Kathmandu — Citing that the project does not appear financially viable and that it would also be required to supply free electricity, the Indian government company NHPC Limited has sought financial assistance from the Investment Board. NHPC, which was awarded the West Seti and Seti River–6 hydropower projects without competition, has requested NPR 40 billion in viability gap funding (VGF) for the West Seti Hydropower Project.
There is an international practice of governments providing viability gap funding (VGF) for the construction of economically important infrastructure that may not appear financially viable in the short term but can deliver positive returns in the long run. In Nepal, the Public–Private Partnership and Investment Act and its regulations provide for the provision of VGF. However, so far there have been no projects or schemes in Nepal that have been built with government-provided VGF.
Earlier, the state-owned Budhigandaki Hydropower Company Limited had prepared investment modalities for project construction both with and without the provision of viability gap funding (VGF). However, the plan could not be implemented after the Ministry of Finance did not grant its approval.
According to the Investment Board Secretariat, NHPC has sought viability gap funding (VGF) on the basis of the project’s detailed project report (DPR). There is a provision to provide VGF for the construction, operation, and expansion of projects that are expected to generate positive returns in the long term and are important from an infrastructure perspective, but are unable to deliver adequate financial returns in the immediate term. Section 43 of the Public–Private Partnership and Investment Act, 2019 provides for the establishment of VGF.
Subsection (1) of Section 43 of the Act states that the government shall establish a viability gap fund to support the construction, operation, and expansion of projects that are expected to generate positive returns in the long term and are considered important from an infrastructure development perspective, but are unable to provide adequate financial returns in the immediate term.
Subsection (2) of Section 43 states that, on the recommendation of the Board and on the basis of prescribed criteria, the required amount may be provided from the Fund to designated projects in the form of capital and operational grants or loans. The same subsection further mentions that the Government of Nepal may allocate necessary funds to the Fund from time to time.
Rule 45(1) of the Public–Private Partnership and Investment Regulations states that the operation and management of the Viability Gap Fund shall be carried out by the Board. Sub-rule (3) provides that, in accordance with Section 43 of the Act, grants or concessional loans shall be made available to projects from the Viability Gap Fund based on the government’s decision taken upon the recommendation of the Board.
Sub-rule (4) of the same rule lists five grounds on which the Board may recommend the provision of capital or operational grants or concessional loans to projects from the Viability Gap Fund. Under clause (a) of Sub-rule (4) of Rule 45, the Board may recommend a project for VGF if it is technically sound but has low competitiveness from an investment perspective and therefore needs to be made financially viable.
Clause (b) of Sub-rule (4) of Rule 45 provides that VGF may be recommended if the relevant public body associated with the project has conducted an analysis and determined that capital and operational grants or concessional loans should be provided. Clause (c) applies where other options to make the project viable are insufficient or inappropriate. Clause (d) applies to projects that fall within the policies, plans, and programs of the Government of Nepal but cannot be implemented immediately by the government itself. Clause (e) allows the Board to recommend VGF on other grounds as determined by the Board from time to time, as provided in the Regulations.
A source said that the Board may recommend a project for viability gap funding (VGF) on the grounds specified in clause (a) of Sub-rule (4) of Rule 45—if the project is technically sound but has low competitiveness from an investment perspective and therefore needs to be made financially viable—and under clause (d) of the same sub-rule, if the project falls within the policies, plans, and programs of the Government of Nepal but cannot be implemented immediately by the government.
Although NHPC has requested VGF, the matter has not yet been finalized, said Sushil Gyawali, Chief Executive Officer (CEO) of the Investment Board. “They have said that NPR 40 billion is required for VGF, but it has not been decided what to do or how to proceed,” he said. “It is a reservoir-based project. Financially, the project is not viable. According to the agreement, after the project is constructed, 21.9 percent of the electricity must also be supplied free of cost. Because free energy must be provided, the project is not viable.”
The Board’s 64th meeting decided to conduct further study of the detailed project report (DPR) of the West Seti reservoir-based project, which has an investment of NPR 160 billion. The CEO, Gyawali, said that an expert team is studying it. “The DPR has already been finalized. Based on the DPR, a proposal has been submitted stating that VGF is required,” he said. “Our team is studying it. It is not something that can be decided immediately as soon as they say so.”
The Investment Board meeting held on 27 November 2024 decided to increase the capacity of West Seti from 750 megawatts to 800 megawatts.
After the project received construction permission but remained inactive for a long time, the government terminated its agreement with the Chinese company China Three Gorges International Corporation (CTGI). Shortly after, during the investment conference in March–April 2019, the government placed the West Seti project in the “SOCASE” list, planning to move it forward by linking it with the SR–6 project. The Japan International Cooperation Agency (JICA) had conducted an initial feasibility study of the proposed SR–6 project to be developed alongside West Seti as early as 1993. The detailed feasibility study, however, was carried out by the Department of Electricity Development. While JICA’s study indicated that SR–6 could potentially generate up to 670 megawatts of electricity, the Department stated that the maximum potential is only 300 megawatts.
On 18 August 2022, in the presence of then Prime Minister Sher Bahadur Deuba, an agreement was signed between the Investment Board and NHPC Limited to assign the responsibility for the West Seti and SR-6 hydropower projects. Shortly after, in October–November 2022, a survey permit was issued. Under the agreement, the detailed project report (DPR) was to be prepared and submitted to the Investment Board Secretariat within two years of receiving the survey permit.
Earlier, on 6 June 2022, the Board’s 51st meeting decided to entrust NHPC with preparing the development and investment framework for these two projects.
On 7 August 2022, the Investment Board’s 52nd meeting approved the memorandum of understanding to issue the survey license. The final DPR of the project will provide information on the overall social, economic, geological, technical, and environmental aspects. Likewise, the DPR will guide on matters such as the estimated project cost, the start and completion timelines and work plan, market assurance, transmission line construction, and the availability of financial resources. After the DPR is analyzed, if the project is to proceed further, a Project Development Agreement (PDA) will be made.
According to earlier studies, the West Seti project with a capacity of 750 megawatts was estimated to cost USD 1,320 million, and the SR–6 project with a production capacity of 450 megawatts was estimated to cost USD 800 million. The memorandum of understanding signed between the Investment Board Nepal and NHPC Limited on 18 August 2022 Bhadra states that 21.9 percent of the electricity must be supplied free of cost once commercial production begins. NHPC has even been lobbying, claiming that it cannot provide free electricity.
Kantipur
