The country’s energy sector achieved two major milestones last week. First was the Cabinet’s endorsement of the Power Trade Agreement initialled by energy secretaries of Nepal and India. Second was the signing of the Project Development Agreement on 900MW Upper Karnali hydroelectric project — the largest hydro project being built in the country — between the Investment Board Nepal and GMR Energy of India. Rupak D Sharma of The Himalayan Times spoke to Finance Minister Ram Sharan Mahat, one of the architects behind both the agreements, on the significance of these deals and effects these pacts would have in the country’s economy.
What kind of message does the Cabinet’s endorsement of the PTA and signing of PDA send?
These developments will send a strong message that Nepal is ready to do business with investors from across the globe. These developments also show that business climate is improving here and decisions will be taken on time. So far, we have only been chanting about the country’s huge hydropower potential, without actually generating electricity. Now, we have shown to the world that we are ready to harness this potential. Once we start generating power, investment will gradually start flowing into other sectors, as electricity is the staple for every type of industry. So, these two agreements will create lots of multiplier effects.
What measures are being taken by Finance Ministry to draw investment, both domestic and foreign?
Recently, through the fiscal policy, we announced to extend cash incentive of Rs five million for every megawatt of electricity that is generated in return for value added tax (VAT) paid by project developers. We are also providing income tax rebate to hydro project developers for the first 10 years and income tax concession for another five years. In addition, we are also trying to expedite decision-making processes to facilitate investors. It should be noted that PTA and PDA were concluded around the 45-day deadline extended by Prime Minister Sushil Koirala and Indian Premier Narendra Modi. All of us did our level best to meet the deadline as we wanted to show everyone that we mean business and decisions can be taken on time here. We hope these developments will raise the confidence of investors who are considering on investing here.
But the issue of extending cash incentive of Rs five million for every megawatt of electricity generation became quite controversial, isn’t it? Few senior bureaucrats were not supportive of the decision to extend incentive to export-oriented hydro projects like Upper Karnali.
The budget document is very clear on extending this grant to all those who evacuate power before mid-June 2023. You know that value added tax is ultimately paid by consumers. But we haven’t imposed VAT on electricity consumption. So, the entire burden of VAT on electricity has to be borne by project developers. Because of this, project developers were insisting on scrapping this tax provision and were demanding VAT rebate to the tune of Rs 10 million for every megawatt of electricity they generate. But we didn’t agree to their demand. Instead, we told them that we’d reimburse VAT in the form of cash incentive. That’s why the government pledged to extend the incentive of Rs five million. This is a policy declared by the government and it applies to all the projects that evacuate power within the deadline. We offered this incentive to encourage project developers to speed up the process of electricity generation so that we could get rid of loadshedding and reduce imports of electricity from India.
But the budget document does not clearly mention that export-oriented projects are also entitled to cash incentive, isn’t it?
We cannot take discriminatory approach in this regard and bar export-oriented projects from enjoying this benefit. In fact, government has been extending various forms of incentives and tax rebates to export-oriented businesses so that their products could compete in international market. These measures are taken to boost exports, and electricity should not be an exception. Moreover, PTA initialled by Nepal and India calls for free trade in power between two countries on non-discriminatory basis. So, if we start taking a discriminatory approach, India may reciprocate in a similar manner while selling power to Nepal, which will add burden on consumers. So, the proposition that cash incentive should not be extended to export-oriented projects is ridiculous and was raised by those who wanted to create a controversy.
Do you mean politics came into play?
There are those who always try to politicise and protest against every move made by the government. For instance, there was a huge outburst of protest when BIPPA (Bilateral Investment Promotion and Protection Agreement) was signed with India. Energy projects, especially those being developed by India, always land into controversy. This is a unique phenomenon seen in Nepal. The PDA document was prepared by best experts after conducting thorough research. But because of misinterpretation and misunderstanding of a few of the clauses, some started opposing it. The problem is that we do not have faith in our institutions and people working there. We should start trusting our institutions as they know how to protect national interest.
You had publicly said that signing of Upper Karnali PDA would be a game changer for country’s hydro sector. Now the document has been signed what benefits could Nepal reap from this pact?
I meant it. This is because we have long been talking about attracting private investment in the hydro sector. In this regard, we have also issued many survey licences for development of hydropower projects. But very few of those projects have taken off. The PDA that we signed with the private investor is for the development of the largest hydro project and it’s the first of its kind. With this, we now have a model PDA document. I believe we can use this document as a reference while designing PDAs for other projects. I believe this will facilitate the PDA signing process with other similar projects in pipeline, such as Upper Marshyangdi, Arun III and Tamakoshi III, which have potential to generate around 3,000 MW of electricity. These are the reasons why I had said that signing of the Upper Karnali PDA would be a game changer for country’s hydro sector.
So, you are very optimistic about the development of the hydro sector?
Yes. The World Bank Group has already expressed interest to invest $5-7 billion in hydro and other sectors here. Similarly, European Investment Bank and Asian Development Bank are also eager to fund hydro projects. Recently, we also allowed two international financial institutions — International Finance Corporation and ADB — to float local currency bonds worth Rs 100 billion and a big chunk of this money is going towards the hydro sector. Also, the Indian government has pledged to extend $1 billion of credit line to Nepal and sizeable portion of it will go towards development of the energy sector. So, there is resurgence in interest in Nepal’s hydro sector, following the installation of new government.
How much of the credit of $1 billion being extended by India is going towards the hydro sector?
We are still in the process of identifying projects. But at the moment we do not have ready-to-implement hydro projects. Implementation of projects like Budigandaki or Pancheshwor may take at least one year. So, we might have to wait till then.
The government seems to be concentrating too much on power generation these days, without laying much focus on development of transmission lines. This has started affecting developers who have already built hydro plants.
We have allocated a signification portion of our annual budget for development of transmission lines. Nepal-India cross-border transmission line and transmission lines along Koshi, Solu, Tamakoshi, Trishuli, Marshyangdi and Kaligandaki are in implementation phase. At no point in Nepal’s history, development of so many transmission line projects was underway.
But the budget allotted for transmission lines usually never gets used, isn’t it?
Yes, there is a problem in implementation of budgetary programmes and we are pushing ministries to timely utilise allocated funds.
And what about problems seen in acquisition of land required for development of transmission lines. How is the government trying to address this problem?
Transmission line projects are usually delayed because of exorbitant sums of money demanded by land owners. Of course, legitimate concerns need to be addressed but if locals start placing unwarranted demands or exerting undue pressure, actions should be taken as per the law. Personally, I favour enrolling projects of national importance in the Essential Services Act, so that such projects do not face obstructions.
Source : The Himalayan Times