KALI GANDAKI A

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

Objectives and Scope

LCGEP - 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 Project

In 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. Justification
Detailed Feasibility study has been completed
Detailed 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 completed

The 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 sector
The 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.

Policy Dialogue
The 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 Dialogue

Macroaffordabili
ty Public
Expenditure
planning and
Resource
Mobilization
Dependence on
Fiscal Budget
Impact on
Development
plans for other
sectors

NEAs self
financing
capability

Enhancing
Private Sector
Participation

Regulations
that dont
discourage
private
participants
Fiscal
incentives tax
exemptions,
lower
customs duty
Pipeline of
public
projects for
worst case

Tariff Levels and

Structure

Strengthening
of MEA

Meeting NEAs
financial
performance
targets

Increasing
autonomy and
Productivity

Ensuring
project
profitability to
meet
investment
requirements
Tariff
structure

Enhancing
ability to
comply with
covenants

to change
consumption
patterns and
avoid crosssubsidization

Improving
staff
productivity
Increasing
pvt sector
share
Tech based

Outcome of Policy
Dialogue
Macroaffordabi
lity
Private Sector
Participation

Tariff

Strengthening
NEA

Government agreement on yearly review of public

expenditure and supply side issues
This should ensure adequate resource mobilization for
power sector
Income tax exemptions and concessional finance have
been provided
Upto 20 private sector projects with 1.3 GW capacity
have been granted license
NEA and Govt. agreement that average residential tariff
will not be lesser than average overall retail tariff
Subsidized first lifeline block limites to 20kWh/month
per consumer
Increased profitability should help NEA manage
maintenance requirements, reducing system losses
Proitability will increase NEAs credit worthiness
NEA to target improved customer employee ratio of 75
by FY 2000
CSP, supported by World Bank to increase NEA
performance by running it like a well managed

Stakeholders
Element

Governm
ent

NEA

Consumer

Lenders

Macroaffordabili Impact on
ty
fiscal
budget

Resource
Funds flow
mobilizatio to other
n
sectors
requiremen
t

Project
completion
critical

Tariff

Increases
Conservativ
profitability e
consumptio
n pattern

Profitability
impacts
ability to
repay loans

Increased
efficiency

Increased
covenants
compliance

Strengthening
NEA

Self
financing
ability of
NEA

Higher
capacity &
better
service

Risks & Weaknesses Sector

Energy Sector
Nepal is mainly dependent on conventional sources of energy
(fuelwood - 68%)
Nepal has no oil or coal deposits, hence hydroelectricity is
important
Commercial fossil fuels are either imported from India or from
international markets through India
Financial sustainability of the sector is in doubt due to
significant debt overhang, revenue gap and increasing losses
Despite a huge hydro potential, it only accounts for 1% of the
total energy
Concerns of increasing amount of load shedding

Risks & Weaknesses Sector

Power Sector

Fragmentation of responsibilities & lack of coordination among

various agencies involved
Power demand showed rapid growth but supply capacity was
insufficient (supply-demand gaps)
Lack of national budget of Nepal to implement large power projects
Reluctance of donor countries due to Nepal's political risk
Low motivation of private investors to invest in large scale projects
No clear view among policy makers on how should sector reforms
be carried out
Another risk in this sector is the legal and regulatory uncertainties

Risks & Weaknesses Executing

Agency
The financial scenario of NEA is in a very poor condition;
significant debt overhang
NEA 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 Project

Project risks could relate to these areas: technical,
implementation, financing, environmental and social.
Technical: Difficult terrain and poor geological
conditions in Nepal
Financing: Probable cost overruns
Implementation: Risk of delay due to unforeseen
weather conditions
Environmental & social: Affecting inhabitants of the
region; Spoil disposal into the river will have adverse
effects on the environment
Impact on IRR of the project due to less/no increase
in tariffs

How 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 works
To minimize risk of delay, a strong Project management
organization is proposed, supported by international
consultants
Excavation work is supposed to start by a local contractor in
October, 1996 itself to mitigate any sort of delays
To address environmental and social risks, access road has
been completed and most of the affectees duly
compensated

Suggestions for strengthening the

project
Involve 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
implementation
For the lowest evaluated tender to represent
approximately the least cost, value engineering
should be used

Covenants Purpose and Who

are Responsible

The covenants were designed to make sure

(i) Environmental aspects are taken care of while construc
(ii)Project is financially sustainable
(iii)Affordable with minimum disturbance(friction) to the p

NEA and government are the main stakeholders responsib

compliance of the Covenants

Are The Covenants

Reasonable
Majority of the covenants are reasonable. However, the compliance of
3 of them dealing with financial aspects are contingent on many
macroeconomic and project risks
The 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

Dropping 3 Covenants
Covenant IV
Analysing 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 II
Increasing 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 III
Some parts of the covenant, especially the ones with stipulated selffinancing 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.

Features of Hydro Project Choices

Storage

Run-of-river
with pondage

Run-of-river
without
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
demand
Large 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 generation
Medium 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
demand
Small and micro size- Low capital intensity, gestation
period, highly unreliable generation, minimum social
and environmental impact

KGA Project: Pros and Con

Pros

Cons

Capacity sufficient to meet current and near future power

demand
Best alternative among other options on the least-cost
parameter
Renewable power project designed to minimize the social
and environmental impact
Focus on improving the T&D losses of the system
Year round peaking load supply capability
Natural downward elevation profile reduces capex
requirement
Project aims to develop NEA as a self-sustaining
organization by improving its administrative, human and
capital resources
to conserve
countrys
valuable
exchange
Ability
Huge size
of the project
relative
to theforeign
Nepalese
resources
economy
and increased
Employment
Governmentsopportunities
equity contribution
towardseconomic
the project
activity
in the
area
may
crowd
outproject
other needful
social sector funds
NEAs autonomy challenged by severe restrictions
imposed by the project proposal
Regular and higher tariff rate increments proposed by the
project may not be in the best interest of the people
Difficult terrain and poor geological conditions pose
significant environment risks

Quantitative Analysis Summary

KGA Project: FIRR and EIRR
Ex-ante
Stage

Ex-post
Stage

FIRR

12.40%

11.73%

FPNV

$ 760.16

$ 770.02

EIRR

17.35%

ENPV

$ 1,393.40

Scenario analysis done on1.

2.
3.
4.
5.
6.

Project cost
Exchange rate
System losses
O&M expenses
Inflation
Tariffs

THANK YOU