Local Shares AN IN-DEPTH EXAMINATION OF THE OPPORTUNITIES AND RISKS FOR LOCAL COMMUNITIES SEEKING TO INVEST IN NEPAL’S HYDROPOWER PROJECTS IN PARTNERSHIP WITH © International Finance Corporation 2018. All rights reserved. 2121 Pennsylvania Avenue, N.W. Washington, D.C. 20433 Internet: www.ifc.org The material in this work is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. IFC encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly, and when the reproduction is for educational and non-commercial purposes, without a fee, subject to such attributions and notices as we may reasonably require. 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Additionally, “International Finance Corporation” and “IFC” are registered trademarks of IFC and are protected under international law. Cover photo credit: Sophia Khatun Tamot 2018 ACKNOWLEDGEMENTS This study was carried out by a consortium of Policy Entrepreneurs Inc., Pioneer Law Group and Kriti Capital Investments Ltd, with the International Centre for Integrated Mountain Development as a knowledge partner. The primary authors were Nirjan Rai and Padmendra Shrestha. The contributing authors were Anup Raj Upreti, Deepesh Vaidya, Narayan Chaulagain, Sandeep Karki, Bhawana Baniya, Srijana Bhattarai, Shreeya Rana, Suman Basnet, Jyotsna Tamang, Ankita Shrestha, Binod Bhattarai, Shristi Sijapati, and Pratikshya Dahal. The IFC team that commissioned and led the study was Kate Lazarus (Team Lead), Sophia Tamot (Technical Coordinator) and Upasana Pradhan Shrestha, who provided constant encouragement, guidance, and feedback throughout the study. They were also instrumental in setting up the independent consultative panel of national and international experts who provided strategic guidance and key input at various phases of the study. We are immensely thankful to our panel members: Sambriddhi Kharel (Gender Specialist), Kulman Ghising (Nepal Electricity Authority), Niraj Giri (Securities Board of Nepal), Maha Prasad Adhikari (Investment Board of Nepal), Sagar Gautam (Ministry of Energy, Water Resources and Irrigation), Pravin Raman Parajuli (Nepal Merchant Bankers’ Association), Bir Bahadur Ghale (Hydro Developer), Deepak Gyawali (Water Expert & Civil Society), Khadga Bisht (Independent Power Producers Association of Nepal), Dal Bahadur Adhikari (Ministry of Law, Justice & Parliamentary Affairs), Mahesh Aryal (Ministry of Finance), Joon Hyung (Nepal Water & Energy Development Co.), Arbind Kumar Mishra (National Planning Commission), Abhishek Singh (Asian Development Bank), and Marcelo Andrade (Pronatura International). Tremendous support and guidance was provided by Justin Pooley, Pablo Cardinale, Debra Sequeira, Lopa Shah, Kamal Dorabawila, Sunrita Sarkar, Jamie Fergusson, Elizabeth White, Edmond Mjekiqi, Wendy Jo Werner, Mohammad Rehan Rashid, Lakhdeep Babra, Hyun-Chan Cho, and Morgan Landy. We recognize the ongoing support of IFC’s Environmental and Social Governance Department and Infrastructure Department, as well as the feedback and collaboration of colleagues at The World Bank Group. We are thankful for the generous support from the Australian and Japanese Governments and The Rockefeller Foundation. We are grateful to all the key informants and participants at the stakeholder meetings representing various sectors including, but not limited to, the government, public utility, power producers, banks, merchant banks, and regulators. Their participation helped the team capture diverse perspectives on the issue of local shares. During the field visits, local communities in Rasuwa, Solukhumbu, Dolakha, Lamjung, and Ilam enthusiastically participated in focus group discussions and individual interviews. We thank all participants from the local communities for sharing their insight and experiences. The hydropower projects visited were highly supportive towards the study. We are especially thankful to Sanima Mai, Chilime, and Solu hydropower companies for allowing the team to visit the project generation sites, and Sanima Mai for helping to coordinate with the local communities. i TABLE OF CONTENTS ACKNOWLEDGEMENTS I ACRONYMS VI GLOSSARY VIII 1 INTRODUCTION 1 1.1 Hydropower, benefit sharing, and local shares in Nepal 1 1.2 Objective of the study 2 1.3 Framing of local shares for the study 3 1.4 Structure of the Report 4 2 METHODOLOGY 5 2.1 Data collection 5 2.2 Accounts from the field 7 2.3 Expert consultation 7 2.4 Consultative panel 7 3 THE CONTEXT OF LOCAL SHARES 8 3.1 Nepal’s Share Market 8 3.2 Nepal’s Hydropower Share Market 11 3.3 The Evolution of Local Shares 12 4 DOCUMENTATION AND ANALYSIS OF LOCAL SHARES 16 4.1 Amount of Allocation 16 4.1.1 Policy and legislation 16 4.1.2 National practices 17 4.1.3 Perceptions 18 4.1.4 Key Issues 19 4.2 Process of Allocation 20 4.2.1 Policy and legislation 20 4.2.2 National practices 21 4.2.3 Perceptions 23 4.2.4 Key Issues 23 4.3 Timing 25 4.3.1 Policy and legislation 25 4.3.2 National practices 25 4.3.3 Perceptions 26 4.3.4 Key Issues 26 4.4 Price 26 4.4.1 Policy and legislation 26 4.4.2 National practices 27 4.4.3 Perceptions 27 4.4.4 Key Issues 28 ii 4.5 Eligibility 28 4.5.1 Policy and legislation 28 4.5.2 National practices 29 4.5.3 Perceptions 30 4.5.4 Key Issues 31 4.6 Delivery Model 31 4.6.1 Policy and legislation 31 4.6.2 National practices 32 4.6.3 Perceptions 32 4.6.4 Key Issues 32 4.7 Financing 33 4.7.1 Policy and legislation 33 4.7.2 National practices 33 4.7.3 Perceptions 34 4.7.4 Key Issues 35 4.8 Holding and Divestment 36 4.8.1 Policy and legislation 36 4.8.2 National practices 36 4.8.3 Perceptions 38 4.8.4 Key issues 39 5 LOCAL SHARES: ACCOUNTS FROM THE FIELD 40 5.1 Limitations 40 5.2 Observed Economic Changes 41 5.3 Empowerment of Local Communities 43 5.4 Noteworthy Observations 45 6 FRAMING OF LOCAL SHARES AS A BENEFIT SHARING INSTRUMENT 46 6.1 Defining benefit sharing 46 6.2 The changing paradigm of benefit sharing in Nepal 47 6.3 Existing practices in equity investment in hydropower development 48 6.4 Local shares versus other practices in equity investment in hpp 50 7 FINDING AN ALTERNATIVE DELIVERY MODEL FOR LOCAL SHARES 51 7.1 Possible delivery models for the SPV 51 7.2 Evaluation of models against key parameters 52 7.2.1 Ability to incorporate SPV and hold shares 52 7.2.2 Ability of SPV to issue local shares 54 7.2.3 SPV’s ability to hold investment and allow communities to participate in decision-making 55 7.2.4 Ability of SPV to distribute earned income 57 7.2.5 Ability of local investors to divest from SPV 58 7.3 Other key issues 59 iii 8 OPTIONS AND RECOMMENDATIONS 61 8.1 Amount of Allocation 61 8.2 Process of Allocation (relevant to both private and public companies) 62 8.3 Timing 62 8.4 Price 64 8.5 Eligibility 64 8.6 Alternate Delivery Model for private companies 65 8.7 Financing 66 8.8 Holding and Divestment 68 9 TRANSFORMING LOCAL COMMUNITIES INTO INFORMED SHAREHOLDERS 69 9.1 The current environment for communication 69 9.2 Assessing the local landscape of stakeholders 70 9.3 Current initiatives of communicating with communities 72 9.4 Pathways to more effective communication 74 10 KEY OBSERVATIONS AND CONCLUSION 78 REFERENCES 81 APPENDICES 82 LIST OF APPENDICES Appendix 1: Rationale for Selection of Hydropower Projects for Study 82 Appendix 2: Focus Group Discussions 83 Appendix 3: Questionnaire for Focus Group Discussions (FGD) 85 Appendix 4: Semi-Structured Interviews 88 Appendix 5: Questionnaire for Semi-Structured Interviews 92 Appendix 6: Key Informant Interviewees 94 Appendix 7: Questionnaire for Key Informant Interviews 96 Appendix 8: Selection of Study Sites for the Rapid Socio-Economic Assessment 99 Appendix 9: Survey Questionnaire 101 Appendix 10: Profile of People Interviewed for the Rapid Socio-EconomicAssessment 105 Appendix 11: Analysis