Investment Archives - James D. Hekel, Esq.

ICIMOD on “Benefit Sharing” of Hydropower Projects in Nepal

The International Centre for Integrated Mountain Development (ICIMOD) published a report on a topic I have blogged about earlier this month: hydropower development. ICIMOD’s report, also published this month, is called “Benefit Sharing and Sustainable Hydropower: Lessons from Nepal.” In it, ICIMOD summarized their findings from data collected from 317 participants and identified five benefit sharing mechanisms for sharing the wealth of hydropower projects with local communities built:

The royalty mechanism
Equity investment: Local share offers in hydropower projects
Support for local livelihoods: Employment and training
Investment in community development and local infrastructure (including rural electrification and irrigation/water-related benefits)
Environmental enhancement activities

Interesting report so far. After I finish reading it, I will post a more in-depth critique. For now, I have two quick observations.

I. “Free Shares”

It seems that no private investors were interviewed about their thoughts on benefit sharing. This is concerning because most of the investors that I talked to at the Nepal Power Investment Summit earlier this month did not seem very pleased with the prospect of offering “free shares” to anyone. It was a non-starter for many of them and it greatly limits their ability to finance large projects. The idea of selling the government shares did seem attractive. Once the government has a stake in a project, it is easier for them to support the project. It is not until a project is in operation that there are investment returns. The government would almost necessarily need to borrow money to buy shares. But it is easier to lend to government than others without a credit history and good returns will service the loans.

Other investors seemed resigned to make certain investments in community development and local infrastructure as a cost of business. One, already operating in Nepal, even said that they are happy to do so. Indeed, it already had delivered far more to its local communities and even increased the number of local communities reached by its efforts. But managing director noted the project company did this largely without the help of, and sometimes in spite of, local government support, or even security. Which leads me to my next point.

II. Local Elections (or the lack thereof)

I have not yet identified a section of the report deals with the possibility that the reason local communities tend to seek certain benefits from projects might be because of the almost complete lack of any (local or national) government presence in their communities and the two-decade absence of local elections that, if in place, would help foster government accountability. Part of the reason local communities demand things like access to healthcare, roads, or education from hydropower projects in their backyard is because their government is not providing for them. When a big project comes to town, many see it as their only chance of someone actually taking an interest in the survival of their community. For many, the only prospect for government interaction is with an unelected official in a faraway district headquarters that speaks in a different language than they do at home. Nepal has not held local elections in more than two decades and many local posts, especially in earthquake-affected areas, remain unfilled because the existing backlog of recovery work scares underpaid civil servants. This absence of government can place a huge burden on the hydropower projects who effectively become the local government. This might seem like a libertarian’s dream, but Nepal is far from a libertarian country (indeed, its ruling coalition are two communist parties with names like Marx, Lenin, and Mao in their name). Even once the local communities and project agree on a benefit-sharing arrangement, it is not difficult to wonder what happens to all the communities not blessed by presence of nearby rivers suitable for bankable hydropower projects. Some benefit sharing, or rather wealth redistribution, may be in order. That takes the steady hand of a government. And the kind of accountability that only local elections can offer. For locally elected official, elections are a good reminder of who is the boss is that is looking over their shoulder: the local people who can vote them gone.

As I continue to read ICIMOD’s report, I hope it addresses my concerns, but I am sure that others will arise in their place. A lot of things have to come together to make a hydropower project work. In Nepal, agreement on benefit sharing may be one of them.

The Future Battery of South Asia: Nepal Power Investment Summit 2016

There are a lot of people interested in ending load-shedding in Nepal and a lot of people interested in making money in Nepal’s hydropower sector once it gets off the ground. For those uninitiated to the realities of living in Nepal, each part of the Kathmandu valley faces 12-14 hours, sometimes more, without electricity as the National Electricity Authority (NEA) attempts to share the load of this precious resource evenly among the area of the greater metropolitan area. This is what is known as “load-shedding” here. While Nepal currently produces only 840 MW of energy from all sources, it boasts of a potential of at least 40,000 MW from hydropower alone. Neoventure and Nepal’s Energy Development Council organized the “Nepal Power Investment Summit 2016: Nepal—The Future Battery of South Asia.” The event was sponsored by Aggreko, Norwegian Geotechnical Institute (NGI), DFDL Tax and Legal, Nabil Bank, NMB Bank, and the Hydroelectricity Investment and Development Company (HIDCL). There were attendees from China, the U.S., Canada, Bulgaria, Norway, India, Bhutan, Slovenia, Czech Republic, Thailand, Vietnam, France, Austria, the U.K., and elsewhere.

Pre-conference Day

DFDL organized the first workshop of the conference. David Doran, Audray Souche, Robert Fitzgibbons, all of DFDL, and Priyadarshani Sherchan, of Nepal’s Pioneer Law Associates, were the panelists. The DFDL lawyers present various models of hydropower development primarily from the Mekong region, including Laos, Cambodia, Thailand, Vietnam, and Myanmar. Ms. Serchan picked apart Nepal’s 2016 Energy Crisis Policy Paper and the recent Budget 2073 speech. She was aided in this respect by several members of the audience which was filled with lawyers from Neupane Law Associates, Sinha-Verma Law Concern, and a sizable contingent from my own firm: Gandhi & Associates, as well as other specialists and interested parties in hydropower sector, such as the Norwegian Embassy.

The Laos model, which Mr. Doran was to present in more detail on the following day, is particularly interesting. It evolved from an entirely private-sector approach with more than 90 percent of the energy from its early 1990s projects exporting to the Electricity Generating Authority of Thailand (“EGAT“). Today, the Lao PDR is in a position to construct hydropower plants entirely for domestic consumption and no longer grants wholesale exemptions from Laotian laws and provides far fewer other concessions to international developers.

It was also here that I encountered my first of several Odd Hoftun connections. Odd Hoftun, an engineer-missionary who grew up on a hydropower plant in Norway, first came to Nepal in the 1950’s to help UMN build a hospital in Tansen and then dedicated his life to hydropower development in Nepal. In addition to helping to construct three hydropower projects of increasing size (the last was 60 MW), he helped establish the Butwal Power Company, its various spinoffs like the Hydro-Consult, and the Butwal Technical Institute which to this day remains the only apprenticeship-model school for Nepal’s young engineers to learn through hands-on experience. I had recently read his biography published by the Martin Chautari publishing house (which itself was named partly after his son, Martin) shortly before the conference so I was able to recognize his fingerprints and legacy throughout the three days. During the pre-conference workshop, I met Tim Lehane of Gilkes. Mr. Lehane had helped Mr. Hoftun restore and assemble secondhand hydropower parts imported from Norway when hydropower projects had upgraded to newer technology. The original, very serviceable, turbines at the Andhikhola Hydropower Project had first served duty powering Lillehammer before the 1994 Winter Olympics.

Unfortunately, no one from the Government of Nepal showed up for this workshop. This would have added more richness to the interactions with the audience. Throughout the conference there was a noticeable lack of government attendance in the many of the conference’s panels where government officers themselves were not speaking.

Day One

The conference was opened by the Right Honorable Prime Minister K. P. Oli. Her Excellency U.S. Ambassador to Nepal Alaina Teplitz, who recently penned an excellent opinion editorial on Nepal’s economic development, also gave a few words.

During the first panel, the Chairman of the Water Resources and Agricultural Committee of Nepal’s Constituent Assembly Gagan Thapa made an important point about the current state of politics in Nepal. While his own party is currently in opposition, hydropower development is one of the areas that all three of the major parties could agree on and should be vehicle for finding common ground and getting something done.

The first day of the conference was overall very positive, though much of the optimism was sucked out of the room by the last panel of the day which included a Statkraft veteran. Statkraft was finally forced to pull the plug on the USD $1.5 Billion 650 MW Tamakoshi-3 hydropower project after sinking over $12 million into the failed effort. Interestingly, it was not the major earthquakes of last year that forced its withdrawal from the export-oriented project, but the souring of political relations between Nepal and India.

Among the other panelists and presenters of the first day were representatives from the government of Bhutan, which like Nepal is surrounded on three sides by India and the north by tallest mountains in the world and China. Bhutan currently boasts that 99 percent of their people are connected to their national grid (and claims that the ones that aren’t have solar panels). Thought Bhutan has significantly fewer people than Nepal, there are some lessons there to be learned I am sure. The country’s approach is markedly different from Laos, for example, because its official line is that too much international private sector development may affect Bhutan’s Gross National Happiness. Another presenter made deft use of both Nicola Tesla and President Barack Obama quotes.

The first full day of the conference ended in a cocktail party sponsored by Dragon Capital. Dragon Capital has long been interested in Nepal’s clean energy development. One of their latest projects is a complete overhaul of Phnom Penh’s solid waste management. While supporting Cambodia’s in other areas of clean development it was an area they just could not ignore. Like many Asian countries including Nepal, the people litter freely, thoughtlessly throwing their trash wherever and burning it after it piles up too high. Dragon Capital has modernized Phnom Penh’s solid waste management system, replacing the Board of Directors of the management company and hiring a young woman to be its CEO. The new board banished the institutional practice of burning trash, installed GPS units in all of their trucks, and is building an entirely new landfill while taking steps to minimize the ongoing environmental degradation causes by the old ones.

I stuck around long enough to chat with representatives from Bauer and the CEO of InfraCo Asia, a member of the Private Infrastructure Development Group and already involved in providing funds to a couple of projects in Nepal. I also met several Norwegians from companies like the Norwegian Geotechnical Institute and Mulitconsult. I also had a very interesting conversation with the General Manager of Himal Power Limited which manages the Khimti Hydropower Plant with Statkraft.

The absence of local government in Nepal is felt strongly by the major hydropower projects. The Khimti project is a resounding technical success, but not as profitable as perhaps first imagined. Since Nepal has not held any local elections in nearly two decades, major development projects often choose to or end up having to take on added responsibility that would normally be the domain of local governments in many other countries. As part of their corporate social responsibility, the Himal Power Limited (“HPL”) had originally agreed to provide electricity for 1,000 households in the area. They willingly extended this to 9,000 households. HPL also funded local schools and a medical outpost, which is now part of the Dhulikhel Hospital network. When the local Village Development Committees (“VDC”) continued to approach the project with more development concerns, the project decided to create a fund of USD $100,000 a year for the ten closest VDCs (USD $10,000 for each VDC). Representatives from each VDC make up the board which itself chooses which projects to fund.

But this past winter was a particular dry one. When some local villagers ran out of water, they broke into the fencing surrounding the Khimti project and dropped a hose down the 40 meters deep intake shaft and began pumping water out. When HPL approached the Chief District Officer (“CDO”) about about the security breach, government security a right guaranteed to HPL by the Power Development Agreement (“PDA”) signed with the government, the project manager was told no such security would be forthcoming and that HPL should try to find a compromise with the locals. When HPC was finally able to get the Nepal Army, Nepal Police, CDO officers all to sit down together to talk about the security issue collectively, the government officers were only really interested in knowing why the USD $100,000 fund was not routed through them. Eventually, HPL was able to find another source of reliable water for the locals, but at the cost of another USD $50,000. Without a local government in place, the local VDCs effectively became wards of HPL, a private company. Without the benefit of a local government to hold accountable, HPL provides not only its electricity, but also the VDCs basic healthcare, education, and water supply needs. This underscores the importance of resolving Nepal’s federal structure as soon as possible and holding local elections regularly.

Day Two

Day two had its own high-level diplomatic support with Her Excellency Rensje Teerink, the European Union’s Ambassador to Nepal, chairing the talks on renewable sources of energy other than hydropower, such as solar, wind, and biomass.bbIt was during this session that Jimmy Carter’s infamous cardigan even made a cameo. I later ate lunch with the ambassador and representative from the U.S. Government’s Overseas Private Investment Corporation (OPIC), Dragon Capital, and Environmental Resources Management (ERM).

Among the other sessions of the day were representatives of Indian power grid and power trading companies as well as regional players in the power trading sector. The ultimate goal in Nepal is to be in a position to sell excess power during the rainy season and to buy needed power for shortfalls during the dry season when Nepal’s rivers run much lower. Nepal has a long way to go to make this possible, but it would be great to be able to sell beyond India.

The last session was one of the most anticipated by the various suppliers of hydropower machinery and solutions. It was also the most awkward. Various managing directors of various projects in various stages of planning were each given exactly ten minutes to present what seemed to be the culmination of their entire livelihoods. It was clear that many of the presenters, speaking in their third language, were not ready to pare down years of hydropower project experience and preparations into a brisk ten minute walk-through of their pet project’s major opportunities and challenges. Such as it was, they did their best to attract some much-needed funders and suppliers. Each was able to collect several congratulatory handshakes from their peers and handfuls of business cards for their efforts.

Fittingly, the conference closed in darkness. When the NEA closed the program with a vote of thanks to everyone who made the event possible, the conference room experienced one of the NEA’s infamous planned power-cuts: load-shedding. It took over a minute for the back-up diesel generator set to kick on, so the first words of NEA’s closing speech were spoken in the dark and without the benefit of a microphone.

Dolalghat: A Place Where the Sun Shines All Day

I had the very unique opportunity of swearing in as an attorney here at the U.S. Embassy in Kathmandu before Vice Consul Michael C. Coker, himself a former practicing attorney in Arizona and Georgia. It was he who welcomed me as a new member of the Maryland State Bar just before Christmas. He enjoyed playing the part of a judge on the Court of Appeals of Maryland. It was quite an experience for the two of us, but even more so for my wife. She also had the opportunity to attend and then celebrated with me afterwards. I wore a new three-piece suit I had tailor-made here in Kathmandu and a certain blue tie that the City Attorney of Little Rock had once gifted me on Christmas while I was the Office Assistant his office in Arkansas.

Unfortunately cameras were not allowed at the Embassy for security reasons, but I have attached a few pictures from our recent company picnic. We went to Dolalghat, just outside of Kathmandu, where there is a beach by the river and sun shines all day long. It was a perfect spot for a wintertime picnic. We played games, ate lots of delicious food, held spirited conversations, and imbibed a few drinks. I even won an award.

I continue to meet new people in Nepal and foster my existing relationships with my colleagues and other contacts here. I enjoyed meeting Vice Consul Coker and other diplomats from the U.S. Embassy here. I met an American named Brian who sells bacon in Kathmandu. I also had the opportunity to meet some of the international journalists and writers who live and work in Nepal. It is interesting to learn from the perspective of those who are entrusted to be the world’s lens into Nepal.

I also have had tea with one of Nepal’s former Attorneys General. He served what has now, in these politically turbulent times, become an unusually long time as Nepal’s top solicitor and legal advisor to Government of Nepal. We talked about the recent changes to Nepal’s judiciary, Nepal’s new constitution, and the evolution of Nepal’s legal education system. We also talked about the 2000 U.S. elections and the time that he had met former U.S. Attorney General Janet Reno.

This month marked my first client referral. Thanks to my membership in the American Bar Association’s Section on International Law, a law partner at the Shanghai office of K&L Gates sent a potential client my way who wants some help expanding their business in Nepal. I arranged a meeting with their representative at our law offices and hope that it marks the beginning of a long, fruitful attorney-client relationship. I am grateful to the ABA for this opportunity and K&L Gates Shanghai for the introduction.

I am having a lot of fun here in Nepal and learning an awful lot. Lately, I have been working with a New York attorney to help a client raise some funds in the U.S. for some much needed hydroelectric power development here in Nepal. I have also recently drafted an engineering, procurement, and construction contract for an international non-governmental organization. I have brainstormed with another of my law firm’s long-time client about how to navigate the unique regulatory environment that is Nepal’s foreign investment regime.

Just yesterday, I helped one of my firm’s law partners draft an article, advocating for reform of some of these regulations and procedures, which will be published in a local business magazine. For example, Nepal’s Foreign Investment and Technology Transfer Act and its Foreign Exchange Regulation Act place the responsibility of approving foreign investment squarely in the purview of the Department of Industry within Nepal’s Ministry of Industries. The Nepal Rastra Bank, Nepal’s Central Bank, however also requires foreign investors to seek a secondary approval from the Bank. It is unclear what value is added by this second layer approval or what additional enforcement goals are achieved by the Bank’s involvement. What is clear, according to the attorney with more 30 years of experience in Nepal, is that it has discouraged some past foreign investors.

I also had the opportunity to sit down with the Chairman and Managing Director of an already established energy company operating in Nepal. He explained that the shares of successful hydropower companies in Nepal always sell out because they can offer a good return on investment,but more participation in the market by the Nepali investors would help encourage more confidence in foreign investors as well.

The Chairman’s biggest concern, though, was the lack of vision or long-term commitment from the Government of Nepal. He has heard for the last 30 years the claims about Nepal’s great untapped hydroelectric potential and a clean, energy independent future. As Nepal has rushed headlong into modernization, there also has grown a great demand for new electricity. This unmet demand is evident whenever the Nepal Electricity Authority (NEA), Nepal’s public and only electric utility company, announces another loadshedding schedule. Loadshedding is the name given to the planned rolling power cuts that the NEA forces on its customers because of the shortage of energy supply. Now, during the dry season, service areas of the NES are hit with up to 14 hours a day without electricity. The Chairman told me that the energy suppliers are ready to help the government build electricity transmission infrastructure, even up to Nepal’s borders, if only the government would take the initiative. The Government of Nepal could then sit back and collect its share in taxes or commissions.

One day the promise of a New Nepal will be fulfilled. There will new local elections: the first in more than twenty years. I recently read a book by Daron Acemoglu and James Robinson called Why Nations Fail: The Origin of Power, Prosperity, and Poverty. The authors drew a direct link between “inclusive political and economic institutions” and prosperity and the alternative link between “extractive political and economic institutions” and poverty. They opened the book by examining the differences between towns on different sides of the US-Mexico border. This example, they argued, cuts against the prevailing idea that prosperity is somehow determined solely by religion, ethnicity, or culture. Acemoglu and Robinson explained that “inclusive economic institutions” are those “that enforce property rights, create a level playing field, and encourage investments in new technologies and skills are more conducive to economic growth than extractive economic institutions that are structured to extract resources from the many by the few. . . . Inclusive economic institutions, are in turn supported by, and support, inclusive political institutions,” that “distribute political power widely in a pluralistic manner and are able to achieve some amount of political centralization so as to establish law and order, the foundations of secure property rights, and an inclusive market economy.” Extractive political institutions are those that concentrated power in the hands of a few and are reinforced by extractive economic institutions that are built on the systematic exploitation of the status quo rather than innovation. Drawing on examples from Venice, Peru, Botswana, and the American South, the authors explained “sustained economic growth requires innovation” and “innovation cannot be decoupled from creative destruction, which replaces the old with the new in the economic realm and also destabilizes established power relations in politics.”

I hope Acemoglu and Robinson are right. Nepal was mentioned by the authors several times as a destabilized place. I am hopefully curious to see whether the implementation of more inclusive institutions; envisioned by Nepal’s new Constitution (as amended) and new local elections; bring about a new era of prosperity for Nepal. In the meantime, I am blessed that to have so many amazing opportunities to learn new things, to be surrounded by supportive people, and presented with new and unique challenges every week.