Friday, July 30, 2010

Economics in the National Interest

July 30, 2010


Mr Madhukar SJB Rana
Professor, South Asian Institute of Management
Former Finance Minister

Dear Madhukarjee

Thank you so much for sending your paper to me.

Upon perusal of the section related to “Maximize the Utilization of Water Resources” I have discovered that you have emphasized the importance of multidimensional uses of water. I like this part the most. One can over-simplify the matter by citing the example of Lesotho which is paid US $ 25 million/year for 18 m3/s of water by South Africa and compare it with the potential augmented/regulated flow from West Seti project of 90 m3/s that India stands to benefit by (this project’s installed capacity is just 750 MW).

I need to make a few comments that could be deemed critical. This, I trust, will be of value to you in finalizing (fine tuning) your paper.

In the para where you have quoted me I have following comments:

Ø You have mentioned that “his study shows that, in 2007-08, only 2.04% of the total national energy utilization (2,800 MW) was met by hydro-power and the rest was met by firewood (75.06%); petroleum (9.82%); animal residue (5.87%); agri-residue (4.08%); coal (2.53%) and solar energy (0.6%).” Kindly please note that these ratios aren’t based on my own study. I had quoted the data (expressed in a pie chart) from Economic Survey published by Ministry of Finance, GoN.

Ø In above point you have also mentioned 2,800 MW as the total national energy utilization that was "met by hydro-power." I have not said as such in my paper. This number needs to be changed at two levels. If your reference is with regard to electricity as a source of energy then the correct number will be 700 MW. However, if you want to specifically talk about hydropower in this context, then the correct number will have to be reduced by 53.4 MW – thermal generation.

Additionally, my attention was also drawn by the para immediately following the one referenced above where you have made following statement:

QUOTE
If the economy leap frogs to the much touted 10.0% growth per annum, it would mean that total national energy demand would rise to, inter alia, no less than 11,000 MW. Now to produce 11,000 MW of hydro-energy to substitute all other sources would actually result in the economy leap-frogging as well with both balance of trade (import substitution) and payment surpluses (fdi, exports, carbon trading) beyond the imaginations of the Arab sheikhs.
UNQUOTE

Here you have referred to “payment surpluses (fdi, exports, carbon trading) beyond the imaginations of the Arab sheikhs” based on your estimate that in order for Nepali economy to leap frog, Nepal will need “no less than 11,000 MW.”

Ø Based on the construction of this sentence, I have inferred that you have come up with this estimate for domestic consumption of power. In which case Nepal will not stand to benefit from carbon trading as Nepal’s baseline is predominantly hydropower and, consequently, there will not be any environmental additionality that will entitle us to indulge in carbon trading.

Ø The only other scenario under which carbon offset will occur is, if and when Nepal exports hydropower to India as her base line comprises of many unclean sources of energy (I am given to understand clean sources are less than 20%). I have played with the number for market rate of CO2 and have discovered that proceed from carbon trading won’t be substantial (hence, no chance of generating revenue stream “beyond the imaginations of the Arab sheikhs” from this). More importantly under the export of power to India scenario, the actual carbon offset will occur in India and, obviously, having been showing good example of economic nationalism, Indians will insist on keeping the revenue stream generated by carbon offset in their country to themselves and Nepal hoping to benefit from carbon trading will be like a pie in the sky.

Please do feel free to contact me if you have any query.

With best regards,

Sincerely,

Ratna Sansar Shrestha


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

From: madhukar [mailto:madhukar1@wlink.com.np]
Sent: Wednesday, July 28, 2010 8:02

To: Ratna Sansar Shrestha
Subject: Re: Request for your paper

thank you, Ratnaji (I owe u aplenty as you will see) I attach the said article
best regards

madhukar

Monday, July 26, 2010

Study on Setting Legal Basis for Private Sector Involvement in Hydropower in Afghanistan

I Introduction
Ratna Sansar Shrestha
1.1 Background
Afghanistan’s population is approximately 30 million and most of them are rural poor, with no access to reliable, modern forms of energy. The per capita power consumption (as measured from grid supply) in Afghanistan is among the lowest in the world: about 27 kWh per year and less than 10% of the population is connected to the Government owned electricity grid. The generating capacity is mainly hydro-based with total hydro potential estimated to be about 23,000 megawatts (MW). Moreover, rural areas are virtually un-served and the supply there, unless attached to the Ministry of Energy and Water (MEW) network, comprises mainly generator sets and micro hydropower plants (having capacities below 500 kW ). These are privately owned, community-owned or belong to Government offices for self-consumption. As the power sector drives the economic growth, the Government has accorded high priority for its development and it has promulgated Electricity Sector Policy (Appendix 1) in 2003.

The Government has depicted electricity as a vital service for the economy in the Policy document. The vision of the Government for the electricity sector is, “By 2010, to evolve into autonomous, financially viable enterprises providing reliable, low-cost electric service to all Afghan citizens in an environmentally responsible manner, consistent with sound business practices.” To implement this vision, MEW has planned ambitious projects with the goals of rehabilitating its existing infrastructure, increasing its generation capacity through participation of the private sector, increasing its revenue through enhanced and effective billing and collection and loss reduction procedures, and all associated with the pressing need to develop institutional capacity and tools to manage the electricity infrastructure.

The state utility, Da Afghanistan Breshna Moassesa (DABM), is responsible to MEW for the operation and maintenance of the country's generation, transmission, and distribution assets, as well as for the sale of electricity it produces. Currently the power system in Afghanistan comprises several regional grids which are not interconnected. There is no national uniform tariff and it varies widely depending on the source of power . However, the cost recovery level is estimated at only 50% on average for the country.

A larger scale private sector participation in generation, transmission and distribution is not feasible under the current situation, given the DABM’s poor organizational systems related to its personnel data, its accounting systems, technical information, billing and collection, and the current level of political and security risks in Afghanistan. A legal basis for private sector participation has to be designed, developed and implemented. Moreover preparatory work is required to create the basic information and support before any private participation scheme can be attempted.

1.2 The Assignment
In the frame of the project “Improvement of the Energy Supply, Afghanistan” German Technical Cooperation requires the services of Consultants to assist in the development of political and institutional frame conditions for the implementation of a reliable energy supply, in particular the elaboration of a legal basis for private sector participation in power generation, distribution and purchase in Afghanistan.

1.3 Scope of Study
The assignment comprised of following activities:

• Screen the sector and collect all necessary and available information regarding Rules and regulation for the access of private, independent power producers (IPP) to Afghanistan’s energy market.

• Based on the existing situation elaborate main headlines on what is necessary for the implementation of a socially balanced tariff system for Afghanistan considering local conditions and the participation of private power producers.

• Identify main points that are to be considered in the Revision of the “Usage of Electricity Act” from 1986.

• Identify main points that are to be considered in drafting a modern Electricity Act for Afghanistan considering rules and regulation for IPPs.

1.4 Deliverables
The deliverable of the study under the abovementioned scope is as stated below:

• a short evaluation of the existing laws and regulations after reviewing Rules and regulation for the access of private, independent power producers (IPP) to Afghanistan’s energy market

• a short report on main headlines on what is necessary for the development of a socially-balanced tariff system for Afghanistan considering local conditions and the participation of private power producers.

• an outline of what has to be considered in drafting modern Usage of Electricity Act considering rules and regulation for IPPs

1.5 Limitations of the Study
This study was conducted over an extremely short period of four days between a weekend and an extended Afghani New Year weekend. Lack of a business directory with telephone references also constrained the mission as the meetings were being set up simultaneously with some of the meetings taking place, even by sending people to the office premises with requests for the meetings. However, a number of meetings with key stakeholders could be held, notwithstanding the constraint.

Similarly, a review of laws and regulations of Afghanistan for the access of private, independent power producers (IPP) to Afghanistan’s energy market was also constrained for lack of these in English language. The consultant succeeded in locating the “Usage of Electricity Act” from 1986 on third day of the series of meetings but it was in Afghani language and needed rendering it in Afghani. Thanks are due to the office of INTEGRATION for translating it at a short notice.

It was imperative to peruse annual reports of DABM including financial statements, in order to conduct a study for the development of a socially-balanced tariff system for Afghanistan considering local conditions and the participation of private power producers. This activity was also constrained for lack of such annual reports.

II Evaluation of Existing Law
The consultant was required to conduct an evaluation of the existing laws and regulations for the access of private, independent power producers (IPP) to Afghanistan’s energy market after reviewing them. However, a full fledged review was not possible as most of the relevant body of law was in Afghani language. An unofficial translation of Law “for Using Electric Energy” from 1986 (Serial Number-607) into English was rendered by an official of INTEGRATION and an evaluation of the same is being made hereunder. Similarly, an analysis of the “Electricity Sector Policy” of 2003 also is being conducted in this section.

2.1 Law for Using Electric Energy
This legislation defines and regulates the relationship between the utility and its consumers, like what accessories (including metering device, transformers, etc.) to use, permissible voltage range, categories of consumers, application procedure, penalty for delayed payment, mode of payment, etc. It even specifies that load shedding will be resorted to in case of low generation as well as during force majeur situations and there is also provision for uninterrupted supply of energy, if there is categorical provision for the purpose in the agreement with specific consumers. There is provision also for the allocation of losses between the distance of power net and meters.

The legislation envisages underground cable network and prohibits construction entailing interference with it. There is a separate section devoted to regulation of use of electricity by each category of consumers. It has designated Afghan law for the settlement of disputes between the utility and its consumers. However, this law does not envisage private sector participation in electric business.

2.2 Electricity Sector Policy, 2003
The policy mentions that “Electricity is the backbone of the economic recovery and availability of reliable power will help stimulate economic growth, raise living standards and restore the traditional sense of community and common purpose that unites the Afghan people” and it infers that “a reliable power system is essential to providing basic services, in attracting new industries, retaining existing ones, and bringing back to the country those that have left.”

The policy has articulated a vision for the Ministry of Water and Power (which has since been transformed into Ministry of Energy and Water ) which is for a limited time till 2010. The vision emphasizes “low cost electric service to all Afghan citizens” and also highlights the importance of being “environmentally responsible.” But the vision is silent about the partnership of both domestic and foreign private sector in the electricity sector.

The main focus of the policy is rehabilitating existing infrastructure and it adds that generation capacity will be increased through the participation of private sector. The policy makes commitment to encourage and attract private sector involvement and mentioned it plan to develop a regulatory framework and to introduce law that would create an independent electricity regulatory entity.

The Government’s chief objective has been mentioned as to set the overall vision for the electricity sector, to create the organizational structure which would allow the transparent execution of all its policies and vision, and to enable the environment for private investment, competition and rapid industry growth. The policy also declares that “the Government itself will no longer be the operator of the electric sector.”

The policy has also laid out a plan to restructuring of the electricity sector entailing separation of utility functions (generation, transmission and distribution/sale of electricity) from sector policy and planning functions. The independent regulatory entity is expected to set technical, financial and operational performance standards and regulate the power sector.

The policy lists that there are nine departments and four public enterprises under the MWP, including DABM. The policy lists activities that the government will undertake to implement the policy, including promulgation of “an updated electricity law.” The policy also envisages setting up a “Reform Task Force,” chaired by the Deputy Minister for Power and reporting to the Minister for Water and Power. The Task Force is reposed with the responsibility “to identify the legal and other constraints (if any) which preclude the divestiture of non-core functions to private owners/operators.”

However, the policy is silent with regard to strategies that will be adopted to implement the policy. It also does not make necessary provisions to encourage the private investors to participate in the electricity sector. As electricity is a capital intensive venture needing longer term for the recovery of investment with a decent return, the policy should have laid down provisions to make private investors feel confident about their investment and to raise their level of comfort. It should have covered issues like water right, power purchase, facilities regarding rates, tax, duties, etc., if any, and so forth. Similarly, from the perspective of foreign investors, the policy also needs to make commitment regarding repatriation, visa, etc. The policy needs to be fully revamped as it does not even define the term “independent power producer.” Besides, the environmental legal system in Afghanistan is still in its infancy. No overall environmental law is yet in place covering, for instance, control of air-, water- and soil pollution, overall environmental planning, EIA, etc.

2.3 Other relevant laws
After scanning the list of laws in Afghanistan, it is obvious that following legislations will also need to be reviewed and amended to ensure that these are private investor-friendly, in order to encourage partnership of the private investors in the electricity sector:


III Socially-Balanced Tariff System for Afghanistan
As mentioned in section 1.5 of this report, in order to conduct a study for the development of a socially-balanced tariff system for Afghanistan it is imperative to peruse annual reports of DABM including financial statements, but it was not possible to analyze DABM’s financial position for lack of such annual reports. However, even without such reports it is known in the knowledgeable circles that the financial situation of DABM is critical. Revenues are limited because of low tariffs, inefficient billing, and inadequate collection procedures. The Electricity tariffs averages about $0.010 per kilowatt-hour (kWh), which is a small fraction of the supply cost. Besides, billing and collection is based on meter readings provided by the consumer. Each customer takes own reading to the bank and the bank’s teller bills and collects the amount due. There is no control or supervision of such readings. It is being said that theft and nonpayment are rampant. Also, technical and non technical losses are high, at about 40–50%, caused to some extent by overloaded facilities, but mainly by theft and inadequate metering and billing processes. “Non-technical loss is estimated at 15–20% and collection efficiency is around 60–70% only. Most of the uncollected revenue—Afghanis (AF) 1,300 million (about $30 million) as of the end of October 2004—is mostly owed by public sector customers (e.g., ministries, departments, military, and police).”

Contrasted with other developing countries, Afghanistan has location-specific tariffs rather than a uniform national tariff. The average domestic tariff varies widely depending on the source of power. Generation source of Kabul, Kandahar and Badakhshan comprises of a mix of thermal, diesel and hydro. Government, holy places, shops, unregistered factories and NGOs pay Afg 10 per kWh while registered factories pay Afg 6 only in these areas. Similarly, households are charged at Afg 1.5/kWh for up to 300 kWh, Afg 4 for the consumption between 310 to 700 kWh and the rate is Afg 6 for anything over 701 kWh. Sarobi and Baghlan’s source is hydro only but the rate structure is exactly same as Kabul. Bulkh province is dependent on imports from Uzbekistan and it charges flat rate for households at Afg 3, shops are charged Afg 6 and the rest pay at the rate of Afg 8 kWh. Samangan uses diesel generators and also uses a flat rate of Afg 18 per kWh across the board.

DABM imports from Turkmenistan for Juzjan, Andkhoy, Sar-E-Pul and Farib provinces and the rate is flat Afg 6/kWh. Main source in Helmand and Waedak is hydro and the rate structure is same as in Kabul. Although DABM uses diesel in Zabul the tariff is relatively low at Afg 6 for households and Afg 12 for the rest. It is imported from Iran and Turkmenistan for Heart and the rate if flat Afg 2/kWh for households and Afg 6 for all others. Diesel generators are used in Farah, Badghis, Khost and Paktia and the rate is Afg 25/kWh across the board. Although in Ghaznee too diesel generators are used, the rate is relatively high at Afg 31/kWh.

From the above it is clear that there is no uniformity in the tariff charged to the consumers from one province to another – even when the source is same or similar. On the one hand this strategy could be helpful in recovering the cost of bringing electricity to the consumers but on the other hand there is no guarantee that DABM is even breaking even. Therefore, it is undoubtedly true that DABM needs to design socially-balanced tariff system for Afghanistan as a whole considering local conditions and the participation of private power producers. Private producers will never feel comfortable in setting up generation plants to sell electricity in bulk to DABM if its capability to pay (or its solvency) is questionable. For this purpose, the tariff needs to be both rationalized and streamlined. However, that is not possible unless exhaustive financial data and information was to become available.

IV Improvements in Legal Environment Imperative for Participation of IPPs in Hydropower

As mentioned above, the current policy document makes commitment to encourage and attract private sector involvement in the power sector. Mere a statement of commitment is not adequate. Necessary legal environment conducive for private sector participation in the sector needs to be created. The extant body of law in Afghanistan needs to be improved in following respects in order to attract private investment in the power sector.

Concession Mechanism
Hydropower development entails exploitation of natural resources, viz. water. Water tends to be a contentious issue even in tranquil country. Therefore, private investors need to be given clear indication as to how they will be afforded access to this natural resource. It can be on build, own, operate and transfer (BOOT) format under which the private developer will be required to transfer the assets created as such to the government upon expiry of the concession period. Nepal follows BOOT format and upon expiry of the license period, the power plant is envisaged to be transferred to government. It is recommended that Afghanistan also follows this format. The advantage of such a format is that upon expiry of the license period the government receives an operating power plant free of cost. The other alternative is “build, own and operate” (BOO) format in which the developer gets to keep the project.

Proper legal environment for the hydropower development needs to be created by promulgating laws to regulate the concession. In other words, in the proposed electricity act (if a new act is to be framed) clear stipulation will need to be made about BOOT or BOO format.

Besides allowing private sector to participate in the business of hydropower generation, even transmission network and distribution service have been opened for the private sector in other countries. Thus the BOOT or BOO concept could even be applied for transmission as well as distribution in Afghanistan, too.

Water Rights
Another facet of the concession in the hands of a hydropower developer amounts to right over water in a specified area. This is regulated by licenses. The right as such also enshrines a guarantee under which the developer will be guaranteed that the water in the upstream area will not be diverted such that it will adversely impact her/his power plant, once constructed. For a hydropower project, each drop of water amounts to certain amount of energy which gets translated into a revenue stream. Undue diversion of water in the upstream areas will result in decrease in the plant’s revenue volume which will impact the feasibility of the project. Substantial decrease in the discharge could even result in financial insolvency of the power plant for failure to meet debt service requirement.

The law on the anvil will have to guarantee the quantum of water to a hydropower developer based on its approved installed capacity. It is suggested that the law make provision for the issue of license for generation of power to a developer for specific site in which head, flow, coordinates of the site and other important salient features are specified.

It is advisable that such licenses are awarded on a competitive basis under a transparent process.

Project Site
A hydropower plant is invariably located by a river and mostly such land is either public land or forest land. A private hydropower developer will need access as well as authority to use such land. The law will need to make provision for providing public land as well as forest for setting up the hydropower plant.

There are times when even private land becomes necessary for a hydropower plant. The developer should be allowed to make arrangement for it on her/his own initiative – purchase or take on long term lease (for the duration of the license) from the private owner. In the national interest, if the private owner refuses to cooperate with the developer, then the law needs to have provision for the government to acquire such land in necessary quantum on behalf of the developer.

Confiscation, Expropriation and Nationalization (CEN)
Private investors all over the world dread CEN. The law needs to categorically guarantee against confiscation, expropriation or nationalization of hydropower plant and other properties of such belonging to such plant.

Security
Hydropower is a venture with high initial investment requiring long gestation period (construction period) and constitutes long term investment. Therefore, it is incumbent on the government to ensure full security of the hydropower plants. It is imperative for the law to make necessary provision for the security of the developer, her/his power plant and the employees working in it.

Environmental Provision
Development of hydropower entails diversion of water and creates “dewatered area” in the specific locality. From the ecological perspective, complete “dehydration” of any locality is not advisable. Therefore, the law needs to make provision for “environmental flow” – the quantum of water that needs to be left in the river at any given time.

Besides, during the construction period the works can result in adverse environmental impact. Therefore, the law needs make stipulation for conducting environmental impact assessment (EIA) – or initial environmental examination (IEE) for projects under specific size like small scale. Such a study also needs to make recommendation with regard to measures for the minimization or mitigation. Such minimization and mitigation measure will have to be properly laid out in such a study.

Concession Fee (royalty)
As development of a specific site for generation of electricity entails exploiting natural resources of the nation, it is the general practice to charge a royalty from the developer. The law needs to stipulate such rate, if it is decided to levy a charge for the use of the country’s natural resources.

Tax and Duties Facilities
In order to entice private investors to invest in hydropower project in the country, various tax breaks are given to them by the concerned governments. For the construction and erection of a hydropower plant, a developer will need to import substantially from foreign countries. The practice is to exempt import duties on such imports, like custom duty, value added tax, etc. Similarly, even income tax is waived on the income from hydropower project to attract investment in the sector. The law to be promulgated needs to list such facilities, if it is decided to provide such facilities.

Power Purchase Agreement (PPA)
In order to encourage private investors to develop hydropower projects, provision will have to be made in the law for the utility (DABM in Afghanistan at the moment) to purchase the electricity generated by such project in bulk. The PPA will have to be for a relatively longer term (20/25 years) in order to mitigate market risk that a developer will face. Similarly, arrangement will also have to be made to purchase all the energy by the utility such that the project does not face revenue risk. Without a provision for such a PPA, private sector will not participate in the hydropower development enthusiastically.

Sovereign Guarantee
In view of the financially weak position of DABM, the developers will be facing payment risk, in as much as DABM’s ability to pay is concerned. In such a situation, no private sector will be willing and able to mobilize fund for the development of a hydropower project, nor will be willing to invest her/his own money by way of equity participation. Therefore, in the initial phases the law will have to make provision for sovereign guarantee of the PPAs till such time DABM becomes financially sustainable.

Foreign Investment Issues
An investor from a foreign country will need to be able to repatriate return on her/his investment back from the host country as well as the investment itself after a specific period of time. Therefore, in order to attract foreign investment, the law will have to specifically provide for repatriation of return on investment and proceed of sale of ownership stake in the power plant as well as repayment of principal and interest thereon in case of debt.

Similarly, provision in the law will have to be made for the issue of visa to the foreign investor and her/his representatives/staff, under a simplified visa procedure.

Foreign investors do not seem to be comfortable if an opportunity to choose governing law is not afforded to them. They are not familiar with law and judiciary of the host country and in order to make them feel comfortable the law should make provision allowing the foreign investor to choose foreign jurisdiction. This will entail using the law of the foreign investor’s choice for settlement of dispute – either by way of arbitration or through judiciary.

Institutional mechanism
Development of a hydropower project is a multi disciplinary undertaking. The investor will have to deal with authorities related to forest, transportation, finance, trade, etc. for various permits and approvals. They do not like to get entangled in the red tape of the bureaucracy. It is incumbent upon the government to have its ministries and departments work expeditiously. For this purpose, in many countries, the institutional structure is streamlined to set up dedicated government unit styled as “one window.” It is recommended that the proposed law make a provision for such an institutional mechanism.

Assistance for Financial Closure
As hydropower is both capital intensive with high initial investment, a developer will never invest all money required for the project from her/his own sources. Between 70-80% of the cost is funded by debt from financial intermediaries (FIs). This requires perfection of security on behalf of the debt providers. Besides, due to the size of the funding, debt is not, generally, taken on the basis of collateral or guarantee. Hydropower is generally financed on “project finance” instrument under which the project, under construction, itself is accepted by the FIs. This will entail lodging the project license, PPA, public land lease agreement and other intangible assets as the collateral. The law will have to take cognizance of this and allow assignment of project license, PPA, public land lease agreement and other intangible assets in favor of FIs.

Risks
Venturing into hydropower sector amounts to undertaking various risks ranging from design risk, construction risk (including cost/time overrun risk, force majeur risk), erection risk, marine risk, etc. on the part of the developer. This necessitates well developed insurance market in the country and provision for re-insurance in overseas countries. The law will need to make necessary provision for the purpose.

Regulatory Entity
There are already plans to set up a regulatory entity. The mandate of such an entity needs to be broadened to regulate the rate that is set between an IPP and the energy off-taker. Such entity needs to set lowest rate consistent with long term economic health of the developer as well as a reasonable return on investment. The factors that need to be taken into account in setting the rate include cost of the physical plant, operation and maintenance costs, financing cost, replacement costs, plus a decent return in equity.

The above is in addition to the role of a regulatory entity with regards to health, safety and environment as well as customer service.

V Recommendation and Conclusion

The prevailing law on Usage of Electricity basically defines the relationship between DABM and its consumers. Therefore, it is recommended that this law is left alone and a new law is promulgated to attract private sector participation in the development of hydropower and to regulate the same.

In one decade the installed capacity doubled from 300 MW to 600 MW in Nepal. It had taken 85 years to generate first 300 MW. The credit goes to a set of policy and law geared to attract and encourage private investors to invest in the hydropower sector. Liquidity is no problem in Afghanistan today. Besides, the market for the electricity is already there. The only missing piece is the legal environment. Once an appropriately designed and structured law is put in place, private sector will start playing an active role in the hydropower sector in Afghanistan, too.

Appendix 1
Transitional Islamic State of Afghanistan

Ministry of Water and Power



Electricity Sector Policy



August 2003

1. Policy Vision
Electricity is a vital service in the economy; it is an input in the production of nearly all other goods and services, and it is also an important final good, consumed by households. The Transitional Islamic Government of Afghanistan recognizes that the electric sector is essential to achieve the nation’s reconstruction and development goals. Electricity is the backbone of the economic recovery and availability of reliable power will help stimulate economic growth, raise living standards and restore the traditional sense of community and common purpose that unites the Afghan people. A reliable power system is essential to providing basic services, in attracting new industries, retaining existing ones, and bringing back to the country those that have left.

Today, only 4-6 % of the country’s population has electricity, and among those 4-6%, the availability is unreliable. Many of the country’s residents and businesses rely on diesel generators placed on their premises. Afghanistan has the lowest per capita consumption of electricity in the world. After 23 years of armed conflict that destroyed the country’s electrical infrastructure, the total consumption of electricity has declined from 554 GWh per year in 1980 to 394,000 GWh in 2000, reducing the consumption by a third of what it is today. Similarly on the generation side,

Even though the country’s nameplate capacity remains at 454 MW, the actual production is around 240 MW, due to the damage and lack of maintenance of the generation plants.

The vision of the Ministry of Water and Power (MWP) is:

By 2010, to evolve into autonomous, financially viable enterprises providing reliable, low cost electric service to all Afghan citizens in an environmentally responsible manner, consistent with sound business practices

To accomplish the above vision, the MWP has planned, over the next few years, ambitious projects with the goals of rehabilitating its existing infrastructure, increasing its generation capacity through the participation of the private sector, steadily increasing the number of customers it serves, establishing more appropriate tariffs, and increasing its revenue through enhanced and effective billing and collection and loss reduction procedures. The MWP also recognizes the pressing need to develop institutional capacity and tools that would allow it to effectively manage the reconstruction efforts of the electric infrastructure. The purpose and objectives of this policy is to provide the organizational structure and the legal and regulatory framework which would allow the MWP to accomplish its vision, while at the same time transforming the power sector into a commercially viable and stable sector that attracts and retains private investors.

The Government supports the liberalization of the electricity sector, through a combination of competition and regulations, as market forces. The government, where possible, will encourage the joint use of its physical electric infrastructure to provide other services. Where joint use is possible, the MWP intends to competitively price the cost of providing and managing these services.

To encourage and attract private sector involvement, and to provide for the safety of customers and environmental stewardship, the government will develop a regulatory framework and will introduce law that would create an independent electricity regulatory entity.

2. Role of the Government
The Government’s chief objective, as articulated and led by the MWP, is to set the overall vision for the electricity sector, to create the organizational structure which would allow the transparent execution of all its policies and vision, and to enable the environment for private investment, competition and rapid industry growth. The Government itself will no longer be the operator of the electric sector. The MWP would continue to have the sole responsibility for sector policy, specifically including the drafting of legislation and the development of international competitive tenders for private sector participation. More specifically, the MWP role would be to:

• Provide overall direction for electricity sector development and formulate broad policies and regulations for the benefit of all of Afghanistan that is consistent with other national development plans and laws;

• Initiate the establishment of an independent electric regulatory entity;

• Promote private sector participation and investment in the electricity sector;

• Encourage the expansion of access to underserved and rural communities;

• Stimulate the rational use of new and renewable sources of energy; and

• Represent the government of Afghanistan in electricity matters pertaining to regional interconnections and international organizations.

3. Restructuring of the Electricity Sector
The sector would be restructured by (i) separating the utility functions (generation, transmission and distribution/sale of electricity) from sector policy and planning functions; (ii) strengthening the role of MWP in preparing and implementing sector policies, coordinating donor programs, and improving governance in the sector; (iii) establishing an independent regulatory entity, which would set technical, financial and operational performance standards and regulate the power sector; and (iv) developing feasible options for handling certain non-core functions which are currently being handled by MWP or by government enterprises controlled by MWP.

3.1. The MWP
The MWP comprises nine (9) departments and has de facto responsibility for four (4) public enterprises. These enterprises are:
• Da Afghanistan Breshna Mosssesa (DABM), which is responsible for the operation & maintenance for generation, transmission & distribution, and sales of electricity.

• New & Renewable Research and Development Center, which is responsible for the research and introduction of devices that use new and renewable sources (solar, wind, biomass, micro hydros).

• Spinghar Construction Unit, which is responsible for the civil works for substations, power stations, and other facilities.

• Power Construction Unit, which is responsible for the erection of power stations equipment, transmission and distribution lines, and substations.

The role of MWP will be redefined to cover (i) the preparation and execution of sector policy and planning; (ii) preparation of the legal framework for the electricity sector (in coordination with other Ministries); and (iii) coordination of donor programs and activities. MWP will no longer be responsible for the day-to-day management and operation of the public enterprises. MWP will seek expert services and advice for strengthening its policy making role, as well as for enhancing staff capabilities through training and other institutional development programs.

3.2. DABM
DABM is responsible for the generation, transmission, distribution of electricity, operation and maintenance of assets, sales of electricity, and revenue collection. As a first step to separate these utility functions from MWP, a new Board of Directors will be constituted. This Board would include representative(s) of the Ministry of Finance, which is the owner of the enterprises, the MWP, and other relevant stakeholders, and will ensure that the public enterprises will operate in accordance with commercial principles.

3.3. Other Enterprises
Presently MWP (and/or DABM) also perform some activities which are normally performed by the private sector, and can be acquired on a competitive basis by the electricity sector entities. These include Power Construction Unit, Spinghar Construction Unit, a Pole Manufacturing Plant, Water and Power Electricity Consultants Authority (WAPECA), and the New & Renewable Research and Development Center – which handles research and pilot programs for promoting new and renewable sources. The Government intends to (ultimately) divest these functions to the private sector.

4. Creation of an Electric Regulatory Entity
Today, no legal and regulatory framework exists in Afghanistan. Tariffs settings, one of the basic functions of a regulatory agency, are done at the MWP. There is no provision for private participation in the power sector.

The government intends to create a legal and regulatory framework by establishing an electric regulatory entity. This regulatory framework would: (i) establish a licensing/ authorization process that would regulate and attract private investments; (ii) create and design electricity tariffs, and (iii) create a process that would ensure consumer safety, protection, and environmental protection.

The scope of the regulatory entity duties will include, but shall not be limited to the following:

• Implement the national policy for the power sector that ensures a fair, transparent and competitive market environment according to international best practices;

• Provide just and reasonable rates and charges for electricity services and promote conservation of energy;

• Create an enabling environment for competition and private sector participation;

• Ensure adequate, reliable, and economical utility service;

• Ensure least cost planning;

• Encourage and promote harmony between utility companies and their customers;

• Set technical standards regarding interconnection between utility companies to ensure open access on a fair and non-discriminatory basis; and

• Ensure consumer protection, safety, and environmental stewardship.

5. Implementation
To implement this policy, the government will:

• Develop an updated electricity law (last revised in 1984) to allow for, among other things, private sector participation in the sector;

• Create a Program Support Unit to ensure the accountable execution of the reconstruction efforts and act as the main implementation interface for donor-funded projects;

• Appoint a Technical Advisory Board to advise the Minister/Deputy Minister when necessary; to advise the Minister/Deputy Minister when necessary; and

• Establish a high-level Reform Task Force to lead the sector restructuring process.

The Reform Task Force, chaired by the Deputy Minister for Power and reporting to the Minister for Water and Power, would be established in MWP. It will engage consultants/experts to: (i) advise on, prepare, and implement the restructuring of DABM into independent entities responsible for the generation, transmission and distribution/sale of electricity; (ii) conduct public relations and information campaigns to develop support for the restructuring and reform program among employees, consumers, and other stakeholders; and (iii) prepare policies and recommendations for enhancing the commercial viability of the new companies/entities.

The Task Force will also identify the legal and other constraints (if any) which preclude the divestiture of non-core functions to private owners/operators, ascertain whether any staff of these entities can or should be accommodated within the MWP or DABM, and develop suitable social programs (early retirement, training, outplacement, etc) for handling the remaining staff of these entities.






Source: MVV Consulting, Da Afghanistan Breshna Mosssesa

Appendix 3

Meetings:

Appendix 4

Souce: MEW

This report was submitted to Afghan Government in April 2007 through Deutsche Gesellschaft fur Technische Zusammenarbeit (GTZ) GmbH, Afghanistan.
______________

1. Power Sector Master Plan Update, 2003



2. The Ministry of Electricity and Water (MEW) categorizes hydropower projects as follows: Micro Hydro 0-50 (kilowatts) kW, Mini Hydro>50 kW≤500 kW, Small Hydro >500 kW≤5000 kW (5MW), Medium Hydro >5 MW≤50 MW, Large Hydro >50 MW.


3. The current tariff is depicted in Appendix 2


4. A list of people consulted is in Appendix 3.


5. In December 2004, the Government created the Ministry of Energy and Water (MEW) by reorganizing the responsibilities of the Ministry of Water and Power and the Ministry of Mines and Industry. The responsibilities of MEW are set out in the Government's Enterprise Act. As a result of the merger, MEW is responsible for, gas, petroleum, and water resources; which is the power sector.


6. Ministry of Water & Power, Afghanistan. 2003. Power Sector Master Plan Update, Kabul


7. ADB, 2006. Hydropower Development Potential in Afghanistan


8. As the “Hydropower Development Policy” was first developed in 1992 only in Nepal, the concession period of most of the projects will expire only next decade. Under same format Norway also developed its hydropower and Norwegian government now owns a clutch of hydropower projects that were handed over to it by the initial private developers.


9. In Nepal the environmental flow requirement is 10% of the dry season flow.

Friday, July 23, 2010

Report on the Study of Legal Framework and Institutional and Regulatory Process for the Development of Private Power Projects in Nepal

Preface

Everyone agrees that the water resource is Nepal’s wealth in abundance that has not been fully tapped. Following the formulation of the Hydropower Development Policy, 1992 and promulgation of two Acts related to this policy, a number of hydropower projects are undergoing construction at the moment. This is forcing the investors, developers, regulatory agencies, legal experts, advocates of development of Nepal’s hydropower within and without Nepal, politicos and last but not least a few men in the streets of urban Nepal to climb the steep learning curves.

This has galvanised people into action to diagnose the ailment and to make prognosis of what will happen. Both of these leading to prescription as to what needs to be done. The present endeavour is one of the attempts to make a stab at coming up with recommendations as to what needs to be done. The success or failure of such prescription can be tested only against time. However, thorough discussion of such proposed measures will afford refinement of the proposal and it will greatly enhance the efficacy of such changes. Therefore, I am banking a lot of hopes on the workshop for assistance in refining the recommendations for improvement.
Improvement is a continuous process, especially with something like “law” which is highly dynamic. This attempt represents just a small step towards initiating the process of improvement. I am deeply indebted to all those who contributed to this study by agreeing to meet me and share the ideas and compare notes with me. USAID deserves sincere thanks for sponsoring this study and giving me the privilege to conduct it. The roles played by EDC, FNCCI and Private Electricity Project are of no less importance and I am very thankful to them. However, I am fully responsible for any inadvertent errors and omissions.
Wishing the hydropower development in Nepal an unmitigated success,



Tuesday, 16 June, 1998                     Ratna Sansar Shrestha

This is the"preface" written for 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

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.

1.1 THE POLICY
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.

1.2 GENERAL COMMENTS ON THE LEGAL FRAMEWORK
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.

1.3 MEGA PROJECTS
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.

1.4 ENVIRONMENTAL MITIGATION VS. LOCAL DEVELOPMENT
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.

1.5 PROMOTION OF FOREIGN INVESTMENT IN HYDROPOWER
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:
 
1.5.1.1 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.

1.5.1.1.1 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.

1.5.1.1.2 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.

1.6 CONCLUSION AND RECOMMENDATIONS
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.

1.6.4.1 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.

1.6.4.2 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.

1.6.4.3 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.

Tuesday, July 20, 2010

An Overview of Institutional Framework for Power Projects

Ratna Sansar Shrestha

All the institutional framework of HMGN is regulated and determined by the law of the land. Such institutions receive their mandate from a number of legislation and each of these is reposed with specific functional responsibilities. We will first take a close look at various functions of the institutions committed for the development of hydropower in Nepal and examine problems and constraints inherent or otherwise in them.

2.1 LICENSE
The practice followed so far by the HMGN seems to be the signing of Memorandum of Understanding (MoU) with the private sector in lieu of issuing a “Letter of Intent” prior to formal issue of a license. Certain quarter believes that MoUs are not worth the paper these are written on. However, HMGN needs to be wary of the potential for damage claim from the other party to such for its breach. The situation does not seem too gloomy at the moment because HMGN has not been taken to court so far.
For example HMGN signed an MoU for Upper Marsyangdi (43 MW) and Middle Marsyangdi (42 MW) Projects with CIWEC in collaboration with Matthew of Canada, Andrade G utierrez of Brazil and Gulf Syndicate of UAE. At present Middle Marsyangdi is being undertaken with German grant in aid and the party signing the MoU was simply cut out of the deal by HMGN with respect to Middle Marsyangdi.

2.1.1 Survey License
Sub-Sections (1) and (2) of Section 4 of Electricity Act, 2049 read together makes it mandatory to issue survey license within 30 days of receipt of an application . Accordingly, HMGN has issued a number of such licenses and many of them are floating around without moving forward, relative to the number of them that have materialised. This leaves an impression that HMGN is mandated to be too liberal in the matter of issuing licenses by the legislation. However, such a phenomenon also pre-empts other developers from working on such projects. There is no mechanism prescribed for the purpose of evaluating applications in order to ensure that any specific applicant has capability to bring the project to fructification.

Without spelling it out, the existing hydropower development policy, in effect, enunciated “first come first served” concept with regards to issuing of license. However, it was thought that this practice does not allow for competitiveness. This was deemed a policy defect. By way of rectification of this apparent defect “requests for proposal” (RFP) were invited for a number of projects publicly a short while ago. Now HMGN is preparing to issue such licenses. However, there is no provision in the policy and the Act to ensure competitiveness.

Survey license should have been granted within 30 days, but were not granted. As there is no mechanism to appeal against HMGN’s such failure, questions arise as to how does one get the problem redressed. Besides counter questions were also posed as to why should a foreign investor even bother to appeal. Private sector feels that time frame must be adhered to. The failure to grant the survey license within 30 days is being viewed as abuse of authority on the part of HMGN. The strong feeling in the private sector is, if even HMGN flouts the law of the land then how can it expect its citizen to abide by the same law. Additionally, HMGN, reportedly, did not formally give any reason for its failure to issue the license within the time prescribed by the law. This is being viewed as lack of transparency.

Thus the RFP process is being branded as flawed and it is being opined that the concept of calling for tenders is not viable. Moreover, in the case of survey license that could be true in view of the fact that ranking of response to RFP for survey license is tricky if there are more than one applicant. At the best it should be done on the basis of capability to perform. Cost cannot be appropriate scale to arrive at a decision whether to award or not. The appropriate basis for ranking such proposal must be what and how much Nepal stands to gain.

There is another dimension to the process of inviting bids (or calling for tenders) for survey license from the private sector instead of granting them on the basis of initially conceptualised policy in this respect. In this scenario there is no guarantee as to whether a survey licensee ultimately finishes up getting the generation license or not. Because the generation license will also have to be granted on the basis of competitive bidding and the original license-holder for survey may not be awarded a generation license eventually. In this case how does the survey license holder recover its cost of the feasibility study, the report of which becomes HMGN’s property? To get private sector conduct feasibility study without any assurance of them getting generation licenses, in case HMGN decides to invite tender for generation licenses, is being described in certain circles as the naivete on the part of HMGN.

Therefore, it is incumbent upon HMGN to make up its mind as to the way forward, formulate a specific policy for the purpose, make necessary changes in the law and then go about having such projects requiring huge investment implemented.

2.1.2 License for Generation, Transmission & Distribution
Sub-Sections (1) and (2) of Section 4 of Electricity Act, 2049 read together also makes it mandatory for HMGN to issue license for generation, transmission and distribution of electricity within 120 days. The policy is deafeningly silent with regard to how to strike a best deal in order to maximise return to the state. No mechanism for the purpose is spelled out. This is a serious flaw needing prompt remedy.

It is normal and logical for a generation license to be conditional upon successful financial closure within a certain date. This allows HMGN necessary latitude to have another investor come into the picture if the original licensee is not able to arrange fund for the implementation of the project within certain time period.

However, a conditional license, reportedly, has also been issued with an instruction to have the Power Project Agreement (PPA) amended. Current Nepal law does not empower HMGN to dictate a developer to amend PPA and the private sector is deeming this action, on the part of HMGN, not business-like [however, as it is the more than majority holder of equity in NEA, it is in a position to ask NEA to renege on the deal – the PPA]. It is being reported that the reason behind needing to have the PPA amended is the excessively high return on investment in this particular project that became apparent afterwards. However, similar review of PPAs have not been required from other developers whose total project cost has also reportedly gone down, with the resulting effect of enhancement of return on investment.

2.1.3 Tenure of License and Hand-over of Hydropower Plant after Expiry of License
Certain sources in the industry feel that duration of license for electricity generation, transmission or distribution of a maximum of 50 years is too long for foreign owned project. However, as this is a discretionary power vested in HMGN and the change in the term of the license can result in change in the buy back rate to be paid by NEA in the case of a plant designed for domestic consumption. Similarly, variation of the term of license can be matched with revenue stream to HMGN from an export-oriented project. Therefore, judicious use of this leverage can result in all round benefit.

However, what is important in this connection is the fundamental philosophy behind inviting foreign private investment in the hydropower sector, which is the fact that Nepal stands to receive the hydropower plant at the end of the term of the license, all clear . This is, for example, how the hydropower revolution occurred in Norway. She has undergone a metamorphosis from a relatively poor European country less than five decades ago to an affluent one at present and one of the contributing factors was the extensive exploitation of hydropower with foreign investment.

However, the precondition for meaningful hand-over is the simple assumption that the plant remains operable even after the expiry of the license and for a substantial number of years thereafter. For this purpose the construction and erection of the plant including the quality of equipment used for the purpose needs to meet high international standard.

Therefore, the Project Agreement must lay down design life of the Project where the HMGN stands to receive such plant handed over to HMGN after expiry of the license. Moreover, development of design standard and construction standard is also imperative for this very reason among others.

2.1.4 Infringement of Right to Equality
A certain segment of legal fraternity deemed the provision of transfer of ownership of a hydropower plant, established with more than 50% of the total investment made by foreign entities, to HMGN after the expiry of the license in 50 years, mandated by Section 10(1) discussed above, as the infringement of constitutionally enshrined fundamental right to equality. This argument does not hold any water as the fundamental idea behind inviting foreign investment is to allow the investors to use the plant to reap necessary benefit in such a way that after a certain period of time the ownership and the benefit appurtenant thereto gets transferred to Nepal and Nepal gets to be ultimately benefited form the exploitation of its own natural resources. As mentioned above this is how it was done, for example, in Norway too. The whole deal will be geared for such eventual transfer and the foreign investor(s) so far have and will develop and use the plant in such a way that they will be ready to leave after the period. Hence, there is no question of unequal treatment.

2.2 WATER RIGHT
Section 3 of Water Resources Act, 2049 categorically state that “the ownership of the water resources available in the Kingdom of Nepal shall be vested in the Kingdom of Nepal.” Under the authority vested in HMGN by this provision HMGN is fully empowered to issue licenses, permits, approvals for the exploitation of the water resources for its various potential uses.

Under the Proviso Clause of Section 3 of Electricity Act, 2049 no license is required for generation of electricity up to 1 MW at present. The recently formed government has made public its intended policy of de-licensing hydropower plants of up to 10 MW. As a step in line with the policy of liberalisation and deregulation this is a welcome step. However, this decision has ramifications on HMGN’s royalty income because the royalty is payable only by a “licensee.” The hydropower development policy specifically mentions that no royalty is payable by a developer for a plant of up to 1,000 KW capacity for which no license is required.

However, a license has two important roles to fulfil. Firstly it is very comforting for an investor to be armed with an authentic document from HMGN stating that the licensee is entitled to do whatever is mentioned in the license and the appurtenant legal provisions. This sort of comfort is very important, especially for the foreign investors, as they would be very unfamiliar with conventions and practices of Nepal. This becomes, in fact, imperative in the case of foreign lending institutions (one even will need to include Nepali financial institutions in this category).

Second important reason for a developer preferring to choose the comfort of a license is the fact if the developer happens to be from somewhere else he will be as good as a foreigner for that part of the world. In such a circumstance the pertinent question begging answer will be who will assure of the availability of water for the plant and how is the access to water gained. Conversely if the developer is locally from the area of project site then he will face relatively very little problems from his neighbours and villagers. For an investor/developer being able produce a license issued by HMGN, subsequent to due process, goes a long way in commanding respect for the project form the users of the water for time immemorial.

One must admit that the Section 3 of the Electricity Act, 2049 has made provision for maintaining an audit trail of documentation in the form of submission of notification to the prescribed officer prior to undertaking any work connected to the specific body of water in the case of a hydropower plant of the capacity ranging from 100 KW to 1,000 KW. The evidence of receipt of such notification will establish the prior consumptive right and the same will be used, obviously, for the enforcement of such right.

However, a developer will need stronger evidential document to get away with depriving users in the downstream area of the river from the benefit they were enjoying in the past. Similarly, the developer will need documentary help to safeguard his prior consumptive right against future bulk users in the upstream areas. Therefore, it is advisable to simplify the procedure for acquiring license for hydropower project up to 10 MW compared to bigger projects rather than doing away with the provision for the issue of license.

There are people who subscribe to the idea that water also needs to be made real property right, freely saleable, transferable, etc. If such changes are made then the principle of equity will need to be introduced hand-in-hand with the real property right over water in order to ensure that drinking water, irrigation, etc. get the priority that these deserve.

2.3 EMPLOYMENT OF EXPATRIATES
The hydropower development policy, Sub-clause (p) of Clause 4, categorically states that “the person who obtains the license to construct or operate a hydroelectric project shall have to utilise the local labour and skill at maximum.”

2.3.1 Employment Generation
One of the benefits of development of hydropower in Nepal lies in its ability to generate employment for Nepali professionals, consultants, skilled workers and unskilled workers. Hydropower being a capital intensive development work, employment of Nepali nationals during the post-construction period will be limited. Thus, maximisation of local employment can truly occur only during the construction period.

However, informed opinion expressed apprehension that, unfortunately, the employment of locals’ stays limited largely to the labour force during the construction period. Thus the total number of Nepalese employed seems very high but in terms of remuneration paid, the fewer expatriates end up receiving more than total spent in salary and wages to the Nepali staff and the whole labour force of the entire project. Besides, this factor also jacks up the tariff charged to NEA in the sense that if the expatriate component of the manpower can be reduced the total cost of construction will go down and same can be reflected in the tariff charged to NEA if the second method of determining the tariff prescribed by the Electricity Act is faithfully used.

The converse side of this issue is the need of the developers/sponsors to provide an employment opportunity to their own work force and when the high salary paid to expatriate staff can be recovered through tariff why would a foreign developer bother. Some even went on to add that the expatriates that deign to come to work in a backward country like Nepal are those who do not get decent job of comparable level in their own countries, except for the diplomats, motivated people like missionaries, etc. Thorough transparency is required in this respect during negotiation of tariff and recruitment of expatriates.

2.3.2 Technology Transfer
More importantly, transfer of technology is the imperative behind the principle of maximisation of local employment. In other words the importance of the policy of maximisation of employment of local manpower gains an additional dimension of significant importance in view of the fact that effective means of technology transfer is the employment of local talent in the maximum possible number. Otherwise, the whole thing will turn into an exercise in “spoon feeding;” foreign entities come to Nepal build a plant and leave which will result in Nepali nationals not being able to even operate and maintain it; and replicating them with Nepali manpower will stay a wistful thinking. In line with any country’s national interest this policy is very important. This is incorporated in the hydropower development policy .

Besides, in view of the investment made to date by HMGN in the education sector, Nepal is not actually short of most of the talent required. Therefore, Ministry of Home is adhering to a prudent policy under which “priority is to be given to Nepali expertise, expatriates to be brought in only in case of unavailability of necessary manpower in Nepal and that too in a fixed number for a fixed time period only.”

2.3.3 Visa/Work Permit for Expatriates
As a mechanism to ensure that the two cornerstones of Nepal’s development are properly laid and cemented, foreigners are not allowed to work in Nepal without being granted work permit. Moreover, in fact, this practice is universally followed in most of the countries, much more strictly in the affluent countries, which can actually afford foreign manpower, which tends to be cost effective for them. In the case of a poor country like Nepal employment of foreign manpower not only deprives Nepali national of the much needed employment opportunity, but it also raises tremendously the price, for example of electricity, that the Nepali consumers are forced to pay.

Therefore, all along each time a developer needed to engage an expatriate for any specific job the developer had to apply for the issue of “work permit” from the Department of Labour. Rule 6(1) of Labour Regulation, 2050 was very clear that non-Nepali shall be granted work permit only “in case no skilled Nepali national is available for employment.” However, as a gesture of goodwill towards the hydropower projects and its developers the Labour Department refrained from asking the projects to furnish documentary trail to the effect that the Project has tried to locate Nepali national skilled for any specific post prior to issuing the work permit.

HMGN, in its apprehension that only lip service is being paid to the concept of utilising, as much as possible and to the extent qualified, the available local skills and labour crafts, it made certain changes to Labour Act, 2048. One of which was the insertion of Section 4A. With the insertion of the new Section 4A in the Labour Act, acquiring work permit has become a slightly involved process, requiring certain lead-time. However, as stated above it is not true that prior to this amendment such procedure did not exist. The Sub-section 2 of this section makes it mandatory to publish advertisement in national-level public newspaper to ensure that a Nepali is not available for any specific technical post. This is basically to ensure that no eligible Nepali national is available for a specific post or no such person is being deprived of an opportunity of employment. Therefore, the officials of Labour Department are now not in a position to circumvent the “due process” any more in contrast to the past practice.

Moreover, under Sub-Section (1) Section 4A of the Labour Act “non-Nepali nationals may not be appointed” in any non-technical post.

2.3.4 Investor(s) or the Representative of Investor(s)2
Section 6(2) of the Foreign Investment and Technology Transfer Act, 2049 stipulates that “a foreign investor or dependant family or authorised representative of such foreign investor and dependant family shall for the purpose of stay in the Kingdom of Nepal be provided a business visa until the foreign investment is retained.” The proviso clause to this Section makes provision for the issue of a “residential visa” if a foreign investor invests more than US $ 100,000 at one time.

These provisions are designed for the representatives of the investors. However, generally a foreign investor would use a development company registered in Nepal as vehicle to forward the cause and they would prefer to have certain staff from the mother country in such company. Similarly, in case where foreign contractor is engaged to execute the work they also would prefer to have certain staff from the mother company.

In this backdrop it is advisable to make provision for the issue of visa without needing work permit for top two positions, Chief Executive (whether called GM, MD, CEO or Executive Chairman), chief of finance and Project Manager of both the developer and the foreign contractor.

2.4 STRUCTURE OF PROJECT DOCUMENTS2
The Section 9 and Section 35 of the Electricity Act, 2049 has made provision for entering into agreement and contract respectively for the implementation of the hydropower development policy. Most of the projects under construction to date have entered into a Project Agreement (PA) with HMGN and Power Purchase Agreement (PPA) with NEA.

2.4.1 Project Agreement
The trend so far has been to conclude an agreement, known as “Project Agreement,” between HMGN and the private developer for the development of each hydropower project. Each such agreement is ultimately approved by the cabinet, which takes place after securing concurrence of each of the concerned ministries including the Ministry of Law and Justice. Perhaps due to the fact that this document goes through such a process, someone opined that such an Agreement must be made to supersede law. However, such a scenario is untenable. (The person must have been thinking of a treaty between two sovereign nations, even, which becomes merely equivalent to an enactment upon ratification of it by the Parliament, thus putting such treaties at par with an Act of the parliament).

The practice followed to date seems to be to include clauses on areas specifically covered by a number of enactment besides dwelling in various subjects regarding the negotiated business deals.

Matters specified by Electricity Act such as provision of license for construction and generation of power, availing of land and houses owned by third parties, income tax holiday for first 15 years and 10 percent points lower for next 10 years, security arrangement, import duty exemption, royalty to be paid by the developer, etc. were also covered, to be applicable as laid down by the Act. Besides, it is also found to be dwelling on subjects like visa, which is covered by Immigration Act and work permit, which is covered by Labour Act.

Probably due to the fact that this agreement deals almost exhaustively with most of the things that a hydropower developer needs to be involved in, tendency on the part of regulatory agencies has been to permit a developer to do only those things that are dealt with by the agreement. This is not correct administration of the Act. A developer should not be precluded from undertaking any legitimate business activity, although not covered by PA, unless such an activity is expressly restricted under prevalent Nepal law. What must not be lost sight of is the fact that a developer, if incorporated as a Company (which is the case most of the time), becomes a separate entity with perpetual succession, entitled to conduct all such legitimate activities that a natural person does, including filing cases in the court of law and be taken to court, etc. (except for exercising voting right). In view of this a developer must not be disallowed to do anything merely because it fails to get mentioned in the agreement. The officials of the regulatory agencies take this kind of stance because this agreement to their mind is a document that lists all the activities that it is allowed to be involved in. Such logic cannot be stretched to mean that any enactment or law that does not find mentioned in the Agreement does not prevail on the Project. In other words, notwithstanding the fact that certain law or Act may not have been mentioned in the Agreement, the Project is still under all currently prevalent law of Nepal.

Moreover, HMGN can give facilities to the extent it is authorised by the law. No decision of HMGN can exceed the law. This can be better explained by using an example. Section 12(7) of the Electricity Act requires a developer to pay 1% as custom duty on certain items. Contrary to this provision HMGN cannot allow any specific developer to pay only 0.5% only as custom duty, unless HMGN makes a specific decision under authority delegated to it by the relevant Act. Conversely, it is also not true that the project does not come under the purview of a specific Act or any specific law only because of the fact that there is no mention of that specific Act or law in the Agreement. If it was true as such then the project will not have to be bound even by the Constitution of Nepal as it does not get mentioned in the Agreement. Thus, repetition of the provisions of the law in a Project Agreement is redundant except if especial authority is being used as delegated to HMGN by the Act to make available facilities beyond what is provided for by the Act.

Therefore, instead of repeating provisions of currently prevalent law that are relevant to the agreement, there should be a single-sentence-statement purporting to say that all relevant provisions of current Nepal law will apply unless specifically otherwise stated in the agreement.

2.4.1.1 Enforcement
The Cabinet of HMGN approves the Project Agreement but certain developers feel that it is not honoured by HMGN agencies other than MoWR/EDC. This has led them to believe that other sister Ministries do not respect MoWR. Such anomalous situation could result in discouraging other foreign investors from investing money in Nepal. They pointedly reiterated that every cause has an effect and such effect can cause further adverse impact.

2.4.2 Power Purchase Agreement
Section 9 of the Act envisages HMGN entering into an agreement with the bulk producer of power for the purchase of electricity. However, to date HMGN has not done so. Moreover, it also does not sound logical for HMGN to do so. In practice to date it is NEA that has been signing agreements with private producers for the purchase of power in bulk, known as Power Purchase Agreement (PPA).

A PPA embodies assurance of the fact that the power produced by a developer will get purchased. It is felt that there should be a model of it, which will achieve standardisation and which also, will result in bolstering effective transparency.

2.4.3 Other Documents
Under the umbrella of these two documents a developer signs agreements for financing the project with its investors on the one hand and the lenders on the other hand. Similarly, the developer also concludes agreements with a number of contractors, suppliers, insurers, etc. for the execution of the project. All these documents put together constitute the project document with a multitude number of parties involved.

2.5 PROBLEMS IN THE IMPLEMENTATION OF PROJECT DOCUMENTS
There are a few prominent problems in the implementation of the multitude of the project documents due to the way these are structured that rate mention here.

2.5.1 L/C for imports
Based on a circular issued by HMGN, these projects are being required to open letter of credit for the purposes of import. This was basically introduced to curb malpractice on the part of those involved in the business of importing for retail/wholesale trade in Nepal. However, requirement of letter of credit is impractical for projects, especially in the case of a project with foreign funding that are in a position to make direct payment to its foreign contractors and suppliers.

2.5.2 Import of Contractors’ Equipment
At present import duty facility is granted only to a licensee. Therefore, even the contractors’ equipment like excavator, dumper, bulldozer, etc. are required to be imported in the project’s name. Due to this requirement a contractor pays for the construction equipment but is registered in the licensee’s name. This creates unnecessary complications, as the project becomes de jure owner of these without paying for them while de facto owner which is the contractor is deprived of the title over the property it actually owns.

Moreover, the provision for the import of equipment for re-export on record (लगत) is unnecessary hassle for custom offices and it also deprives Nepal of 1% custom duty on such imports. Therefore, the contractors need to be allowed to bring all necessary construction equipment at 1% custom duty with the clear understanding that they are allowed to re-export the equipment that are not the integral part of the project.

2.5.3 Re-export from Nepal
An executive order of the Commerce Ministry, HMGN published in Nepal Gazette dated 2049/8/15 expressly forbids export of imported raw materials, spares and capital equipment. This hinders import of contractor’s equipment by a foreign contractor who would want to re-export items that are of no use in Nepal after its use in Nepal and needed for their work somewhere else. This notification should be made inapplicable with regard to contractors’ equipment for those involved in the hydropower development.

2.5.4 Visa/Work Permit for Foreign Contractor
Visas and work permits are required for a foreign contractor’s expatriate staff but the contractor is not allowed to apply for them directly. Only the licensee is authorised to apply. In order to cut through the hassles of involving too many parties for routine matters as such a mechanism needs to be developed to allow the contractor to make application for these.

2.5.5 Communication Equipment
HMGN is committed to grant necessary license for satellite phone to certain hydropower developers. But Ministry of Communication, the licensing authority for such communication equipment, does not even grant the license in the name of the developer company incorporated in Nepal. The most they would be persuaded to do for a hydropower project is to grant such license in the name of an expatriate staff of the Project.

2.5.6 Transparency
Certain investors/developers and potential investors/developers feel that the fundamental rights of “Right to Information” that is enshrined in the Article 16 the Constitution of Nepal gets abused at times . Due to this whole thing gets politicised in the name of TRANSPARENCY at times. There have been times when cases were filed in the Supreme Court to force the release of documents.

Private sector cherishes and thrives in CONFIDENTIALITY and it is not always sinister nor is it wise to impute sinister intent to request for confidential treatment by the private sector. Even advanced countries like United States have provision for proprietary information that does not need to be made public. While governmental agencies and its corporations are required to be transparent.

2.5.7 Security
Recently certain projects were asked to pay 1% of the project cost in order for HMGN to provide necessary security to these projects. This has not gone down very well with the investors. Section 31 (1) of Electricity Act makes provision for the arrangement of security of a hydropower plant but there is no mechanism under which HMGN can demand such payment, if HMGN is making such arrangement on its own initiative. HMGN will be in a position to make the licensee bear such expense only if the request for the security arrangement comes from the developer under Sub-section (2) of this Section.

Security is the primary responsibility of HMGN except for the internal security of the Project. Therefore, it becomes the natural obligation of HMGN to make necessary security arrangement to maintain general law and order in the settlements around the Project sites, which are bound to grow both in shape, size, diversity and quality with the implementation of the project. The cost of security related to population dynamics is obviously for the account of HMGN.

2.5.8 Control of misuse of facilities vs. harassment
It cannot be denied that facility to import with import duty exemption has potential for misuse. However, in the name of control of misuse of facilities by a developer of hydropower project HMGN’s activities should not result in harassment. Besides all control mechanism have the built in possibility of it breeding corrupt practices.

2.6 ONE WINDOW (SINGLE WINDOW)
Industrial Enterprises Act, 2049 has made provision for “one window” that is based on the Department of Industry (DoI), the same is applicable for the purposes of Foreign Investment and Technology Transfer Act, 2049 while Electricity Development Centre (EDC) is has been named to be the “one window” for the purposes of hydropower development. A foreign investor at the moment is required to go through two sets of one window in order to set up a company for the development of hydropower and get on with it.

2.6.1 Department of Industry under Industrial Enterprises Act
Department of Industry (DoI) is armed with an “One-Window Committee” under the chairmanship of the Director General of Industries Department and with Director-Generals from several departments like Custom, Excise, Tax, Commerce, etc. as members . This committee has specific functions, duties and powers spelt out in the Act .

The one window of Industries Department stays active in the case of a hydropower project in which foreign investor are involved till the financing agreements including joint venture agreements gets approved culminating in registration of these documents under FITTA and then it takes the back seat. Prior to granting concurrence to these documents this Department studies the documentation and even make requests for changes in these documents. This department also grants registration as Energy Industry to specific hydropower projects.

2.6.2 EDC under Electricity Act
Neither the Hydropower Development Policy nor the Electricity Act envisages establishment of an “one window” set up. Nor did it envision any “one window” mechanism. The policy refers to “one window policy” in connection with foreign investment and the repatriation facility that such investments are entitled. Similarly, for certain reasons Electricity Development Centre (EDC) also does not find mention by name in these documents. Section 36 of the Electricity Act makes provision for setting up of a Hydroelectricity Development Unit in the Ministry of Water Resources (MoWR). Nevertheless, EDC is filling the role of such a unit. However, EDC does not have statutory arrangement for any “one window committee.”
The EDC has different responsibilities at various stages. In the first stage of hydropower development (inception stage) it has two-fold responsibility: issuing license and concluding Project Agreement. The first part of this role is visualised by Section 4 of the Electricity Act . Project Agreement is the instrument executed between HMGN and the developer, which works as a bridge between various documents .

Thereafter, it co-ordinates efforts to garner necessary permits and approvals in order to achieve the financial closing. These include, inter alia, consent and agreement between HMGN and lenders, legal opinion of HMGN’s legal counsel, lease agreement for forest between HMGN and the developer, permit to operate convertible foreign currency bank accounts within and without Nepal, permit for procurement, transportation and usage of explosives, etc.

During the construction and operation phase EDC helps make arrangement to secure import duty facility, in the acquisition of visa/work permit and so forth. It will be also be involved in assisting the developer in the repatriation function during the commercial operation period.

Most felt that there is no problem with EDC in as much as its willingness to co-operate is concerned. However, it is straitjacketed for lack of authority and stature. In other words its effectiveness is being very critically questioned. Other HMGN agencies do not honour EDC’s letters and this is turning out to be harassment for the developers (and the Officials of EDC). Documents travel up from EDC to MoWR and then laterally to another line Ministry only to come down to specific Department. Therefore, at the moment after climbing through this “One Window” there are several doors that are required to be traversed. This fact can be described through the following rough diagram, which attempts to list the steps that the letter will navigate requiring the developer to follow through each step:


2.6.3 Nodal Agency
The situation obtaining at present is so difficult for the developers, in their desperation various suggestions have been made. Some recommended forming an advisory Board with representatives from various Ministries. Others felt that EDC would become effective if other Ministries are made to co-sign the PA in order to have them extend full co-operation . Claims were made that in other countries governments do the follow through on behalf of the developer. Similarly, it was expressed that EDC should go to other agencies to get necessary approvals and give the necessary response to the licensee thereby playing the role of a real “one window.” An example of Pakistan Private Power Infrastructure Board (PPIB) was cited which does the follow through, through one of its staff known as “advocate.” Certain others came up with the suggestion that EDC should be turned into implementing agency attached to the Prime Minister’s Office. Some thought the problem emanates due to lack of stature on the part it and recommended upgrading it to a Ministry.

The phrase “one window” itself is borrowed from a situation where the person seeking help stands in front of a window and the person behind the window does all that is requested. This precludes the necessity for the person seeking help having to go from door to door (running from pillar to post). Frustrated developers have even compared EDC with a Post Office through which all letters have to pass through.

Possible solution of the present hiatus lies in creation of a NODAL AGENCY armed with necessary authority and facilities to fulfil the all in one truly “single window” function on behalf of HMGN for the development of hydropower. Electricity Development Centre can be made such an agency (whatever name is chosen as long as the objectives set out for it could be achieved).

First of all, as hydropower is a special type of industry, this NODAL AGENCY, therefore, needs to be designated as the “department” under FITTA for the purposes of hydroelectricity based industry. This will abolish the need to have to go to DoI for approvals under FITTA. Besides as this agency will be specialising in the foreign investment in hydropower sector it will attract and will be filled with manpower with special talent in this field. This will turn this agency into the hub centre of activities for hydropower development.

Then, at the initiative of this agency all the permits and approvals must be forthcoming from concerned agencies during the course of getting concurrence to the Project Agreement itself from various arms of HMGN related with such activity. Actually finalisation of Project Agreement can and should go hand in hand with the approval of the foreign investment agreements.

Finally and most importantly, also during the process of getting concurrence from various Ministries of HMGN, each of these Ministries should be made to formally delegate project specific authority to this agency for routine activities like import duty facility, thus, allowing it to approach frontline agencies of HMGN like Tribhuvan Airport Custom Office . This will enable this agency to write letters directly to front-line offices that come in the picture . Copies of such authorisation must be made available to the NODAL AGENCY, the concerned frontline agencies and the developer.

2.6.4 Other Regulatory Agencies
Company Registrar’s Office is another regulatory agency for the purposes of incorporation of a Company and thereafter, monitoring its corporate affairs. Happily there have been very few hassles emanating due to the nature of its role and work requirement.


2.7 CONCLUSION AND RECOMMENDATIONS
The extant institutional framework, their regulatory functions and the manner of their working also has some room for improvement. Moreover, the mechanism of “One Window” is in need of strengthening by raising its stature and empowering it all necessary authorities. It is not to say that present institutional framework has not succeeded in accomplishing what was envisaged to be accomplished. The proof of its unmitigated success lies in the fact that a number of hydropower projects are undergoing construction. However, one needs to learn from the experience during the above trials and tribulation and improve for better and enhance the effectiveness the institutional framework.

2.7.1 License and Water Rights
8.7.1.1 Since there is no guarantee as to whether a survey licensee gets generation license when these licenses are granted on the basis of competitive bidding a mechanism needs to be developed in order for the survey licensee to recover its cost of the feasibility study in case it fails to bag the generation license, eventually.

Private sector prefers to have an arrangement under which the survey license holder would have the first right to the development license.

2.7.1.2 Granting of licenses on the basis of competitive bidding is definitely a better method. However, evaluation of competitiveness of the bids on the basis of the cost of the project is not suitable for a hydropower project. Parameters of the bidding needs to be changed to what Nepal stands to gain rather than how much will the developers spend.

2.7.1.3 Rather than doing away with the provision for the issue of license for hydropower project of up to 10 MW capacity it is recommended that the procedure for acquiring license for a project of such scale is simplified because a license has an important role to play in the matter of asserting water right.

2.7.1.4 It is imperative that a hydropower plant remains operational, for a substantial number of years, even after the expiry of the license, in order for the hand-over of hydropower plant thereafter to be meaningful. Therefore, the PA needs to lay down design life of the Project where it gets handed over to HMGN after expiry of the license. Moreover, design standard and construction standard also must be developed and implemented.

2.7.2 Employment of Expatriates
It is recommended to make provision for the issue of visa without needing work permit for top two positions, Chief Executive (whether called GM, MD, CEO or Executive Chairman), chief of finance and Project Manager of both the developing company with foreign investment and its foreign contractor.

2.7.3 Structure of Project Documents
8.7.3.1 A Project Agreement should have a single sentence provision stating that current Nepal law is applicable instead of repeating all pertinent provisions of the law. The private sector is willing to accept it subject to the condition that EDC takes the responsibility to compile up to date versions of all relevant laws and make them available. The Project Agreement should have detailed provisions when HMGN is using discretionary authority vested in it by specific provision of the law. In other words, however, departures from law must be specifically stipulated in the Agreement.

In the case of Power Purchase Agreement these should be standardised, which will result in boosting effective transparency.

2.7.3.2 Letters of Credit for the import by a hydropower developer should not be required, especially in the case of a project with foreign funding that is in a position to make direct payments. Similarly, the contractors should be allowed to import all the necessary construction equipment at 1% custom duty in their own name with clear understanding that they are allowed to re-export equipment that are not the integral part of the project. Moreover, the contractors should be allowed to apply directly for visa and work permit for its staff in accordance with the prevalent law. Since hydropower development work generally takes place in the remote part without communication facility all hydropower developer and their contractors should be granted license for satellite phone with least hassle.

2.7.3.3 There has to be a limit to Transparency and, the “Right to Information” cannot be allowed a free run, unencumbered. This should be based on “need to know” criteria as “confidentiality is important for private sector.”

2.7.3.4 The private sector should be asked to bear the cost of security under Section 31(2) of Electricity Act only in case the developer has asked HMGN to help it with the internal security of the Project. HMGN must bear full obligation of making necessary security arrangement to maintain general law and order in the settlements around the Project sites, which are bound to grow both in shape, size and quality with the implementation of the project. This is important to enable the developer carry out the work for which it has been licensed.

2.7.3.5 In the name of control of misuse of facilities by a developer of hydropower project HMGN actions should not result in harassment and impose control mechanism which may breed corrupt practices. However, use of import duty facility needs to be monitored to prevent its misuse. For this purpose also number of agencies monitoring the project must be curtailed and the NODAL AGENCY must adopt scientific measures to see to it.

2.7.4 One Window (Single Window)
2.7.4.1 Electricity Development Centre (or any agency to be created to function as the all in one truly “single window” arm of HMGN) needs to be made a NODAL AGENCY armed with necessary authority and facilities with special reference to hydropower development. First of all, as hydropower is a special type of industry, this NODAL AGENCY needs to be designated to have the authority of the “department” under FITTA for the purposes of hydroelectricity based industry.

2.7.4.2 For the sake of empowerment of this agency and to raise its stature too necessary legislative change should be made to empower HMGN to constitute a Hydropower Promotion Board to be chaired by the Minister of Water Resources with high level representatives from all relevant and related ministries and departments (the Director Generals from Departments and Joint Secretaries from the Ministries). Specific functions, duties and powers needs to be assigned to such a Board in order to ensure that work related to hydropower development moves on the fast track. This NODAL AGENCY should be designated to work as the Secretariat of such a Board with its Director General as the Member Secretary.

2.7.4.3 It is recommended that a clause is added to the Project Agreement listing the permits and approvals necessary to reach Financial Closure and during the course of getting concurrence to the Project Agreement from various arms of HMGN related with such activity such permits or approvals are to stand granted by the respective agency, with the final seal of approval to these coming from the Cabinet when the agreement is approved by it.

2.7.4.4 Finally and most importantly, also during the process of getting concurrence from various Ministries of HMGN, each of these Ministries should formally delegate project specific authority to this agency for routine activities like import duty facility, thus, allowing it to approach frontline agencies of HMGN directly. Copies of such authorisation must be made available to the concerned frontline agencies, the NODAL AGENCY and the developer.

This is the second 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. Sub-section 1 dwells on how an application for the purpose is submitted and the Sub-section 2 fixes the time frame within which a license, whether for survey or generation, transmission or distribution has to be granted.

2. Sub-section 2 of Section 5 of Electricity Act has fixed 50 years as the maximum term of a license for generation, transmission or distribution of electricity.

3. Under Sub-section 1 of Section 10 of Electricity Act the ownership of the land, building, equipment and structure related to the electricity generation plant or transmission and distribution line vests in HMGN after the expiry of the term of the license in the case if foreigners hold more than 50% of the total investment in the developing company.

4. In Sub-section (2) of Section 21.

5. Generally one month’s salary package for an expatriate can pay a Nepali of the same level of expertise for over four years – 48 months.

6. Clause 4(p) of the policy states that “if the person, who obtains the license to construct or operate a hydroelectric project, is a foreigner, he shall make or cause to make the arrangement for technology transfer to the Nepali citizen in the course of performing the work.”

7. The first one being employment generation and second and more important one being technology transfer.

8. Section 9 stipulates that “HMGN may enter into agreement with the licensee for bulk purchase of electricity, guarantee for the necessary capital to be invested or other financial and technical matters.”

9. Similarly, Section 35 specifies that “notwithstanding anything written elsewhere in this Act, HMG, by entering into a contract with any person or corporate body, may do or cause to do the generation, transmission or distribution of electricity subject to the terms and conditions as mentioned in such contract.”

10. Article 16 of the Constitution of the Kingdom of Nepal stipulates that “every citizen shall have the right to demand and receive information on any matter of public importance. Provided that nothing in this Article shall compel any person to provide information n any matter about which secrecy is to be maintained by law.”

11. Sub-section 1 of this section provides for HMGN making “necessary arrangement for the security of any electricity generation plant, transmission plant, sub-station, or any reservoir made for generating electricity or any other structure related to electricity, on the request of the licensee or by itself, if it deems necessary to provide such security.”

12. This sub-section stipulates that “if the security arrangement is made pursuant to sub-section (1) on the request of the licensee, all the expenses incurred for such security shall be borne by the licensee.”

13. Section 17 of Industrial Enterprises Act, 2049 makes the provision for the constitution of an “one window committee.”

14. Section 18 of the same Act lays down the functions, duties and powers of the Committee.

15. Clause 4(i)(1) states that “all facilities concerning exchange of foreign currency shall be provided to the foreign individual, firm or company who invests in the construction of project for generating, transmitting and distributing the electricity at the private sector under the foreign investment and single door policy.”

16. In this Section, it is stated that “in order to develop or cause to develop hydroelectricity and to encourage private sector entrepreneurs for the development of hydroelectricity and to follow up the works relating to hydroelectricity development, a Hydroelectricity Development Unit shall be constituted in the MoWR.”

17. Discussed at length in Chapter 4 of present Report.

18. Chapter 9 of this report deals with the Project Agreement.

19. Seeking and garnering of concurrence on the Agreement proposed to be concluded between the parties, from all the relevant ministries tantamount to their co-signing the Agreement. The important thing to be remembered in the context is the fact that this document is backed by the approval of HMGN Cabinet.

20. Another type of example of an effective delegation of authority will be to authorise the Department of Forest (DoF), in principle, to enter into Lease Agreements with the specific project for the lease of forest identified to be necessary for the implementation of the project. This will obviate the need for DoF to await grant of approval to lease a patch of forest to the project from the Cabinet or the concerned Minister, every time the project needs to lease a specific patch of forest.

21. In the above example EDC will write to DoF to conclude a lease agreement for the forest identified and DoF will be in a position to do so in the matter of a few hours as it already has the authority delegated, in principle, to sign lease agreement for lease of forest the purpose of a specific project.