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KALI GANDAKI A HYDROELECTRIC PROJECT, NEPALINFRASTRUCTURE FINANCE GROUP 10PRATEEK AGARWAL 0269/51PRAYAG MUKHERJEE 0276/51S SURYA TEJA THOTAKURA 0302/51SAMBIT DAS 0313/51ASHIK SIROYA 0355/51

Objectives and ScopeLCGEP - Assist meeting the demand for electric power in Nepal at least cost in an environmentally sustainable and socially acceptable manner NEA Productivity : Strengthen the institutional and financial (management capacity) position of the NEA Improve cost recovery to promote efficiency in power consumption. Energy Security and Revenue from Exports: Project was proposed to meet the growing domestic demand for electricity and, beyond that, to produce electricity for export to India

Rationale for the ProjectIn 19921996, economic growth in Nepal was constrained by power shortages, which resulted in frequent load shedding. Meet growing power demand in a least-cost manner and with minimal environmental and social impacts. The Kali Gandaki A Project was thus an integral component of the least-cost expansion program, and was developed after considering a number of hydro and thermal alternatives.1. JustificationThe project was designed to reduce system load shedding by building year-round capability to meet daily peak load requirements and to complement non-peaking run-of-river type smaller projects envisaged in the private sectorThe project was also intended to strengthen NEAs institutional and financial capacity, improve cost recovery, and promote efficiency in power consumption. With 144 MW, the project would eliminate load shedding and brownouts and allow further economic development Lead to extension of peak power to additional segments of the population that did not have electric power. Detailed Feasibility study has been completedDetailed reports on Project design and Social and Environmental Impact mitigation have been prepared by KEA (Consultants)Essential support infra, like access road to the dam and power station work completedPolicy DialogueThe purpose of policy dialogue related to future development plans is to agree on strengthening plans of NEA, evaluating the fiscal prudence, and ensuring more private investments. The ability of NEA to meet its covenants and realizing the power sectors Least Cost Generation plan will depend on the outcome of this dialogue.Areas of Policy DialogueMacroaffordability Public Expenditure planning and Resource MobilizationDependence on Fiscal BudgetImpact on Development plans for other sectorsNEAs self financing capabilityEnhancing Private Sector Participation

Tariff Levels and StructureStrengthening of MEARegulations that dont discourage private participants Fiscal incentives tax exemptions, lower customs dutyPipeline of public projects for worst case scenarioIncreasing autonomy and ProductivityMeeting NEAs financial performance targetsEnsuring project profitability to meet investment requirementsTariff structure to change consumption patterns and avoid cross-subsidizationEnhancing ability to comply with covenantsImproving staff productivityIncreasing pvt sector shareTech based developmentsOutcome of Policy DialogueMacroaffordabilityGovernment agreement on yearly review of public expenditure and supply side issuesThis should ensure adequate resource mobilization for power sectorIncome tax exemptions and concessional finance have been providedUpto 20 private sector projects with 1.3 GW capacity have been granted licenseNEA and Govt. agreement that average residential tariff will not be lesser than average overall retail tariffSubsidized first lifeline block limites to 20kWh/month per consumerIncreased profitability should help NEA manage maintenance requirements, reducing system lossesProitability will increase NEAs credit worthinessNEA to target improved customer employee ratio of 75 by FY 2000CSP, supported by World Bank to increase NEA performance by running it like a well managed commercial enterprisePrivate Sector ParticipationTariffStrengthening NEAStakeholdersElementGovernmentNEAConsumerLendersMacroaffordabilityImpact on fiscal budgetResource mobilization requirementFunds flow to other sectorsProject completion criticalTariffSelf financing ability of NEAIncreases profitabilityConservative consumption patternProfitability impacts ability to repay loansStrengthening NEA Increased efficiencyHigher capacity & better serviceIncreased covenants complianceRisks & Weaknesses - SectorEnergy Sector

Nepal is mainly dependent on conventional sources of energy (fuelwood - 68%)Nepal has no oil or coal deposits, hence hydroelectricity is importantCommercial fossil fuels are either imported from India or from international markets through IndiaFinancial sustainability of the sector is in doubt due to significant debt overhang, revenue gap and increasing lossesDespite a huge hydro potential, it only accounts for 1% of the total energyConcerns of increasing amount of load sheddingRisks & Weaknesses - SectorPower Sector

Fragmentation of responsibilities & lack of coordination among various agencies involvedPower demand showed rapid growth but supply capacity was insufficient (supply-demand gaps)Lack of national budget of Nepal to implement large power projectsReluctance of donor countries due to Nepal's political riskLow motivation of private investors to invest in large scale projectsNo clear view among policy makers on how should sector reforms be carried outAnother risk in this sector is the legal and regulatory uncertaintiesRisks & Weaknesses Executing AgencyThe financial scenario of NEA is in a very poor condition; significant debt overhangNEA being a public utility is completely government controlled entity & fails to operate under strict business principles. NEA suffers from significant revenue gap due to rising cost of generation and stagnant revenue from electricity sales. In addition to revenue gap, NEA suffers from significant losses in transmission and distribution of electricity.NEA does not have a proper energy accounting to identify technical and non technical losses.Risks arising from demand fluctuations and market price fluctuations are taken by NEA alone & there is no risk sharing mechanism between power producers & NEA

Risks & Weaknesses - ProjectProject risks could relate to these areas: technical, implementation, financing, environmental and social.Technical: Difficult terrain and poor geological conditions in NepalFinancing: Probable cost overruns Implementation: Risk of delay due to unforeseen weather conditionsEnvironmental & social: Affecting inhabitants of the region; Spoil disposal into the river will have adverse effects on the environmentImpact on IRR of the project due to less/no increase in tariffsHow are Project Risks addressed?To deal with the technical and geological risks, the tunnel is supposed to adopt a conservative method of construction.Risk of cost overruns has been minimized through conservative physical contingency provisions of ~20% for power station civil works and ~10% for other civil worksTo minimize risk of delay, a strong Project management organization is proposed, supported by international consultantsExcavation work is supposed to start by a local contractor in October, 1996 itself to mitigate any sort of delaysTo address environmental and social risks, access road has been completed and most of the affectees duly compensatedSuggestions for strengthening the projectInvolve the Nepal Resident Mission to a greater degree so that problems may be diffused sooner Loan covenants should be more strictly enforced Future projects should have sufficient storage capacity to better address load shedding Future projects need greatly improved environmental and social impact assessment and implementationFor the lowest evaluated tender to represent approximately the least cost, value engineering should be used The covenants were designed to make sure Environmental aspects are taken care of while constructionProject is financially sustainableAffordable with minimum disturbance(friction) to the public

NEA and government are the main stakeholders responsible for the compliance of the Covenants

Covenants Purpose and Who are Responsible Are The Covenants ReasonableMajority of the covenants are reasonable. However, the compliance of 3 of them dealing with financial aspects are contingent on many macroeconomic and project risksThe increase of tariffs depends on lot of other factors ranging from political pressures to administrative issues. Achieving planned rates of return and self financing ratios based on the background of increasing tariffs is not practically feasible

Another covenant that plans to restrict system losses to specific percentages doesnt sound plausible since it depends on the degree of maintenance expenses.Given the doubts on profitability of the project to result in adequate maintenance and investment, this covenant may be relaxed to some extent.

Maintaining accounts receivable to not more than 3 months is possible on paper. However, lot of administrative hassles and resistance from the public makes the compliance of this covenant little doubtful.

Along with this, taking prompt actions considering the advice from environmental agencies may delay the construction of the project and result in conflict of interest.Covenant IVAnalysing the past data for system losses (26.3% in FY 1995) and projected targets (23% in FY 1997, 22 in FY 1998 and so on), to achieve covenanted rates of return based on reduced system losses is risky. System losses are 66% due to the technical losses which cannot be controlled in times of adverse conditions such as natural disasters etc

Covenant IIIncreasing tariffs and becoming financially viable is risky as well since increasing household tariffs depends on many factors that may not be under the control of the NEA.

Covenant IIISome parts of the covenant, especially the ones with stipulated self-financing ratios may have to be modified. Achieving these targets depends a lot on profitability of the project and autonomy of NEA, which can be difficult to achieve in the short run.

Dropping 3 CovenantsFeatures of Hydro Project ChoicesStorageRun-of-riverwith pondageRun-of-riverwithout pondage Large reservoir built across the river flow Surplus water supply during the wet spell used in the dry spell Regulated generation for meeting the peaking load demandLarge size- High capital intensity, high gestation period, huge social and environmental impact Small reservoir(pond) built across the river flow Water stored during non-peak hrs for use during peaking hrs of the day Used for peaking load generationMedium size- Moderate capital intensity, gestation period, social and environmental impact; associated with seasonal variations and unreliable generation No reservoir storage Huge variation in generation, used for non-peaking load demandSmall and micro size- Low capital intensity, gestation period, highly unreliable generation, minimum social and environmental impactKGA Project: Pros and ConProsCons Capacity sufficient to meet current and near future power demand Best alternative among other options on the least-cost parameterRenewable power project designed to minimize the social and environmental impactFocus on improving the T&D losses of the systemYear round peaking load supply capability Natural downward elevation profile reduces capex requirementProject aims to develop NEA as a self-sustaining organization by improving its administrative, human and capital resourcesAbility to conserve countrys valuable foreign exchange resourcesEmployment opportunities and increased economic activity in the project area Huge size of the project relative to the Nepalese economyGovernments equity contribution towards the project may crowd out other needful social sector fundsNEAs autonomy challenged by severe restrictions imposed by the project proposalRegular and higher tariff rate increments proposed by the project may not be in the best interest of the peopleDifficult terrain and poor geological conditions pose significant environment risksQuantitative Analysis - SummaryKGA Project: FIRR and EIRREx-ante StageEx-post StageFIRR12.40%11.73%FPNV$ 760.16$ 770.02EIRR17.35%ENPV$ 1,393.40Scenario analysis done on-Project costExchange rateSystem lossesO&M expensesInflationTariffsTHANK YOU