Federalism and Water Resources in Nepal

                                                                                   Ratna Sansar Shrestha

1.     Preliminary

Is federalism a reality? What would be Nepali federalism like? The federal structure of the country is yet to be decided politically.  Nepali people want to know about federalism and its positive and negative impacts. Will it be beneficial to divide a small country like Nepal into provinces with the right to self-determination? If yes, how many provinces should be there?  What will be the consequences after the delineation of provinces? The political leadership should think about it in time and seek the opinion, support and approval of the sovereign Nepali people.  We should learn from the disappearance of Yugoslavia from the world map as a result of adopting federalism without any preparation.

It will not be wrong to say that the decision to adopt federalism was not backed by people’s pre-informed consent or through a general consensus. Rather, it was a decision made by a limited leadership, without any homework and giving proper thoughts about it. It should be understood in the background that before the election of the Constituent Assembly (CA), the Interim Legislature-Parliament made the first amendment of the article 138 (1) of the Interim Constitution 2007, with the provision that the country would be restructured  with  a federal system of governance. Perhaps it would not be wrong to say that the ideas of a limited few were imposed on the people in the name of a progressive move forward without any consultation, or seeking prior consent or approval of the general public about state restructuring, and whether or not to adopt federalism or other system of governance. Experts allege that the act of deciding to adopt federalism by the members of the Interim Legislature-Parliament by using the powers similar to that of the elected Constituent Assembly is a violation of the right to self determination of the sovereign people. An issue like adopting federal system (of governance) should have been approved only after holding extensive brainstorming, discussions and debates with the people. Actually the Interim Legislature-Parliament has attempted to preempt Constituent Assembly in the matter of deciding whether Nepal should stay unitary or adopt federal structure. An unelected body as such doesn’t any such right. In a recent verdict Supreme Court too has decreed that federalism as fait accompli without being solicited by any litigant.

Federalism was not declared in Nepal on the basis of the research studies on its positive and negative impacts in the country. Nor was it declared by forming a State Restructuring Commission according to the provisions of the Interim Constitution. No deliberation was held to decide whether the adoption of federalism in a small country like Nepal will prove to be a progressive move or otherwise. This has created confusion whether Nepal should continue the unitary system or adopt a federal system. As discussed above, the provision of adopting federalism by amending the Interim Constitution has deprived sovereign Nepali citizens of exercising their right to full and meaningful participation in decision making in matters pertaining to water resources in the future progressive set up. This has also violated the important element and right to environmental justice.

It will not be wrong to say that the elected CA members and Nepali people have been deprived from the opportunity of providing their consent after holding extensive brainstorming and serious interactions and discussions as to how the available water resources could be used for the maximum benefit to the country and the people. What arrangements could be made for equitable access to and utilization of and sharing of benefits from it? It will be appropriate to hold serious discussion on the matters, rights, responsibilities and duties relating to the water resources, and incorporate them as basic elements in the constitution.

In Nepal’s context,  water resources is as important as other issues such as  nationality, economy, structural arrangements, administration, security perspective and national integrity. It will be better to be clear about the challenges of optimum exploitation of water resources, its management and usage of the benefit for the betterment of Nepal and Nepali people in the federal context. What will be the model of the constitution? What kinds of provisions relating to water resources should be included in it?  It would be better if the Constituent Assembly (CA) discusses on the utilization of water resources, and formulates necessary provisions by arriving at a proper decision while adopting federalism in the country.  Whether or not the country adopts federalism, the problems described in this concept paper are inherent challenges pertaining to the utilization of water resources.

2.     Water Resources in Federalism

While some people understand water resources only as hydropower, others have extensive understanding of this natural resources which is instrumental in meeting basic need for livelihood along with the need for adequate pure and healthy drinking water, as well as its use in sanitation, irrigation, fisheries, water transport, tourism based on water sports, and its wise use for industrial purposes; besides electricity generation. Will there be any obstacles in the optimum exploitation of water resources, its management and usage of the benefit for the betterment of Nepal and Nepali people under federal structure? In case of obstacles, how should they be resolved? How would it be addressed?   What issues should get special attention while adopting federalism? How could people’s participation be made more meaningful and inclusive for equitable access to and utilization of water resources while ensuring equitable sharing of benefits? What kinds of decisions on water resources will result in the maximum benefit of the country and the people? It is essential to have serious thoughts and extensive discussions on this matter. Thus, it would be appropriate to hold discussions on the following points with regard to the water resources in federalism:

2.1  Nepali people’s Right to Natural Resources

Under the universally accepted principle of right to natural resources each Nepali citizen bred and brought up in any part of the country is entitled to equal right to the available natural resources of the country in any part of the country. For example, the Nepali people living in the concrete jungle of Kathmandu valley are entitled to the same equitable right on the trees, plants, woods, wildlife, herbs, etc. of renowned Charkose jungle (Green wealth). However, after the country is divided into different provinces under the federal system, complexities over sharing of natural resources is certain to arise. However, people of Manang district have misinterpreted the right to harvest ‘Yarsagumba’ (a medicinal herb) as their exclusive right and this has resulted in a shocking incident in which seven unarmed, innocent  people from Gorkha district were killed by  local people. This incident has revealed that with the imminent implementation of federal structure people have started subscribing to the idea that people of one province will not get anything from the other province, even before the adoption of federalism in the country. Therefore, it is high time to analyze the negative impacts that may result while sharing water resources after the adoption of federalism and to assess whether or not the existing Nepali economy can bear the burden of the uncontrolled and unlimited expenditure in the name of federalism?

2.2  Water Resources

Despite being one of the natural resources, the nature and forms of utilization and benefiting therefrom in the case of water resources is entirely different from other natural resources. It is necessary to identify the existing differences between water resources and other natural resources in the context of the federalism. By involving themselves and working as entrepreneurs local people can benefit directly from natural resources like land, forests, herbs, wildlife, minerals, etc. through collection, utilization and other forms of use i.e., harvesting fruit from trees and by cultivating land, collecting herbs, etc. Water resources, however, cannot be utilized in this manner. At the micro level local people can benefit from micro irrigation schemes, micro hydropower, tourism based on water sports and other industries. But the benefit from water resources can only be maximized by ensuring its optimum exploitation which is likely to be hindered by fragmentation of the country in very small units in the name of federal structure. People are already discussing division of water resources under federalism which is premature without its optimum exploitation.

2.3  Drinking Water

There has been an age old practice of buying a source of water of one village by another village. After twenty years of conception of the idea of diverting water from Melamchi River of Sindhupalchowk district through underground tunnels into Kathmandu Valley to resolve the drinking water problem of the capital city, the contract for the execution of the project was concluded only recently.  Although, this will deprive the local people from using the water of this river, traditionally used by them, no arrangement has been made to recompense them for being deprived as such. In the meantime, local people have been putting forward various demands for compensation, including sustained source of income for them. However, arrangements for such sustained source of income cannot be made by hiking the cost of drinking water for consumers. If source of this project is to fall in one state with right to self determination while Kathmandu valley in another state, the complexity of this project will get compounded.

Water is an essential “commodity” for human beings; also for plants and other land and aquatic/marine wildlife.  Water has also become a product for sale like other commodities. The tap water also bears a ‘price’ because of the stance taken by multilateral financial institution with respect to water supply utilities. The water sold in plastic bottles, jar or similar vessels and tankers has become a profit making business rather than a service oriented activity.

It was heartrending that about 500 Nepali citizens had to lose their lives untimely last year due to the outbreak of diarrhea, mainly in Rukum and Jajarkot districts of Mid-west region (and several districts of Far-west region), which was caused by lack of potable drinking water and sanitation facilities.  In this backdrop, it has become imperative, to incorporate a clause in the constitution declaring access to potable water supply in adequate quantum and also for sanitation facilities as one of the fundamental rights. Only such a provision will be able to respect the human rights.

2.4  Hydropower

Implementation of a large hydropower project may mean economic prosperity for some, but it also entails several negative impacts on the local people. For example we have numerous examples where local people living in the vicinity of the large hydropower project sites do not have access to electricity even for lighting their homes.

From the perspective of production and use, even though the Western development region produces the highest quantum of electricity (about 330 MW) in the country, it consumes only half of what it produces.  However, the Eastern development region consumes 20 times more electricity than what it produces (14 MW). The Central development region consumes a little more than its production (275 MW). Even if the existing five development regions are to be declared as the five provinces, this type of happy sharing will not be possible. Simple issue like pricing can spin out of control and provinces with more generation capacity can shut off power if the price is not right. There is even a possibility that if India is to buy at a higher rate, then a province could choose to export it rather than supply to other provinces. Thus, provisions should be made in the new constitution to vest the power in the Centre regarding the formulation of policies and laws for large hydroelectricity projects and the production, sale and distribution of the electricity and give power to local governments for small scale hydroelectricity projects;, should also incorporate local people’s rights and responsibilities in this regard. 

2.5  Priority ranking of uses of water resources 

Regarding the utilization of water resources, the Section 7 (1) of Water Resource Act, 1992, categorizes drinking water including for water for domestic use, irrigation, and agriculture based utilization like animal husbandry and fishery with  first, second and third priority, respectively, whereas electricity generation rates fourth priority.     However, after the implementation of hydropower project, the priority of the Water Resources Act will be superseded by the license granted which will entitle the hydropower project water in a specific quantum thereby rendering the priority ranking of the law irrelevant.  

Following the implementation of a hydropower project, the local people living in the upstream reaches of the river will not be able to undertake projects to irrigate new land because of the project’s water rights. The project’s electricity production will decrease if the quantum of water available to the project is reduced, and consequently, project’s revenue too will decrease; thereby rendering the project unfeasible. . In order to avoid this, the Rule 10 of the Electricity Regulation guarantees specific quantum of the water to the licensee in accordance with the license. If the Upper Karnali Project, for example, is implemented, the people in Jumla will be denied the opportunity of further consumptive uses of water from the Tila River. Thus, under the existing laws although irrigation rates the second priority, the implementation of a hydropower project in downstream area will change the firm priority in the upstream area in order to guarantee specific quantum of water under the license for the hydropower project. 

Priority accorded to drinking water by the law have been negated by the farmers time and again when the farmers break water supply pipelines, whenever monsoon rains fail, to irrigate their field during the plantation season thereby triggering extreme scarcity of drinking water to the consumers. This may have been taken as a simple incident in the unitary system but it could lead to serious incident in the federal system.

It has been said that the water of Yangri and Larke Rivers of Sindhupalchowk district will be diverted into Kathmandu valley to supply drinking water to the denizens there in the second and third phase of Melamchi Project. It may create problems as one hydropower project has already been implemented and construction work of several other projects is underway. Thus, it creates potential for serious disputes if several smaller provinces are to be created in the name of federal structure.

2.6  Shortage of Water in the River

Diverting water through canal/tunnel for a hydropower project creates dewatered area in a stretch of the river similar to the impact of Marshyangdi project on Marshyangdi river on the highway to Pokhara. If the electricity produced in one province is to be utilized in another then it will be difficult for the local people to agree to allow the construction of the hydropower plant due to this problem.  Thus,  the new constitution should ensure equitable access to and use of water resources, equitable sharing of the benefits, participation of local people in policy and decision making, monitoring and evaluation process, meaningful inclusive participation of nomadic Rautes (on the verge of disappearing), poor indigenous/janajati/women/dalit, excluded community without any discrimination on political economic, social, cultural, religious grounds. 

2.7  Multipurpose Project with Reservoir

A hydropower project with reservoir results in negative externalities by a magnitude than a run of the river project. The Kali-Gandaki A hydropower project, which stores water on a daily basis impacts less adversely than Kulekhani hydropower project, which stores water around the year. Apart from submerging land, forests (and wildlife), tourist site, temple, and local infrastructure, the construction of a reservoir project displaces local people.  

2.8  Downstream benefit  

With the implementation of a reservoir project, downstream areas stand to benefit due to availability of water even during the dry seasons due to augmented/regulated flow from the project. Such water can be used for industries, drinking and sanitation purposes, and for irrigation. The downstream areas will also benefit from water sport based tourism as well due to watershed improvement. If a project on water bodies involves two or more provinces, the water resources regulations will prohibit the  people living in the upstream will be deprived from the consumptive uses water as explained above while people living in the downstream areas will benefit as water will become available even during dry season for the purposes of irrigation. Similarly the province where the project is located will suffer due to submergence/inundation of land and displacement of the populace. In such a circumstance, the province where the project is to be located and the people in the upstream area will hardly be willing to have the project implemented.

 2.9 Irrigation

According to the official record, there are nearly 4 million hectares of arable land (of which the major portion in the lowlands) in Nepal. Of which only 500,000 hectares (less than 13 percent) has irrigation facility, mostly during the rainy season. Thus most land produce only one crop in a year; only if the rainfall is good. Crop yeld is bad if the monsoon is late, which results in food scarcity. In order to make constitutional provision of food security, it would be better for the political leadership to prepare a strategy and implement an effective plan of action to promote cash crop and ensure crop yield at least three times in a year, and prevent youths from going abroad and working as cheap laborers in the name of weak remittance. For this, reservoirs can be built in the mid-hills to collect rain water (during the raining season) and use it for the remaining eight months. If Nepal’s Terai is to become a separate province, the possibility of such a project will be reduced because a reservoir project will inundate land in the upstream areas resulting in displacement of local people while the people in the lower basin areas will stand to benefit through irrigation and other use of perennial source of water.

2.10 Flood control   

The construction of a reservoir will also control flood and landslides in downstream areas during the rainy season. However, disputes could arise between the provinces in upstream and downstream areas as the province in the upstream area will have to pay a high price to control floods in the province in downstream areas.

2.11 Resettlement 

Construction of a hydropower project with reservoir is not possible in the plains. It is possible only in the hilly area. Conversely there is not enough land in the hilly area to resettle people displaced by such a project due to lack of habitable lands. While there is enough land for resettlement in Terai but after declaration of Terai as a separate province, resettlement of people from hills in Terai will not be acceptable as it may disturb ethno-socio-cultural pattern of the area. The Tharus of the Western Terai have already refused to let the people displaced by the West Seti Project to be resettled in their area. After the delineation of separate provinces, the people of the upstream areas who stand to lose their land and be displaced by the construction of dams for hydro projects to provide electricity in other cities and irrigate downstream areas may not easily give consent to such projects.

2.12 Delineation of boundaries

Rivers have been used to delineate most of the districts, administrative zones and development regions of Nepal since long time. If two provinces are delineated on the basis of a river, there is a possibility for the two provinces to have different aspirations, needs and priorities, which will result in disputes forcing non-implementation of projects based on water resrouces.

2.13 Provincial conflict 

Since that Nepal is all set to adopt federalism in the country, the disputes over sharing river waters in the neighboring countries of India and Pakistan should serve as an eye opener to the problem.  There exists a dispute between Panjab and Haryana over sharing river water. Likewise, Madhya Pradesh, Maharastra, Gujarat and Rajastan are involved in a dispute over sharing the waters of Narvada River. There has not been much headway following the serious dispute between Tamilnadu and Karnatak over River Kaveri. Due to  disagreement of Bihar Uttar Pradesh was unable to build a hydropower project in Kanpur.

According to the Indian constitution, water resources is considered a provincial issue. Even though the constitution gives the Centre the power to deal with disputes regarding a river that flows through several provinces, dispute settlement has not been easy. Federalism appears reasonable for a large country like India, but a country like Nepal which is smaller than averate Indian provinces, the disputes that may arise between several smaller provinces regarding the appropriate use of water resources may pose serious challenge. The dispute between Pakistan’s Panjab and Sindh provinces regarding Kalabag project has impeded its implemtation. The local people who depend on water bodies for their livelihoods have been sidelined from participating in the formulation of policies and decision making, as well as in the evaluation and monitoring of appropriate uses of water. Thus, their right to inclusive participation on this matter should be ensured in the constitution without any discrimination on economic, political, social and cultural grounds.

Long before the discussion on federalism began Nepal has already signed Gandaki, Koshi, Mahakali and the Tanakpur treaty which are detrimental to Nepal. This happened while Nepal had unitary structure. With fragmentation on ethno-cultural-religious-linguistic lines in the name of federalism outsiders may pit Nepal’s one province against the other and take undue advantage. We can also learn from the challenges of federalism from other countries. If we make a hasty decision in adopting federalism and dividing the country, future generations would blame it on today’s intellectuals, writers of the constitution and all those who accepted it. 

3. Optimum Exploitation of Water Resrouce

Along with the concept of state restructuring on ethno--cultural-religious-linguistic lines people are also talking of division of the water resources. Without ensuring optimum exploitation of it, what could be divided in the situation obtaining at the moment is the division of flood during rainy season and drought during dry season. Nepal can benefit by ensuring optimum exploitation and distributing such benefit from multidimensional uses of the water resources.

It is obvious that indiscriminate fragmentation of this small country into more than 10 provinces on ethno-cultural-religious-linguistic lines will render Nepal unable to ensure optimum exploitation of water resources. Being different from other natural resources, there will not be much to distribute amongst various provinces if optimum exploitation couldn’t be achieved. In the case of water resources, Nepal and her people can benefit only by ensuring optimum exploitation, prudent management and benefit maximization through positive externalities.

Due to lack of river basin approach, sites that can result in multidimensional benefit have been “given” away as projects that will deprive Nepal from benefits of a magnitude. a prominent example is Upper Karnali project, which is an ideal site for 4,180 MW installed capacity with reservoir that has potential to irrigate up to 1.5 million hectares of land even in dry season and also flood control. However, GoN has already issued a license for this project as a run-of-the-river project of 300 MW.

Similarly, GoN has also failed to understand the potential benefit from electricity consumption in Nepal and have earmarked a number of good project sites that can generate quality power cost effectively while Nepal is suffering from the vagaries of load shedding.

4. Suggestions      

If necessary provisions are not made in the new constitution on the basis of above mentioned examples and suggestions to draw maximum benefits from water resources projects, the country is certain to face several obstacles. Nepal is geographically a small country and if it is divided into smaller provinces under federalism, the country is certain face problems in drawing benefits from water resources. Thus, it is crucial for the decision makers to give timely thoughts about restructuring the country into fewer provinces.

In view of the above, the best solution for Nepal is to declare provinces on the basis of river basins of large river systems. As Mechi River has a limited catchment area, we can have a Sapta Koshi-Mechi province in eastern Nepal. The river basin of Sapta Gandaki could be declared as the second province. Mahakali River too has a limited catchment area in Nepal, and therefore, we can have a Karnali-Mahakali province in west Nepal.

The right to decide the maximum use of a river that flows through a province should rest with the concerned province. Owing to the geographical realities of the country, the possibilities of disputes over water resources would be minimal if limited provinces are restructured on the basis of watershed areas of major river systems of the country.

In recent years, a trend has developed to obtain license by individuals or organizations from within the country and abroad to harness river water. This has denied local people to draw benefits from the river that flows from their area. This calls for reform in water policy in two ways. First, local people should have the preferential right to obtain certificate for the use of river water. Secondly, the local people who do not have the required capital to implement such water resources projects should be given the opportunity to have share in it through other means, and develop their ownership in the project. In this way local people will not be denied from the opportunity of investing in water resources projects and draw benefit from it. This will also prevent those who want to be rich by dealing with the certificates. Various demands (or protest activities) that may arise or may be raised in the name of local people could also resolve the problems associated with the successful implementation of such projects.

Since that most of the water resources projects could be basically capital oriented, there is not any possibility to charge high royalty from such projects. Thus, the right to get such royalty should rest with the concerned province, and it would be appropriate to make arrangements to spend the money only on rural electrification and for the construction of canal system for irrigation.

The question as to what kind of constitutional provision should be made in the federal set up regarding the preservation and use of water resources is very important. The suggestions have been made because it will be appropriate to make constitutional provisions for the maximum utilization of water resources through its conservation and wise use:

·        From the discussions held so far the new constitution envisions three levels of governance system – centre, province and local level government. Each level of the government will have the power to monitor the preservation and use of natural resources within its jurisdiction. Other powers will also be similarly divided between the three levels.

·        Water resources cannot be compared with other natural resources as it is not limited to one place, nor is it always limited to solid or liquid form, or remains underground, or above the ground, or in all the places or in all forms. However, it is essential for everybody. If it is not properly managed it can invite disasters. Thus, by considering its special characteristics and nature, it is necessary to specify it in the constitution as a fundamental duty of citizens to preserve it.

·        Since that water has its own distinct characteristics and inevitability, the ownership of which cannot be limited to one province, local government or community. Thus, the  power of control over it should rest with the Centre. The Central, provincial and local governments should have the power to mange and regulate it. 

·        Water resources form a part of the system of water cycle. Thus, water resources management should be done by understanding this water cycle. With the objective of drawing maximum benefits from the wise use of water resources it would be appropriate to collect available statistics on it, conduct feasibility studies of projects to be based on water resources, conduct research and analysis on it, formulate policies and strategies regarding it, set criteria and standards about it, outline priorities pertaining to project development, and include it within the rights and responsibilities of the Centre to give approval to technical aspects within the set criteria. 

·        It would be appropriate to include the management, monitoring and the running of projects within the jurisdiction of the Centre, or the irrigation projects that are to be built in two or more provinces, hydro-power projects, construction of reservoir and buildings to generate hydro-electricity, central electricity grid, drinking water projects etc. 

·        It would be appropriate to vest the power to the province to implement (by itself) mega and medium levels of hydro power, irrigation, drinking water and recreation based projects that will be limited within the province and are within its resource capacity, and needs to be implemented on the basis of the basic criteria and priority set by the sangh (organization). Moreover, it would be better to make a constitutional provision to rest the powers and duties to the provincial government regarding the supply of electricity by itself within its territory whether by linking or not linking it to the central grid.

·        It would be better to make a clear constitutional provision whether to allow local governments to initiate, implement and manage small scale projects, or to involve the private sector to do it.

·        It would be contextual to make necessary provisions for the Central, provincial and local governments to collect revenue from the projects implemented within their jurisdiction through an arrangement to make an equitable distribution of it by the Centre among the concerned provinces and the province to do the same among the local governments.

·        It would be better if set up Constitutional Commission on Environmental or Natural Resources at the Central level and Council on Environmental or Natural Resources, or Corporation  at each executive level to settle disputes that may arise among provinces or among local governments. Likewise, Committee on Environmental or Natural Resources should be formed at the Legislature level and,

Environmental Court

or Green Bench at the judiciary level.

·        Despite our long experience in social, cultural and religious diversity in the country, in view of the inevitability of our inter-dependence, lack of capacity, and inexperience of the federal system, maximum utilization of the country’s water resources would be possible only if the residual power for its management rests with the Centre.

·        There is a provision in Interim Constitution for the Legislature-Parliament to support, approve, or pass any general treaties or agreements on sharing water resources other than those that may not have extensive, serious or long-term impact on the nation, with the majority of the its members present. There is a need for clear interpretation about the extensive, serious and long-term impact of the activities pertaining to certificates issued for business investment, the distribution of the profits drawn from selling of electricity, and whether the distribution of profits made according to the treaty would be acceptable. If it is clearly stated in the constitution that it would be specified by a future act of the Government, it would help to remove suspicions about passing an act with the purpose of deviating from the intentions and provisions of the constitution. It would be better to give a thought about including a provision in the constitution as to the need for parliamentary approval to issue certificate for the initiation of projects with a certain specification, capacity, or size.  

·        There should not be any provision in the constitution to allow the export of electricity or other services relating to water resources in foreign countries though private entrepreneurs on the basis of letter of certificate, or through the provinces themselves. Since that the matters pertaining to the use of water resources is sensitive from physical, strategic and security reasons, it would be practical as well as contextual if the power relating to the use and sharing of water resources with foreign countries rests with the Centre.

Conclusion

These suggestions could form the basis for distribution of power and responsibilities among the Centre, provinces and local governments. The government’s decision about opening universities in the Mid-western and Far-western developmental regions resulted in heated debate, especially about the city where they were to be established. And, the debate still rages on. The decision about naming the capitals of the future provinces following the restructuring of the state cannot be free from such debates. Thus, it is necessary for the decision makers to do proper home work in this regard, otherwise the class that are happy to see such disputes without trying find any solutions would be quick to point out the anomalies of other people’s ideas. After the official declaration (on the model) of governance system, the importance of suggestions made in the concept paper on the equitable use and distribution of benefits of water resources would increase even more. It can be expected that there will be serious discussion over it after the model of federalism is determined.      

Published by UNDP in June 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

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.