The government faces a daunting task of generating resources for the development of the 1,200MW Budhi Gandaki Hydropower Project whose field office was inaugurated by Prime Minister Pushpa Kamal Dahal at Ghyalchowk in Gorkha district on Wednesday.

After prolonged uncertainty due to policy instability, the government in June last year decided to implement this storage type project under company modality. Subsequently, a company was established in September last year.

The government is also preparing to hand over the project to the Nepal Electricity Authority for development after efforts to establish various other institutional arrangements and involve foreign investors yielded no results.

Officials say that this storage-type project is important for the country’s energy security as Nepal has been reliant on India for power in the winter even though the country produces excess power in the summer.

However, the estimated cost of its development is $2.59 billion, according to the Detailed Feasibility Study submitted by French-Nepali joint venture—TRACTEBEL Engineering SA France and JADE Consult (Pvt) Ltd Nepal—in late 2015.

Now, in 2023, the cost will significantly rise due to inflation in the last eight years, according to officials.

During the inauguration of the field office, Prime Minister Dahal said that he would soon inaugurate the construction work of the project that straddles Gorkha and Dhading districts.

“Unlike in the past, construction will immediately follow the foundation-laying ceremony this time,” he said.

If the project goes into implementation, significant resources will be needed over the next few years.

But the government does not have a fund dedicated to this project even though it has been collecting infrastructure tax on the import of petroleum products citing the same project.

In the fiscal year 2016-17, the government started levying a Rs5 tax per litre of petroleum products—petrol, diesel and aviation fuel. “I have arranged this fund to be spent on the construction of the Budhi Gandaki Hydropower Project,” then-finance minister Bishnu Poudel had said in the budget speech.

In February 2020, the government decided to increase the infrastructure development tax from Rs5 to Rs10 on each litre of fuel sold.

According to the data provided by the Nepal Oil Corporation, it has so far paid around Rs110 billion in infrastructure tax to the government. But finance ministry officials said that the money collected under the infrastructure tax header was not allocated to any particular project.

“The infrastructure tax was not set aside as a separate fund. It is part of the government revenue and I think it was spent on implementing the government’s many budgetary programmes,” said Ritesh Shakya, joint secretary at the Ministry of Finance.

Shakya said that the government allocated funds for the Budhi Gandaki project in the budget, not from any resource meant to fund it. Officials said that over Rs42 billion has been spent on land acquisition so far.

Without any specific resource to fund the development of the Budhi Gandaki project, the government will have to tap its annual budget.

The government thus needs to allocate a huge chunk of its annual allocations to develop this project unless alternative sources of funding are explored and arranged.

A committee led by Swarnim Wagle, then vice-chair of the National Planning Commission, had suggested in 2017 that the government develop the project on its own by providing viability gap funding covering around one-third of the total cost.

In its report, the committee said the government could cover the cost of land acquisition and the resettlement of the displaced families which could come to as high as Rs94 billion.

According to the report, a big chunk of the resources can be gathered through self-financing by government institutions including the government itself, the NEA, the Employees Provident Fund, the Citizen Investment Trust, and the Hydroelectricity Investment and Development Company.

An infrastructure tax being imposed on imported fuel could be an important source of funding, the report added.

“As much as Rs164 billion could be collected by the fiscal year 2026-2027, based on an increase in petroleum consumption by 10 percent a year,” the report said. The estimated tax collection is based on Rs5 per litre infrastructure/carbon tax that the government has been imposing since 2015. With the government taxing more since 2020, collection could be higher.

The project has caused a lot of debate, but policy inconsistency pushed back its implementation.

In 2017, in his second stint as prime minister, Pushpa Kamal Dahal awarded the building contract to the China Gezhouba Group Corporation (CGGC) without competitive bidding. The project was to be built under the engineering, procurement, construction and financing (EPCF) modality.

The decision was cancelled by the Sher Bahadur Deuba government in November 2017, citing procedural flaws in awarding the contract.

Again in September 2018, the project was engulfed in politicking. The KP Sharma Oli administration again decided to rope in the Chinese company, reverting the Deuba government’s decision to develop the project with internal resources.

In April last year, the Deuba administration again decided to revoke the licence issued to the CGGC. Then the government announced that the project would be built by mobilising domestic resources. The project was estimated to cost $2.59 billion, according to a detailed feasibility study.

Infrastructure tax collected by the government