Opinion (Spotlight Weekly)

Private Sector Participation in the Power Sector Lessons Learnt/Unlearnt So Far

By MP Pradhan & SB Pun

After the lenders, IFC and the private sector window of the ADB, had the "signed, sealed and done" power purchase agreements (PPAs) of Khimti and Bhote Kosi, a staff of the World Bank (IDA) who was appraising the Power Development Fund (PDF) casually commented that these PPAs were examples of how exactly Not To Do the PPAs. Both these plants have been in operation for over a year now. The experience indicates HMG indulging too much on promoting developers instead of the markets, NEA in a sour mood but continuing with the "take or pay" mode, our Rastra Bank grudgingly dishing out the valuable foreign exchange, the two developers despite their "pocketful of monies" grumbling about the "continuing risks" and the two major lenders wondering whether the exorbitant interest rates they charged are sending the right signals or not. These two private sector projects have taught valuable lessons for all. It is more the question of whether we have learnt or unlearnt them. Permit us to tick below the three major agencies involved in this learning/unlearning process:

i. The Regulator, Electricity Tariff Fixation Commission (ETFC):

One may say that the regulator, in the true sense, was virtually non-existent in our power sector. The developer could literally, in the name of foreign investment, rampage through the Secretaries, Ministers, NPC members and even the Prime Minister in the manner they wished. Our Electricity Act 2049 stipulates that HMGN "shall constitute a Tariff Fixation Commission for the purpose of fixing electricity tariff and other charges". The scope of fixing electricity price by the Commission is then narrowed down to the "selling price of the electricity to be utilized in the national electric system or the system of NEA Ö.". The Commission was mandated, either conveniently or through ignorance, to deal with the Retail Price of NEA and NOT the Whole Price of the IPPs. The fathers of the Act and the Policy went ahead to encircle the ETFC within the bounds of the "covenants as agreed between the Donors and HMGN" in tariff setting. After the Khimti episode, when NEA requested the then EDC that both the organizations put their heads together in dealing with the Bhotekoshi PPA, NEA was categorically warned not to involve them at all. It was NEA's perception that the attempts with more heads will result in a better PPA, with a tariff beneficial to the consumers and the country as a whole. But EDC, in its eagerness to promote the private sector, ostensibly wore the mantle of the "neutral umpire" which ETFC should actually have been entrusted with. It is now felt that DOED, as the licensing authority, should do the IPP's first Project cost pruning to be followed up with further pruning by NEA during PPA negotiation and finally by the Tariff Commission during the PPA approval. This way the "gold plating" of the Project cost, that affect the tariff, would be regulated to a large extent. Ten years down the road, the revised Hydropower Policy 2001 has now mandated the Commission to oversee the Whole Sale price as well i.e the private developers' selling price to NEA.

ii. The Licensor, MOWR/Department of Electricity Development (DOED):

Though in theory the Ministry of Water Resources (MOWR) issues the license, it is in practice, the DOED, that deals, interacts and finally recommends for approval the developer's license to the MOWR. One of the major tasks entrusted to DOED is the promotion of the private sector which some view as being pursued too religiously with the Mullah-like zeal, irrespective of the consequence to the country. For an example, just take a peep at the mid-nineties' period when the American IPP, Energy Initiative, came to Nepal to pick up the license for the 144 Mw Kali Gandaki A. When NEA argued that this was too big an IPP project for its system, incurring unduly heavy outflow of foreign exchange from the country, the immediate response of the then EDC was that private sector promotion was their concern not the foreign exchange outflow. The intense rivalry between the two agencies was in full display here. With the lady American ambassador putting her full weight behind the IPP and MOWR awaiting instructions from higher ups, Kali Gandaki A developed into a very hot potato. This is generally how "privatization " works in the developing countries. Ultimately, Rodney Addison of the ADB itself and Dr. Niranjan Kapali had to literally plead with the lady Ambassador to leave this in the Public Sector domain.

The other classic example of private sector promotion is the "la affaire" with the American giant, Enron, for the 10,800 Mw Karnali Chisapani. When DPM, Ms Shailja Acharya, wrote to the Enron executive, HD Ramm, to defer their license application until a suitable environment (read downstream benefits) is created, all hell broke loose. Our Parliamentarians were so much "educated" with the virtues of private sector and foreign investment that even her own Congress Party wailed and bemoaned that she had killed the goose that would have surely laid the golden eggs. Recent unfolding Enron events have revealed that private sector, especially in the electricity infrastructure, needs to be nurtured with "caution and care". Their motive is quite clear: profit and more profits. Even with the best stringent regulatory eyes of the American laws, the escapades of Enron, Arthur Anderson and WorldCom do escape. Some even go to the extent of charging Enron with reaping sinful profits from the Californian price hikes and causing the power blackouts. One can only conjecture what damages Nepal would have incurred if our Parliamentarians' supposed golden goose, Enron, had drowned clutching the Karnali Chisapani license.

We firmly believe that too much promotion has been done on the licensing part. In July 2000, DOED opened the "floodgates" to private sector by licensing seven 1100 Mw worth of projects: 402 Mw Arun III to California based EuroOrient, 20 MW Budi Ganga to India's Birla, 51 Mw Likhu Khola-4 to Australia's Pacific Hydro, 101 Mw Tamor-Mewa to US Combined Energies, 301 Mw Dudh Koshi to Canada's ASTQ Holdings, 60 Mw Kankai to France's Coyne Et Beller and 176 Mw Andhi Khola to Nepalese joint venture with EuroOrient. The chest thumping by the EuroOrient executive, Ron Nechemia and the local Nepalese agent of about eight or nine on-going projects in India and the spade work for the"immediate digging" in the Arun valley are still fresh in our minds. Our then Prime Minister, GP Koirala, even gave his valuable time slot to Mr. Nechemia to extend his "commitment to help this project to start as soon as possible". Two years down the road, we can only sigh in dismay like the Chairman of a District Development Committee who belatedly realized that the licenses of all his district's rivers were safely lodged in the pockets of never-heard-of weird developers. The Project Agreements of DOED have generally been perceived as being too "developer friendly". It is high time that the new generation of Project Agreements with the developers be more sensitive to the requirements of the locals (project affected or not affected) if equity and justice is to be practiced. It is also high time that DOED instead of running to the lenders and developers in Washington, Toronto, London and Paris they should rethink and meditate on their strategies. With the advent of Kali Gandaki A, Nepal has begun to suffer from an excess energy of about 1,000 million units per year. So why not just stroll down to Delhi, Chandigarh, Jaipur, Lucknow and Patna to promote and create markets? Promoting lenders and developers, the policy assiduously followed so far, will have to be matched equally with promoting markets both within and outside Nepal.

iii. The Utility, NEA:

NEA, now in its eighteenth year, is perceived by many as being an old, decrepit organization incapable of delivering the services. The recent reorganization of NEA is in all probability the precursor of the creation of smaller units as mandated in the revised Hydropower Policy (2001). This unbundling has its own contradictions particularly in a tiny system of less than 600 Mw. Ceylon Electricity Board, note Ceylon and not Sri Lanka, created in 1969 handles a system of 1800 Mw. Whatever NEA's deficiencies and inequities, it still is considered to be a credit worthy institution, thanks to the donors' hefty tariff increase dosages. It was precisely due to this creditworthiness that the Karmachari Sanchay Kosh stepped forward to finance the first public/private joint 20 Mw Chilime venture. Sanchay Kosh, as the repository of the employees' salary, saw Chilime with the NEA tag as a safe venture. Older executives in the Butwal Power Company would recall that it was NEA that bailed them out when they were in financial crisis due to their 14% share investment in Khimti. We believe that Khimti and Bhotekoshi developers would also like to see a strong NEA, with the present status quo retained at least until their 12-year debt-servicing period are over. The present much vaunted policy of the IPPs realizing their revenues from the Grid who then get them from the Distribution companies are fine in theory. But when it comes to the implementation crunch, like in Orissa for instance, the Distribution companies could not pay the Grid and in return the IPPs. The Orissa model has, hence, created more friction and animosities among the many new players. We must not unlearn this experience of others.

There is no doubting that NEA must reform, improve its efficiency and be responsive to the requirements of its consumers and the nation as a whole. The juggling with the unbundling must not be seen as the end in itself. No matter how carefully you select the size, shape and label of the bottle, it is ultimately the contents within the bottle that will determine the performance of the institution. If the mindset of the NEA employees do not change for the better then the "tharra will always be the tharra" no matter in what bottle you encapsulate it. Similarly, if the likes of the same NEA Board masters rule the roost in these unbundled organizations, then restructuring will serve no purpose, none at all. Consider the October 2001 power purchase agreement that NEA concluded with a weird humanitarian French organization, Elysee Frontier, for the 300 Mw Upper Karnali. Like the EuroOrient of Arun III, there was much euphoria about NEA receiving a fabulous 30% equity for not a dime's investment. Not only did the NEA Board clear this murky deal hurriedly, even the Cabinet Committee on Fast Track Projects had no qualms in approving this non-transparent deal in the "fastest track" possible. Traditionally, the marriage of our Nepalese boys and girls are never approved without first undergoing the thorough genealogy, ancestry and chinha scrutiny tests. The NEA Board and the Cabinet Committee apparently never bothered to follow this age-old proven tradition: the investor's antecedents, its credit worthiness and the balance sheets. But this tradition, of course, has no value when the boy and girl have a love affair and elope. Apparently, the only explanation for this hasty runaway PPA deal is the same kind of intense boy and girl love affair between Elysee and the government/NEA. That is why it has now ended up in a ludicrous fiasco. The government must govern and not don the cap of the businessman.

iv. The Final Word:

It is quite normal for all of us to ask, in the final count, where exactly are the likes of EuroOrient and Elysee Frontier. Appropriate lessons must be imbibed from them by the concerned agencies. Despite the interagency rivalry and the bashing resorted to above, we must not belittle their achievements in promoting the private sector so far. Besides Khimti, Bhotekoshi and Indrawati, the 20 Mw Chilime and the 3 Mw Piluwa are shortly due for commissioning making an impressive 127 Mw, aside from the 17 Mw of Andhi Khola and Jhimruk, in a system that barely has a peaking load of 440 Mw. Though nothing has materialized by opening the floodgates to 1100 Mw worth of seven projects, the silver lining is that DOED has for the first time set the precedent of licensing based on international competitive bidding and refrained from the usual, behind the scene, MOU route licensing. Similarly NEA must be given due credit for announcing the flat buy back rates of NRs 3/- and NRs 4/25 for the wet and dry seasons respectively with an annual 6% escalation with 1998/99 as the base year for the under 5 Mw plants. This has triggered a flurry of positive activities in the local developers, contractors and the financial institutions. This kind of transparency should be exhibited by the larger developers also who invariably guard themselves through the "Confidentiality" clause in the PPAs. Once the PPA is "signed, sealed and done", this should become a public document by law. All the concerned players will then be forced to play the game of negotiation in an accountable manner. Indian laws stipulate that PPAs should be public documents. Finally, with a decade of experience, the legal and regulatory framework better placed, the government and NEA more wiser, it is expected that future Project Agreements and Power Purchase Agreements will exhibit more symptoms of the famous "level playing field" concept.

(Pun is former Managing Director of Nepal Electricity Authority and Pradhan heads the NEA's distribution department)