nepal, SCP Hydro International from Canada, and Asia Pacific Power Tech from China following a bid organized by DOED with World Bank support. The project suffered from initial hiccups due to DOED utilizing a tariff-based bidding without prior consultation with NEA. It is currently under detailed feasibility and design phase. World Bank’s Power Development Fund has committed to contribute 40% of the funding with soft loan.
Each of these projects will need to receive Generation Licenses from DOED.
Final Report August 2010 ii PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
3. Proposed IPP projects for export to India
At the regional level, large cross-border and export-oriented projects have an important long- term role to play in supplying renewable energy to the region, and to allow Nepal’s growth through a sound management of its potential hydropower export revenue.
In 1983, India and Nepal had agreed to execute three major multipurpose hydro projects namely Karnali (3,600 MW), Pancheshwar (6,480 MW) and West Rapti. The ratification of the Integrated Mahakali Treaty meant a break through in the Pancheswar export oriented mega-project. The vast majority of the power from these projects will be exported to India. However, the details of the implementation of these projects and other issues have yet to be settled by the two countries.
Large privately built projects, and bilateral mega projects are still achievable. However it requires a closer and critical assessment of current conditions and ground realities in order to develop a thoughtful strategy and roadmap on a case by case basis.
The table below provides a status update for a shortlist of medium size projects that have been the object of specific attention by private developers in the recent years. These projects have been discussed at various levels of the government and among the private developer community as having higher development potential for a variety of reasons. However, this list is not based on a methodical master planning exercise that would have considered the many angles of each project and the optimization of the hydropower potential of the river basin in which they are located. As such, the list below is not exhaustive and does not intend to preclude other projects to be considered in priority, nor it is aimed to favour any project in particular.
Project name Developer Stage of development Comments
Advanced PPA negotiation with PTC India Stalled because of the overall political situation in Nepal, SMEC, Licence extended to 750MW West interference from the local 1 CNMICC, Dec10. Seti communities, etc IL&FS, GON Chinese majority SPPC has temporarily participation expected by stopped operation. GON (MOU signed early 2010)
Developers’ selection Stalled because of the overall followed International political situation in Nepal. Competitive Bidding Maoists have been obstructing access to site. 900MW Upper 73% GMR, ITD process. 2 Karnali 27% GON MOU with GON. Lack of prior master planning PPA discussion with of the Karnali river basin is India. being criticized (such as failure to consider irrigation potential, etc)
Final Report August 2010 iii PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Project name Developer Stage of development Comments
Stalled because of the overall PPA discussion with 600MW Upper Himtal Power political situation in Nepal 3 India Marsyangdi-2 (80% GMR) Maoists have been obstructing Preparation of DPR access to site. MOU with GON Stalled because of the overall 4 402MW Arun-3 Sutlej Vidut PPA discussion with political situation in Nepal India 880MW PPA discussion with Stalled because of the overall 5 SN Power Tamakoshi-III India political situation in Nepal MOE has given greenlight to develop the project as a PPP 600MW Budhi NEA Discussion with potential 5 but both bidding attempts in Gandhaki developers 2007 and 08 have failed.
The above projects are all in various stage of development, but all are stalled because of the overall political situation in Nepal, mismanagement of stakeholders’ relation and other issues that prevent these projects to be financed. The case of West Seti project, which after more than 12 years of development, decided in early 2010 to suspend its operation although it could successfully progress the negotiation of a PPA with India, is of particular concern.
Final Report August 2010 iv PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Appendix 5: Bidding Guidelines
Final Report January 2011
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Bidding Guidelines for HPP in Nepal ADB TA 4997-NEP “Promoting Private Sector Participation in the Power Sector” January 2011
Table of Content:
1 PREAMBLE AND BIDDING GUIDELINES OBJECTIVE ...... 3
2 INTRODUCTION...... 5 2.1 GENERAL ...... 5 2.2 CONTRACT TYPE, PROJECT SIZE AND PURPOSE ...... 6 2.3 RECOMMENDATIONS FOR THE CREATION OF A JOINT COMMITTEE FOR PROJECT SELECTION AND PREPARATION, AND BID EVALUATION...... 7
3 DESCRIPTION OF THE BIDDING PROCESS ...... 8 3.1 PROJECT AND CONTRACT PREPARATION ...... 8 3.2 NOTIFICATION AND ADVERTISING ...... 10 3.3 PREQUALIFICATION OF BIDDERS ...... 11 3.4 TWO-STAGE BIDDING...... 12 3.5 ALTERNATIVE ONE-STAGE BIDDING FOR EPC CONTRACTS (SMALLER PROJECTS)...... 14 3.6 EVALUATION CRITERIA ...... 15 3.7 TIME FOR PREPARATION OF BIDS ...... 17 3.8 BID SUBMISSION ...... 17
4 BIDDING DOCUMENTS...... 18 4.1 GENERAL ...... 18 4.2 VALIDITY OF BIDS AND BID SECURITY ...... 19 4.3 LANGUAGE ...... 20 4.4 CLARITY OF BIDDING DOCUMENTS...... 20 4.5 CURRENCY OF BID AND CONVERSION FOR BID COMPARISON ...... 21 4.6 CONDITIONS OF CONTRACT ...... 21 4.7 DEVELOPMENT BOND ...... 22 4.8 LIQUIDATED DAMAGES AND BONUS CLAUSES ...... 23 4.9 FORCE MAJEURE ...... 23 4.10 APPLICABLE LAW AND SETTLEMENT OF DISPUTES ...... 23
5 BID OPENING, EVALUATION AND AWARD OF CONTRACT...... 24 5.1 TECHNICAL BID OPENING PROCEDURES...... 24 5.2 CLARIFICATIONS OR ALTERATIONS OF BIDS...... 25 5.3 FINANCIAL BID OPENING PROCEDURES ...... 25 5.4 CONFIDENTIALITY ...... 25
Final Report January 2011 1
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
5.5 EXAMINATION OF BIDS...... 26 5.6 EVALUATION AND COMPARISON OF BIDS ...... 26 5.7 AWARD OF CONTRACT...... 27 5.8 EXTENSION OF VALIDITY OF BIDS...... 28 5.9 PUBLICATION OF THE AWARD OF CONTRACT ...... 28 5.10 REJECTION OF ALL BIDS ...... 28 5.11 DEBRIEFING ...... 29
APPENDIX: Template Request for proposal / Invitation to Bid
Reference documents: 1 – Model Project Development Agreement, April 2010, Department of Electricity Development, Ministry of Energy, Government of Nepal. 2 – Request for proposal for the Development of Solu Hydroelectric Project included in Package A, August 2009, DOED/MOE/GON. 3 – Section 3.4 - Bidding guidelines from the Draft Final Report on TA-4997-NEP, August 2010. 4 – Procurement guidelines, April 2010, Asian Development Bank 5 – Concessions for infrastructure – A guide to their design and award, World Bank Technical Paper n°399, 1998
Final Report January 2011 2
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
1 Preamble and bidding guidelines objective
a) The purpose of the present Guidelines is to help DOED GON to identify and select the most relevant private partners to develop some of Nepal hydropower potential on a BOOT basis. The Guidelines are meant to be a stand-alone document, however the reader is invited to consult the Section 3.4 - Bidding procedures of Final Report on TA-4997-NEP (Nov 2010) for additional recommendations and explanations. These guidelines are also meant to be adaptive, whereas GON can initially use a competitive process to solicit proposals in response to broad project specifications and then negotiate directly with one or more developers. In this manner, competition is used to narrow the number of potential developers, and direct negotiations may be used to work out detailed terms and conditions of the contract. b) These guidelines have been designed to comply with ADB’s Procurement Guidelines below (April 2010), subparagraph (a).
------
Procurement under BOO/BOT/BOOT, Concessions and Similar Private Sector Arrangements
3.13 In the case of loans made by ADB to the private sector without government guarantee, ADB does not insist on ICB procedures, but will request borrowers to satisfy ADB that procurement procedures have been applied in a transparent manner, preferably through competitive bidding procedures, and that the goods and works procured are from eligible member countries and are suitable for the project. Where ADB is participating in financing a BOO/BOT/BOOT or similar type of project, either of the following procurement procedures shall be used:
(a) The project sponsor for a BOO/BOT/BOOT or similar type of project shall be selected in a transparent manner, preferably through competitive bidding procedures acceptable to ADB, which may include several stages in order to arrive at the optimal combination of criteria for the purpose of establishing the most economic
Final Report January 2011 3
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP) and efficient proposal, such as the performance specifications of the facility offered, the cost charged to the user or purchaser, and the period of the facility depreciation. The project sponsor selected in this manner shall then be free to procure the goods and works required for the facility from eligible member countries, using suitable procedures.
Or,
(b) If the project sponsor has not been selected in the manner set forth in subparagraph (a) above, the goods and works required for the facility and to be financed by ADB, shall be procured from eligible member countries in a transparent manner, through competitive bidding procedures acceptable to ADB.
------
Final Report January 2011 4
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
2 Introduction
2.1 General
The success of a hydropower project (HPP) concession depends equally on the project quality (i.e. project site specificities, robustness of E&S safeguards, appropriate risk sharing and clarity of commercial contracts), but also on designing an appropriate bidding method to award the concession for the project development to the right partner. In that regard, the main issues include: • Preparing the project to draw sufficient interest from the market • Structuring and evaluating bids • Completing the project development with a preferred bidder
The bidding process itself shall involve the following elements: • Public notification of GON’s intent to award a concession for a new HPP through a request for proposal process • Preparation of information memoranda, bidding documents, draft contracts and other project information for distribution to potential bidders • Proposals preparation by bidders
Final Report January 2011 5
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP) • Proposals submission, evaluation and clarification, selection and negotiation with a preferred bidder • Execution of the contract
2.2 Contract type, project size and purpose
Essentially, the competitive bidding is there for DOED to identify and commit the most experienced and relevant private companies as developers and equity investors in some carefully selected projects in the framework of a Project Development Agreement (PDA). On their side, private developers bid to obtain the right to develop HPP alongside DOED in the framework of the PDA, and to establish a special purpose Project Company to own, finance, construct, own and operate the project on a BOOT basis. However, such competitive approach is meaningful only if a thorough project preparation is made prior to the bidding process. Depending on the project size and purpose, the level of project preparation by GON may vary and, as a result, the criteria for developer selection would be different. For the purpose of defining the most appropriate bidding methodology and selection criteria on a project by project basis, projects can be categorized as per their size and purpose as follow: • Small projects for domestic power generation (<50 MW): PPA with NEA may be bankable, and therefore such draft PPA should be disclosed in the tender documentation as an annex to the PDA • Medium Domestic Projects (50-300 MW): PPA with NEA may not be bankable and alternative offtake mechanism may have to be identified prior and/or through the bidding process • Large Export Projects: Essentially, a PPA with a foreign offtaker such as an Indian utility will be sought
Final Report January 2011 6
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
2.3 Recommendations for the creation of a Joint Committee for project selection and preparation, and bid evaluation
At present, DOED is the authorized body delegated by MOEn to establish bidding standards, bid documents, solicitation, evaluation and selection of the bidders for the offered HPP in Nepal. It is nevertheless critical that DOED and NEA coordinate their effort to ensure that: • Project for which bids are being launched are selected on a priority basis, taking into account the suitability of the proposed sites, access to the INPS and the distance from the main load centres (including abroad). In general, prospective hydropower sites should be identified and fully assessed by such committee considering a variety of national priority criteria before seeking bids from prospective developers.
• The evaluation of technical and commercial bids is made by a dedicated committee with the required competency to properly balance the pros and cons of each proposal. Essentially, such committee should be composed of DOED and NEA members, so that issues that are in the jurisdiction of NEA can be considered, including access to the INPS, electricity tariff and PPA consideration when projects are proposed to generate electricity for domestic use. In case where projects are also proposed for irrigation purposes, the participation of the Ministry of Irrigation is advisable for coordination purposes.
Final Report January 2011 7
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
3 Description of the bidding process
3.1 Project and contract preparation
In general, the better the quality and accuracy of information disclosed on a particular project and proposed contract, the more credible DOED will be and the more successful it will be in receiving quality proposals.
Project technical and E&S safeguard aspects In order for DOED to receive meaningful proposals, bidders have to be made aware of the project status and context. If there are uncertainties in the framework, these have to be flagged. Essentially, developers are concerned with every possible issue that can create undefined extra cost on the project. In addition to the technical feasibility study defining the project size and operating options, some essential matters that can be of concern by bidders include:
Final Report January 2011 8
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP) • Geology and hydrology • Interconnection issues and plans • Access issues and plans • Environmental and R&R issues and plans
Project contractual aspects While the technical preparation shall allow for the identification and definition of all project internal and external components and issues, draft contract or terms sheet shall be prepared to explain the expected roles and responsibilities of each party in a fair and balanced manner. Essentially, bidders will be concerned whenever project related costs are perceived as not being capped. For instance, where costs may justifiably escalate beyond initial estimates or time delays are encountered for reason outside developers’ control, these should be allowed as a “pass-through”, whereas GON would be responsible for cost in excess of what had been earlier disclosed to bidders. The PDA is a critical document that defines the roles and responsibilities of both the GON and the Special Purpose Project Company to be established and managed by the winning bidder. Among other information, the PDA shall clearly define the scope of work and legal obligations of each party. The PDA shall clearly define the taxation and royalty regime, while clarifying that such regime will prevail on any future regulation, so that the bidders are able to confidently construct their preliminary project financial model and make optimum financial proposals accordingly. As the case may be (essentially for small domestic projects), PPA should be included as annex to the PDA. The PPA negotiating process should be fully transparent and NEA’s guidelines should be published to better inform potential developers. Draft contracts proposed in the bid package (PDA and PPA essentially) shall be endorsed by all relevant entities within GON. Pre-bid consultations with potential bidders Prior to launching specific project tender, DOED should hold preliminary, informal discussion with interested bidders on project offering, and get their views on preparing required documentations, information and data potentially useful in bidding. This will help in taking developer concerns in consideration, in formulating the tender documents, and ensure better bids at a later stage.
Final Report January 2011 9
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
3.2 Notification and advertising
Timely notification of bidding opportunities is essential in competitive bidding. For the purpose of attracting a comprehensive panel of relevant bidders, DOED shall first issue a general procurement notice in relation the project. It may request international development agencies to assist in the process, should the project be proposed to be funded using financial facilities from such agencies. Depending on project size and purpose, development fundamentals are different and the contractual roles and responsibilities of the parties can also change radically. As such, HPP projects are likely to attract different sort of developers and investors depending on their size, offtake objective and timing of their development. Prior to launching specific project tender, DOED should establish an advanced list of expected bidders and hold preliminary discussion with potentially interested parties. This process may help in pre-tender preparation of projects. Moreover, potentially interested bidders may be invited to register for future solicitation of projects. Criteria for registration should be broad, generally requiring experience, financial strength, and prior performance in infrastructure, preferably water resources projects. Criteria should be announced in soliciting a permanently open pre-bid Expression of Interest (EOI) on DOED’s website. The list of prequalified firms should be updated periodically and the shortlist disclosed publicly on DOED website. In addition to a targeted distribution to relevant parties that had previously expressed interest in the process, Invitation to Bid (ITB) shall be announced as specific procurement notices, so that any firm may then bid independently or in joint venture, either with domestic firms and/or with foreign firm. The following communication channels shall be used: • As an advertisement in national newspapers of general circulation in Nepal of which at least one in English language • In the Official Gazette of GON • Posted on the DOED website • In international hydropower journals and specialized websites in English
Final Report January 2011 10
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
3.3 Prequalification of Bidders
Typically prior to launching the tender process DOED should issue a notice to potential developers requesting to indicate their interest in the offered project. This is particularly recommended for significant size projects over 50 MW; for smaller projects presenting no specific difficulties, prequalification stage may be skipped. Brief but relevant and accurate basic information should be included in the requesting document indicating the purpose, scope, size, brief technical and economic parameters of the specific project; expected initiation, construction and COD schedule etc. Timeframes of the various stages of the tender process should be announced in this EOI phase. EOI also must include basic eligibility criterion: technical, financial and proven prior experience in the project development and operations of hydro or other infrastructure project. By soliciting a timely Request for EOI and careful definition of eligibility criteria, including technical and project development experience, DOED should be able to develop a sound list of interested respondents well ahead of the project RFP tendering. This ensures competent participants to proceed further in tender process. The prequalification stage will also allow, for larger projects, bidders to group themselves into consortia, each member offering strength in different project area. At the end of the prequalification stage, a maximum of 8 firms or consortia should be shortlisted. The shortlist must be communicated to all applicants.
Final Report January 2011 11
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
3.4 Two-stage bidding
The development of Nepal HPP on a BOOT basis involves the negotiation of complex projects. When awarding a concession for an HPP, DOED needs to ensure that the winning consortium has the technical and financial capacity to develop, construct and operate the project successfully during the entire term of the concession. DOED shall not award such concession to an entity that offers the best deal on paper but later fails to deliver what was promised. One way to reduce this problem is to design the concession contract so that it is attractive only to operators who are confident that they can operate the business successfully. This can be done by defining the signing of the Project Development Agreement, rather than the award of a Survey License, as the defining moment at which a successful bidder is announced. By doing so, DOED can also impose a penalty mechanism for poor performance such as a failure to develop the project on time, by requiring the winning bidder to post a development bond sufficient to pay the penalties. If poor performance can be objectively observed, and the winning bidder believe that it will indeed forfeit its bond in case it fails to meet the PDA's performance standards, this system should deter those who lack the requisite technical and financial capacity from bidding for the concession. This concept is sometimes referred to as the Performance Security, committing the winning bidder to a performance – via the issuance of a development bond – i.e., to develop the project up to financial close, or commercial operation as the case may be. It applies both to one- stage and two-stage bidding processes. In practice, however, it may be difficult to enforce penalties specified under the contract, and the development bond may not always prevent bidding by overconfident operator. The two-stage bidding process is there to shortlist prospective bidders during a first stage technical bid. This process allows DOED to screen out unsuitable firms before financial proposals are made by shortlisted bidders. Each Bidder, either by itself or as a partner of a Joint Venture, may submit no more than one Bid.
First stage (technical proposal) During the first stage, unpriced technical proposals are invited. These shall express bidders’ credentials, a proposed development methodology and shall reflect bidders’ understanding of the project and challenges ahead. Bidders still require an adequate package of information about the project in order to produce relevant technical proposals. A non exhaustive list is proposed in section 4.1 below. During this first stage, bidders shall be able to request clarifications via the sending of questions and the compilation of responses by DOED. DOED shall offer the opportunity to bidders to familiarize themselves with local and site condition, including access. To that end, DOED shall organise the required logistic for bidders’ representative to visit the
Final Report January 2011 12
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP) site and ask questions to GON in the meantime. DOED shall prepare power point presentation describing the project purpose and context with a view to comfort the bidders regarding the project feasibility. Environmental and R&R issues and proposed plans shall be carefully prepared and described in order for GON to demonstrate that it fully comprehends and is in control of the matter. Bidding documents shall be amended by DOED to encompass the clarifications provided to bidders, and reasonable extension of time provided accordingly to bidders for remittance of their proposal. Likewise, DOED may reserve the right to request clarifications on technical proposals proposed by bidders once such proposals are remitted.
Second stage (financial proposal) This first stage of technical proposals is to be followed by the issuance of amended bidding documents to those bidders who have successfully passed the technical evaluation. The bidders shall be allowed to amend their technical proposals in order to ensure conformance to the same revised technical terms as amended by DOED. Bidders will then be able to fine tune their financial model and prepare their financial proposal accordingly.
Final Report January 2011 13
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
3.5 Alternative one-stage bidding for EPC contracts (smaller projects)
In certain cases, mostly the smaller projects that have already been allocated a PPA with NEA, a simplified procedure may be used. It may be possible for DOED to launch invitation for tenders for the project EPC contract on behalf of the Project Company to be created for the project. The main terms would be: • EPC Contractor to be selected by the Project Company on the basis of its experience and the technical and commercial terms of its bid • EPC Contractor to proposed a Contract Price in its bid • Project Company to conclude the EPC turnkey Contract with the EPC Contractor • EPC Contract to be established between Project Company and EPC Contractor • Bidder to propose financing solution for the Project to be channelled via the Project Company on a debt-equity project finance basis Such tendering option has the merit of setting up clear and relatively straight-forward selection criteria for the financial component of the bid (i.e. the proposed Contract price). However, it would require that DOED prepare the project in even greater scale so that the bidding document also include adequate technical information including conceptual design and some performance specifications. In cases where DOED could reasonably act on behalf of the project company to be created by the winning bidder for the procurement of turnkey EPC contract, a two- envelope procedures with single-stage bidding, wherein bids with separate envelopes for technical and financial proposals are submitted simultaneously, may be used. In such situation, only the financial proposals of bidders with responsive technical proposals are opened for evaluation and comparison. The financial proposals of bidders whose technical proposals are not responsive shall be returned unopened.
Final Report January 2011 14
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
3.6 Evaluation criteria
A critical aspect of tender preparation is the definition of evaluation and selection criteria. When defining such criteria, DOED shall adequately ponder between quantitative or qualitative methods for evaluating potential bidders so that skills and offered methodology match the project specificities and requirement.
1st stage: Technical Evaluation
Depending on the type of project proposed, DOED should seek for a variety of bidders with skills and experience adapted to the particular project category, as per these suggested above. Essentially, the pondering of evaluation criteria should be made from the following list: Reputation and credibility in domestic and/or international power market Relevance and credibility of proposed power offtake option (in the case of large domestic or export projects) Relevance of technical options and improvements to the basic design that may be proposed by the bidder Experience in stakeholders’ relations (this could be critical to assure that affected population views and consideration are incorporated in project design, and R&R measures are successful) Quality of the letter of support from credible financial institution Credentials in managing large civil work projects • Equity investment capability • Financial strength and credit rating • Other criteria as per project specificities The degree of experience and capacity required of bidders shall depend in part on the size and attractiveness of the market to be served (i.e. domestic or export) and the complexity of the project. Smaller projects may set less rigorous criteria in order to ensure a sufficient number of bidders and real competition in the process. 2nd stage: Financial Evaluation There are many different options for structuring financial proposals. Depending on the type of HPP project, some of the more common criteria on which to compare bidders’ financial proposal may include: • The highest price, in upfront “goodwill” fee to be paid to GON at the time of signing the contract or at the project financial close (for funding a portion of GON equity in the project, as the case may be) • The lowest tariff to be charged by the Project Company to NEA • The highest tariff to be charged by the Project company to a foreign utility
Final Report January 2011 15
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP) • The lowest EPC cost to the Project Company for constructing the project on a turnkey basis. In the case DOED would launch EPC bid for turnkey contract on behalf of the project company to be created, the bidder shall be required to quote the price of the installed plant at site, including all costs for supply of equipment, transportation and insurance, installation and commissioning, as well as associated works and all other services included in the scope of contract such as design, maintenance and operation. Unless otherwise specified in the bidding documents, the turnkey price shall include all duties, taxes, and other levies. • Other relevant criteria as per the project specificities
DOED may also opt for a combination of the above.
Final Report January 2011 16
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
3.7 Time for preparation of bids
The time allowed for the preparation and submission of bids shall be determined with due consideration of the particular circumstances of the project and the scope of the contract. Because of the complexity and multi-angle development consideration of HPP project in Nepal, DOED shall allow for a minimum of eight weeks for bidders to submit their technical bid from the date of the invitation to bid or the date of availability of all bidding documents, whichever is later, to enable prospective bidders to conduct investigations and request clarifications before submitting their bids.
3.8 Bid submission
Bidders shall be permitted to submit bids by mail or by hand. DOED may also use electronic systems permitting bidders to submit bids by electronic means, provided the system is secure, maintains the confidentiality and integrity of bids submitted, and employs acceptable management procedures to establish date and time of submission, and facilitate modification and withdrawal. Where electronic procurement is used, bidders shall continue to have the option to submit their bids in print form. The deadline and place for receipt of bids shall be specified in the invitation for bids and the bidding documents.
Final Report January 2011 17
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
4 Bidding documents
4.1 General
As discussed above, it is essential that the bidding documents provide all the information necessary for bidders to prepare responsive bids. While the details and complexity of these documents vary depending upon the kind of project to be developed, its size and the type of offtake agreement proposed, they shall normally include the following: • Project Information Memorandum describing the project salient features, location and purpose (domestic power only, hybrid or export, multipurpose, etc.), the type of contract to be entered into, and summarizing the proposed contract provisions • Updated feasibility study including conceptual design • Environmental Impact Assessment and R&R policy and plans • Draft Project Development Agreement • Draft Power Purchase Agreement (as the case may be) • Request for Proposal in the form of an Invitation to Bid (ITB) summarising the bid governance, the amounts of bid bond and subsequent project development bonds, and describing the project development counterpart agencies within GON, including coordination mechanisms • Bidding Forms, Proforma bid bond and performance bonds • Relevant appendices such as technical specifications as the case may be
Final Report January 2011 18
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP) An electronic system may be used to distribute bidding documents. The electronic system shall be secure to avoid modifications to the bidding documents and shall not restrict the access of bidders to the bidding documents. Bidding documents must be provided in print form to bidders who request them. A master copy of electronic documents shall be retained in print form, suitably authenticated by signature, stamp or other instrument.
4.2 Validity of bids and bid security
Bidders shall be required to submit bids valid for a period specified in the bidding documents which shall be sufficient to enable DOED to complete the comparison and evaluation of bids, and obtain all the necessary approvals so that the contract can be awarded within that period. In order to ensure that bidders will remain committed to the bidding process until either the rejection of their bid or the award to the contract, DOED may require a bid security. The bid security can be in the form of a certified check, a letter of credit or a bank guarantee (otherwise called bid bond) from a reputable bank. When used, the bid security shall be in the amount and form specified in the bidding documents and shall remain valid for a period of four weeks beyond the validity period for the bids, in order to provide reasonable time for DOED to act if the security is to be called.
Bid security shall be released to bidders being rejected at the Technical Stage when such announcement is made, in accordance with the schedule proposed in the bidding documents. Bid security shall be released to unsuccessful shortlisted bidders once the Project Development Agreement has been signed with the winning bidder. In place of a bid security, DOED may require bidders to sign a declaration accepting that if they withdraw or modify their bids during the period of validity, or they are awarded the contract and they fail to sign the contract or to submit a performance security before the deadline defined in the bidding documents, the bidder will be suspended for a period of time from being eligible for bidding in any contract in Nepal. This option is recommended in the case where DOED would launch EPC tenders for smaller projects on behalf of project companies to be created.
Final Report January 2011 19
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
4.3 Language
In order for projects to be easily assessed by international bidders, bidding and project document, and any other relevant documents including advertisements, shall be prepared in English. Where Nepalese is also used for some or all of the bidding documents, an English version shall also be prepared and prevail.
4.4 Clarity of bidding documents
Bidding documents shall be so worded as to permit and encourage international competition and shall clearly describe the project purpose, size and anticipated issues, while describing precisely the respective role and responsibilities of both GON and the developer, as well as any other pertinent terms and conditions. The bidding documents shall specify any factors which will be taken into account in evaluating bids, and how such factors will be quantified or otherwise evaluated. All prospective bidders shall be provided the same information, and shall be assured of equal opportunities to obtain additional information on a timely basis. DOED shall provide access to project site for a visit by prospective bidders, preferably as a group. A pre-bid conference may be arranged whereby potential bidders may meet with DOED and other relevant GON representatives to seek clarifications. Minutes of the conference shall be provided to all prospective bidders. Any additional information, clarification, correction of errors, or modifications of bidding documents shall be sent to each recipient of the original bidding documents in sufficient time before the deadline for receipt of bids to enable bidders to take appropriate actions. If necessary, the deadline for proposal submission shall be extended.
Final Report January 2011 20
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
4.5 Currency of bid and conversion for bid comparison
Bidding documents shall state that the bidder may express the bid price in any currency. If the bidder wishes to express the bid price as a sum of amounts in different foreign currencies, they may do so, provided the price includes no more than three foreign currencies. Furthermore, DOED may require bidders to state the portion of the bid price representing local costs incurred in Nepalese rupee. In the case of small projects for which DOED would issue a separate EPC tender on behalf of the project company to be created, DOED may require bidders to state the bid price entirely in the local currency, along with the requirements for payments in up to three foreign currencies of their choice for expected inputs from outside Nepal, expressed as a percentage of the bid price, together with the exchange rates used in such calculations. The exchange rates to be used for payments shall be those specified by the bidder in the bid, so as to ensure that the value of the foreign currency portions of the bid is maintained without any loss or gain. The bid price is the sum of all payments in various currencies required by the bidder. For the purpose of comparing prices, bid prices shall be converted to a single currency selected by DOED (Nepalese rupee or fully convertible foreign currency) and stated in the bidding documents. DOED shall make this conversion by using the selling (exchange) rates for those currencies quoted by an official source (such as the central bank) or by a commercial bank or by an internationally circulated newspaper for similar transactions on a date selected in advance, such source and date to be specified in the bidding documents, provided that the date shall not be earlier than four weeks prior to the deadline for the receipt of bids, nor later than the original date for the expiry of the period of bid validity.
4.6 Conditions of contract
The PDA shall clearly define the scope of work to be performed, the goods to be supplied (in the case of a separate EPC tender for the smaller projects), the rights and obligations of GON and of the project company, and the functions and authority of consultants employed by DOED as the case may be, for the negotiation, supervision and administration of the PDA on behalf of DOED. In addition to the general conditions of contract, any special conditions particular to the project economic, social, environmental and technical features shall be included. The conditions of contract shall provide a balanced allocation of risks and liabilities in line with such conditions.
Final Report January 2011 21
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP) 4.7 Development bond
As briefly explained under section 3.4 above, bidding documents shall require that upon the signing of the PDA, the winning party shall issue a development bond commensurate with the size of the project and its bid bond shall become void. Such security shall be issued in an amount sufficient to protect DOED in case of breach of contract by the developer. This security shall be provided in an appropriate form and amount, as specified by DOED in the bidding document. The format of the development bond shall be in the form of a bank guarantee, or cash deposit, in accordance with the standard bidding documents, and shall be issued by a reputable bank or financial institution selected by the bidder. If the institution issuing the security is located outside Nepal, it shall have a correspondent financial institution located in Nepal to make it enforceable. The amount of the development bond may vary, depending on the type of security furnished and on the nature and magnitude of the project. Typically, the development bond shall be returned to the developer upon achievement of the project financial close, at which point superseding performance securities are being issued. As an alternative to large bid bond (specifically in the case of smaller projects), a lock-in period can be instated, forbidding project shareholders to sell shares before financial close or commercial operation. In the case of a separate tender for EPC contract on behalf of the project company, DOED shall require that the performance security extend sufficiently beyond the date of completion of the works to cover the defects liability or maintenance period up to final acceptance the project company. In addition, retention money to ensure compliance by the contractor of its warranty or maintenance obligations may be required in an amount not to exceed 10% of the payments. Such retention money will be withheld until the expiration of the warranty or maintenance period. After completion of the works, but before the expiration of the warranty or maintenance period, the retention money may, at the option of the project company, be replaced with a suitable bank guarantee or other appropriate security.
Final Report January 2011 22
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
4.8 Liquidated damages and bonus clauses
In the case of a separate tender for EPC contract on behalf of the project company, provisions for liquidated damages or similar provisions in an appropriate amount shall be included in the conditions of contract when delays in the delivery of goods, completion of works or failure of the goods or works to meet performance requirements would result in extra cost, or loss of revenue or loss of other benefits to the project company. Provision may also be made for a bonus to be paid to suppliers or contractors for completion of works or delivery of goods ahead of the times specified in the contract when such earlier completion or delivery would be of benefit to the project company.
4.9 Force majeure
The conditions of contract shall stipulate that failure on the part of the parties to perform their obligations under the contract will not be considered a default if such failure is the result of an event of force majeure as defined in the conditions of contract.
4.10 Applicable law and settlement of disputes
The conditions of contract shall include provisions dealing with the applicable law and the forum for the settlement of disputes. International commercial arbitration has practical advantages over other methods for the settlement of disputes. In the case of a separate tender for EPC contract on behalf of the project company, the dispute settlement provision shall also include mechanisms such as dispute review boards or adjudicators, which are designed to permit a speedier dispute settlement.
Final Report January 2011 23
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
5 Bid opening, evaluation and award of contract
5.1 Technical bid opening procedures
Technical bids shall be open at the same time as the deadline for receipt of such bids. The opening time shall be announced, together with the place for bid opening, in the ITB and in any subsequent bid clarification notice in case an extension. DOED shall open all bids at the stipulated time and place. From there, the bid evaluation committee shall undertake the bid review and announce a shortlist of two or three bidders within the period stipulated in the ITB. Technical bids received after the time stipulated shall not be considered. When electronic bid submission is used, an online bid opening procedure may be employed.
Final Report January 2011 24
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
5.2 Clarifications or alterations of bids
After the deadline for receipt of technical bids, DOED may ask bidders for clarification needed to evaluate their bids but shall not ask or permit bidders to change the substance of their bids after the bid opening. Requests for clarification by DOED, and the bidders’ responses, shall be made in writing, in hard copy or by email.
5.3 Financial bid opening procedures
Financial bids by shortlisted bidders shall be open at the same as the deadline for receipt of such bids. The opening time shall be announced, together with the place for bid opening, in the ITB and in any subsequent bid clarification notice in case an extension. DOED shall open all financial bids at the stipulated time and place. Financial bids shall be opened in public, and bidders or their representatives shall be allowed to be present. The name of the bidder and total amount of each bid shall be read aloud and recorded when opened, and a copy of this record shall be promptly sent to all shortlisted bidders who submitted bids in time. Bids received after the time stipulated, as well as those not opened and read out at bid opening, shall not be considered.
5.4 Confidentiality
After the public opening of bids, information relating to the examination, clarification, and evaluation of bids and recommendations concerning shortlisting and awards shall not be disclosed to bidders or other persons not officially concerned with this process until the publication of contract award.
Final Report January 2011 25
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
5.5 Examination of bids
While reviewing the bids, DOED shall ascertain whether the bids (a) meet the eligibility requirements specified in the bidding documents (b) have been properly signed, (c) are accompanied by the required securities or required declaration signed, (d) are substantially responsive to the bidding documents, and (e) are otherwise generally in order. The bidder shall not be permitted to correct or withdraw material deviations or reservations once bids have been opened.
5.6 Evaluation and comparison of bids
The purpose of bid evaluation is to determine the technical and commercial value of each bid in a manner that permits a fair comparison. As discussed previously, only those bidders that have successfully passed the technical evaluation shall be invited to proceed with the financial stage bid. Then, the bid with the highest scores when pondering the financial criteria shall be selected as preferred bidder for award of the Survey Licence, and completion of the Project Development Agreement negotiation. For the sake of transparency and informed disclosure of results after the second stage and final assessment, DOED shall prepare a detailed report on the evaluation and comparison of bids setting forth the specific reasons on which the recommendation is based for the award.
Final Report January 2011 26
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
5.7 Award of contract
The signing of the PDA, rather the granting of a Survey Licence, shall mark the ultimate award. Nevertheless, DOED shall award the contract within the period of the validity of bids. A bidder shall not be required, as a condition of award, to undertake responsibilities for work not stipulated in the bidding documents or otherwise to modify the PDA as originally submitted, other than to finalize the draft to reflect the successful bidder’s proposal. DOED shall issue a Survey License and rights to the Site to the Project Company upon application and payment of a license fee as per the Electricity Act and Regulation along with the committed upfront fee, should the latter be used as selection criteria. The Project Company shall apply to DOED for a generation and transmission license for the Project within the validity period of the Survey License. DOED shall grant the Project License to the Project Company provided all requirements for such license are fulfilled, as defined in the PDA. Failure by the selected bidder either to sign the PDA, or to submit an application letter for the Survey License of the Project within thirty calendar days from the date of notice of bid award, shall allow DOED to forfeit the bid bond of the selected bidder and invite bidder with second most economically evaluated financial bid for negotiation. If the negotiation with second bidder also fails, DOED may, at its option, either invite the third bidder (if any) with the most economically evaluated financial bid for negotiations or decide to abandon the selection process and return the bid bonds to all bidders.
Final Report January 2011 27
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
5.8 Extension of validity of bids
DOED shall complete evaluation of bids and award of contract within the initial period of bid validity so that extensions are not necessary. An extension of bid validity, if justified by exceptional circumstances, shall be requested in writing from all bidders before the expiration date. The extension shall be for the minimum period required to complete the evaluation, obtain the necessary approvals, and award the contract. Whenever an extension of bid validity period is requested, bidders shall not be requested or be permitted to change the conditions of their bid. Bidders shall have the right to refuse to grant such an extension. If the bidding documents require a bid security, bidders may exercise their right to refuse to grant such an extension without forfeiting their bid bond, but those who are willing to extend the validity of their bid shall be required to provide a suitable extension of bid bond.
5.9 Publication of the award of contract
No later than the date of contract award, DOED shall publish the results in an English language newspaper or well-known and freely accessible website, including the name of each bidder who submitted a technical bid, name of shortlisted bidders, name of shortlisted bidders whose financial bids were rejected and the reasons for their rejection, and name of the winning bidder and the financial bid it offered, as well as the duration and summary scope of the contract awarded.
5.10 Rejection of all bids
Bidding documents shall provide that DOED may reject all bids. Rejection of all bids is justified when there is lack of effective competition, or bids are not substantially responsive. Lack of competition shall not be determined solely on the basis of the number of bidders. Even when only one bid is submitted, the bidding process may be considered valid, if the bid was satisfactorily advertised.
Final Report January 2011 28
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP) If all bids are rejected, DOED shall review the causes justifying the rejection and consider making revisions to the project information provided, scope and conditions of contract, or a combination of these, before inviting new bids. When all bids have been rejected, a rebidding may be called, and DOED shall request for new bids from all bidders that were supplied with previous bidding documents.
5.11 Debriefing
In the publication of contract award, DOED shall specify that any bidder wishing to ascertain the grounds on which its bid was not selected, should request an explanation from DOED. DOED shall promptly provide an explanation of why such bid was not selected, either in writing and/or in a debriefing meeting, at its discretion. The requesting bidder shall bear all the costs of attending such a debriefing.
Final Report January 2011 29
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP) APPENDIX: Pro-forma Request for Proposal / Invitation to Bid (Basic template for DOED to develop RFP on a project by project basis)
Government of Nepal - Ministry of Energy - DOED Request for Proposal for the Development of [SPECIFY NAME] HPP [SPECIFY DATE]
TABLE OF CONTENTS 1 Project description & Invitation for Proposal • Project description, size, purpose (domestic PPA, export, multipurpose, etc) and BOOT terms. Project offered for exclusive bidding to the bidders for development, financing, construction, ownership, operation and transfer to the government • Explanation of two-stage bidding purpose and process as per the bidding guidelines • Summary of evaluation criteria for each bidding stages • Cost of obtaining bid documents • Eligible bidders, single firm and/or consortium, local and/or foreign • Bid schedule • Confidentiality
2 Project financing • Project financing principle • GON participation • Royalties regime and source of funding for GON participation
3 Project documents & bidder due diligence • Describe level of information provided about the project • State the role of GON and plans for the development and construction of side infrastructure (such as access and transmission facilities) required for the project implementation • State the role of GON and plans in relation to environmental and R&R issues • Advise bidders to familiarize with project information and general context including laws and regulations in Nepal
4 Cost of preparing bids & liability of DOED • Costs of preparing bids shall be at the bidders’ expense, no refund to be expected from DOED.
Final Report January 2011 30
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP) 5 Communication & requests for clarifications protocol • Language to be used, notices and any communication procedures including addresses, etc
6 Instruction to bidders • Definition of terminology used • Pre-bid conference, site visit and procedure for clarifications requests
7 Amendment to RFP of bid documents • DOED right to modify RFP or bid document before bid submission deadline, and extension of deadline accordingly
8 Preparation of technical proposal • Content of technical proposal (bidders organisation, credentials, project development plan, bid bond, bank guarantee, etc) • Format of technical proposal • Procedure for submission of technical bid • Deadline and nonqualified bids
9 Technical bid opening and evaluation • Evaluation committee • Criteria for technical proposal evaluation • Technical bid opening procedures and examination • Clarifications or alterations of bids • Confidentiality • Evaluation and comparison of bids • Extension of validity of bids • Rejection of All Bids • Bid bond return to unsuccessful bidders
10 Preparation of financial proposal • Content of financial proposal • Criteria for financial proposal evaluation • Currency of bid and conversion for bid comparison • Format of financial proposal • Procedure for submission of financial bid
Final Report January 2011 31
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP) 11 Financial bid opening, evaluation, PDA negotiation and award of contract • Joint Committee for project selection and preparation, and bid evaluation • Financial bid opening procedures • Clarifications or alterations of bids • Evaluation and comparison of bids • Negotiation and award of contract • Publication of the award of contract • Rejection of All Bids • Debriefing
12 Condition of contract • GON roles and responsibility • Project Company roles and responsibility • Development Bond • Liquidated damages and bonus clauses • Force majeure • Applicable law and settlement of disputes
13 Representations, Warranties and Understanding
Attachments: Annex A – Bid Forms (Bid Letter, Bid Bond, Bank Guarantee, Technical Proposal, Financial Proposal) Annex B: Project Information Memorandum, Feasibility Study, EIA and R&R documents, etc Annex C: Project contractual information, Draft PDA, Draft PPA, Draft Project Company Registration Document, etc
Final Report January 2011 32
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Appendix 6: Summary of Seminars, Workshops and Trainings conducted during the TA
Final Report January 2011
PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
SUMMARY OF TRAINING, WORKSHOP AND SEMINARS
1. Promoting Private Sector Participation in Power Sector Inception Workshop moderated by Hasso Bhatia, Team Leader. Purpose of the workshop was to apprise the stakeholders of the TA scope, tasks and study approach; assess the current status of hydropower development in Nepal, identify main issues, information sources, major players in the HP sector. Workshop was successful in its purpose; there was lively debate between govt. and private stakeholders on principal barriers and their root causes. Participants made serious comments and provided many helpful suggestions on how to approach to resolve major issues. Attended by 42 invitees form hydropower-related government offices and major private sector stakeholders. February 10, 2009, Hotel Malla, Kathmandu, 9:30 am-1pm Cost: Rs. 38404.00
2. Electric Tariff Setting Training workshop conducted by Hasso Bhatia, TL; Presentation included basic elements of electric tariff setting, cost of service and tariff calculations, discussion of various tariff structures, calculating unbundled tariffs for generation, transmission and distribution, calc. system losses . Attended by 17 DOED staff. Monday, July 6, 2009, DOED Conference Hall, Kathmandu. Cost: Rs. 2660.00
3. Elements of Power Purchase Agreement for an Independent Power Producer Training workshop for DOED staff conducted by Hasso Bhatia, TL. Presentation discussed how to formulate a power purchase agreement (PPA), basic issues , technical and commercial issues , negotiating techniques in a PPA; also discussed current thinking on PPA vs. merchant power; interesting discussions followed the presentation Attended by 15 DOED staff. July 14 and 20, 2009, from 3-5 pm, DOED Conference Hall, Kathmandu; Cost: Rs. 4650.00
4. Promoting private Sector Participation in Hydropower Opportunities and Challenges (Project Study):
Final Report August 2010 i PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Full-day seminar for stakeholders in hydropower development, Key- note address by the Mr. S.P.Koirala, Secretary, Ministry of Water Resources (Now, Ministry of Energy) with a welcome address by Mr. S. Lacoul, DG, DOED and moderated by Hasso Bhatia, TL; Organized to share TA study major findings and recommendations with stakeholders in preparation of the Final Report. Presentations made by eight public and private stakeholders regarding their views, experiences and suggestions for accelerating the hydropower sector development, followed by discussions of Study findings and recommendations on critical issues and implementation going forward. In general participants concurred with the report findings and major recommendations. There was much concern whether the GON was ready to assume a proactive role, grant financial and other incentives, facilitate clearances etc. Some additional views and recommendations have been incorporated in the final Report based on seminar discussions. Participation by 60 persons. Wednesday, July 29, 2009 from 10: am -6pm, Radisson Hotel, Kathmandu Cost: Rs. 156080.00
5. Workshop on Legal Framework of PPP in Hydropower Projects Training workshop for DOED staff conducted by Murali Sharma, SOFRECO National Legal Expert. Presentation discussed current legal framework for hydropower development in Nepal and comparisons with India and Bhutan. Discussed inadequacies and ambiguities in the current framework, inaction on pending legislation,. Attended by 16 DOED staff. Tuesday, September 8, 2009 from 3 pm-5pm, DOED Conference Hall, Kathmandu. Cost: Rs. 3811.00
6. HPP Financing : Lessons learnt from 1080 MW Nam Theun 2 Hydropower Development in Laos Presentation to Ministry of Energy and DOED by Ludovic Delplanque, International PFExpert Presentation made at the request of MoEn/DOED to learn how to organize, financially structure and manage a large hydropower project for cross-border export and power trade in Asian setting, developed under public, private partnership mode. Many important project aspects, hurdles and mitigation steps leading to successful financial closure were discussed. Presentation is very useful in the context of Nepal’s own efforts to promote export oriented large projects. In particular presentation focused on social issues of land acquisition, local community resettlement and cooperative efforts of local, central and private partners. Attended by 20 senior level staff from Ministry of Energy and DOED. Thursday October 8, 2009 from 4-6 pm, Hotel Annapurna, Kathmandu.
Final Report August 2010 ii PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Cost: Rs. 19408.00
7. (I) Financing of Hydropower in Nepal Briefing for DOED staff conducted by Sunil Devkota, National FE. Brief presentation and discussions of opportunities available and limitations within the banks and financial institutions for financing hydropower projects in Nepal. Attended by 23 staff members from DOED Wednesday, October 14, 2009 from 2-4 pm, DOED Conference Hall, Kathmandu. Cost: Rs. 345.00
(II) Large Hydropower Project Financing Training workshop for DOED staff conducted by Ludovic Delplanque, International PFE. Discussed project financing for large hydropower development through Case study: Nam Theun 2 Project. Attended by 23 staff members from DOED Thursday, October 15, 2009, DOED Conference Hall, Kathmandu Cost: Rs. 3070.00
8. Project Finance Principles and Applications, and competitive Bidding guidelines in Nepal Training Workshop for DOED staff conducted by Hasso Bhatia, TL and Ludovic Delplanque, International PFE. Organized to discuss: (a) Project Finance Principles and Application to HPP in Nepal, (b) Bidding procedures and preparatory issues for Sharada Babai project. Attended by 23 staff members from DOED Wednesday, November 11, 2009, DOED Conference Hall, Kathmandu. Cost: Rs. 9882.00
9. Training on AutoCad and GIS Outsourced training in two courses for DOED staff conducted by Hi-Tech Academy, KTM. Organized to impart working knowledge in the use of Auto-CAD and GIS applications software. This course is an important addition to staff skills and will have direct use in hydropower project evaluation, surveys, and studying hydrology and design parameters. Attendance: 10 nominees from DOED for each class (total 20). September 9 to October 27, 2009, Hi-Tech Academy, Kathmandu Duration: 120 Hours (60 Hrs AutoCad and 60 Hrs GIS) 6 days a Week o Timing AutoCAD - 04:00 pm to 06:00 pm o GIS - 07:00 am to 09:00 am
Final Report August 2010 iii PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Cost: Rs. 337800
10. Training for DOED Personnel in Economic and Financial Analysis of Hydropower Projects Outsourced training course( two parts) conducted by Dr. Rabin Shrestha , Visiting Faculty, Institute of Engineering, Kathmandu. Workshop provided basic concepts and applications of economic and financial principles in evaluating economics of hydropower projects. Course provided in-depth training on cost development, sensitivity analysis, cost- benefits ratios, evaluating alternative projects based on least cost options, NPV and DCF analysis; calculating expected financial and economic IRR under various probabilistic assumption.; application of Monte-Carlo techniques. . Course organized in class-room setting with actual Nepalese project case studies. Attended by 30 nominated personnel from DOED. The training in 3-hour sessions November 16-18 and 23-24, 2009 from 1-4 pm DOED Conference Hall. Cost: Rs. 154393
11. Promoting PPP in Nepal Final Workshop moderated by Hasso Bhatia, Team Leader. Purpose of the workshop was for the Consultant to present its final Findings and Recommendations. It was followed by a fruitful discussion on urgent steps to jumpstart Hydropower in Nepal. In particular, it was said that political parties do not have consensus on exporting electricity to India; some are against, some reluctant, some say value added e.g. cement. Nepal does not have enough Bauxite (iron ore) raw materials for cement – very limited. Electricity should be treated as commodity sold to India with consensus. Needs focus on political and geopolitical issues Attended by 45 invitees from hydropower-related government offices and major private sector stakeholders, as well as ADB representatives from Resident mission and Head office in Manila April 29th, 2010, Hotel Radisson, Kathmandu
Final Report August 2010 iv PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Appendix 7: Proposed Training Programme for DOED
Final Report January 2011
Promoting Private Sector Participation in the Power Sector (TA 4997-NEP)
Proposed Programme for ENHANCEMENT OF OPERATIVE SKILLS
Orientation Course (induction of new personnel) Hydropower Technology Alternative Energy Course 1 : Solar Energy Alternative Energy Course 2 : Wind Power Alternative Energy Course 3 : Biomass Energy Systems Environmental Impacts on Hydropower Development Basics of Hydropower Projects License Application Process of Hydropower Projects Manuals and Guidelines Relevant to Hydropower Development Relevant Legislation for Hydropower Development Civil Works of Small Hydropower Projects Bid Process Management
Final Report August 2010 i Promoting Private Sector Participation in the Power Sector (TA 4997-NEP)
COURSE DESIGN: ORIENTATION COURSE (INDUCTION OF NEW PERSONNEL)
Objectives: At the end of the course, the participant should be able to exhibit the following behaviors:
1. Restate the goals and objectives of the DoED; 2. Identify the various DoED offices, i.e. Divisions and Sections and the major functions of these; 3. Describe the respective office of assignment in terms of objectives, functions, and interrelationships with other DoED offices; 4. Discuss the duties and responsibilities of the assignment/position and reporting relationships; and 5. Recognize relevant DoED personnel policies and benefits.
Course Coverage:
1. The DoED Goals and Objectives
2. The DoED Organizational Structure i. Project Study Division a. Survey and Feasibility Section b. Planning Section
ii. Privatization Division a. Proposal Evaluation and License Section b. Project Promotion and Monitoring Section
iii. Inspection Division a. Project Inspection Section b. Electricity Inspection Section
3. Office of Assignment – Mainline functions and relationship/linkages with other DoED offices 4. Duties and responsibilities of the Assignment/Position 5. DoED Personnel Policies and Benefits
Final Report August 2010 ii Promoting Private Sector Participation in the Power Sector (TA 4997-NEP)
COURSE DESIGN: HYDROPOWER TECHNOLOGY
Objectives: At the end of the course, the participant should be able to exhibit the following behaviors:
1. Cite the advantages and disadvantages of hydropower as source of energy; 2. Discuss the different types of hydropower plants; 3. Discuss the different considerations in the selection of hydropower turbines; 4. Differentiate Impulse Turbine from Reaction Turbine. 5. Explain the different factors that have to be resolved during the preconstruction stage; and 6. Enumerate the major considerations during the construction stage.
Course Coverage:
1 The advantages and disadvantages of hydropower as a source of energy. 2 Types of hydropower plants i. Impoundment ii. Diversion iii. Pumped storage 3. Selection of hydropower turbines - generally based on the height of standing water referred to as “head” and the flow or volume of water at the site. Other deciding factors include how deep the turbine must be set; efficiency; and cost. 4. Types of turbines i. Impulse turbine ii. Reaction turbine 5. Preconstruction considerations - selection of site and data analysis; definition of power output aimed at; types of waterwheels; materials and tools; etc. 6. Construction considerations - preparation of the shrouds and buckets; bearings, shafts , mountings. and tail race; mounting the wheel; maintenance.
Final Report August 2010 iii Promoting Private Sector Participation in the Power Sector (TA 4997-NEP)
COURSE DESIGN: ALTERNATIVE ENERGY COURSE : SOLAR ENERGY
Objectives: At the end of the course, the participant should be able to exhibit the following behaviors:
1. Define solar energy. 2. Describe a solar thermal power plant. 3. Cite a disadvantage of tapping and using solar energy. 4. Discuss the different types of solar power systems designs. 5. Discuss the different types of solar energy technologies. 6. Enumerate some advantages of photovoltaic systems.
Course Coverage:
1. Solar energy – the energy of sunlight can be converted into thermal (or heat) energy used to heat e.g. water, spaces, etc. 2. Solar thermal plant – used sun’s rays to heat a fluid heat from which heat transfer systems may be used to produce steam. Steam in turn is converted into mechanical energy in a turbine into electricity from a conventional generator coupled to the turbine. 3. Disadvantage of solar energy – amount of sunlight that arrives at the earth’s surface is not constant. It varies on the location, time of day, time of year, and weather conditions. 4. Solar power systems designs i. Parabolic Trough design – reflects direct sunlight onto a receiver running along a trough above the reflectors. ii. Power Tower designs - array of flat moveable mirrors (called heliostats) to focus the sun’s rays upon a collector tower. Higher temperature thermal energy can be converted to electricity more efficiently and can be stored cheaply for later use. iii. Dish designs – focuses al the sunlight that strike the dish up to a single point above the dish where a receiver captures the heat and transforms it to useful form. iv. Fresnel Reflectors – structurally simpler, these systems aim to offer lower overall costs by sharing a receiver between several mirrors (as compared to trough and dish concepts) while still using the simpler line-focus geometry with one axis for tracking. 5. Solar energy technologies i. Photovoltaic (PV) systems – converts sunlight directly into electricity by means of PV cells made of semiconductor materials. ii. Concentrating solar power (CSP) systems – concentrates the sun’s energy using reflective devices such as troughs and mirror panels to produce heat that is used to generate electricity. iii. Solar water heating systems – which contain a solar collector that faces the sun and either heats water directly or heats a “working fluid” that in turn is used to heat water. iv. Transpired solar collectors – “solar walls” which use solar energy to preheat ventilation air for a building. 6. Advantages of Photovoltaic systems i. Direct conversion of sunlight into electricity. Final Report August 2010 iv Promoting Private Sector Participation in the Power Sector (TA 4997-NEP)
ii. PV arrays can be installed quickly, and in any size required or allowed. iii. Environmental impact is minimal requiring no water for cooling and generating no by-products.
Final Report August 2010 v Promoting Private Sector Participation in the Power Sector (TA 4997-NEP)
COURSE DESIGN: ALTERNATIVE ENERGY 2: WIND POWER
Objectives: At the end of the course, the participant should be able to . exhibit the following behaviors:
1. Describe the various wind flow characteristics; 2. Discuss the methods for wind data analysis and presentation; 3. Identify the different factors affecting the market development of wind power; 4. Enumerate the various considerations in selecting wind energy site; 5. Discuss the different factors affecting site suitability; and 6. Describe the possible effects of wing power on local grid stability and power quality.
Course Coverage:
1. Wind flow characteristics 2. Wind data analysis and presentation i. Wind speed frequency distribution ii. Directional distribution iii. Seasonal variations 3. Assessment of Market considerations i. Policy incentives ii. Regulatory limitations iii. Technical issues – turbine size, model and tower height; construction contracting; power system operation impact; etc. 4. Selecting Wind Energy Site 5. Factors affecting site suitability i. Land agreements ii. Environmental review iii. Transmission capacity and accessibility iv. Terrain orientation to prevailing wind v. Soil conditions vi. Site capacity for expansion 6. Effect on local grid stability and power quality
Final Report August 2010 vi Promoting Private Sector Participation in the Power Sector (TA 4997-NEP)
COURSE DESIGN: ALTERNATIVE ENERGY COURSE 3: BIOMASS ENERGY SYSTEMS
Objectives: At the end of the course, the participant should be able to exhibit the following behaviors:
1. Define biomass and give examples; 2. Cite the advantages of biomass energy systems; 3. Enumerate the components of a biomass energy factory; 4. Explain how biomass is converted into other useful energy forms (i.e. electricity, heat, etc.) 5. Discuss the various issues related to biomass energy systems; and 6. Describe some continuing activities pertaining to research on biofuels.
Course Coverage:
1. Different types of biomass 2. Advantages of Biomass Energy Systems i. Lowopportunitycost ii. Low levels of capital input iii. Built-in flexibility iv. Overall energy efficiency v. Enviromentally benign conversion and utilization technologies 3. Components of a biomass energy factory 4. Conversion of biomass – Thermal; Biological; Extractive 5. Issues relating to biomass energy systems i. High production cost ii. Lead times for market penetration iii. Commercial cost iv. Limitations of existing conversion technologies v. Policy issues relating to costs and prices of raw materials; subsidies/aids to investments; production and use of biofuels; etc. 6. Researches and developments on various aspects of biofuels.
Final Report August 2010 vii Promoting Private Sector Participation in the Power Sector (TA 4997-NEP)
COURSE DESIGN: ENVIRONMENTAL IMPACTS ON HYDROPOWER DEVELOPMENT
Objectives: At the end of the course, the participant should be able to exhibit the following behaviors:
7. Cite the 3 principal impacts and give an example of each. 8. Enumerate 5 major examples of adverse impacts on the physical environment; 5 examples of adverse impacts on the biological environment; 5 examples of adverse impacts on the socio-economic & cultural environment. 9. Discuss the mitigation measures that can be adopted for each adverse impact. 10. Enumerate 5 major beneficial impacts and discuss what enhancement measures there are to realize them.
Course Coverage:
1. Some impacts on the physical environment are change in topography and land use; slope stability, sedimentation and soil erosion; change in water quality; operation of quarry site; sedimentation on downstream due to sediment flushing from settling basin. 2. Some impacts on the biological environment are loss of vegetation due to clearances for project activities; disturbance to aquatic species and its habitat due to obstruction of the weir; loss of wildlife and habitat due to construction activities; encroachment of surrounding forests for forest products; loss of wildlife due to fragmentation and destruction of the habitat. 3. Some impacts on the socio-economic and cultural environment are existing use of water rights; pressure on existing infrastructure facilities (e.g. drinking water, health post, etc.) due to increased outside project staff and workers; decrease in agricultural production and local economy due to acquisition of agricultural land; safety and sudden movement of people due to presence of open canal; impact on livelihood. 4. Some mitigation measures are: On adverse impacts on the physical environment – provide compensation to affected families; bioengineering works and replanting in the upstream area; no large quarry site; watershed management done in the upstream and sediment flushing with adequate water.
On the biological environment – minimize cutting of trees and compensatory replanting; maintain minimum flow of 10% during dry season; strict enforcement of rules and awareness program; habitat restoration program like compensatory plantation.
On the socio-economic and cultural environment – additional water flow will be released for irrigation downstream; provision of necessary facilities for construction workers; provide adequate compensation for loss of agricultural land; fencing of open canal area; proper counseling of people livelihood. 5. Beneficial impacts: Final Report August 2010 viii Promoting Private Sector Participation in the Power Sector (TA 4997-NEP)
- Employment opportunities for local people during the construction and operation phases. - Potential improvement of public facilities such as health posts, drinking water, etc. - Upliftment of rural economy - Business opportunity for local people - Electricity royalty being given to affected VCDs/DDCs/ Development region and watershed management groups.
Final Report August 2010 ix Promoting Private Sector Participation in the Power Sector (TA 4997-NEP)
COURSE DESIGN: BASICS OF HYDROPOWER PROJECTS
Objectives: At the end of the course, the participant should be able to exhibit the following behaviors:
1. Identify the components of a small hydropower plant and their respective functions. 2. Discuss the elements that are considered in the conduct of a site survey. 3. Discuss the considerations in sizing the civil works of a small hydropower plant. 4. Identify the components of the electro-mechanical equipment of a small hydropower plant. 5. Describe the major cost components in a small hydropower project.
Course Coverage:
1. Components of a small hydropower plant and their functions: weir; intake; headrace; desilting tank; power channel; forebay; penstock system; inlet valve; turbine-generator system; governing systems; and tailrace. 2. Site survey: definition of gross head; methods of determining the gross head; head losses; net head; determining design flow; tracing the channel path; tracing the penstock path; and geological issues. 3. Considerations in sizing of civil works: sizing of weir, intake, headrace, desilting tank, main channel, forebay, penstock, typical hydraulic losses from intake up to turbine inlet. 4. Electro-mechanical equipment: inlet valve – types and characteristics, types of turbines, function of draft tube, typical efficiency curves, generator and switchgear, protection systems, transformer. 5. Costing small hydropower projects: major cost components; typical cost breakdown by major project elements; allocation of contingencies; O & M costs; insurance costs; financing cost.
Final Report August 2010 x Promoting Private Sector Participation in the Power Sector (TA 4997-NEP)
COURSE DESIGN: LICENSE APPLICATION PROCESS FOR HYDROPOWER PROJECTS
Objectives: At the end of the course, the participant shoud be able to exhibit the following behaviors:
1. Identify which hydropower projects require a Survey License and what other licenses are required for construction and operation. 2. Describe the application process for hydropower projects with installed capacity of less then 100 KW; 100KW to 1,000 KW. 3. Describe the license application process for hydropower projects with installed capacity of more than 1,000 KW. 4. Identify the critical steps in obtaining the Production License; the Transmission License; the Distribution License.
Course Coverage:
1. Hydropower projects with installed capacity of more than 1,000 KW are required to get a Survey License. Production License is for construction and operation of a production facility. Transmission License is for construction and operation of a transmission facility. Distribution License is for construction and operation of a distribution facility. 2. The DoED/MoWR is the licensing authority. Licenses for construction and operation of the facilities are needed only after the studies are completed under a Survey License. A proponent requires a license for each type of facility that is part of a proposed project. 3. No license is required for a hydropower project with installed capacity of less than 100 KW. However, the proponent must obtain a permit from the District Water Resources Committee (DWRC). No license is required if the hydropower project has only 100 to 1,000 KW installed capacity but there are requirements to be submitted to the Ministry of Water Resources (MoWR) through the DoED. 4. For hydropower projects with installed capacity of more than 1,000 KW, it is necessary to obtain the Survey License, Production License, Transmission License, and Distribution License. The Survey License is issued within 30 days after filing the application. Fees vary according to stated installed capacity. 5. Production Survey License – starts actual physical work within 3 months; submit 6 monthly reports to the DoED; complete survey; submit Feasibility Study Report including IEE (1.5 MW); EIA (5MW); Topographical Survey; Hydrological Survey; Geotechnical Survey; Design of Structure; Project Optimization; Financial and Economic Analyses.
6. Transmission Survey License – submit 6 monthly reports to the DoED; complete the survey; submit Feasibility Study Report including IEE (transmission voltage 33 – 66 KV); EIA (transmission voltage greater than 66 KV); Route survey with alternate route; Geotechnical Survey; Design of Structure; Project Optimization; Financial and Economic Analysis. 7. Distribution Survey License – submit quarterly progress reports to the DoED; complete survey; submit Feasibility Study Report including IEE (distributing capacity between 1-6 MVA); EIA (distributing capacity greater than 6 MVA); Final Report August 2010 xi Promoting Private Sector Participation in the Power Sector (TA 4997-NEP)
Route survey with alternative route; Design of Structure; Project Optimization; Financial and Economic Analysis.
Final Report August 2010 xii Promoting Private Sector Participation in the Power Sector (TA 4997-NEP)
COURSE DESIGN: MANUALS AND GUIDELINES RELEVANT TO HYDROPOWER DEVELOPMENT
Objectives: At the end of the course, the participant should be able to exhibit the following behaviors:
1. Enumerate the different manuals produced for the DoED with assistance of USAID and IRG. 2. Describe each DoED manualin general. 3. Discuss some working guidelines for the acquisition of forest land for hydropower development,2063. 4. Discuss some guidelines of the National Impact Assessment, 2050. 5. Discuss the Forest Collection and Sale/Distribution guideline, 2054.
Course Coverage:
1. The DoED produced several manuals on EIA with the assistance of USAID and IRG. Examples of these are:
Manual for Preparing Scoping Document for EIA of Hydropower Projects – facilitates the work of developers in the Scoping process; guides in the preparation of the Report using a common format.
Manual for Preparing TOR for EIA of Hydropower projects with Notes on EIA Report Preparation – no uniformity in the preparation of the TOR but Environment Protection Rule recommends one format. This manual aims to establish uniformity between the preparation of the EIA report and the TOR.
Manual for Conducting Public Hearing in the EIA Process for Hydropower Projects – provides the general guidelines for public hearings to help the project proponents to effectively conduct public hearings. This will facilitate the public involvement process.
Manual for Public Involvement in the EIA Process of Hydropower Projects – designed to help hydropower developers, concerned government agencies, other stakeholders and the general public to plan hydropower projects in cost effective ways and sensitively addressing the socio-economic and cultural issues. The main objective is to make the public actively participate during the assessment of the physical, biological and socio-economic aspects of the environment.
Manual for Preparing Environmental Management Plan (EMP) for Hydropower Projects – to guide the developer in ensuring that all mitigation measures recommended by the EIA are implemented and to provide a basis for examining whether the implemented mitigation measures are effective.
2. Working Guidelines for Acquisition of Forest Land (for other development purposes, e.g. hydropower development) 2063:
Final Report August 2010 xiii Promoting Private Sector Participation in the Power Sector (TA 4997-NEP)
Working Policy 1 : Forest area will be made available for national priority projects only.
Working Policy 2 : The forest area to be acquired will be kept to a minimum for the required project only.
Working Policy 3: If there are some environmental impacts, mitigation measures shall be adopted. An IEE or EIA may be required.
Working Policy 4 & 5: The should plant 25 times the trees felled in the area and nurture these up to 5 years before handing them over to the related District Forest Area
Working Policy 6: The MoFSC will monitor the implementation of mitigation measures.
3. National Environment Impact Assessment Guidelines provide the basis for proposing environmental protection measures in order to mitigate adverse impacts and to augment beneficial impacts for the project.
4. Forest Product Collection & Sale/Distribution Guideline 2054 specifies the procedures and formats for securing approvals for vegetation clearance, evaluation of wood volume, etc.
Final Report August 2010 xiv Promoting Private Sector Participation in the Power Sector (TA 4997-NEP)
COURSE DESIGN: RELEVANT LEGISLATION FOR HYDROPOWER DEVELOPMENT
Objectives: At the end of the course, the participant should be able to exhibit the following behaviors:
1. Enumerate the 10 different legislative Acts relevant to hydropower development.
2. Describe the relevant Sections and Clauses of each Act.
3. Discuss the accompanying regulations of each legislative Act relevant to hydropower development.
Course Coverage:
1. Legislative Acts relevant to hydropower development:
Electricity Act 2049 was enacted to manage the survey, generation, transmission, and distribution of electricity and to safeguard electricity services.
Water Resources Act 2049 is to make legal arrangements for determining the beneficial use of water resources, preventing environmental and other hazardous effects thereof.
Environmental Protection Act 2053 states that no development activities shall take place without IEE or EIA..
Forest Act 2049/2055 recognizes the importance of forests in maintaining a health environment. Appropriate mitigation measures should be undertaken when forest are affected by hydropower development.
National Parks and Wildlife Conservation Act prohibits certain actions without permission from authorized persons inside national parks and reserves i.e. damaging wildlife, blocking or diverting rivers or streams, felling of trees, creating earthworks, clearing, etc.
Land Acquisition Act 2034 states that in the process of acquiring land for hydropower projects, compensation must be given to the parties who are directly or indirectly affected.
Local Self-Governance Act 2056 contains several provisions for the conservation of soil and other natural resources and implements environmental conservation activities.
Explosives Act 2018 states that the expected use of explosives will occur during the construction of the project.
Aquatic Life Protection Act 2018/2056 obliges the proponent to minimize the adverse impact on aquatic life. Final Report August 2010 xv Promoting Private Sector Participation in the Power Sector (TA 4997-NEP)
Labour Act 2048 safeguards the laborer who works for hydropower projects.
2. Research on the following Sections and Clauses:
Electricity Act 2049 Sections 4, 23 and 24 Water Resources Act 2049 Clauses 8, 9, 16; Section 18, 19, 20 & 22 Environmental Protection Act 2053 – Section 3,4, 5, & 6 Forest Act 2049/2055 Sections 49 and 68. Land Acquisition Act 2034 Sections 3 and 47 Local Self-Governance Act 2056 Sections 28 & 189, 43 & 201, 96. Explosives Act 2018 Section 3, 4, and 8 Aquatic Life Protection Act 2018/2056 Sections 3, 5(B) Labour Act 2048 Clauses 4, 5, & 18
3. Research on the following Regulations:
Electricity Regulation 2050 – Rules no. 12, 13, & 88 Water Resources Regulation 2049 – Rules no. 17 & 28 Environment Protection Rule – Rules no. 3 & 4 Forest Regulation 2052 – Rules no. 3 & 9 Local Self- Governance Regulation – Schedule 26. Himalayan National Parks Regulation, 2037 Buffer Zone Management Guidelines, 2053 Conservation Area Management Regulations, 2053
Final Report August 2010 xvi Promoting Private Sector Participation in the Power Sector (TA 4997-NEP)
COURSE DESIGN: CIVIL WORKS OF SMALL HYDROPOWER PLANTS
Objectives: At the end of the course, the participant should be able to exhibit the following behaviors:
1. Explain why the factor of design is most important for the civil works of a small hydro.
2. List down all the major components of civil works in a small hydropower plant.
3. State the function of each major civil works component.
4. What are the critical considerations in the design of dams and weirs; intakes; gates; forebay; penstock; powerhouse; tailrace.
Course Coverage:
1. Due to smaller cost share, the importance of good design of civil works is most often overlooked. If the design is inadequate, this can cause problems during the construction stage and in the long run too. 2. Design of a small hydro becomes more challenging because the funds available for investigation are limited; need to use local labor skills; and need to use local materials. 3. Components of civil works in a small hydropower project: Means of diversion – dam, weir; Means of conveyance – canal, tunnel, penstock; Intake – facilitates smooth entry of water to passage of conveyance, with minimal head losses; Trashracks – to prevent entry of trash; Desilting basins – for facilitating the settling of sediment in water and subsequent removal; Forebay – facilitating smooth entry of water into the penstack or directly to the turbine inlet flume; Power plant building – reinforced concrete/steel structure; Means of release back to the stream – canal; Tailrace – minimum head loss in the tail channel. 4. Most important aspect incivil works of a small hydro is finalizing its layout. 5. Dams and weirs must be stable against sliding and overturning; reasonably water tight to prevent seepage; provision is made available for desilting such as scour gates; must be possible to empty the reservoirs for repairs and removal of deposited silt. 6. Intakes must be able to admit design discharge smoothly without undue head loss; able to eliminate entry of silt to a certain extent; must be able to prevent entry of flood waters to the waterway; as much as possible, control gate or orifice flow through a breast wall. 7. Trashracks eliminate debris from entering the waterway. They are arranged at steep angles along the horizontal to facilitate mechanical or manual clearing; velocity through the racks are kept at 0.5 – 0.8 m/s to ensure minimum head loss even when partially clogged; spacing between the trashrack bars depends on the runner dimensions of the turbine. 8. Gates are usually vertically lift types and capable of complete shut off in case of an emergency or for maintenance; Final Report August 2010 xvii Promoting Private Sector Participation in the Power Sector (TA 4997-NEP)
9. Canals must be able to carry the design discharge with minimal loss in head. Velocities are kept at around 0.6 – 2.0 m/s; Sidespills have to be provided and catch drains to prevent entry of rain water into the canals. 10. Forebay provides storage to regulate flow; discharge surplus water; distributes discharge evenly; protects against floating debris and silting. 11. Penstocks – the larger the diameter, the smaller the head loss; alignment as short as possible (capital cost, head loss, waterhammer). as straight as possible (anchor, vacuum, head loss). 12. Powerhouse is typically a reinforced concrete or a steel building with reinforced concrete substructure; located above flood levels; crane beam building determined by heaviest component to be loaded. 13. Tailrace ensures smooth flow and merging with stream; avoid high tailwater levels by proper dimensioning.
Final Report August 2010 xviii Promoting Private Sector Participation in the Power Sector (TA 4997-NEP)
COURSE DESIGN: BID PROCESS MANAGEMENT
Objectives: At the end of the course, the participant should be able to exhibit the following behaviors:
1. Descuss the General Instructions to Bidders necessary to prepare responsive bids. 2. Enumerate the bidding documents that should be read in conjunction with any Addenda issued. 3. Describe how the bids are prepared including the currencies of bids and payment acceptable for Works contracts. 4. Discuss the important factors to observe in the submission of bids. 5. Describe howbids are examinedand determined as to their responsiveness. 6. Describe howthe contractis awarded.
Course Coverage:
1. The General Instructions include Scope of Bid; Source of Funds; Eligible Bidders; Eligible Materials, Equipment, and Services; Qualification of the Bidder; One Bid per Bidder; Cost of Bidding; Site Visit.
2. Bidding Documents include content of Bidding Documents (i.e. Instruction to Bidders; General Conditions of Contract; Condition of Particular Application; Technical Specifications; Forms of Bid, Appendix to Bid, and Bid Security; Bill of Quantities; Form of Agreement; Form of Performance and Domestic Preference Securities, and Bank Guarantee for Advance Mobilization Payment; Drawings) Clarification of Bidding Documents; and Amendment of Bidding Documents.
3. The language used in International Competitive Bidding in which the bidding documents are written are in English, French, or Spanish whichever the Employer so designates. The bidders may quote entirely in the currency of the Employer’s country but specifies the percentages of foreign currency or currencies they require. Alternatively, bidders may quote separately in the currencies of the origin (foreign or local) of the various inputs.
4. There are specific instructions given for the Sealing and Marking of Bids; Deadline for Submission of Bids; Late Bids; Modification and Withdrawal of Bids.
5. Note that information relating to the examination, clarification, evaluation and comparison of bids, and recommendations for the award of a Contract shall not be disclosed to the bidders or any other persons not officially concerned with such process until the award to the successful bidder is announced.
6. Prior to the detailed evaluation of bids, the Employer will determine whether each bid iv. meets the eligibility criteria; v. has been properly signed; vi. is accompanied by required securities; Final Report August 2010 xix Promoting Private Sector Participation in the Power Sector (TA 4997-NEP)
vii. is substantially responsive to the requirements of the bidding documents; viii. provides any clarification and/or substantiation that the Employer may so require.
7. The Notification of Award will constitute the formation of the Contract. The Employer will send to the successful bidder the Form of Agreement provided in the Bidding Documents, incorporating all agreements between the parties. Failure of the successful bidder to comply with the requirements (e.g. performance security, etc.) shall constitute sufficient grounds for annulment of the Award and forfeiture of the bid security.
Final Report August 2010 xx Promoting Private Sector Participation in the Power Sector (TA 4997-NEP)
Proposed Programme for MANAGEMENT DEVELOPMENT
Corporate Planning Training of Trainors Introduction to Project Management Project Costing Human Resource Development Organizational Development Policy Formulation Project Control and Evaluation Tools Budget Preparation and Financial Controls Effective Records Management Inventory Management
Final Report August 2010 xxi Promoting Private Sector Participation in the Power Sector (TA 4997-NEP)
COURSE DESIGN: CORPORATE PLANNING
Objectives: At the end of the course, the participant should be able to exhibit the following behaviors:
1. Explain the objectives and importance of undertaking corporate planning for the DoED; 2. Describe the standard structural configuration of the corporate planning system; 3. Identify the specific activities under each phase of the corporate planning system; and 4. Propose specific recommendations toward facilitating its implementation in the DoED.
Course Coverage:
1. Conceptual Framework of the DoED Corporate Planning System – objectives; process goals; resource allocation benchmarks 2. Structural Configuration of the Corporate Planning System – Corporate Planning Committee (CPC); CPC Secretariat; Corporate Planning Group Heads (Program Sponsors) and their respective Management Teams; Budget Responsibility Units; Functional Staff 3. Corporate Planning System Phases: Phase I – CPC Direction Setting: Organization of the CPC; Environmental Scanning and Analysis; Position Assessment; Goal/Objective Setting and Strategy Development Phase II – Program Formulation: Organization of Corporate Planning Group Heads; Program Design; Program Documentation and Presentation; CPC Review and Approval Phase III - Departmental Detail Planning/ Resource Requirement Determination: Organization of Management Teams/Groups; Operational (Unit) Planning; Integration of Unit Plans and Consolidation of Resource Requirements; CPC Review and Approval 4. Finalizing the Corporate Plan – Budgeting Process; Prioritization of Programs; Documentation; Communication of Corporate Planning activities; Timetable and Implementation Schedules 5. Preparation of Corporate Planning Job Aids
Final Report August 2010 xxii Promoting Private Sector Participation in the Power Sector (TA 4997-NEP)
COURSE DESIGN: TRAINING OF TRAINORS
Objectives: At the end of the course, the participant should be able to exhibit the following behaviors:
1. Discuss training as a management function; 2. Explain the staff training and development process; 3. Assess the training needs of their respective units and subordinates; 4. Prepare course designs and trainee handouts; 5. Demonstrate trainor skills in the effective delivery of instruction.
Course Coverage:
1. Overview of the Training Function 2. The Training and Development Process 3. Assessment of Training Needs i. Approaches to training needs determination ii. Identification and prioritization of training needs 4. Preparation of Course Design i. Formulating course objectives and prerequisites ii. Determining and structuring course content and coverage iii. Identifying and analyzing data on participants iv. Determining instructional requirements v. Determining training venue(s) vi. Estimating course duration vii. Determining appropriate approaches and teaching strategies 5. Development of Trainor Skills i. The instructional system ii. The learning process iii. Instructor-oriented training methods iv. Trainee-oriented training methods v. Use of audiovisual aids vi. Training evaluation 6. Practicum: Delivering a lecturette
Final Report August 2010 xxiii Promoting Private Sector Participation in the Power Sector (TA 4997-NEP)
COURSE DESIGN: INTRO. TO PROJECT MANAGEMENT
Objectives: At the end of the course, the participant should be able to exhibit the following behaviors:
1. Define project management; project development cycle; entities coordinated by project management; and responsibilities of the Project Manager; 2. Discuss the various types of organizational structures and explain the different factors/ parameters to be analysed in considering appropriate organizational forms; 3. Discuss the various management functions in terms of processes involved and their impact or consequences if not properly executed; and 4. Explain the different employee or manager problems that normally arise and how these can be resolved through able leadership.
Course Coverage:
1. Overview of Project Management i. Definition and differing views ii. The project development cycle iii. Entities coordinated by project management iv. The responsibilities of the Project Manager 2. Organizational Structures i. Traditional organization ii. Line-staff organization iii. Matrix organizational form iv. Selection of organizational structure 3. Management Functions i. Planning ii. Identifying strategic project variables iii. Controlling iv. Directing v. Project Authority 4. Project Environment i. Employee / Manager problems ii. Management pitfalls
Final Report August 2010 xxiv Promoting Private Sector Participation in the Power Sector (TA 4997-NEP)
COURSE DESIGN: PROJECT COSTING
Objectives: At the end of the course, the participant should be able to exhibit the following behaviors:
1. Explain the conceptual framework of project costing including cost derivation, analysis and methodology; 2. Discuss the various practices for payment of engineering services; 3. Differentiate various cost items according to given standard categories; and 4. Discuss the importance of planning for contingencies.
Course Coverage:
1. Conceptual Framework for Project Costing i. Workrequired ii. Project cost derivation iii. Cost analysis iv. Organizational input requirements v. Costing/ Payment methodology 2. Bases for Payment of Engineering Services i. Lumpsumfee ii. Percentage of construction costs iii. Cost-plus fee iv. Retainer fee 3. Direct Labor Cost, Payroll Cost and Overhead Cost i. Directlaborcost ii. Payroll costs iii. Overhead costs (list of items included) iv. Direct reimbursable expenses (list of billable items) 4. Planning for Contingencies 5. Practicumon Project Costing
Final Report August 2010 xxv Promoting Private Sector Participation in the Power Sector (TA 4997-NEP)
COURSE DESIGN: HUMAN RESOURCE DEVELOPMENT
Objectives: At the end of the course, the participant should be able to exhibit the following behaviors:
1. Define the basic concepts of HRD in terms of objectives, manpower development, management development and organizational development; 2. Describe each of the major activities of human resource management in terms of importance, mechanics of the system, report formats, and existing policies and procedures; 3. Suggest improvements on current practices related to manpower planning and forecasting, personnel recruitment, compensation and benefits administration, staff appraisal, job analysis and evaluation, and personnel records management; 4. Describe related administrative services such as health and safety, security services, etc. and how these contribute to HRD; and 5. Explain the importance of staff training and development toward accomplishment of DoED’s HRD objectives.
Course Coverage:
1. Conceptual Framework of Human Resource Development (HRD) i. Objectives andgoals of theHRD program ii. Manpower/ Management/ Organizational development 2. Major Activities of Human Resource Management i. Manpower planning and forecasting ii. Personnel recruitment and employment iii. Compensation and benefits administration iv. Staff appraisal v. Job analysis and evaluation vi. Personnel records management 3. Related Administrative Services 4. Staff Training and Development i. Enhancement of Operative Skills Program ii. Management Development Program iii. Professional Specialization Program
Final Report August 2010 xxvi Promoting Private Sector Participation in the Power Sector (TA 4997-NEP)
COURSE DESIGN: ORGANIZATIONAL DEVELOPMENT
Objectives: At the end of the course, the participant should be able to exhibit the following behaviors:
1. Describe the DoED organization in terms of goals and objectives, functional areas, network of offices and responsibility areas; 2. Discuss the organizational policies of DoED; 3. Identify the characteristics of different types of organizational structures; 4. Analyse the different determinants that impact on organizational development; 5. Cite the steps for the conduct of an Organization Plan Review; and 6. Enumerate the benefits to be derived from having an Organization Manual.
Course Coverage:
1. The DoED Organization – Goals and objectives; Mainline functions and Support functions; Network of Offices and responsibility areas 2. Organizational Policies and Guidelines 3. Characteristics of different types of organizational structures 4. Organizational Arrangements i. Management concepts and principles ii. Grouping of activities iii. Line and staff relationships iv. Defining organizational responsibilities v. Approaches for coordination and integration of activities and outputs 5. Guidelines for Organizational Development i. Integrating mechanisms ii. Authority structure and delegation iii. Influence distribution iv. Information systems 6. Organization Plan Review and need for Staffing Schedule 7. Benefits of an Organization Manual
Final Report August 2010 xxvii Promoting Private Sector Participation in the Power Sector (TA 4997-NEP)
COURSE DESIGN: POLICY FORMULATION
Objectives: At the end of the course, the participant should be able to exhibit the following behaviors:
1. Discuss the legal and political bases and linkages of the organization; 2. Explain the policy-making function of top management; 3. Describe an organization’s institutional efforts vis-à-vis its service commitments; 4. Identify and discuss the success factors underlying plans, strategies and development programs; and 5. Explain projects and financial planning undertakings.
Course Coverage:
1. Legal and political bases and linkages of the organization 2. Policy-maker’s Functions – Management blend; Areas of policy vs. operating guidelines 3. Institutional Development 4. Success Ingredients: Plans, Strategies, and Programs i. Planning cycle ii. Objectives setting iii. Forecasting iv. Design of strategies v. Policy making 5. Project Undertakings – Project management; Cost-benefit analysis, 6. Financial Planning i. Financial review ii. Analysis of financial indicators iii. Financial Control measures
Final Report August 2010 xxviii Promoting Private Sector Participation in the Power Sector (TA 4997-NEP)
COURSE DESIGN: PROJECT CONTROL & EVAL. TOOLS
Objectives: At the end of the course, the participant should be able to exhibit the following behaviors:
1. Explain the importance and necessity of project planning and control indicating the need to adopt integrated management techniques; 2. Demonstrate the use of the Bar Chartor Gantt Chart by way of examples; 3. Discuss the Critical Path Method (CPM) as a project management tool and provide examples to illustrate its usage; 4. Discuss Program Evaluation and Review Technique (PERT) and cite applications of this management tool; and 5. Analyse the existing project information management system and identify areas that need improvement.
Course Coverage:
1. Project PlanningandControl i. Importance and necessity for DoED management ii. Integrated project management techniques 2. BarorGanttChart 3. CriticalPathMethod i. Basics and usage ii. CPM for allocating andschedulingresources iii. Monitoring and control techniques 4. Program Evaluation and Review Technique (PERT) i. Basics ii. Slack time iii. Network replanning iv. Estimating activity time v. Problemareas 5. Project Information Management System i. Establish objectives ii. Monitoring inspections
Final Report August 2010 xxix Promoting Private Sector Participation in the Power Sector (TA 4997-NEP)
COURSE DESIGN: BUDGET PREPARATION & FIN’L CONTROLS
Objectives: At the end of the course, the participant should be able to exhibit the following behaviors:
1. Discuss the conceptual framework of the Budgeting System; 2. Define organizational and cost concepts; 3. Propose the mechanisms for the conduct of long-range planning and review; 4. Describe the preparations for the making of a budget plan; and 5. Discuss some financial control mechanisms and processes.
Course Coverage:
1. Conceptual Framework of the Budgeting System i. Purpose and use ii. Advantages iii. Management involvement at all levels 2. Desired Organizational and Cost Concepts i. Use of responsibility centers ii. Responsibilities and direct control iii. Timely and accurate reporting iv. Use of exception reporting 3. Budget Planning Cycle and Timetable of Activities 4. Documentation of Outputs i. Estimated billings and collections ii. Estimated miscellaneous service revenues iii. Operating revenue budget iv. Divisional expense budget v. Divisional capital expenditure budget vi. Materials and supplies budget vii. Depreciation budget viii. Cash budget ix. Income statement x. Funds flow xi. Projected balance sheet 5. Financial Control Mechanisms and Processes
Final Report August 2010 xxx Promoting Private Sector Participation in the Power Sector (TA 4997-NEP)
COURSE DESIGN: EFFECTIVE RECORDS MANAGEMENT
Objectives: At the end of the course, the participant should be able to exhibit the following behaviors:
1. Express the importance of effective records management; 2. Discuss the requirements and components of a Records Management Program; 3. Identify the principles of effective records management as applied to forms, correspondences, reports, mail and files; 4. Recognize the strengths and weaknesses of the existing practice in the disposition of records; and 5. Propose appropriate records management technology to adopt.
Course Coverage:
1. Importance and requirements for effective records management; 2. Developingthe Program i. Objectives and goals ii. Program formulation iii. Organization and staffing iv. Implementation guidelines and scheduling of activities 3. Records Management i. Records creation ii. Forms management iii. Correspondence management iv. Reports management 4. Records Maintenance/Use i. Mail management ii. Files management 5. Disposition of Records i. Administrative requirements ii. Inventory/Appraisal of records iii. Disposal guidelines and procedures 6. Records Management Technology
Final Report August 2010 xxxi Promoting Private Sector Participation in the Power Sector (TA 4997-NEP)
COURSE DESIGN: INVENTORY MANAGEMENT
Objectives: At the end of the course, the participant should be able to exhibit the following behaviors:
1. Describe the scope and importance of inventory management; 2. Organize the planning for inventory control; 3. Evaluate the existing practice of supplies acquisition in terms of application of inventory management concepts; and 4. Define the various inventory control procedures.
Course Coverage:
1. Scope and importance of inventory management 2. Inventory Management Program i. General policies ii. Organization and staffing 3. Planning for inventory control i. Control cycle ii. Categorizing supplies into classes iii. Determining supply needs 4. Supplies Acquisition i. Factors influencing order quantities ii. Cost of carrying inventories iii. Valuation of inventories iv. Economic order quantity concept 5. Inventory Control Procedures i. Stock levels ii. Receiving and inspection iii. Storekeeping iv. Issuance of supplies v. Recordkeepingandreporting vi. Physical inventories
Final Report August 2010 xxxii PROMOTING PRIVATE SECTOR PARTICIPATION IN THE POWER SECTOR (TA 4997-NEP)
Appendix 8: List of Equipment procured during the TA
Final Report January 2011