Thursday, March 5, 2015

Hydropower and Hydrocratic Intellectuality

Nepal is facing severe scarcity of, among other commodities and services, energy sources like cooking gas, petroleum products, electricity, etc., which can be mitigated by prudent harnessing of Nepal’s water resources. Whereas Nepal is rich in intellectuals, pseudo intellectuals as well as self-declared and self serving intellectuals (this scribe doesn’t consider himself to be an intellectual, though). But the problem lies in the fact that very few “intellectuals” understand economics of hydropower subsector within water resources sector, economic linkages of hydropower projects (forward, backward, investment and fiscal linkages) to macro and micro economy. Nor do they understand that the concept of optimum harnessing of water resources by rising above the wrong mantra that “river equals hydropower.” Conducting comprehensive options assessment to decide whether Nepal will benefit by building hydropower project at a particular site or putting it to other uses is simply unheard of. Even with respect to hydropower, deciding whether Nepal will benefit from multipurpose reservoir project or run of river project, including optimization based on river basin-wide approach is rare (GoN failed in this respect in projects like UKP). It manifests in what they claim/pretend to understand and the way they pontificate.

There are many self-declared intellectuals in GoN and outside holding important sounding degrees, who general public don’t credit for any intellectuality and no point in discussing them. However, some intellectuals have proved their intellectuality and few amongst such intellectuals, sadly, have demonstrated lack of understanding of economics of hydropower.

Failure to understand high finance
A former finance secretary of GoN, who became popular amongst general public by resigning on the ground of principle, is one. He opined, in an article published in a vernacular daily, that Nepal should allow projects to be implemented and afterwards if the project doesn’t serve Nepal’s interest, Nepal can bring it under her ownership (hope he is NOT advocating expropriation by GoN unconstitutionally). It sounds rather naïve in the backdrop of failure, for example, to have power purchase agreements (PPAs) with Khimti and Bhote Koshi projects amended in Nepal’s interest, notwithstanding the fact that there is consensus amongst voters (general consumers), voted (parliamentarians), business community, bureaucrats and policy makers that these PPAs are detrimental to NEA’s (hence, Nepal’s) interest.

Divert energy for export to Nepal
To reinforce his argument, he adds that if Nepal wishes to buy electricity from export-oriented project at the export tariff, there shouldn’t be any problem. Alas! He doesn’t seem to appreciate the mechanism of “high finance.” As hydropower projects are capital intensive requiring long gestation period and fraught with a number of serious risks, even people possessing ample financial resources don’t implement projects with just equity. Just to share/transfer risks, developers inject just a small portion (around 25 to 30%) of cost as equity and borrow the rest, which involves signing loan agreements. From the perspective of risks, financial intermediaries don’t avail fund without having a PPA in place to mitigate market and revenue risk. Once a PPA for an export-oriented project is signed, it will be well-nigh impossible to divert electricity to Nepal, thereby depriving buyers abroad and breaching PPA and defaulting on loan agreement. The exporter cannot sell to Nepal even if she is to offer higher tariff. It is heartrending that a highly educated person, who had been a finance secretary, doesn’t understand mechanism of hydropower finance.

Nepal will own the project after quarter of century
He also took solace in the fact that after expiry of license period Nepal will own the project. He is correct to the extent that it is an important element of BOOT (build, own, operate and transfer) mechanism. However, there are two important points he has missed. One, it will be grave injustice to deprive people and economy of Nepal from electricity generated in Nepal in order to export (there is no problem exporting excess, though). Installed capacity in Nepal’s system is about 800MW (which generates less than half during dry season), while peak demand, based on suppressed economic growth scenario, was 1,200MW last year. Under normal economic growth scenario Nepal needs more than 6,000MW right now: 2,700MW to provide access to electricity to 100% population as against currently obtaining scenario of access to 45% of population, 700MW to displace standby generators, 1,000MW to power industries at full capacity, 1,000MW to displace LPG from urban and peri-urban kitchens (to displace firewood from rural kitchen will be too ambitious at the moment), 500MW for electrification of transportation, 700MW to displace diesel pumps used for irrigation in Tarai, etc.

Secondly, after expiry of license period, the power plant will become old and dilapidated and will require costly rehabilitation and refurbishment (being past its prime); nor will it be able to generate fully. A groom having borrowed to marry taking comfort in the assurance that the lender will return his bride in 25 years’ time after loan has been fully repaid is a good analogy!

Export mutually un-exclusive with domestic use
There was another intellectual associated with Investment Board who came up with convoluted logic to prove that electricity export and internal use of electricity are "mutually un-exclusive". His logic even defies principle of physics; something used by Tom will not be available to Harry. He may have been pontificating as such on account of the fact that there is stipulation for Upper Karnali Project (UKP) to provide 12% free energy to Nepal. However, it has since been established that even free energy from UKP is to be exported and, therefore, Nepal doesn’t get to use single watt.

Nepal doesn’t need electricity
Another intellectual who was active in the campaign to have Arun III project (201MW) cancelled in 90s, justifies new incarnation of export-oriented Arun III project (900MW), by drawing a parallel between it and Andhi Khola (5.1MW) that was commissioned in June 1991. Electricity from latter was evacuated to Rupandehi district for lack of demand in Syangja district.

It has been clearly established that Nepal right now needs more than 6,000MW and, therefore, there is no justification for exporting now or in about a decade by when demand would have further escalated. He also has demonstrated his lack of knowledge of high finance by presuming that Nepal can start using electricity from export-oriented project as and when she needs; requiring developer breach PPA.

An interesting (rather saddening) facet of Andhi Khola is that even after almost a quarter of century since its commissioning, Syangja doesn’t use electricity generated by it fully, which manifests vision and policy failure on the part of GoN which failed to encourage/facilitate establishment of industries in Syangja including energy intensive ones.

However, demand of Eastern Development Region, where Arun III is sited, was around 350MW last year, while installed capacity of hydropower was 33.7MW and multi-fuel 39MW (total 72.7MW). Obviously the recorded demand is based on suppressed economic growth and this region can use additional 200MW right now as most industries are operating at half the capacity and no power available for new industries. In this manner this region will require close to 1,000MW by the time Arun III is commissioned (without including electrification of transportation, irrigation, etc.). In this backdrop it is futile comparing Andhi Khola with Arun III and condoning the crime committed by GoN in this respect.

Remuneration for advocating in Nepal’s interest
Former finance secretary has also opined that the likes of this scribe receive remuneration for opposing projects. It is obvious that certain sources do pay its agents in Nepal to lobby and write in favor of projects that benefit foreign countries at the cost of Nepal’s economy; some also lobby in favor of bad projects due to the prospect of being able to earn through subcontracts (contract for projects of this scale is beyond capacity of business people in Nepal) for construction/supply. Similarly, those who bend over backwards to justify projects detrimental to Nepal must have been remunerated by the beneficiaries.
But one wonders who would pay those advocating in Nepal’s interest; especially in the backdrop of the fact that even policy makers, politicos and bureaucrats, reportedly, get paid in cash/kind when they advocate/work in the interest of foreign country/business; Mahakali treaty was reportedly ratified by parliament for pecuniary benefit. Actually it will be nice for the likes of us at least to be recognized for advocating/lobbying in Nepal’s interest instead of calling such people “anti-development”; this bunch isn’t selfish to expect to be paid for serving the interest of the motherland.

Hydrocratic intellectuality
Hydrocratic intellectuality is the curse on Nepal, Nepal’s economy and Nepali people. Hydrocrats believe that Nepal will prosper by mitigating load shedding in India, including industrialization there. Due to such intellectuality, Nepal has to import from power-starved India in the name of mitigating load shedding now, contrasted with dream peddled by hydrocrats since more than 2 decades ago that Nepal will become rich by exporting electricity. Nepal is now facing tragic consequence of this dream. Consequence of current spree of signing documents for export will result in Nepal importing the very electricity it exported at around Rs 2.50 from India at more than Rs 10. Wonder when would hydrocrats understand it!

Published in Peoples Review on 4th March 2015
Ratna Sansar Shrestha

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