The development of Budhi Gandaki Hydropower Project has once again hit a snag with the Ministry of Energy failing to receive an official letter from the Prime Minister’s Office about the Cabinet’s decision to provide viability gap funding (VGF) for construction of the 1,200MW project.

A Cabinet meeting held on February 9 had decided to provide Rs94 billion in VGF for development of the storage project. The VGF is equivalent to around a third of the project’s estimated cost. VGF is provided to important infrastructure projects that are not financially feasible. The estimated cost of the project located in Dhading and Gorkha districts is $2.6 billion (approximately Rs270 billion).

It has been a month since the decision to provide VGF was made. But the Energy Ministry is yet to get an official letter from the Prime Minister’s Office about the decision. 

“We cannot work on the project unless we get an official letter,” said an official of the Energy Ministry on condition of anonymity. “But it is less likely that the new government will take ownership of the decision made by the previous government. So there are high chances of the government coming up with other plans to develop the important hydropower project in the central region.”

Recently, a report prepared by the National Planning Commission (NPC) had recommended that the government provide VGF to build the project. The report was submitted to former energy minister Kamal Thapa who tabled the proposal at the Cabinet.

If the project is built through a special purpose vehicle, the government should provide VGF of Rs94 billion to the developer, says the NPC report. This money is required to acquire land for the project and resettle locals who will be displaced by the project. If this amount is deducted from the project cost, the developer will have to invest only Rs176 billion in the hydro project. This will raise the return on investment, according to the report.

The NPC started looking for implementation and funding modalities for construction 

of the Budhi Gandaki Hydropower Project after the Sher Bahadur Deuba-led government terminated the memorandum of understanding signed with China Gezhouba Group Company to build the scheme under the engineering-procurement-construction-and-financing (EPCF) model.

After cancelling the agreement with the Chinese company, the government decided to build the project using domestic financial resources via state-owned Nepal Electricity Authority. Subsequently, a committee was formed under then NPC vice-chairman Swarnim Wagle to look for financing options to build the crucial energy project.