Bringing down cost of doing business for hydro developers by $1.2 Million

benefit sharing in hydropower in nepal

Samriddhi, The Prosperity Foundation has released a new publication on benefit sharing in hydropower projects in Nepal. The publication comes in light of existing struggles that hydropower developers and locals face when trying to come to a meaningful conclusion of benefit-sharing between the two.

Our observation through this study in short is that hazy interpretations of benefit sharing (in lack of adequate legal provisions) have been costing the private developers dearly. The study tries to quantify this cost. For small projects the total cost of benefit sharing from our estimates comes to NRs. 29.29 Million, whereas the feasible amount (based on typical total cost for small projects) for small projects to spend on benefit sharing is NRs. 10 Million. For medium projects the total cost of benefit sharing comes to NRs. 184.04 Million (without the addition of remobilization cost). This is also higher than feasible amount of NRs. 50 Million (as discussed in the study). Based on these estimates, a medium size hydro project will save NRs. 134.04 Million ($1.2 Million) in transaction cost if a proper rule of law is established in the hydro sector with regards to benefit sharing.

However, to establish Rule of Law in the sector, the effort has to begin from the very start, which is setting up clear ‘rules of the game’. The opportunity is to bring all stakeholders together and build ‘rules of the game’ in a way that one party does not unjustly benefit at the expense of the other.

In this paper, we use data from a survey we conducted with ten hydropower projects to estimate the cost associated with benefit sharing. The paper, however, does not incorporate the cost of lost investment owing to the uncertainty faced by developers. It concentrates on generating estimated cost to developers due to the lack of a clear and enforceable regulatory framework.

This paper recommends setting up clear policy guidelines defining the scope and basis of benefit sharing with locals. This should take into account the size, budget, source of funding, and financial feasibility of the project. Based on the survey data from this study, we have concluded that it is financially feasible for small projects, less than 10 MW, to spend 2% of total cost on benefit sharing. For medium projects, greater than 20 MW and less than 60 MW, it is financially feasible to spend less than 0.5% of total cost on benefit sharing.

Acute electricity shortages have created pressure to rapidly develop hydropower projects in Nepal, which boasts enormous hydropower production potential. However, construction of hydropower projects has not picked adequate pace owing to several regulatory challenges. Samriddhi Foundation ventured into studying the hydropower sector first in 2011 while developing the Nepal Economic Growth Agenda, 2012. In the subsequent years, Samriddhi has focused on specific challenges keeping the sector from realizing its potential.

In 2013, we analyzed the sector from the perspective of competition laws and Doing Business, which brought out issues related to licensing for power developers and monopsony of Nepal Electricity Authority. In 2014, we focused on a prominent challenge impeding the growth of the sector – transmission. We produced “Policy Options for Improved Transmission System in Nepal” in 2014. In 2015, we are focusing on the provision of benefit sharing. Difficulty in resolving benefit sharing issues with local communitis at construction sites have caused many projects to halt. The Power Trade Agreement with India in 2014 and the decision taken by the Council of Ministers in February 2015 to form a separate transmission company (National Transmission Grid Company) in an effort to initiate unbundling of the Nepal Electricity Authority were significant steps towards speeding up hydropower development. While these moves helped address some key challenges, benefit sharing (which is a prominent challenge) awaits attention from policymakers.

Click here for the entire publication!