Upper Arun development: Financing modalities

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    hydro_artSocio-economic progress in Nepal has been severely stuck because of the ever increasing deficit of electricity supply, which has almost remained stagnant. The demand for power annually is 10 to 12 per cent but the increase in electricity production has not kept pace with it. Limited hydropower projects (Chamelia and Upper Tamakoshi) are in the pipeline for boosting supply. Even after the commissioning of these projects, acute problem of short supply would continue as they will produce amount of electricity less than what the anticipated demand requires. For the last decade or so Nepal has been struggling with long hours of loadshedding. As a result, economic progress has stagnated or even declined to its minimum as an impact of power outage among other things. Low average rate of growth of economy for the last several years could not help create employment opportunities for the growing labor force which means the number of unemployed has increased. So, it has put livelihood of the great majority of people in peril.

    Featured by limited viability of conventional sources such as oil, coal and natural gas for electricity generation, water resource is the only option for Nepal to rely for power development. Imported conventional sources if used to generate electricity would fill the gap between demand and supply in a very short period of time but the high costs make them unaffordable for the 80 per cent of the people in the lower rungs. Power from these sources would increase production cost thereby leading industrial entities towards closure. It would make domestically produced goods dearer in both the domestic and international markets and hence in turn work as the stimulator for higher inflation rate. Although a capital intensive and relatively time consuming for construction, hydropower is the only option that Nepal should take initiative in earnestly. That can be the drive for Nepal’s prosperity.

    Nepal is enriched by over 6000 rivers and rivulets among which Arun river with length of 510 km and average flow of 58 cusecs, originates in Tibet and meets Sunkoshi to become a part of the Koshi River. Some experts claim that variation in water flow is minimal in the dry season as compared to the same for the rest of the rivers. Experts further reckon that Upper Arun Hydropower Project (UAHP, 650 MW), UAHP I (350 MW) and UAHP II (600 MW) are highly feasible projects in terms of water availability, height from which the water falls, geological conditions, cost effectiveness and environmental impact.

    Generally, the average cost of production of a KW of power has been estimated to be between $1500 to $1700. However, the cost of UAHP is slightly more than the half of this average. The same for UAHP I and II is higher than the cost of UAHP but less than other already commissioned hydropower projects in Nepal. UAHP among others could become a boon for Nepal’s development but yet they haven’t really come to the fore in the real sense. An Indian power developer, Sutlez, bagged license of Arun III (900 MW). The rest are waiting for an action to be fertile but efforts, commitments and investment matter. Experiences from the two representative hydropower projects – Chilime and Upper Tamakoshi – prove that investment through internal resource is more cost effective.

    Modality one: NEA itself can develop UAHP through internal resource mobilization. Liquidity of some financial institutions has been increased with the increased numbers of contributors over the year to invest in UAHP. Employees Provident Fund (EPF) and Citizens Investment Trust (CIT) along with others are capable of providing the required loans at reasonable interest rate if NEA commits to implement it.

    Modality two: seeking the private sector (domestic and foreign) investment. Resource constraint and issue of governance, corruption, political uncertainties and pessimism is restraining them from making investment in hydropower projects. Alternatively, at a reasonable rate of power purchase agreements with comfortable subsidies resource rich institutions such as EPF, CIT, insurance companies etc. themselves can undertake the construction of UAHP under their joint investment and management. The assurance and prompt action from the government in matters related to security concerns, access road and transmission line construction and benefit sharing are vital and mandatory.

    For both the modalities, provision of equity is an essential component that works as a catalyst (i) to mobilize private sector capital; (ii) to convert household savings into investment; (iii) to create positive attitude towards the implementation of project (iv) to increase people’s participation in development ventures; and (v) to work as a mediator to settle negative debates if any in the course of project implementation. Equal proportion of loan and equity will help power developer to mobilize capital from organized and unorganized sources. The citizens will invest money at a call for equity depending how the government plans to materialise it. If the government with effective measures among other things commits to act for the development of hydropower, it would certainly work.

    by : PROF. DR. KAMAL RAJ DHUNGEL

    Source : The Himalayan Times