Monday, March 9, 2009

A Case Study of Khumbu Bijuli Company

The Khumbu region in Northeast Nepal is the homeland of Sherpas, renown all over the world. The area is visited by more than 15,000 tourists every year. A substantial number of them as mountaineers, quite a few of them being fascinated by Sherpa lifestyle and most of the others to trek in the area. Sherpa people are hardy lot and are able to easily adjust to the hardships of high altitude and alpine climatic conditions. Quite a few of them have taken up the profession of assisting mountaineers in their campaigns to scale various Himalayan peaks. This has turned out to be a highly lucrative vocation for the people from the region. They also benefit from the high altitude tourism as lodge owners, porters, tour operators, etc.

All of this happened only after the Sherpaland was opened for tourism in 1950’s. Certain negative impacts from all these activities have also occurred on the environs of the area, which was inevitable anyhow. These are, inter alia, new constructions, pressure on forest resource for such construction and increased demand for fuel wood to satisfy the needs of the tourists, causing intolerable environmental stress due to the eradication of the forests in the region. It is estimated that approximately 800 tons of fuel-wood is consumed during a tourist season each year. To satisfy the needs of the local populace and tourists more and more trees inside and outside the boundaries of the National Park were cut down. This made it imperative to utilize renewable sources of energy to avoid further depletion of the forest cover.

In other words, the disastrous fuel wood situation around Namche Bazar due to increased demand through tourism and the local’s lack of financial means to substitute wood with kerosene became the rationale behind the construction of a power plant to generate electricity by using locally available water resource. The objective was to provide electricity to the residents, transients and the travel industrialists in order to reduce fuel wood consumption. Availability of electric power also affords additional facilities and amenities to the tourists. This not only attracts more tourists to the area but also encourages the tourists to spend more while they are visiting the area.

Thame Small Hydropower Plant
These factors galvanized the Austrian government into signing an agreement with His Majesty’s Government of Nepal in 1988 to build a hydropower plant in Thame Valley (in Solukhumbu District) with the financial and technical assistance of the former. This plant utilizes the water from Thame Khola River, a tributary of local Bhote Koshi River that has its confluence with Dudh Koshi River in its downstream area. Construction of the power plant with a capacity of 600 kW (nominal) commenced in 1989. There is a “balance pondage” at the headwork with a capacity of 2,000 m3 and it uses “net head” of 205 meters. This plant uses Pelton turbine and uses a 13-km long 11 kV transmission line of which only 6-km is over ground.

This plant started generation and distribution of electric energy from February 1995 and since that date this plant is serving eight villages in the Khumbu area viz. Namche, Khumjung, Khunde, Thame, Phurte, Thamo, Syangboche and Thame Teng. A private limited liability company named Khumbu Bijuli[1] Company (KBC) was established in May 1994 to give the plant a corporate vehicle. An Austrian NGO named Öko Himal, Society for Ecological Cooperation Alps – Himalaya, based in Salzburg, Austria has been assisting KBC for last 5 years in its management and also channeling fund from Austrian government for efficient operation and management of this company as well as the plant. Beginning with April 1999 Öko Himal has arranged to have corporate management advisory services provided by Winrock International through its renewable energy program through to end of 1999 on a trail basis. This arrangement is expected to assist corporate and institutional development of KBC besides endeavoring to make KBC financially self-reliant.

Conventionally, a plant like this, constructed/erected with foreign grant in Nepal, is generally handed over to Nepal Electricity Authority (NEA) – the only electric utility in Nepal – by HMGN for its operation. However, a non-conventional approach was taken in this case at the advice of Austrian government. Ownership of NEA in this plant was limited to 15% and rest, 85 % of the outstanding sharers in KBC, was equally distributed amongst three users’ groups from the area in accordance with an Agreement between His Majesty’s Government of Nepal and Federal Government of Austria, signed on 23rd May 1994. The three users’ groups are Namche Users’ Group, Khumjung-Khunde Users’ Group and Thame Users’ Group. For this purpose these three users’ groups were established and share certificates in KBC have been handed over to them. There are 645 users altogether that are members of these three users’ groups.

Cost and Capitalization
The Austrian government has spent around 90 million ATS (equivalent to approximately US Dollar 6.5 million) to date on this project. However, only about Rs 138 million (equivalent approximately to US $ 2 million) have been capitalized in the Company’s books of account as the fixed assets of the company. This has resulted in understatement of Austrian government’s contribution for this plant in the company’s books of account.

However, such state of affairs eases the burden of depreciation on KBC and this may enable it to show profit on paper sooner than if it had to capitalize the full investment on the plant and charge depreciation thereon. But this is not something an institution that is required to be self-sustainable should rejoice. Because by charging depreciation an enterprise can ensure that adequate fund becomes available for the replacement of the plant at the end of its economic life. Conversely, charging smaller amount of depreciation or being able to charge smaller amount of depreciation means the institution will have siphoned off lesser amount for future replacement of the plant.

The ownership structure of this company has created an anomalous situation as far as the “Shareholders” and “Users” of this company are concerned. Shareholders being owners of a specific company would like to see that the company is making adequate level of profit. In order to attain this objective they (shareholder/owners of an enterprise) would happily do needful to raise more revenue. On the other hand, it is not surprising that users tend to be reluctant in the matter of changing electricity tariff upwards to garner more funds for running the institution.

It is slightly different in the case of KBC. On one plane both the users and shareholders of this company are one and same. But the shareholders of this company are not the owners of this company in its truest sense as they are not entitled to share in the profit of the company, even if the company is able to make some profit. Because the Agreement signed between the two governments of Nepal and Austria specifically stipulates that “the profits of the Company shall be reinvested in the Company for the replacements and the System expansion.” Therefore, the shareholders of this company look at themselves more as users than owners. Primarily due to this reason this company has not succeeded so far to collect revenue from its users commensurate with the investment and the operating cost. The point that needs to be noted here is that the revenue is not commensurate even to the “capitalized” investment (US $ 2 million) plus the operating cost; a far cry from its revenue being commensurate to the actual investment (over US $ 5 million) plus the operating cost.

Users’ Groups
It is definitely an innovative approach to have the local users’ groups own a hydropower plant. At times the sense of belonging does help. But at the moment the three users’ groups owning 85% of this company are in effect dysfunctional. After having come into legal existence more than 5 years ago these are yet to start functioning as an entity legally extant. In fact it could become debatable whether these legal entities do exist today or not. These groups were registered by local administration of Solukhumbu District as “non-government organization” which are subject to annual renewal. None of these groups have so far renewed their registration even once.

A properly elected Executive Committee should have replaced the Ad Hoc Executive Committee formed at the time of registration, within 6 months of the registration; such elected Executive Committee having a tenure of 3 years. Going by this these groups should have had two elections by now, but even one has not been held so far. Nor have these groups conducted their Annual General Meetings. This is basically a case of system failure caused by the indifference of individual members of these groups. These groups even do not have any resource to conduct such meetings, nor have any staff to help complete the renewal of registration formalities.

A healthy empowerment of the local users can take place if the annual financial statement of KBC is provided to each Users’ Groups and these groups in turn table such report in its own annual general meetings. This kind of interaction has not taken place even once so far in any of the users’ groups.

An institution can be run in a number of ways. (1) One can run a business enterprise as long as it is able to and then abandon it when it becomes unviable. (2) A sensible way to run a plant as such, without making profit, will be to run it such that it is sustainable from the standpoint of operation. (3) It would have been more sensible if the plant is operationally sustainable as well as it is also able to have created a nest egg of fund adequate for the replacement of the plant at the end of its economic life. (4) However, successful business people, of course, will manage an enterprise in such a way that it is both operationally sustainable while ensuring that adequate fund becomes available for the replacement of the plant at the end of its economic life and in the meantime each year the entrepreneur is also able to draw a tidy profit.

Currently KBC is not even functioning in the second way. In 1998 KBC earned total revenue of Rs 3.4 million while the total annual cost of its day to day operation amounted to around Rs 2 million without including the cost of regular repairs and maintenance. In 1998 alone Austrian government spent 3.5 million ATS which is equivalent to about Rs 18 million. In other words the current level of revenue is not able to operationally sustain the plant

The challenge that KBC is facing at the moment is to be able to at least run the plant in such manner that it is operationally sustainable. In other words it should be able to generate necessary fund for regular repairs and maintenance of the plant without having to rely on Austrian government’s largesse to defray these costs throughout the life of the plant.

To put it simply the question KBC is struggling with at the moment is the sustainability of Thame Small Hydropower Plant. Till the end of preceding fiscal year the weighted average rate of the tariff it charged its users was Rs 2.08 (equivalent to US $ 0.03) per kWh. Whereas weighted average rate of the tariff charged by NEA is slightly under Rs 5 (equivalent to US $ 0.07) kWh. Subsequent to some vacillation on the part of Board and Management of KBC the tariff has been slightly increased with effect from the beginning of current fiscal year (July 16, 1999) in order to have KBC move on the path of self-sustainability. However, even subsequent to this increase weighted average rate of the tariff comes to merely Rs 2.86 (equivalent to US $ 0.04) kWh.

These rates can be put on its perspective by comparing KBC rates with some other isolated power plants whose load factor is comparably low. The power plants constructed with financial and technical assistance of UNDP under its Rural Energy Development Project charge Rs 1 per watt or Rs 1,000 per kW. Whereas a KBC consumer subscribing 1,260 watt is required to pay only Rs 600 per month from the beginning of current fiscal year. Another micro power plant on the way to Namche charges Rs 250 per month for 18 watts.

Another way to appraise the sustainability is to compare anticipated revenue for current fiscal year with budgeted expenditure. With the change in the tariff KBC is expected to earn revenue of Rs 4.9 million during current fiscal year whereas its operational expense is forecast to amount to Rs 3.2 million and even if the plant is expected to have an economic life of 25 years the depreciation will amount to Rs 5.5 million. This shows that KBC has a long way to go in terms of being sustainable at the rates of tariff it charges to its users. For the near future KBC cannot even hope to be able to break-even in paper. Because the depreciation of Rs 5.5 is worked out on the basis of understated value of Thame power plant.

Capacity Utilization
Another impediment in this plant becoming self-sustaining is the fact that this plant is highly underutilized. However, this feature is unique to isolated power plants of this kind. Although its installed capacity is 600 kW, the highest load of 418 kW was recorded in February and November 1998. In this perspective it also must be noted that this load would last only during peak hours of the evening and early morning. Otherwise, even in these months the nighttime and day time (off peak) load were quite low.

Holy Cow
Prior to concluding, it must be noted here that the users’ groups who own 85% of the outstanding shares of KBC would never have been in a position to invest the required amount to own such a large chunk of Thame Small Hydropower Plant, if not for financial and technical grant of the Federal Government of Austria. So the plant is an Austrian gift to the populace of the Khumbu region. However, this factor is also making the users complacent in the matter of seeing to it that the plant is successfully operated for a long time to come, putting aside the worry about being able to replace the plant at the end of its economic life.

An analogy that comes to mind is that of a gifted holy cow. The people in the region can milk it till it is able to without spending necessary amount for its feed, medical care, etc. for a very short period of time. Or they can choose to spend reasonable amount so that they can milk the cow for a long time to come. Initially the recent small increase in the tariff was resented and resisted by the users. However, eventually they got around to agreeing to the argument and KBC was able to implement the changes. The acid test will take place when KBC will be impelled to implement another phase of the tariff increase without which KBC will not be able to operate the plant without having to be spoon fed by external agencies.

In order for KBC to attain both corporate and institutional development while achieving operational sustainability as well as being prepared to replace the plant at the end of economic life, its Board of Directors and Management needs to become capable of having vision and being able to lead the Company with firm hand in the appropriate direction. As the three users’ groups from the Khumbu area hold 85% of KBC’s outstanding shares, there are three representatives from these groups in its Board of Directors. NEA deputes the fourth member to the Board, comprising four members. Only this member (Director) – coming from Kathmandu – has exposure to certain level of managerial practice and experience. The three other Directors representing the users’ groups from Khumbu area are in need of adequate capacity building to know what is good for KBC in particular and the users’ groups in general. Öko Himal has introduced a measure for empowerment of KBC’s Board, its Management and its constituent three users’ groups.

[1] Bijuli in Nepali means electricity.

Paper presented in HydroEnergia 99 Conference in October 1999, in Vienna, Austria.

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