Exploiting hydropower in mountainous Nepal

By Wang Jihong and Xu Yibai, Zhong Lun Law Firm
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Hydropower is the main form of power generation in Nepal, however it is relatively under-developed, with only a small portion of exploitable capacity already developed or being developed as installed capacity. Meanwhile, the nation’s electricity supply is extremely insufficient, especially during the dry season. Even in Katmandu, the capital, a rolling blackout system is implemented.

Wang-Jihong
Wang Jihong
Partner
Zhong Lun Law Firm

GOLDEN OPPORTUNITIES

The Nepalese government has introduced many preferential policies to attract foreign investment. In the field of hydropower development, a power plant company may sign a Power Purchase Agreement (PPA) directly with the Nepal Electricity Authority (NEA); a “take or pay” clause may be negotiated with the NEA and inserted in the PPA; and pricing and payment in US dollars may be negotiated with the NEA for projects with large installed capacity. Chinese enterprises are following up or developing quite a few hydropower projects in Nepal, among which at least three have begun construction and one entered commercial operation last year.

In recent years, Nepal’s government has promulgated and revised a series of laws and regulations to improve the foreign investment environment in Nepal. These include the Industrial Enterprises Act, the Private Finance in Construction and Operation of Infrastructure Act, and Foreign Investment and Technology Transfer Act. In addition, pursuant to its “single window for foreign investment” policy, foreign investors can apply for approvals and licences for matters such as company registration, project land, etc., through a “window” committee, which simplifies and shortens administrative procedures.

In February 2016, a work plan for national energy crisis alleviation and electric power development was approved by the government to establish an electric power industry reform programme and promote private sector investment. On 27 March 2017, China’s president Xi Jinping met with Pushpa Kamal Dahal, the prime minister of Nepal, during the latter’s state visit. Xi declared that China and Nepal must take the opportunities within the Belt and Road initiative to promote the two countries’ economic co-operation, including in the energy sector. With the national development plan and improvements in the Sino-Nepalese diplomatic relationship, observers can see positive signals for Chinese investors in Nepal’s energy sector.

Xu-Yibai
Xu Yibai
Associate
Zhong Lun Law Firm

CHALLENGES FOR INVESTORS

Together with the opportunities, various policy, economic, administrative and natural risks accompany investment in Nepal. Chinese companies must make full use of the investigation skills and abundant experience of legal, financial and other professional counsel agencies to accurately evaluate the risks and map out risk prevention and mitigation measures in a relatively short period of time. With respect to risk in relation to Nepalese laws, regulations and national policies, there are two major risks that Chinese and other foreign investors in Nepal should consider.

REMITTANCE OF CAPITAL

Foreign investors who invest in foreign currency are entitled to remit dividends, loan principal and interest, income from sales of shares and technology out of Nepal. However, the remittance must be approved by the Central Bank of Nepal, i.e., Nepal Rastra Bank, or other banks authorized by the Central Bank of Nepal. In addition, Nepalese rupees cannot be freely exchanged against foreign currencies under the foreign exchange control system of Nepal.

Although Nepalese rupees are linked to Indian rupees at a fixed rate, there is no guarantee of timely money exchange through official channels. Generally, the black market exchange rate is 10% to 40% higher than the officially published rate. Since inflation in Nepal has been high for the past 10 years, foreign investors are advised to place great importance on negotiating with the government on the electricity settlement currency, to mitigate risks of Nepalese economic fluctuations and foreign exchange.

TIME NEEDED FOR EIA APPROVAL

Nepal’s environmental laws and regulations are relatively comprehensive. Pursuant to the Law on Environmental Impact Assessment, an Initial Environment Examination Report (IEE) and/or Environment Impact Assessment (EIA) are required according to the project’s nature and investment amount. The IEE/EIA for a hydroelectric project must be prepared by a local advisory agency registered with the Ministry of Environment of Nepal, and then submitted to the Ministry of Energy and the Ministry of Environment for review.

If either of the ministries has questions, comments or objections, the IEE/EIA will be sent back to the investor for clarification and modification. A letter of confirmation will be delivered to the investor after the reports are approved. Theoretically, the IEE/EIA must be approved within 60 to 90 working days of the submission, but in practice the approval time can be much longer. Foreign investors are advised to hire experienced advisory agencies, and if possible ask local partners to be responsible for obtaining IEE/EIA approval.

WANG JIHONG is a partner and Xu Yibai is an associate at Zhong Lun Law Firm

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Zhong Lun Law Firm

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Contact details:

Email: wangjihong@zhonglun.com

Email: xuyibai@zhonglun.com