PDA with GMR likely to attract more foreign investment in hydropower

KATHMANDU, Sept 19:

Endorsement of the preliminary draft of the Project Development Agreement (PDA) for Upper Karnali Hydropower Project (900 megawatts) by the cabinet on Thursday signals better days ahead for investment in the hydropower sector in Nepal.

Economists and some former bureaucrats said endorsement of the preliminary draft of PDA has sent across a positive message and is likely to attract more foreign investment for hydropower development. The project, which is estimated to cost Rs 110 billion, would be the biggest hydropower project in the country.

The PDA document, which is key to project financing, elaborates liabilities of the developer and the government and addresses possible risks and protection from policy-level changes, among others.

Though it would be the biggest project so far to be developed by a foreign investor in Nepal, endorsement of the PDA by the cabinet has opened the gates for foreign investment in other big hydropower projects, said Posh Raj Pandey, an economist. “It also sends across the message that Nepal is ready to invite foreign investors with arms wide open,” he added.

Former finance secretary Krishna Hari Baskota also echoed Pandey and hailed the government’s decision. However, some former bureaucrats, CPN-UML and opposition parties have opposed some of the provisions of PDA and demanded revision. However, all acknowledge that a project of this scale would create job opportunities for a large number of skilled and unskilled workers.

Former finance secretary Rameshore Khanal said though the project is export-oriented, it would provide 108 megawatts of electricity free of cost to Nepal. In addition, the government would also get 27 percent shares of the project free of cost. The project along with transmission line for the project would come under the government’s ownership after 25 years of operation.   

The government had awarded the project to GMR, an Indian company, in 2008 but it took six years to finalize the PDA for the project.
“This is the most significant step taken for hydropower development in Nepal after the government opened hydropower sector to private investors in 1990s,” said Khadga Bahadur Bisht, president of the Independent Power Producers’ Association, Nepal (IPPAN).

However, detractors say some of the issues, including downstream irrigation projects have been overlooked in the PDA.

Former energy secretary Surya Nath Upadhayay said the PDA document overlooks issues of irrigation projects and water use as well as risk-sharing with a private developer. Upadhyay is also the author of the book ‘International Water Course Law and a Perspective on Nepal-India Cooperation’. These issues have been overlooked as IBN does not have expert manpower to deal with issues relating to big projects, said Upadhayay. IBN is an autonomous body formed in 2011 to facilitate investment in big hydropower projects.

Upadhyay said though he is in favor of the project he wants the government to ensure that national interests are safeguarded. Likewise, the issues of VAT subsidy worth Rs 4.5 billion to the developer upon completion of the project by the fiscal year 2022/23 is another bone of contention. But the cabinet approved the provision.

Chief Secretary Leela Mani Paudel and Governor of Nepal Rastra Bank Yuba Raj Khatiwada are also against VAT subsidy. Khatiwada was absent in the IBN meeting on Wednesday that endorsed the PDA document and forwarded it to the cabinet.

CPN-UML during the IBN meetings this week had also expressed disagreements with some of the provisions contained in the PDA document. Bhim Rawal, vice-chairman of CPN UML, said they had sought justification on the issue of VAT subsidy.

Rawal also expressed concern over waiver on annual five percent capacity royalty escalation as domestic developers are paying five percent capacity royalty escalation. According to Hydropower Development Policy 2001, export-oriented projects have to pay Rs 400 annually per kilowatt for first 15 years as capacity royalty and Rs 1800 per kilowatt after fifteen years with 5 percent escalation every year.

But the PDA approved by the cabinet has exempted GMR from five percent capacity royalty escalation. GMR has to pay Rs 360 million in capacity royalty to the government in the first year of completion of the Upper Karnali Hydropower project.

Asked if the benefits of the project would outweigh its downside, economist Pandey said they have yet to study the contents of the PDA document.

Likewise, UCPN (Maoist) has also taken exception to the PDA document. Party chairman Pushpa Kamal Dahal had urged Prime Minister Sushil Koirala to sign the PDA with GMR only after forging political consensus.

Source: Republica