Nepal can build 1,200-megawatt Budhi Gandaki Hydropower Project using domestic financial resources if the government forks out around 52 percent of the project cost and mobilises remaining funds from contractual savings institutions, state-owned power utility, bodies like Nepal Army and Nepal Police, and the public, a report prepared by the National Planning Commission (NPC) says.

Nepal needs $2.6 billion (approximately Rs270 billion) to build the project located in Dhading and Gorkha districts within eight years of commencement of construction. Of this cost, at least Rs140 billion—or 51.9 percent of the total cost—must be borne by the government, says the report, which was handed over to Deputy Prime Minister and Energy Minister Kamal Thapa by NPC Vice Chairman Swarnim Wagle on Monday.

A viable source for the government to meet this investment need is infrastructure tax, which it has been imposing on imports of petroleum products, adds the report. This means the government need not cut down on other expenses to make investment in the project.

The government has been collecting Rs5 from imports of every litre of petroleum products as infrastructure tax.

The concept of infrastructure tax was introduced to build Budhi Gandaki Hydropower Project through domestic resources. As per estimates, the government can raise Rs164 billion in the next 10 years through this tax if fuel consumption goes up by 10 percent per year.

The rest of the fund required to build the project could be raised through Employees Provident Fund (Rs30 billion), Citizen Investment Trust (Rs30 billion), Nepal Telecom (Rs15 billion), Nepal Electricity Authority (Rs10 billion), insurance companies (Rs10 billion), Hydropower Investment and Development Company Limited (Rs10 billion), Upper Tamakoshi Hydropower Company (Rs7 billion), Chilime Hydropower Company (Rs3 billion), Nepal Army and Nepal Police (Rs5 billion) and general public (Rs10 billion), adds the report.

All these stakeholders, according to the report, should form a special purpose vehicle before proceeding ahead with project construction. Formation of the special purpose vehicle is one of the project implementation modalities proposed by the NPC. The other modalities are full self-financing by government and Engineering, Procurement, Construction and Financing (EPCF).

Under the EPCF model, the government may have to agree on conditions, including interest rate, placed by the contractor selected to build the project, says the report. And if caution is not taken during contractor selection process, the quality may be compromised, adds the report.

Under the full self-financing by government model, on the other hand, the government will have to allocate at least Rs33.8 billion per year through the annual budget for eight years. This may prompt the government to cut back on spending in other areas, says the report, adding, possibilities of the government facing resource crunch cannot be ruled out, which may delay project construction.

Considering these challenges, the report has recommended that the government form a special purpose vehicle to build the project.

If the project is built through the special purpose vehicle, the government may provide a viability gap funding of Rs94 billion to the developer, says the report. This money has to be spent to acquire land for the project and resettle locals who will be displaced by the project. If this money is deducted from the project cost, the developers will have to invest only Rs176 billion in the project. This will also raise return on investment made by developers, says the report.

If the government does not wish to provide viability gap funding of Rs94 billion, it may provide viability gap lending facility to developers at a very low interest rate, adds the report. “The fund for viability gap lending can be mobilised through the infrastructure tax basket.”

The NPC had started scouting for implementation and funding modalities for construction of the Budhi Gandaki Hydropower Project after the government terminated memorandum of understanding signed with China Gezhouba Group Company to build the project under EPCF model.

After cancelling the agreement with the Chinese company, the government had decided to build the project using domestic financial resources via state-owned Nepal Electricity Authority. Subsequently, a committee was formed under NPC Vice Chairman Wagle to look for financing options to build the project. It is not known whether the new government that will be formed soon will heed the recommendations made by the committee.