Re: Rs 250 billion as royalty from 10,000 MW

December 26, 2008

Dr Shankar Sharma

Former Vice Chair
National Planning Commission

Dear Shankarjee

I trust you had a fruitful/productive trip to east Nepal. Good to hear from you. Welcome back.

This statement about Nepal earning a royalty of Rs 250 billion a year has done quite a lot of damage, because it has misled not only general public but the powers to be and policy makers in Nepal. I am not surprised that "that these numbers, as were quoted by Mr. Thakur thrilled" you. You are not alone in getting thrilled as such. I know of quite a lot of "experts" of Nepal that have been thrilled similarly. And when people like you quote these numbers, the general populace, in turn, also gets "thrilled" and they are belaboring under this mistaken impression. I must admit that you are magnanimous in not hating such people. In view of disservice it does to our nascent republic and the water resource sector I do feel strongly about it.

Because, the number is absolutely incorrect. I myself have had first hand opportunity of hearing Mr. Thakur say that and I have refuted him (in Nepal) at every opportunity. Looks like you were not present in any of those events.

No matter what is the assumption, annual royalty of Rs 250 billion is an impossibility. One scenario under which it will be possible, as I mentioned in my email to you, is to sell electricity at the bulk rate of Rs 8.65/kWh and to levy hundred percent of the proceed from the sale of electricity as royalty (with the plants operated at 50% plant factor). But this scenario is outrageously out of the world. Because no one will invest in hydropower sector if total sale proceed has to be paid to government as royalty (no money left for debt service, nor dividend!!).

There is not even the possibility of wriggling out of this statement now by saying that the amount will be earned by Nepal in 100 years or less because it has been trumpeted time and again that this will be annual revenue for Nepal – "yearly revenue of Rs 250 billion." Conversely, if Nepal is to earn this amount as royalty in, say, 50 years, it is not worth announcing from the podiums of the big gatherings; even without bothering about quantum of the present value of the future income stream earned over several years.

I am glad that you have decided to "talk to some of the experts in NEA and try to validate these numbers". However, I know of experts and experts in NEA; having worked with them for more than a decade (including 21 months as a member of NEA board). I hope you will be able to find the right expert. Moreover, this computation is not something like rocket science. You should be able to figure out yourself, when someone like me had no problem doing so.

Discussing about these is very welcome but announcing them in a big gathering as such is very different, especially when announcement is made without quoting the source (how credible - or otherwise - the source may be); further, especially by a person like you who has occupied the high positions in Nepal. People in Nepal, I am glad, do look up to you and they want to believe in you and your statements.

With best regards,

Sincerely,

Ratna Sansar Shrestha, FCA

From: Ratna Sansar Shrestha [mailto:rsansar@mos।com।np]

Sent: Friday, December 26, 2008 10:21

Subject: Re: [NNSD] Re: Rs 250 billion as royalty from 10,000 MW

Dear Ajayajee

I couldn't agree more with you. Looks like he is doing his best to wriggle out of the "soup."

With best regards,


Sincerely,

Ratna Sansar Shrestha, FCA


-----Original Message-----

From: Ajaya Dixit [mailto:adbauwatar@wlink।com।np]

Sent: Friday, December 26, 2008 ७:48

To: Ratna Sansar Shrestha

Subject: Re: [NNSD] Re: Rs 250 billion as royalty from 10,000 MW

Sir

My god what a mumbo jumbo gooblidooble 223@#$%reply a typical economist.
With such person heading Nepal's planing for so long no wonder we are in such a soup.

Ajaya

From: Ramesh Munankami [mailto:rameshmunankami@yahoo।com]

Sent: Thursday, December 25, 2008 13:37

To: Undisclosed-Recipient@yahoo।com; Ratna Sansar Shrestha

Subject: RE: Rs 250 billion as royalty from 10,000 MW

One can not mislead others or followers all the time। I understand time has come to correct ourselves and stop giving wrong dreams to the people। Regards।

Ramesh B। Munankami (Ph।D।)

-----Original Message-----
From: Shankar Sharma [mailto:shankarpsharma@gmail.com]
Sent: Thursday, December 25, 2008 21:39
To: Ratna Sansar Shrestha
Cc: NNSD@yahoogroups.com
Subject: Re: Rs 250 billion as royalty from 10,000 MW

Dear Ratna Sansarji,

Many thanks for the kind words about me and the email commenting on my presentation done in the Annual Meeting of CNI, last week. I was travelling to Dharan and Jhapa for the last 5 days and therefore was unable to see and respond to your email. I returned back this evening and thought that I should at least acknowledge the receipt of your email and provide quick comments on it.

Yes, you heard it correctly, but only partially. I said "we need to discuss it further (on the numbers and its assumptions) but the royalty of 10,000 MW can earn Rs 250 billion". I didn't mention the royalty rate and didn't talk about the time frame (or the year) when we can get Rs. 250 billion as royalty. The main reason for saying this is as follows.

i) When I was in Patna Mr TN Thakur of PTC India said in the public meeting that Nepal will earn Rs 250 billion by exporting 10,000 MW. You said it correctly, but it is better to talk and discuss before "hating him" for his comments. He might have some assumptions and argument.

ii) When I came back to Kathmandu, I wanted to check what he meant by Rs. 250 billion earnings. I wanted to validate this number with one of the applications submitted to NEA for PPA.

iii) I don't know the details, yet but I verified the numbers written in PPA applications with the expert (s) who has written it. He confirmed and the numbers were as follows.

PPA applied for 35 MW (I think it is in Q45), the royalty mentioned in the PPA document was Rs 35000,000 (or 35 million for capacity) and Rs 98368,000 (Rs 98.4 million as revenue royalty) in the 19th year (not 25th or 30th, but probably it is the same under present regulations/acts). I think the capacity royalty is at the rate of Rs 1000/MW and revenue capacity is 2% of total earned revenue (without deducting anything including taxes). The plant capacity and other assumptions are in lines which are acceptable to NEA.

iv) The royalty rates are different in different countries, too. Even in Nepal if it is 2% today, it has been proposed to be increased to 7.5% in the amendment proposed. In the mean time the earnings to the government comes from different sources (e.g. free energy, free share and dividend associated with it, income tax, or export tax or combination of some of these parameters). The final number probably the government will be interested is in the total earnings and it can come from various combinations of different taxes and fees.

v) I was working in Laos and Bhutan for the last 9 months, and their high growths (14% in Bhutan last year and 8% in Laos) were achieved mainly because of electricity exports. They have high rates of royalty, but lower offers in free energy of free share. As for example, the royalty rate is 18% in Bhutan and is fixed. What Bhutan gets is not only the royalty; it also gets free energy and or free share.

vi) Therefore, if we calculate by the rule of thumb of 35 MW and assume linearity, the capacity royalty will be Rs 10 billion and revenue royalty could be Rs 253 billion in the 19th year at the rate of 18%, which is Bhutan's rate, for 10, 000 MW. In fact, the total earnings to the government could be even higher. If royalty is not raised then income tax or other types of compensations or taxes or fees could increase. Government can reduce tax rates, may not want to shop around for higher return and can have "special influence from our neighboring countries" and in those circumstances, the earnings could be lower. However, I don't think Nepal Government will just hand over power projects to India, even without getting what India has offered to other countries or other companies are offering to Nepal.

vii) So, when I heard the numbers from Mr Thakur, I tried to link it with the real life example and it made some sense to me, but definitely with certain assumptions. I just didn't hate him for his remarks.

I may be wrong in the assumptions and numbers. Since you have raised the question, I will talk to some of the experts in NEA and try to validate these numbers, again. However, my preliminary comment is that these numbers, as were quoted by Mr. Thakur thrilled me; I tallied with some numbers received from actual PPA proposals (of course, with certain assumptions) and therefore I mentioned it in the CNI meeting . However, I remember it very correctly what I said in the meeting. I said "we need to discuss it further, but…". And what I meant by discussions were the assumptions.

With best regards and seasons greetings.

Shankar

From: Vishwa Amatya [mailto:vbamatya@hotmail।com]

Sent: Tuesday, December 23, 2008 10:05

To: rsansar@mos।com।np

Subject: RE: Rs 250 billion as royalty from 10,000 MW

Dear Shresthaji Well I have rechecked the calculation myself and yes you are right। Only possibility that will make Dr। Shankar is right is to assume GWh is 10^7 kWh instead of 10^6। So Dr Sharma is off by a scale of 10 under existing legislation and off by a scale of 5 taking proposed changes into account। Rediculous! isn't it? By the way, I am wondering what would be your opinion on installing a diesel power plant to tackle existing loadshading problem of the country। As most of us know that a litre of diesel plant will generate 3-3।5 kWh (Thermodynamic compulsion), Combined cycle gas engine could be twice efficient (which is not the proposal)। Another aspect we also need to remind us is that the current deficit is not the peak hour power deficit but the overall power and energy deficit as a whole। One could understand installing a diesel plant to operate an hour or so seasonally will make sense to optimise national power system but to balance the overall demand in a country like Nepal (economically poor, rich in hydro resource) by diesel that will cost anything from Rs. 30-35 per kWh (generation cost only) under current NOC price. One will also need to add NEA's inefficiency costs (transmission/distribution lost and pilferage, which is currently at 25-28%). This will make per unit of energy (kWh) delivered cost NPR 40-47 per kWh. One more, difficulty that will need to be considered is do we have transport infrastructure to transport diesel to operate the plant. To operate a so called 200 MW plant per 12 hours a day (Loadshading hours) will require 70-80 tankers of diesel everyday (at 10 kl per tanker). May one will be tempted to add cost of transportation (vehicles' and road's wear and tear (??) and energy cost of transporting fuel in power generation). Taking all these factors into consideration, cost of a unit of energy delivered will easily become Rs 50. Now who can buy this energy and at what price........? Thanks for keeping me in loop of your interaction. Vishwa B. Amatya

From: rsansar@mos.com.np

To: Dwarika Dhungel

Subject: RE: Rs 250 billion as royalty from 10,000 MW

Date: Tue, 23 Dec 2008 06:22:39 +0545

Dear Dr Dhungel

There are two options for him. One, prove that my calculations are incorrect. Two, accept his error graciously.

With best regards,

Sincerely,

Ratna Sansar Shrestha

From: Dwarika Nath Dhungel [mailto:ddhungel@hotmail।com]

Sent: Monday, December 22, 2008 14:46

To: Ratna Sansar Shrestha

Subject: RE: Rs 250 billion as royalty from 10,000 MW

Dear Ratna Sansarji:

I think that Dr। Shankar Sharma should take your comments seriously। Similarly others also should take it seriously। Regards

Dwarika
From: rsansar@mos.com.np

To: Amrit Nakarmi

Subject: Re: Rs 250 billion as royalty from 10,000 MW

Date: Mon, 22 Dec 2008 07:30:38 +0545

Dear Amritjee

Thanks a lot for confirming that I am right.

With best regards,

Sincerely

Ratna Sansar Shrestha

From: Amrit Nakarmi [mailto:nakarmiamrit@gmail।com]

Sent: Sunday, December 21, 2008 9:46

To: Ratna Sansar Shrestha

Subject: Re: Rs 250 billion as royalty from 10,000 MW

Hi, Ratna Sansarji
You are right, their calculations seem not tallying. Perhaps they meant to say Rs 2,500 million instead of Rs 250 billion.
Regards
Amrit Nakarmi