Butwal Power Company The Costs of Delay

By A Staff Reporter

Despite initial controversy, the government has re-started the process of privatizing this infrastructure company

After nearly nine months, the Finance Ministry has finally restarted the process of selling majority stakes in the government-owned Butwal Power Company (BPC). The Ministry has invited bids from national and international investors interested in buying 75 percent shares of the Company.

According to the public notice, the interested parties will have to submit their proposals within November this year. "If things go their way, we will be able to finalize the deal by early next year," said a senior official at the privatization cell of the Ministry.

This was not the case last year. After nearly one-year-long process, as the government was evaluating both technical and financial proposals of the investors one of the two international bidders for BPC withdrew its application blaming the government of not maintaining transparency in the tender procedures and favoring its competitor. Independent Power Corporation (IPC), a British-American joint venture, said it had decided to pull out of the bidding process as the Nepal government had allegedly favored its competitor, Interkraft, a Norwegian Company. Lord Moynihan, joint managing director of IPC, had said, "We cannot continue with a process where Nepal ignores its own rules by favoring one bidder at the expense of another."

Nepali officials were prompt to refute the allegations. "There is no question of any favoritism on the part of the government," said the Ministry of Finance in a press note. "We are committed to maintain transparency in all the present and future procedures of privatization." Finance Minister Mahesh Acharya said there had been no irregularities as claimed by the IPC in what would be the biggest privatization offer by the country. As a damage control measure, officials said they were considering to call for re-bidding for the majority stakes in BPC. But, Interkraft warned that it would not take part in any such bidding. As the country was going to the polls within a few months, the then government could not decide whether to negotiate with Interkraft, the only international bidder left in the fray, or call for re-bidding.

After the majority Nepali Congress government resumed office, Finance Minister Acharya said he would re-initiate the process of privatizing the BPC. But his brief exit from the Ministry early this year did not help the matter. It was only after G P Koirala became Prime Minister in March this year that the Finance Ministry decided to call tenders for selling its stakes in the company.

This is the first time that the government is selling a profit-making company, with an estimated total saleable asset worth Rs 830 million (approx. 11 million US dollars), to the private sector.

Established jointly by HMG Nepal and United Mission to Nepal (UMN) in 1966, Butwal Power Company is a leading hydropower development company in Nepal. It manages and operates 2 hydro power stations with a total capacity of 17 MW, and owns 14.9% of Himal Power Limited, which currently owns and operates US$135 million Khimti hydropower project, that includes the construction of a 60 MW power station. The project went on stream just a few months ago.

BPC operates on a profit (before tax and bonus payments) of around NRs 145.9 million (1997/98). It employs around 300 people, and includes subsidiary companies, some having joint venture partners, specializing in plant building and maintenance. BPC also operates a highly successful engineering services and consultancy division.

A 5-year Power Purchase Agreement (PPA) was signed in December 1997 between BPC and the Nepal Electricity Authority (NEA), which is itself scheduled for eventual privatization. BPC currently generates 5% of the power distributed by NEA.

The Norwegian government had assisted Nepal in setting up the company before handing it over to the government. In response to plans from NORAD (Norwegian aid agency) to contribute a grant to the estimated US$80 million Melamchi River Diversion Scheme, Nepali government has said it will contract out the construction works of the tunnel component of Melamchi project to BPC. NORAD has set a precondition that it would provide its grant only if the government gave the tunnel works to the privatized BPC. But Norwegian officials have made it clear that they will not interfere in the privatization process of the BPC (that is, they don’t say that the company be sold to Interkraft).

Reports, however, said concerned embassies in the Nepali capital were actively lobbying on behalf of their respective companies. Interestingly, the scenario got murkier as two rival Nepali business houses threw their weight on the side of the either company. While Jyoti Group, led by Padma Jyoti, is a local partner of Interkraft, Chaudhary Group, led by Binod Chaudhary, has business collaboration with IPC.

According to officials, Interkraft has already bought RFP (request for proposal) for the BPC. And IPC is also said to be interested to renew its bid, sources said. Nepali companies are also said to be interested to bid for the lucrative project as the government has excluded the condition of experience (that the investor company must have had an experience of developing a 30 MW hydropower company earlier). Officials said such an experience would, however, add weight in favor of the bidding company.

Analysts say the government could fetch more money for the BPC by making provisions like authorizing it a monopoly over certain distribution zone, say Lumbini, or announcing that the NEA would buy power from it at the prevailing market rate. NEA officials, however, will resist any such move for obvious reasons. This means that the government will have to pay heavily for its delay in selling its stake in the BPC.

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