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Out of 40,000 MW of economically feasible hydropower potential in Nepal only about 791 MW is currently developed. The reason for underutilization of hydropower potential is that there are various challenges to developing hydropower projects in Nepal, namely- technical, financial and regulatory. Foreign Direct Investment (FDI) in hydropower sector in Nepal can be a solution to the technical and financial challenges as developed countries interested in investing in Nepal have necessary finances and have technical knowhow, but they still face regulatory challenges imposed by the government of Nepal. Regulatory challenges arise due to lack of co-ordination among ministries (industry, energy, forest, water, etc.) and political parties. A hydropower project has to deal with 7 ministries, 23 government departments and comply with the terms and conditions of thirty-six Acts. In case of FDI there is additional bureaucratic hurdles on issues related to visa, ownership of capital and exchange rates.
In Samriddhi’s new study “Benefit Sharing in Hydropower Projects in Nepal,” which looks into the cost imposed on private hydropower developers due to lack of clear benefit sharing regulations, we asked private developers to list the major actors and causes that obstruct development of hydropower project in Nepal. They responded local politics and political leaders along with co-ordination among the parties involved, lack of transmission lines and Power Purchase Agreement (PPA) as major agents and causes. These agents and causes not only obstruct the construction and operation of projects but also hinder the projects at planning phase from coming into the fruition.
Tamakosi III (650 MW) project would have been the biggest FDI in Nepal with estimated cost of $1.5 Billion, but Norwegian company Statkraft decided to back out from the project. The company had been working on the project since 2007. The company cited increased bureaucratic hurdles, fragile political situation, insufficient transmission capacity and absence of necessary policies and regulatory frameworks for operationalizing power sales as causes for backing out of the project. Few years ago, the Australian Snowy Mountain Engineering Corporation (SMEC) also pulled out of the export-oriented West Seti (750 MW) hydropower project in western Nepal after battling bureaucracies for two decades.
While Nepal is facing power shortages and lacks sufficient funds and technical skills to build mega hydropower projects, FDI in hydropower sector will be reasonable alternative to solve the current problem. In order to attract FDI for such projects, there must be an environment of ease of doing business so that the investors can feel confident to invest in Nepal. This objective can be achieved with well thought out regulatory framework and well-coordinated bureaucracy. Careful amendments to the Industrial Enterprise Act 1992, the Foreign Investment and Technology Transfer Act 1992 and the Electricity Act 1992 can create favorable environment of doing business and can attract FDI for mega hydropower projects in Nepal.