Wednesday, July 21, 2010

An Overview of Hydropower Policy

Ratna Sansar Shrestha

Present hydropower development policy has attracted comments from the knowledgeable quarters like “inadequate policy got formulated which resulted in the trailblazers getting benefited” or “it was formulated merely to meet the interim demand.” People strongly felt that export of power is a very different objective from that of making arrangement to meet internal consumption requirement.

In view of what has happened since this policy was made public, it has been felt that of the three aspects of hydropower development, viz. generation, transmission and distribution, present policy trend is heavily inclined towards generation only. Questions were raised as to whether this tilt is the undeclared part of the policy or the bias is inherent in the implementing institutions. Moreover, this policy does not look beyond the single product, electricity and single buyer, NEA. There are other products or by products of hydropower development like flood control, irrigation, navigation, etc. and several other buyers if the products are correctly packaged.

An endeavour can be made to find the proof of this by examining following three reasons (in three separate sentences) that were cited as the rationale for the formulation of the Hydropower Development Policy at the time of its being made public:

“It is necessary to make alternative arrangement to meet the interim demand of the country till the above projects come into operation.” In this excerpt the words “above projects” were used in reference to Arun-III (402 MW) and Kaligandaki (110 MW) which were expected to “be executed within a period of 7-12 years.”

“It is also necessary to construct new small hydroelectric projects to meet the demand of those hilly and remote Himalayan region where the national electricity system has not been extended or would not be extended in the near future.”

“It is utmost necessary to extend proper distribution system in the rural areas where electrification has not been done and also to develop hydropower of the country by motivating national and foreign private investors in the electricity sector.”

The only place where private investors, both national and/or foreign, get mentioned in the above three sentences is in connection with extension of distribution network in rural areas. The first two rationale of the new policy is basically to make alternative arrangement to meet the interim demand during the time spent on the construction of Arun and Kaligandaki Projects and to encourage the construction of small plants to serve hilly and remote Himalayan region.

1.1.1 Policy Swings
This in fact establishes that there are extreme swings in the HMGN policy. It is immaterial whether such swings take place by design or accident. The published policy, as discussed above, was formulated (a) to make alternative arrangement to meet the interim demand, (b) to meet demand of the hilly and remote Himalayan region deprived of national electricity system, and (c) to extend distribution system in rural areas bereft of electrification. These three reasons were being attempted to be addressed while “huge” projects like Arun and Kaligandaki would have been in the construction time scale of 7-12 years. Whereas HMGN attempted very seriously to bring in foreign investment in mega projects like Karnali through the access built by the present hydropower development policy package that includes two Acts. In other words Nepal is trying to drive down the path of mega project, but the path itself has not been readied.

1.1.2 History
Having seen to it that Jhimruk came into existence as conceived, the same group that is responsible for the realisation of Tinau and Andhi Khola, conceived the idea of executing the Khimti Project. With the implementation of modern economic concepts of privatisation, liberalisation and globalisation in Nepal, adhering to the world wide trend, the promoters of Khimti Project wished to have it implemented by the private sector, in early 90’s (the first three were grant funded). Legal scholars from Norway volunteered to help Nepal in drafting appropriate and necessary policy and legislation for the purpose. Initially, they held the opinion that a special statute needs to have promulgated just for Khimti. Such an idea was rejected, as it will be too narrow – an enactment of parliament just for one project.

Subsequent to many rounds of discussion and deliberations between Nepali legal experts and their Norwegian counterparts, followed by grave contemplation, the package of documentation that we have now were brought into existence, viz. Hydropower Development Policy, 2049, Water Resources Act, 2049 and Electricity Act, 2049. The legal experts from Norway that were fully involved in the process of formulation of the policy and promulgation of the legislation have expressed amazement that Nepal is now contemplating implementing mega sized projects using the same package of documentation as the vehicle.

1.1.3 Change in Policy
In this backdrop a sea change is warranted in the declared policy as well as HMGN’s stance on the issue. If changes are to be made to accommodate mega projects with export potential then it is high time to learn from mistakes of small scale projects. The advice given was that it is very difficult to make large scale mistakes in a small scale project, but same will not hold true in the case of a large scale project. Nepal’s priority is to have the benefit from a mega project stay in Nepal. These benefits should percolate down to the consumers and more importantly to the man on trails of the hills/plains (there are no streets in most of the rural areas).

This aspect is more important in the case of foreign investment projects, the cream of the benefits from which will be skimmed off by the foreign investors. Therefore, an ideal hydropower development policy should aim at maximisation of benefit to Nepal from a hydropower project built with foreign investment.

Moreover, if the power generated from a foreign sponsored project is used in Nepal then it will help Nepal in many ways for all round development of the country including industrial development, development of communication and transportation, production of implements and fertilisers for the enhancement of agricultural production, electrification of each and every village resulting in emancipation of the rural populace from darkness including the darkness of illiteracy and so on and so forth - all of this bolstering the standard of living of the common Nepali. When the electricity is exported even that gets scuttled. Therefore, it becomes natural for Nepal to expect more from a hydropower project built to export.

1.1.4 Private Sector
Even private sector felt that HMGN lacks clarity of purpose in its objective to encourage involvement of private sector in hydropower sector. A giant foreign company (mega projects like Karnali are beyond the capacity of average foreign companies) does not need Nepal, but Nepal needs their money in order to develop such huge projects. If such companies are made to feel unwelcome then they will not come. Foreign investors will not take chances with uncertainties, nor will they wait too long without putting their money into investment opportunities that come their way in other more accommodating countries.

The rationale for attracting foreign investment is the enhancement of overall efficiency. One needs to pause and take stock whether overall efficiency has effectively increased or not. The cost of foreign investment tied up with convertible currency is high. Using a conservative (one on the lower side) rate of depreciation of Nepali currency vis-à-vis US Dollars, an amount borrowed today in hard currency will require 34 percent more in total repayment (cumulative interest and principal repayment) in 15 years of debt service at 12 % interest, compared to Nepali currency loan on the same terms. If the debt service period is 20 years then the excess repayment for foreign currency loan exceeds 39 percent in total at the same rate of interest.

Besides, current fiscal problem of Indonesia can be partly ascribed to excessive foreign borrowing, which can even lead to a debt trap. In this respect one must not loose sight of foreign currency reserve as well which has to be able to withstand the pressure of demand for repatriation. Moreover, the impact of hydropower project with the foreign investment on the consumer and ultimately the national economy also needs to be projected.

Substantial numbers of people polled were of the view that the law as it is today is okay to an extent, but implementation is more of problematic. It was felt that faithful application of law is lacking. It was reiterated that the commitment made by the government with regard to the incentives should be kept. In the matters of hydropower project Electricity Act should clearly supersede Industrial Enterprises Act and hydropower project should not be deemed an industry - it is not a factory.

One of the multi-nationals also found laws to be acceptable. They too did not ask for any change in the law notwithstanding a few ambiguities in certain laws. However, the important thing is the implementation of what is clear in the law by the government. If Electricity Act is not designed for export oriented mega project HMGN should have made necessary changes prior to inviting investors for such projects.

It is further suggested that provisions be made in the legislation for each of these types befitting their uniqueness and the requirement.

1.2.1 Social Engineering
There is no doubt that a hydropower plant is a product of specialised feat of engineering. Most of the disciplines of engineering like civil, mechanical, electrical, electronic, etc. are fully involved in the design and constriction/erection of a hydropower plant. However, the design and construction and erection of a hydropower plant also involve social engineering. If the design of such a structure is viewed as a triangle then there will the government on top balancing on a base formed by Investor(s) and Consumers.

The balance and symmetry of this will govern whether such a structure is able to stand on its own and, further, same will also govern how long will it continue to stand; meaning whether it will be sustainable or not. Without the money of investor(s) no development will occur when the government is in no position to invest, however, as the government allows the investor to exploit the natural resources, the government is entitled to an equitable, if not equal, share in the profit that the investor(s) make(s). The balance and symmetry will fail or such a structure will collapse if the first two partners (one possessing money and the other owning the natural resources) of this triangle wish to maximise without any consideration for consumers (whether in Nepal or abroad) who have to be able to afford the electricity generated by the plant. The purchasing power of the consumers or their ability to afford is a very important part of this social engineering.

As discussed above, the extant policy was not formulated envisioning construction and operation of mega projects to be built by private sector, especially the ones the electricity from which will not be consumed internally in Nepal and which will have international ramification in terms of downstream benefit to another nation – India specifically. In a mega project maximisation of national interest based on project needs to be done on a mega-scale. Each mega project is unique and same rule cannot be applied on all projects.

In view of the above, it is felt, therefore, HMGN should, hold extensive discussion with the concerned investor from the position of strength. For this purpose Nepal needs to enhance technical know-how in Nepal which will require capability building among Nepali technocrats. The best way to do so is to develop a core group who should be adequately remunerated.

1.3.1 Usage of Power in Nepal
Clause 4 (2) of the Hydropower Policy, 1992 stipulates that “excess electricity in any specific area may be supplied to the system of NEA.” This was contemplated to be done by way of “operation procedures of hydroelectric projects” under “planned works to be done for the development of hydropower.” It is very obvious that at the time of formulation of this policy the magnitude of excess electricity of a number of projects was not envisaged to be higher than what could be absorbed by the consumers in Nepal, channelled through NEA. Today the situation has come to a head in such a way that only the recently formed new government has agreed to buy electricity generated by plants with the capacity between 1 MW to 10 MW, in total not exceeding 50 MW after 2003. This completely precludes implementation of the policy statement made by Clause 4(2) in the case of projects larger than 10 MW. In this scenario mega projects were outside the gamut of the policy formulated in 1992 and the policy of the current incumbents in the seat of power also does not envisage purchase of power from mega projects. Besides, NEA will never be able to accept and resale excess electricity of a project of the magnitude of Karnali (Chisapani).

The anomaly of the situation described above gets reinforced when perusing the Sub-Clause (3) of the same Clause which goes on to state that “the whole electric-power generated through a hydroelectric project shall be supplied in bulk into the NEA system.” This further expands the ambit of scope of hydropower that NEA is obliged to buy. When it will be remotely probable for NEA to be able to buy and sale merely excess energy from a decent sized mega project, if in substantial quantity, without getting “drowned” in it, it is out of question for NEA to do so with the whole energy produced by a mega project in the bulk. There is no way for NEA system to withstand, at present or in near future, bulk power from hydropower project like Karnali (Chisapani). However, at present this is mandated by Section 21 (1) of the Electricity Act, which states that “if any person desires to sell in bulk the electricity generated pursuant to this Act, HMGN may purchase or cause to purchase such electricity to the national grid.”

This further establishes that mega projects were not envisioned by the hydropower development policy currently prevalent. The scene here is comparable, in hugely reduced scale, to endeavouring to take an elephant through a doorway designed for passage of a rabbit (no pun intended).

1.3.2 Export
Sub-section 2 of Section 22 of the Electricity Act makes provision for the export of electricity generated by a licensee . Moreover, we have seen above that use of hydropower generated by mega projects is not NEA’s cup of tea and nor will it be fully consumed within Nepal in the near future even if 100 percent of households in Nepal are electrified; provided that the mega project does not generate less than 2,000 MW. Thus, the only purpose for tapping majestic rivers of Nepal to generate electricity will have to be willy-nilly for export purposes. Export of power will be a business as is any other business. Export of power cannot be regimented by legislation especially because another sovereign country will be involved. If the government of Nepal is to get involved in such business then the transaction will have to be cemented by a treaty with a country prepared to buy. However, if a private developer strikes a deal with a buyer across the border then such an arrangement will obviate the need for a treaty between the two countries.

Even in this matter there is another viewpoint; a conservative one, subscribing to the idea that the two governments must formally enter into a treaty for each deal. In the mean time, however, Power Trade Agreement, to enable export of power from Nepal has been initialled between HMGN and the central government of India and is awaiting ratification in the respective parliaments of the two countries.

Nevertheless what is wanting is the infrastructure for export and HMGN support to the exporters in order to exploit the export market that exists.

1.3.3 Downstream Benefit
Mega projects with storage facility involve relatively high downstream benefits in the forms of irrigation, flood control, navigation, etc. besides generation of electricity. Certain segment of Nepali intellectuals has made an educated guess that the downstream benefit of a high-dam, water storage project is equivalent to 2/3 of the cost of such a project. However, both the policy and the legal framework are deafeningly silent with regard to this.

However, the private sector showing interest in such mega projects have taken a stand that it is not bothered with the downstream benefits. It is matter for two governments. Because if the quantification of such benefit will be slightly involved, ascertaining who should pay to Nepal for the downstream benefit will be very complicated. An agency can be expected to charge for the irrigation facility in the downstream area and pass on such money back to Nepal, but quantification of benefit due to flood control and recovering charges for such benefit will be well nigh impossible, except for the Indian government who will have substantial savings in terms of flood damage, flood relief outlays, etc.

Then it becomes incumbent upon HMGN to conduct technical negotiation with knowledge, from a position of strength. The unfortunate part of the situation is that far from prescribing a method (a) to quantify such benefits and (b) to receive recompense for them, the policy formulated and the Acts promulgated for the purpose is completely silent even about the concept of the downstream benefit.

1.3.4 Wheeling
The product, electricity, is not storable; therefore, private sector feels that provision should be made for transferring it through the NEA’s transmission line at reasonable service charge. In other words wheeling facility is required to encourage private sector. The availability of which will allow the private sector, especially the ones who are not looking at mega projects, to make alternative arrangement for the sale of electricity in case NEA is unwilling or unable. This could very well involve extension of the grid by NEA. This group feels that NEA’s objective is to provide service to the nation and this is a form of service.

At the moment this aspect is covered by the current hydropower development policy in Clause 4(m). It is stipulated that “if it is feasible from the technical point of view the private sector may supply electricity produced by it to a point of the present electric system in a region and take it from another point of any electric system or may export it to a foreign country. It shall be required to pay the required fee for such arrangement.”

The small-scale private sector prefers to have the rate of such fee to be fixed by law depending upon the voltage. A reference point is available to us from an electricity project in Orissa of India, developed by investors from Hong Kong who pays between INR 0.50 to 0.55 for wheeling the electricity to another state in the western India, Punjab.

Construction of a hydropower project involves certain amount of unavoidable damage, including felling of trees, boring of holes in the hills, putting up barricade in a freely flowing river, etc. What is important is that such destruction needs to be controlled and must be mitigated promptly. The Electricity Act has made necessary provision for the purpose in Section 24 which states that “while carrying out electricity generation, transmission or distribution, it shall be carried out in such a manner that no substantial adverse effect be made on environment by way of soil erosion, flood, landslide, air pollution, etc.”

1.4.1 Land – private and public
For the construction of a hydropower plant different kinds of land become necessary; private land, government land and forest. Land is needed to build structure and to dig tunnels. At times the location of the plant forces a developer’s hand without allowing any choice in the matter of whether these development ravage forest or displace populace from their homes and fields. A striking distinction between a simple run-of-the river project and a water storage project is in the scale of such destruction and/or displacement.

There have been problems acquiring pastureland owned by the government. However, the problem was not in the law rather the problem emanated from the fact that a specific government agency refused to honour HMGN’s commitment made in the Electricity Act and the Project Agreement. There have been situations where VDCs claim that forest belongs to it without any documentary proof of such ownership.

1.4.2 Land Acquisition Act
The spin off effect of acquisition of land as such is the displacement of inhabitants of the area depending upon the scale of the project. It is felt that the Land Acquisition Act, 2034 is designed to acquire land for public sector project launched by HMGN, benefit from which is not pocketed by a specific private party. It was opined that the current legal framework is geared towards payment of compensation for absolute values of the land not the relative value including access to common property like forest, water, pastureland etc. Therefore, it is being felt by certain section that the Land Acquisition Act, 2034 needs to be revamped to enhance the adequacy of resettlement, rehabilitation, and compensation plan for the displaced populace.

1.4.3 Local Development
In the matters of tax and duties payable to HMGN private investors tend to forget that they are fully commercial project. Similarly, in the matter of local development the local authorities, the local political leaders and the local populace do not make any distinction between grant-funded project and a private sector project.

In view of the fact that the electricity generated by private power project gets fed to central grid the aspirations of local community increases by leaps and bounds with the commencement of a hydropower project in the area. However, it was felt that obligations, related to local development which are beyond the scope of mitigation of environmental damage, of a developer must be specifically defined and transparently reflected in the tariff charged to NEA. In other words, at the outset itself a developer’s obligations with regard to the development work at the local level must be exhaustively listed and an opportunity must be given to incorporate these in the project’s construction budget so that the cost of such development work could be reflected in the tariff. Moreover, the portion of royalty earmarked for local level must be specifically used for these purposes.

Policy change in HMGN is warranted on following three issues, which makes it difficult for foreign investors to invest in Nepal.

1.5.1 Choice of Law to Govern Documents
Prior to amendment of Foreign Investment and Technology Transfer Act in 1996, the choice of law to govern foreign investment agreements was not exercisable even if a project is financed with foreign investment. However, as it was not expressly prohibited anywhere else in the case of other documents involving foreign parties, this choice existed.

The amendment of FITTA made the choice of law to govern documents available for all documents when foreign entities are involved in industries above a certain level. However, it is still not clear whether such a choice is available in the case of agreements where no foreign parties are involved. There is no law, which expressly bars such choice. The situation can be depicted in the use of following diagram: Settlement of Dispute
The issue of choice of law becomes relevant mainly for the purpose of settlement of disputes between parties to an agreement. The main two courses available for the settlement of disputes are arbitration and judicial decision. Arbitration
With the adoption of New York “Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958” by HMGN foreign arbitral award have become enforceable by a Court in Nepal. Section 18 of Arbitration Act, 2038 has made provision for this purpose. Judicial Decision
Although the liberty to choose the laws of a specific country to govern a document is now exercisable, use of judicial decision for the purpose of settlement of dispute, in case the law of a foreign country governs the document, is problematic at best.

The concerned parties are at liberty to approach the judiciary of the country whose law is chosen to govern the document. However, enforcement of a foreign court’s judgement in Nepal is not possible. Therefore, the whole exercise of getting the judiciary of such a foreign country to hand down a verdict in settlement of dispute between the parties becomes futile, as the verdict will not get implemented in Nepal.

Similarly, application of a foreign country’s law by a Nepali Court for the settlement of disputes is also out of question. This takes the form of physical impossibility, as this will involve Nepali judiciary studying law of foreign countries in foreign languages. Once such a practice is allowed Nepal will have unenviable and onerous task of interpreting laws of foreign land in foreign language which exists in one too many languages.

Moreover, adjudication of litigation arising out of an agreement governed by foreign law by a Nepali Court by applying Nepali law is likely to be out of the question. In the present set up of judiciary structure, the first reaction of a judiciary could very well be to tell the parties to seek the assistance of the judiciary of the country whose law has been chosen to govern the documents. There are no known precedents in Nepal in this respect. But an Indian Court reportedly refused to adjudicate a dispute arising out of a document governed by Japanese law; the parties were told to get the dispute settled by Japanese Court.

However, these three avenues for settlement of disputes are deemed to be the integral part of the benefit accruing from being allowed to choose foreign law to govern documents by the international community of investors. Thus there are some problems if the liberty to choose governing law is exercised and needs to be enforced. In other words, except for the settlement of dispute by arbitration, the right to choose the governing law is meaningless at the moment.

1.5.2 Mortgaging Real Property with Foreign Entities
Section 2 of the Chapter 2 (Rule of Virtuous Conduct) Civil Code, 2020 prohibits mortgaging real estate property with foreign entities without prior approval of HMGN. This is not an insurmountable problem, however, this also takes up a lot of time and for most of the investors “Time is Money.” Therefore, this calls for some rectification because once HMGN agrees that a developer can borrow from foreign sources, securing approval for this all over again is unnecessary drain on time and resources of both HMGN and the developer.

1.5.3 Pledging Shares with a Foreigner
Prior permission of Nepal Rashtra Bank is required to pledge shares in a Nepali company to foreign entities under Section 10 of Foreign exchange (Regulation) Act, 2019. This also needs to be made simpler in order for foreign investment to come into the country without many hassles.

1.5.4 Registration fee
No lender will be willing to make a loan available if the security is not perfected to its liking except in the case of soft loan. And possibility of soft loan for commercial purposes is rather slim. One of the ways to perfect the security of lien over the borrower’s property mortgaged with the lender in Nepal is the registration of such loan instrument with the Land Revenue Office in the respective district.

Registration of document to borrow from Nepali financial institutions does not attract any registration fee , whether putting property as collateral or not. However, on registration of document to borrow from foreign lenders there is no such exemption. This discourages foreign investment in Nepal and is also discriminatory.

The current hydropower development policy was basically formulated “to make alternative arrangement to meet the interim demand of the country till” the Arun and Kaligandaki “projects come into operation.” The planned focus of this policy was construction of small hydroelectric projects to meet the demand of hilly and remote Himalayan region and “to extend proper distribution system in the rural areas where electrification has not been done.” This policy simply did not envision mega projects; the electricity from which will not be consumed internally in Nepal and which will involve partaking of the downstream benefit.

In this backdrop it is recommended that following changes be made in the hydropower policy and other policies such that private sector is encouraged in Nepal’s hydropower sector and more foreign investment is attracted.

1.6.1 The Policy
It is time the policy look beyond making alternative arrangement to meet the interim demand of the country till” the Arun and Kaligandaki “projects come into operation.” Construction and operation of mega projects which involve exporting power and also acquiring adequate recompense for downstream benefit is the only way Nepal can truly be benefited from its famed affluence in the water resources. However, getting involved in these in haste will lead to a lot of repentance at leisure. Each project must be evaluated by weighing pros and cons along with an assessment as to how much does the developer take away and how much does come Nepal’s way. The nation needs to ponder whether the amount that Nepal will receive from a specific developer is justifiable and must be judged in terms of opportunity cost of going ahead with a particular developer instead of finding another developer.

It is recommended that the hydropower policy should make provision for following four broad categories of projects:

(a) Projects of up to 10 MW capacity
As stated in the current policy Nepali financial institutions must be directed to grant concessional loan on priority basis to such projects. Foreign component of loan requiring repatriation must be kept to the minimum by ensuring that such borrowing is limited to the extent of the cost of the electro-mechanical equipment.

(b) Run of the river projects
     (i) Projects costing up to $ 100 Million
As foreign entities (from third countries) are generally not interested in such small projects, we should get investors from India interested. This will also make the path for sale (export) of electricity in India smooth. Besides the technical expertise and equipment will be available at economical prices.

    (ii) Projects costing over $ 100 Million
Such projects are less complicated and do not result in displacement of populace in large number. We should be able to get a fair number of third country investors interested in such projects.
(c) High dam project
High dam project involves huge investment, displaces bigger group of people. Moreover, such project also raises questions of downstream benefit thereby raising bilateral issues between Nepal and India at national level. A private sector investor/developer cannot be and would not be in a position to negotiate with Indian government on the matter of downstream benefit and the chanellisation of such benefit to Nepal without Nepal government doing anything. Because if the quantification of such benefit will be slightly involved, ascertaining who should pay to Nepal for the downstream benefit will be very complicated. An agency can be expected to charge for the irrigation facility in the downstream area and pass on such money to Nepal, but quantification of benefit due to flood control and recovering charges for such benefit will be well nigh impossible, except for the Indian government who will have substantial savings in terms of flood damage, flood relief outlays, etc.

The licensing procedure must be simplified in the case of a project of up to 10 MW while it must be exempted from RFP/RFQ procedures. Similarly, simple IEE can be prescribed for such projects instead of a full EIA.

1.6.2 Mega Projects
HMGN should build and provide infrastructure for export and extend necessary support to the exporters. Moreover, as mega projects with storage facility involve relatively high downstream benefits like irrigation, flood control, etc. and the private sector is not bothered with getting recompense for such benefit HMGN is required to formulate policy decision as to how it will have the downstream benefit also percolate to Nepal. HMGN needs to establish mechanism to identify, value such benefit involving quantification of the benefit accruing in the downstream areas and receive recompense for these

It should move ahead with competitive bidding process (if that is the route that it feels it needs to take) only after coming to a conclusion about the downstream benefit aspect.

1.6.3 Environmental Mitigation vs. Local Development
As current legal framework is geared towards payment of compensation for absolute value of the land to the people displaced by a hydropower project instead of the relative value including access to common property like forest, the Land Acquisition Act, 2034 needs to be revamped to enhance the adequacy of resettlement, rehabilitation, and compensation plan for the diaspora.

The obligations of a developer related to local development which are beyond the scope of mitigation of environmental damage should be specifically defined and transparently reflected in the tariff charged to NEA. Moreover, a specific portion of royalty must be earmarked for local level and must be used for the purposes of local development of the affected area directly. HMGN should ensure that such fund is used for the stated purpose.

1.6.4 Promotion of Foreign Investment in Hydropower
If Nepal is serious about attracting foreign investment in its hydropower development, following two aspects must be attended to, in order to promote foreign investment in hydropower. Choice of Law to Govern Documents
Although the choice of law to govern documents is available for all documents when foreign entities are involved but its use in settlement of disputes is limited to arbitration purposes only, to the exclusion of judicial action.

Enforcement of a foreign court’s judgement in Nepal and application of foreign governing law by a Nepali Court is not possible without having a major overhaul in the constitution and the judicial system. However, exercise of the choice to be governed by foreign law should not preclude adjudication of a litigation arising out of an agreement by a Nepali Court under Nepal law. Electricity Act must have a provision for this purpose incorporated in it. Moreover, HMGN should conclude treaties with foreign governments for the mutual enforcement of each other’s court decision in the other country. Mortgaging Real Property and Pledging Shares with Foreign Entities
Similarly, provision should also be made in the Electricity Act permitting mortgaging of real estate property and pledging of shares in a Nepali company with foreign entities. Registration fee
There should be a provision in the Electricity Act exempting registration fee on registration of loan document to borrow from foreign lenders for investment in hydropower projects.

This is the first chapter of the report on the Study of Legal Framework and Institutional and Regulatory Process for the Development of Private Power Projects in Nepal , prepared in the capacity of the Legal Specialist, in June 1998. A set of four separate working papers were presented in a one-day workshop on “Legal and Institutional Framework for Hydropower Development in Nepal” based on the above study, in June 1998.

1. Although the installed capacity of the Kali Gandaki Project is listed at 110 MW in the policy document, construction of this project is in full swing at the moment and the installed capacity of the plant is planned to be 144 MW.
2. This policy receives its sanction from Section 21(1) of the Electricity Act, which stipulates that “if any person desires to sell in bulk the electricity generated pursuant to this Act, HMGN may purchase or cause to purchase such electricity to the national grid.”

3. The developer is required to enter into an agreement for export of electricity pursuant to this provision.

4. Sub-section (2) of Section 33 is categorically clear on the subject which states that “on receipt of an application pursuant to Section (1), HMGN may, after conducting necessary enquiries into the matter, make available such land and house in the same manner as it makes available to any corporate body under prevailing laws. If the land is owned by the government, such premises shall be made available on lease for a period up to the term of license.”

5. These are enforcement of a foreign court’s judgement in Nepal, application of foreign governing law by a Nepali Court and adjudication of a litigation arising out of an agreement governed by foreign law by a Nepali Court by applying Nepali law.

6. Similar prohibition is also applicable under this provision on other forms of transfer of immovable property to foreigners by way of sale, bequest, donation, etc.

7. Section 1 of the Chapter 21 on “Registration” of Civil Code (Muluki Ain) makes it mandatory to register a loan document for borrowing by providing any type of collateral.

8. Schedule 11 under Section 16 of Finance Act, 2040 specifically waived registration fee for the registration of loan document while borrowing from banks and the exemption continues to be available to date. However, the word “bank” in this provision has been defined to be limited to Nepali banks and such exemptions has been denied to foreign lending institutions.