nepal hydropower development project year 2 …

NEPAL HYDROPOWER DEVELOPMENT PROJECT

YEAR 2 ANNUAL REPORT July 2017

Draft submitted: July 31, 2017 Revision submitted: [August 9, 2017] This publication was produced for review by the United States Agency for International Development. It was prepared by Deloitte Consulting LLP

NEPAL HYDROPOWER DEVELOPMENT PROJECT YEAR 2 ANNUAL REPORT JULY 1, 2016 – JUNE 30, 2017 NEPAL HYDROPOWER DEVELOPMENT PROJECT CONTRACT NUMBER: AID-367-TO-15-00003 TASK ORDER NUMBER: AID-367-TO-15-00003 DELOITTE CONSULTING LLP USAID/NEPAL ENERGY OFFICE DRAFT SUBMITTED: JULY 31, 2017 REVISION SUBMITTED: [AUGUST 9, 2017]

USAID/Nepal Hydropower Development Project Year 2 Annual Report, July 2016 - June 2017 3

Table of Acronyms

Acronym Term ADB Asian Development Bank BFSI Banking, Financial Sector and Insurance CEO Chief Executive Officer

CERC Central Electricity Regulatory Commission of India COD Commercial Operation Date

COR Contracting Officer Representative

CTGI China Three Gorges International

CWE China International Water and Electric Corporation

DFID Department for International Development

DOED Department of Electricity Development

DoS Department of State

DQA Data Quality Assessment

E&S Environmental and Social

EBRD European Bank for Reconstruction and Development

EIB European Investment Bank

EPC-F Engineering, Procurement, Construction and Financing Contract

FC Financial Closure

G-2-G Government to Government

GESI Gender Equality and Social Inclusion

GIZ Deutsche Gesellschaft für Internationale Zusammenarbeit GmbH (German Development Agency)

GMR Group Grandhi Mallikarjuna Rao Group

GoI Government of India

GoN Government of Nepal

HPP Hydropower Project

IBN Investment Board of Nepal

IFC International Finance Corporation

IFIs International Financial Institutions

IMC IMC Worldwide

INR Indian Rupees

IPPAN Independent Power Producer Association of Nepal

ISOC PR International School of Communication, Public Relation

JICA Japan International Cooperation Agency

JVA Joint Venture Agreement


Acronym Term KW Kilowatt

KWh Kilowatt hours

M&E Monitoring and Evaluation

MCC Millennium Challenge Corporation

MoE Ministry of Energy

MOP Ministry of Power

MOU Memorandum of Understanding

MW Megawatt

NEA Nepal Electricity Authority

NGO Non-Governmental Organization

NHDP Nepal Hydropower Development Project

NWEDC Nepal Water and Electricity Development Company

PANI Program for Aquatic Natural Resources Improvement

PAPs Project Affected Populations

PDA Project Development Agreement

PFAN-Asia Private Finance Advisory Network- Asia (a USAID regional project)

PIU Project Implementation Unit

PPA Power Purchase Agreement

PPP Public Private Partnership

PRG Partial Risk Guarantees

PTA Power Trade Agreement

RPG RPG Company

SAPDC SJVN Arun-3 Power Development Company

SARI/E South Asia Regional Initiative for Energy/ (a USAID regional project)

SJVNL Satluj Jal Vidyut Nigam Limited

SPV Special Purpose Vehicle

Transco Transmission Company

USAID United States Agency for International Development

USEA United States Energy Agency

USG United States Government

UT-1 Upper Trishuli -1

VAT Value Added Tax

VROCK VROCK & Company Pvt. Ltd.


Table of Contents

INTRODUCTION.. ............................................................................................................. 6

RISK MITIGATION SUPPORT IN YEAR 2 ...................................................................... 8

HIGHLIGHTS OF NHDP’S SUPPORT TO IBN DURING YEAR 2 AND PLANS FOR YEAR 3 .............................................................................................. 19

Component 1: Advisory support to facilitate the development and financial closure of large and medium HPPs .................................................................................................................... 19

IBN YEAR 2 PRINCIPAL ACTIVITIES ........................................................................... 36

HIGHLIGHTS OF NHDP’S SUPPORT TO MOE DURING YEAR 2 AND PLANS FOR YEAR 3 .............................................................................................. 37

Component 2: Advisory support to the MOE, NEA, and other key sector stakeholders related to the design and implementation of targeted electricity sector reforms ................................. 37

MOE YEAR 2 PRINCIPAL ACTIVITIES/HIGHLIGHTS .................................................. 48

PROJECT MANAGEMENT AND ADMINISTRATION ................................................... 49

CHALLENGES IN YEAR 2 ............................................................................................. 51

APPENDIX 1……. ........................................................................................................... 53

MONITORING AND EVALUATION ANNEX .................................................................. 53

APPENDIX 2……. ........................................................................................................... 63

FORMAL DELIVERABLES ............................................................................................ 63

APPENDIX 3……. ................................................ ERROR! BOOKMARK NOT DEFINED. FINANCIAL REPORT .......................................... ERROR! BOOKMARK NOT DEFINED.


INTRODUCTION The Nepal Hydropower Development Project (“NHDP”) agreement1 was concluded between USAID and Deloitte Consulting LLP on July 9, 2015. This report (Report) combines NHDP’s Fourth Quarter Report (April – June 2017) and the Year 2 Annual Report (1 July 2016 – 30 June 2017), both of which are deliverables under the project agreement. This Report will:

• Provide an overview of NHDP’s goals and approaches, with particular focus on the Project’s support to the Ministry of Energy (MoE) and the Investment Board of Nepal (IBN)

• Highlight NHDP’s collaboration with other Development Partners in the sector

• Identify NHDP’s principal activities and deliverables during Year 2

• Discuss the lessons learned during Year 2

• Describe planned activities for Year 3

• Provide relevant post-Year 2 project financial information

Project Focus It is widely accepted that the key to Nepal’s social and economic development is the sustainable utilization of the nation’s massive hydropower potential. In close consultation with Donor Partners, NHDP’s mission is to provide transactional and policy support to IBN (Component 1) and to the MoE (Component 2)2 to assist the Government of Nepal (GoN) to achieve Nepal’s hydropower potential, both domestically and in export markets. On the transactional side, NHDP is supporting IBN and the MoE in the development of six medium and large hydro power projects (HPPs). Five of these fall within IBN’s jurisdiction (above 500 MW)3 while the other, the Upper Trishuli-1 (UT-1) HPP (216 MW), falls under the MoE’s authority. On the policy and legislative side, NHDP is assisting the MoE to develop policies and laws that inter alia, facilitate regional electricity trading and establish an independent electricity sector regulator. Background In 2015, NHDP’s first year, the nation of Nepal and its electricity sector were in a state of disarray and quasi-recovery. Earthquakes, social unrest, and border blockades diverted minds from quotidian activities, focusing them rather on immediate health and safety matters. Developers were facing many of the same issues. Much of NHDP’s transactional work at IBN during the first year addressed a myriad of Force Majeure claims under a number of contracts. Concurrently, the bulk of the NHDP’s support to the MoE assisted the Government of Nepal (GoN) to develop a policy and a strategy to address the nation’s energy crisis, provoked by crippling load shedding and acute shortages of petroleum products.

1 # AID-367-TO-15-00003. 2 To date, the MoE’s transactional work has focused on bringing the Upper Trishuli-1 HPP (UT-1) to PDA closure and subsequently, to financial close. In the future, the GoN may allocate other medium or large-scale HPPs to the MoE. One of the MoE’s affiliated administrative bodies, DoED, is responsible for all of the nation’s small HPPs. Though NHDP will also be providing technical support to DoED in Year 3, NHDP’s principal role under this contract is to support large and medium HPPs. 3 They are Arun 3, Upper Karnali, Tamakoshi 3, West Seti, and Upper Marsyangdi 2.


Though these events were painful, commencing in Year 2 they were also transformative. The GoN’s Concept Paper on National Energy Crisis Prevention and Electricity Development Decade 2016 (Concept Paper),4 together with its implementing Action Plan, catalyzed the parties (MoE and the developer, Nepal Water and Electricity Development Company (NWEDC)) to conclude the UT-1 HPP Project Development Agreement (PDA). The Concept Paper also directly led to the development of new legislation (currently before Parliament) to establish an electricity sector regulator. NHDP actively supported and continues to support each of these initiatives.

4 A description of NHDP’s role in the development of the Concept Paper during the NHDP’s first year can be found in the Year 1 Annual Report.

Meeting with Peter Malnak, USAID Mission Director at NHDP Office On July 21, 2016 the entire NHDP team welcomed USAID Mission Director Peter Malnak to the Project’s office. Millennium Challenge Corporation (MCC) Country Director, Himesh Dhungel, and Shanker Khagi, USAID Environment and Energy Specialist and NHDP A/COR also joined the meeting. Rob Taylor, Chief of Party (COP), made a presentation about the Nepal Hydropower Project, its progress, working partners, target areas, activities and challenges. After the presentation, the Director asked questions about the project and also suggested that NHDP work closely with other likeminded organizations for better results towards hydropower development in Nepal.

Samrat Roy addresses the project at the Project kick-off meeting in Nagarkot, August, 2016

Rob Taylor, Chief of Party (COP) describing the project to the USAID team at NHDP Office, July, 2016


Key Project Assumptions Project assumptions are comprised of risks and performance management eventualities. While some of these lie within NHDP’s control, many do not. The project assumptions for Component 1 are:

1. That the GoN and developers are committed to timely and environmentally responsible completion of the selected and future HPPs.

2. That HPPs in the pipeline are viable. 3. That the GoN is committed to the establishment of an independent regulator and

eventually to sector restructuring.5 Component 2 is based on the following assumption:

4. That political and social stability remain. All of the HPPs are driven by the GoN through IBN or MOE, and the project developer. Ultimately it is they who will decide whether a project goes forward, as evidenced most recently by Statkraft’s withdrawal from the Tamakoshi 3 HPP. These decisions lie outside of NHDP’s control. The same is true for Component 2. Ultimately, any decision to go forward with sector restructuring lies with the Government and Parliament.

RISK MITIGATION SUPPORT IN YEAR 2 A. Risk Matrix

NHDP intends to achieve the project goals outlined above by assisting IBN and the MoE to reduce the risks that hinder both large and small HPPs as they move toward financial close (FC) and subsequently, construction. At the MoE, over and above transactional risks,6 there are also a plethora of policy risks to address.7 NHDP, being located in IBN and working closely with the MoE and its associated bodies, is uniquely able to assist project counterparts to identify and address many of these risks. NHDP works to mitigate transactional and policy risks by:

• Assisting both the MoE and IBN to address specific transaction related issues as they arise;8

• Assisting all project counterparts to acquire data and develop tools to mitigate or remove barriers to FC as they are identified;

• Assisting the MoE to drive Nepal’s long-awaited power sector reforms; and

• Providing training and capacity building related to all of the above-described activities for the benefit of all NHDP counterparts.

While it was once accurate to describe NHDP’s transactional and policy support as being two sides of the same coin, now at the end of Year 2, that coin looks much more like a ball of

5 The language of this assumption has been changed slightly. Formerly it read “is committed to sector restructuring”. Very little during Project Year 2 demonstrated the GoN’s commitment to sector restructuring. The “legislative package” described under rubric 3 of Component 2 has not been taken up by the MoE or endorsed by the GoN. The GoN has, however tabled a bill in Parliament for an act to establish a regulator. In many countries, the establishment of a regulator is a part of a larger restructuring activity. Often the regulator can even drive the government’s reform process. Because the tabling of the bill can be seen as a part of a much larger restructuring activity, the language of the assumption has been slightly adjusted. 6 Associated for the time being, solely with the Upper Trishuli HPP (216 MW). 7 Many of the elements of the GoN’s Concept Paper on National Energy Crisis Prevention and Electricity Development Decade 2016 (Concept Paper) and of its implementing action plan, are comprised of risk reducing activities. 8 These appear on a near daily basis at both institutions; while sometimes they are foreseen in an HPP’s risk matrix, other times they are not.


yarn. No longer are issues flat and isolated; today they are three-dimensional and universally confronted in all of Nepal’s HPP supporting institutions. Since these issues are now widely acknowledged to exist across GoN’s institutional boundaries, and given NHDP’s progress in Year 2, requests for the project’s support to the MoE and its associated bodies continue to grow. During Year 2, working closely with DFID consultants at IBN, NHDP revisited and refined the Project Risk Matrix, a tool that NHDP developed during Year 1. In its revised form, the matrix has two parts. Part 1 provides a high-level overview of the policy risks that negatively affect HPP development in Nepal. Part 2 describes project-related risks identified in the course of day-to-day transactional work, both at the MoE and IBN, for three medium and large projects that have concluded their PDAs.9 The revised Project Risk Matrix names and describes each risk, and seeks to quantify (i) the possibility that a specific risk will occur and (ii) the amount of damage that can be expected if it does. The risk matrices for the HPPs under PDA identify a number of project risks, at varying degrees of severity. Evaluated both for probability and impact, a risk that would cause serious negative impacts and has a high probability of occurring would be considered a serious risk. For the Arun 3 and Upper Karnali HPPs, the following potentially serious risks include:

• Opposition to the project that might cause the GoN to terminate the PDA; • Change in government; • Failure to satisfy local expectations related to local benefits and investment

participation; • Delays in finalizing private land transactions or transferring national forest land to an

HPP; • Delays in planned power sector reforms that negatively affect a given HPP; • Delays in finalizing transmission line development that negatively affect an HPP’s

ability to evacuate power; • Delays in taking steps necessary to operationalize the Nepal/India Power Trade

Agreement allowing the opening of new regional markets; and • Lack of Capacity among projects, which is itself a kind of project risk.

9 Upper Karnali, Arun 3 and the Upper Trishuli-1 HPPs.

A gravel and sand mine on the lower Trishuli River, Fishling, Dhadhing District


Table 1 Policy Risk Matrix

Each risk identified in the risk matrix is color-coded to classify the risk as either “Low”, “Medium”, or “High”. The Project Risk Matrix also identifies the logical or legal owner of the risk10 and the most effective risk mitigation measure to employ. The Risk Matrix is a tool that can be used by both the developer and the GoN (IBN or the MoE) to more effectively manage policy or transactional risks. Because the matrix provides a snapshot view of a risk at a specific moment in time, it is most effective when it is regularly updated. NHDP has found the matrix to be a useful tool because when properly maintained, it avails accurate and up-to-date information, both to the GoN and other HPP stakeholders. A snapshot of the current Policy Risk Matrix as it relates to policy risks appears in Table 1. Some of the risks most actively addressed by the NHDP during Years 1 and 2 are briefly described below.

10 The owner of a risk is the one who assumes responsibility to manage it. Oftentimes, “ownership” is not specific, but shared among the contracting parties.


(a) Inadequate or Incomplete Project Documents A common way of streamlining the procurement of large projects is to standardize project contracts in the form of ready to use contract templates. Bankable contract templates will make the HPP procurement process much more efficient. They will also facilitate the procurement of generation facilities through public tenders, thereby reducing procurement costs, both for the government and the developers. As an added benefit, the development of and frequent use of templates will also require government bodies to agree on approaches and obligations. Finally, the templating of agreements will facilitate capacity building among the numerous GoN administrative bodies that must approve them. (b) Country and Sovereign Risks Broadly speaking, country risk is a collection of risks associated with investing in a foreign country, including political risk, exchange rate risk, economic risk, sovereign risk, and transfer risk, which is the risk of capital being locked up or frozen by government action. Sovereign risk is also made up of political risk that arises when a foreign nation refuses to comply with a previous payment agreement, as is the case with sovereign debt. There are a number of tools that can be used to mitigate country and sovereign risks, including those related to expropriation, nationalization, government breach of contract, and changes in law or tax treatment. Mitigating tools relevant for Nepal include guarantees both from the government and multilateral banks. (c) Gaps and Defects in the Legal and Regulatory Framework For more than twenty years various Nepali governments have sought unsuccessfully to establish an electricity sector regulator. Developers often indicate their desire for the sector to be subject to independent regulation. Donor Partners working in the sector also urge the establishment of a regulator. When properly implemented, an independent regulator brings transparency, predictability of outcomes, and better service for consumers. It also protects IPPs from the state utility’s monopoly power. There is precedent for independent utility regulation in Nepal; the telecoms sector regulator has been in existence for twenty years and

A view of the Upper Karnali River


the Nepal Civil Aviation Authority of Nepal is also an independent regulator11. Though not a public utility regulator, Nepal’s banking and securities sectors each operate under strong regulation. Now, after years of struggle, efforts to deliver an independent regulator to the electricity sector are gaining traction; with the support of NHDP and the good offices of the electricity sector’s Development Partners, a bill to establish a regulator has been tabled in Parliament. The NHDP team’s hard-won practical regulatory expertise and leadership on regulatory start-ups in numerous countries has taught that while a good, independent regulator can catalyze electricity sector development, it is also extremely difficult to achieve in practice, at least initially. Experience shows that the likelihood of establishing a “good regulator” is greatly increased when the institution is endowed with a strong legal framework from the outset. This can only be achieved by building the capacity of those responsible to consider the legislation and by legislative shepherding. (d) Gaps in Frameworks and Failure to Implement Existing Policies and Mechanisms

for Compensation, Mitigation and Benefits Sharing (including Local Shares) The development of hydropower, especially storage-based hydropower, inevitably results in the displacement of project affected populations (PAPs) and social upheaval. The development of sound compensation, mitigation, and benefits sharing policies also shares a transactional nexus with all government institutions dealing with HPP issues. The kinds of issues that must ultimately be resolved in order to develop coherent approaches to benefits and the allocation of local shares include:

• The distinction between small and large hydro projects: Should this be a one-size-fits-all approach?

• Eligibility criteria: Clear guidelines are required for the allocation of benefits, as evidenced by recent protests.

• How to define ‘local’ and ‘affected’ populations: Because different classifications and categories of locals are used to determine the allocation of shares (and because

11 The Civil Aviation Authority can be distinguished from other regulators listed here in that it is a creation of international treaty, not Nepali law.

Radhesh Pant, former CEO of IBN and current CEO of VROCK Consulting speaks during stakeholder meeting on electricity sector regulation, June 2017


several disputes over these classifications have arisen in the context of share allocations) it is important to formulate clear and consistent policies in order to prioritize share allocations to project-affected people in different project-affected areas;

• Timing of share offerings: What is the right time to offer shares? Before, during or after Commercial Operations Date (COD)? These will affect participation and the reduction of risks. An offering at or just before COD limits risk, which protects against local disputes if things go poorly, but the “equity” implies sharing of profits and risks.

• Pricing: How should the shares be priced? At par, or at a premium? • Percentages for the locally affected population: What percentage of the shares

offered will be reserved for the local populations? • Handback: There is currently no established policy that clarifies what will happen to

shares and shareholders when project ownership is transferred back to the government at the end of the concession period (25-30 years).

• Financial education and awareness: Because financial education remains highly uneven across rural regions of Nepal, it is crucial to ensure that people understand the principles of equity investment as well as the associated risks.

• Social inclusion: Equity sharing requires a complex financial system in which even a well- educated person might have difficulty understanding the risks associated with the share market. Making these opportunities available to all local populations will require thought and attention.

Compensation, mitigation and benefits sharing issues are not restricted to large and medium HPPs. The Ministry of Energy’s Department of Electricity Development (DoED) is occupied with these issues in relationship to literally dozens of small HPPs that it manages on a daily basis. It is prudent therefore, and widely agreed, that policies and mechanisms should be put in place that can be used to address these issues wherever they arise. (e) Gaps or Defects in the Environmental and Social Framework All river-based development initiatives share a common feature: they are comprised of stakeholders with widely divergent and often incompatible interests. Given Nepal’s hydrology and climate, a major hydropower sector challenge in Nepal is that of balancing the need for a sufficient quantity of water for hydropower with the legal requirement to avoid interfering with the usage needs of other water users. Following international practices, Nepal’s

Kiran Vergis giving a presentation for MOE and DOED engineers on HPP development, April 2017


applicable law, the Water Resources Act, prioritizes the use of water for hydropower fifth, following drinking, irrigation, livestock, and fisheries.

Hydropower development changes the hydrology of rivers and river basins. Often, it also negatively affects formal and informal water rights. Under best practices (reflected in Nepalese law) developers are legally required to pay damages (compensation) for hydrological losses, just as they are for any other physical and financial loss. This is a problem because hydrological damages are less demonstrable, more difficult to quantify, and harder to monetize than most other obvious physical losses. As a result, in practice, hydrological losses, if not ignored altogether, are often classified under the heading of “benefits”, a more subjective and flexible category that is less driven by international practices. The result is competition among stakeholders, many of whom suffer from an unequal bargaining position, unequal and inequitable treatment, and unpredictable outcomes, none of which encourages proper development of the nation’s water resources.

(f) Communications and Communication Planning Failures Because, as it is said, “all politics is local”12 and because in Nepal, hydropower development has become widely considered to be the perfect political football, IBN’s Communications Unit and NHDP have focused their attentions on developing and implementing communications plans specifically focused on the regions, districts, and 12 “All politics is local” is a popular political saying, most often associated with House Speaker Thomas P. “Tip” O'Neill, Jr. (1912-1994). O'Neill used the saying in his first political campaign, in 1935.

A high-level team visiting the power station on the Trishuli River near Bidur, Nuwakot district, November 2016

Rob Taylor during Capacity Enhancement Training for IBN staff, IBN office, March 2017


villages most affected by HPP development. As HPPs progress closer to FC, the ability of entities beyond the developer itself to provide meaningful assistance to what often are confidential commercial matters, often recedes. One of the few areas where IBN continues to provide essential support is by developing and executing strategic, focused communications interventions in the regions, districts, and villages aimed at PAPs. For their part, journalists play a critical role in educating local populations regarding plans, progress, and next steps. For that reason, it is essential that they have a strong basic understanding of how the HPP process works. Failure to strengthen this key link in the communications chain can put the largest projects in jeopardy. Failure to build the capacity of journalists carries a high risk; if they do not grasp the intricacies of HPP development they may not be able to get critical points across to their readers. Because the readers often include a large number of PAPs, the damage to a project that can be expected from failure to close that communication gap is extremely high. (g) Gaps in the Cross Border Electricity Trading Framework All regional trade must pass through India; owing to India’s vast demand for energy, most of Nepal’s energy exports should also be destined for India’s markets. India conducts cross-border electricity trading with Bangladesh, Bhutan, and Nepal, largely under Government-to-Government (G-2-G) arrangements. In October 2014, India concluded a treaty with Nepal, the Power Trade Agreement (PTA), which formalized the two nation’s intentions significantly to expand cross-border trade in electricity. The PTA established a broad outline of the work, identified the responsibility of the parties, and finally, identified the procedures that will be necessary to coordinate and operationalize cross-border trade in electricity. However, until the PTA is fully implemented, the benefits of increasing and streamlining regional electricity trade will remain unrealized and export projects will stall. (h) Gaps in the Local Banking and Insurance Framework Not all HPPs in Nepal qualify as megaprojects; most projects are not financed by international banks or international financial institutions (IFIs) at all. The number of small HPPs in the Nepali market far exceeds large HPPs. Naturally, local investor interest gravitates to local HPPs. Logically, Nepal’s banking and insurance sectors should play a key role in the development of these projects. Domestic institutions such as banks and insurance companies should also have significant financial resources to mobilize for HPP development in Nepal. Unfortunately, Nepali insurance and banking institutions have so far failed to live up to their potential as supporters and stakeholders of what should be Nepal’s most lucrative sectors. This is to the detriment both of the banking and insurance sectors and the HPP sector.

Nepal Banking and Financial Institutions Workshop, jointly organized by NHDP and IBN at Hotel Park Village, September 2016


(i) Lack of Capacity NHDP was not designed primarily to be a capacity building project; rather, it was intended to

provide transactional support to IBN and policy and legislative support to the MoE. However, over the course of two years, it has become apparent that in Nepal, insufficient capacity among transactional and policy decision makers generates its own kind of project risk. HPP training required across all GoN institutions involved in hydropower issues.

Capacity building will undoubtedly also be required to support making the new electricity sector regulator operational, if and when currently tabled legislation passes.

B. Donor Coordination

(i) Work with Development Partners At the project’s outset, NHDP provided support only to the MoE and IBN. However, by the middle of Year 2 NHDP had expanded its coverage to provide nearly daily support to all four of the GoN’s principal electricity development HPP development institutions.13 Because Development Partners work closely with each of these institutions, NHDP constantly crosses paths with a number of very important sector supporters, including DFID (the NHDP’s closest donor colleague), the World Bank, the IFC, the Asian Development Bank, JICA, GiZ, and the three branches of USG donor support, USAID, DoS, and the Millennium Challenge Corporation (MCC). During NHDP Year 2, energy sector stakeholders close to NHDP met on numerous occasions to:14

13 NHDP supports each element of Nepal’s electricity sector quincunx -- the Ministry of Energy, the Department Of Electricity Development, the Nepal Electricity Authority, the Investment Board of Nepal, and the inchoate Electricity Regulatory Commission of Nepal. 14 The last series of meetings of the Donor Partners was held over the course of three days in May, 2017 at the offices of the World Bank in Kathmandu to consider recommended changes to the bill for an act to establish an electricity sector regulator.

Michael Boyd, COR, giving a speech during the training session of Module 4, HPP development and the Environment , Hotel Yak and Yeti, May 2017

MOE

NHDP

DOED IBN

NEA


• Respond to the MoE’s request for technical and financial support for the implementation of the GoN’s Concept Paper and the establishment and operation of the project implementation unit (PIU) for the UT-1 HPP;

• Support the development of coherent policies and strategies to address the benefits sharing framework, specifically direct equity participation by PAPs;

• Support the development of a bankable power purchase agreement (PPA) for UT-1;

• Support making the new transmission company (RPG) operational; • Support the promulgation of an act to establish a strong and independent regulator

for the electricity sector and, as a follow on, making it operational; and • Support capacity building for Nepal’s banking sector (specifically in respect of

hydropower investment and developing a mechanism for local shares).

(ii) Work With DFID

Throughout Year 2, NHDP moved in near lock-step with DFID on many issues related to HPP development, not only at IBN, but also at the MoE. The synergies and mutual support generated by this collaboration drives innovative approaches at both institutions. Current issues of daily collaboration between NHDP and DFID include:

• Continuing to develop and mitigate risks related to Upper Karnali and Arun 3 HPPs reaching FC;

• Establishing and training the MoE’s implementation unit for the UT-1 HPP; • Supporting the development of a bankable PPA for UT-1 and transforming that

document into a bankable standard form template for all subsequent domestic HPPs; • Continuing to develop additional templates for all contracts required for large HPP

development; • Addressing issues related to local benefits and investment participation; and • Implementing a more rational phasing of NHDP work at IBN.

NHDP will continue to work closely with Nepal’s principal power sector donors, as depicted in the following table.

Project Affected Village at the Arun 3 construction site


Table 2 Donor Partners in Nepal’s Hydropower Sector

Donor Program Areas of Cooperative Activity Risk Focus

USAID: South Asian Regional

Initiative/Energy Integration (SARI/EI)

• Collaboration on training and twinning services, particularly cross-border Nepal-India electricity trading, capacity building for the future Nepal electricity regulator, and additional transaction advisory services to IBN.

• Collecting outputs and requirements asked of the GoN from the 3 SARI/EI Joint Committees as potential areas for NHDP to support with technical assistance and capacity building.

Utility Risk, Trading Risk,

and Regulatory Risk

USAID: Water Resources Management

NHDP (PANI)

• Collaboration on E&S issues to mitigate negative impacts of hydropower projects on rivers, river basins, and communities, particularly those populations most vulnerable such as female-headed households.

• Training at the MoE on E&S matters over and above basic EIA issues. Flag major E&S issues that arise out of PDAs or project reviews and communicate with PANI to potentially provide mitigating solutions.

Environmental, Social and

Planning Risks

Millennium Challenge Corporation (MCC) Energy Compact Preparatory Work

• MCC completed an analysis that identified access to energy as a key constraint to growth; it is currently designing its Compact with GoN.

• Currently conducting a situation assessment on the policies, laws and regulations; institutions; development partners and private investors and power systems.

• This situation assessment will support their development of an Energy Sector Reform Roadmap and the establishment of an electricity sector regulator.

• NHDP has been collaborating closely with MCC on the drafting of a regulatory law and will continue to work with MCC on the shepherding process in Parliament and making the institutional operational once of the legislation.is gazetted.

Policy Risk, Country Risk

USAID:Private Financial Advisory Network - Asia

• Collaboration with Deloitte-implemented regional PFAN-Asia project to leverage prior country risk profiles and potential clean energy financing. Country Risk

Department of State Regional Activities

• Coordination with the Department of State on energy sector regulatory reform in Nepal to enable synergies particularly as it relates to establishing the Transco.

Policy Risk Restructuring

Risk Utility Risk

World Bank

• Kabeli-A HPP. • Nepal: Power Sector Reform and Sustainable Hydropower Development

(PSRSHD). • Additional Financing for Nepal-India Electricity Transmission and Trade

NHDP. • Kali Gandaki-A HPP Rehabilitation Project (KGAHPRP). • Nepal-India Electricity Transmission and Trade

Policy Risk NHDP

Completion Risk

Trading Risk

DFID

• At IBN, monitoring and mitigating various project risks for the Upper Karnali HPP and the Arun 3 HPP.

• At IBN, supporting the Communications Unit. • At IBN, implementing a more rational phasing of project work. • At IBN, addressing issues related to local benefits and investment

participation. • Continuing to develop other template contracts that can be used on all large

HPPs. • At the MoE, supporting the establishment and training the Ministry’s

implementation unit for the UT-1 HPP. • At the MoE, supporting the development of a workable PPA for UT-1 and

transforming that document into a bankable standard form template for all subsequent domestic HPPs.

Policy Risk NHDP

Completion Risk

Asian Development Bank

• Nepal: Hydroelectricity Financing Project • Nepal: Power Transmission and Distribution Efficiency Enhancement Project • Nepal: South Asia Sub-regional Economic Cooperation (SASEC) Power

System Expansion Project. • Nepal: Electricity Transmission Expansion and Supply Improvement Project. • Nepal: Energy Access and Efficiency Improvement Project.

Policy Risk Restructuring

Risk Utility Risk

GiZ • Energizing Development (EnDev) Nepal. Policy Risk and Energy Savings


HIGHLIGHTS OF NHDP’S SUPPORT TO IBN DURING YEAR 2 AND PLANS FOR YEAR 3 Component 1: Advisory support to facilitate the development and financial closure of large and medium HPPs Introduction Just as a river naturally runs downhill, NHDP’s support to the GoN runs to every transactional risk and issue that hinders the FC of Nepal’s major HPPs. This rubric will briefly summarize NHDP’s work on a number of risks and issues; it also outlines NHDP’s related plans for Year 3, including:

• HPP Transactional Support

• Support to the IBN Communications Unit

• Compensation and Benefits (including Local Shares)

• Social and Environmental Issues

• Banking and Insurance Sector Support

• Capacity Building for the Staff and Consultants at IBN, MoE, DoED and NEA

1. HPP Transactional Support (a) Overview of the Large HPPs

To date, three large HPPs have concluded PDAs that subsequently were approved by the Cabinet of Ministers.15 The developers of those projects are now working to achieve FC within the time frames set out in their respective PDAs. These time frames have been severely tested by the earthquakes of 2015 and their aftermath. Nevertheless, Arun 3 and UT-1 are each expected to reach FC before the end of calendar year 2017. Upper Karnali should achieve that milestone in 2018 or 2019. A full discussion of the progress of each HPP supported by NHDP is provided below.

15 Upper Karnali, Arun 3, and Upper Trishuli-1. The PDA is a framework agreement developed at IBN through DFID support to HPPs which is comprised of, among other elements, the GoN’s concession terms. The PDA is the anchor agreement for all large projects; it has even been modified by IBN for application to other types of infrastructure projects, including large cement and solid waste plants. The success of the PDAs on HPPs has resulted in the agreement being adopted by the MoE for use on the UT-1 HPP. There is also some discussion about developing a “short form” of the PDA for much smaller HPPs.


Geographical Locations for Major HPPs

Table 3 Upper Karnali HPP Project Overview Progress So far (as on 31 May

2017) Expected Outcomes for Year 3

Upper Karnali

(900 MW)

• This HPP is in fact, 2 projects. The first is to design and build power generation facilities; the second is to build a dedicated transmission line for the evacuation of power to India.

• Commercial operations are expected to commence in 2022.

• The PDA provides ‘free’ power (12%) and equity (27%) to GoN, with 2 years to reach financial close after conclusion of the PDA. According to the Memorandum of Understanding (MoU) with IBN, GMR must

• IFC has withdrawn from its 10% equity sponsorship role in the project but will continue as lead debt arranger for 1.2 billion USD of project debt.

• On 8 January 2017, IBN extended the PDA timeline for Financial Closure (FC), granting a 1-year extension to the developer in accordance with Section 3.1.3 of the PDA. Despite this, however, the HPP will fail to meet the new FC deadline of September 2017 and will be required to re-negotiate the FC target.

• The ADB and EIB have conducted due diligence on the

Scenario 1 – Project continues (status quo)

• Support on local benefits and compensation at IBN

• Legal support as required on the PDA and suite of project documents

• Public Outreach and communications to local communities

• Review of financing documents (if required)

• Support IBN on Project Dashboard (if required)

• If new equity investors are introduced, legal


Project Overview Progress So far (as on 31 May 2017)

Expected Outcomes for Year 3

build the transmission line.

project (including a technical review) and maintain their interest in investing in the project.

• GMR Energy is willing to offer 30 percent equity stake in the Upper Karnali hydropower project to K-water, a Korea state owned company, K-Water, are in ongoing discussions on the matter.

support to review joint venture agreement (JVA)

Scenario 2 – Project suffers additional delays

• Support IBN if GMR withdraws from the project or if GoN seeks to terminate for breach of PDA.

NHDP Activities in connection with the Project After a year of political and financial delays, the Upper Karnali HPP has once again begun to generate momentum in its journey to achieve FC. NHDP has supported IBN in a number of meetings between the Investment Board and project developers where the main issues included the application of various negotiating and signing fees applied by the GoN after the PDA was signed.16 NHDP has also worked continuously on Force Majeure matters which linger and continue to hinder the completion of conditions precedent to FC. These Force Majeure issues have been aggravated by social unrest in areas contiguous to the site and the developer’s inability to diversify its exposure by attracting other equity investors. The developer’s parent company is also dealing with financial setbacks in India. With the assistance of some bridge financing, however, land acquisitions at the construction site are expected to move forward and send positive signals to local communities.

16 Thereby rising change in law (CIL) issues under the PDA.

The Upper Karnali River near Dailekh District


A number of NHDP’s interventions with IBN on the Upper Karnali HPP have not been, strictly speaking, transactional in nature; rather, they have been transaction facilitating. During Year 2 NHDP supported and assisted the IBN Communications Unit to conduct two 2-day workshops in Surkhet, and Achaam, Nepal for local journalists serving districts affected by the Upper Karnali HPP.

Table 4 Arun 3 HPP



Arun 3 (900 MW)

• SJVNL and IBN concluded the PDA for Arun 3 in November, 2014. The PDA requires the developer to build the transmission line.

• Commercial operations are expected in 2022.

• The PDA Provides ‘free’ power (21.9%) to GoN, with 2 years to reach financial close.

• Land Acquisition transactions related to the construction sites are progressing and should be concluded immediately prior to FC.

• The power from the HPP will be evacuated from Dhalkebar in Nepal to Muzaffarpur in India. SJVN Arun-3 Power Development Company (SAPDC) the special purpose vehicle of SAPDC in Nepal has entered into memorandum of understanding for the lease of forest land with the Department of Forest. On 22 February 2017, the Cabinet of the GoI approved the investment proposal for generation component of Arun-3 Hydro Electric Project in Nepal by SJVN Limited along the following principal lines:

• Investment for generation component of Arun-3 HPP (900 MW) for an estimated cost of INRs. 5723.72 crore at May 2015 price level;

• SJVN is preparing the following plans and is expected to submit them to IBN for approval by end of June 2017: Local Benefits, Industrial Benefits and Employment Skills.

• SJVN has opened the tender process for Package I (contract not awarded yet). The bids for Package II also have also been received but not opened.

• Works are being slowed down by road blocks on access roads.

• Forest Clearance issue (Change of Law – CIL) still affecting the HPP and could result in commercial arbitration. Policy clarity is

• FC will be achieved in Q1 or 2 and Construction will start in Q2 or Q3 of Y 3.

• Support on local benefits and compensation at IBN

• Legal support as required on the PDA and suite of project documents

• Public Outreach and communications to local communities

• Review of financing documents (if required)

• Support IBN on Project Dashboard (if required)

Maha Prasad Adhikari, CEO, IBN Second from Left and other Representatives during the Stakeholders Meeting at UK Dam Site on 18th October 2016




• Completion period of the project is 60 months from the date of financial closure, which is planned for September 2017;

• Ex-post facto approval for the existing implementing agency, already incorporated in the name of SJVN Arun-3 Power Development Company (P) Limited (SAPDC) registered in Nepal as a 100% subsidiary of SJVN Limited for implementing the project; and

• Any component of work already or being made by the Nepalese authorities must be so certified by Central Electricity Authority (CEA) and accordingly deducted from the project cost requirements.

required from the Forest Ministry.

NHDP Activities in connection with the Project Because the parent company of the SPV of Arun 3 HPP in Nepal is a GoI and Government of Himachal Pradesh-owned company and because the GoI has allocated funds to support the investment, this HPP is well-positioned to achieve FC during the Project’s Year 3. NHDP will provide all the support required to achieve this important milestone. In Year 2, NHDP focused on assisting IBN to support the developer to accomplish its PDA conditions subsequent,17 including making the final land acquisitions less onerous by the project’s financial liquidity. The developer has also had to contend with some post-PDA changes in law affecting land purchases which remain outstanding. Outside of transactional support to Arun 3, during Year 2 NHDP also supported IBN’s Joint Secretary, Ravi Bhattarai and the IBN Communications Unit to:

• Conduct a stakeholder meeting for seventeen local and affected persons in Num, Nepal, just above the Arun 3 dam site; and

• Conduct an intensive 2-day workshop in Khadbari, Nepal for local journalists serving districts affected by the Arun 3 HPP.

As was the case for the Upper Karnali HPP workshop, this workshop exposed the journalists to many of the HPP issues faced by local communities.

17 Under the terms of the PDA, “Conditions Subsequent” must be accomplished in order for FC to be achieved. “Subsequent” in this context means after the PDA has been concluded.


Table 5 West Seti HPP

Project Overview Progress So far (as on 31 May 2017) Expected Outcomes for Year 3

West Seti 750 MW

• This project has not yet reached PDA.

• Because this project is a domestic storage project, not a run-of-river project, the CEO of IBN has identified it as a priority, moving forward.

• China International Water and Electric Corporation (CWE), a Chinese SOE, and the GoN signed a MoU in August of 2012, pursuant to which CWE will own 65% of the project company, the GoN 25% and local nationals 10%.

• The HPP has run into delays in finalizing the JVA, but the Developer has not stopped project preparation.

• The Developer is currently in the process of conducting geological and technical studies for the purpose of determining the optimum capacity of the plant.

• Because the structure of the project is not yet known, it is unclear how much support NHDP can provide.

• JV has been initialled by both parties (NEA and CWE (CTGI))

Scenario1: IBN retains control and NHDP provides support to IBN on PDA negotiations

• Project continues to support IBN on PDA negotiations with consent of USAID/USG

Scenario 2: Project is assigned to NEA Genco

• Project supports MoE/NEA Genco on PDA negotiations with consent of USAID/USG.

Journalist Training for Arun-3 Affected District On 17th and 18th July 2016, supported by NHDP, IBN hosted a workshop for 17 (15 Male and 2 Female) local journalists from the Sankhuwasabha districts at Khadbari. The workshop focused on educating the participants on Hydropower Development Issues related to the Arun-3 Hydropower project (HPP). Workshop topics included environmental issues in IBN projects, economic issues surrounding HPPs, the IBN information system, the legal framework for HPP development, project participants, phases and contracts, social benefits specific to the Arun-3 area, the electricity market in Nepal, and Arun-3 issues and IBN responses. For Rob Taylor, COP and Karnika Bhalla, DFAC from NHDP, the workshop also included a site visit to the dam site on 15th July along with IBN staff, and meetings with local and affected persons at Num Village Development Committee.

Training for Local Journalists, Khadbari, Sankhuwasabha, July 2016


NHDP Activities in connection with the Project During Year 2 NHDP worked closely with IBN and NEA to develop a Joint Venture Agreement (JVA) between NEA and China Three Gorges International (CTGI), the parent of China International Water and Electric Corporation (CWE), a hydropower development company incorporated under the laws of the People’s Republic of China. NHDP drafted and negotiated the JVA for IBN and NEA and the parties had put in their initials in the JVA in January, 2017 which was followed by approval of the JVA by the NEA Board. At the end of Year 2 the JVA remained unexecuted because of delays by CTGI in getting its board to approve the agreement. Local press releases raise the possibility of NEA canceling thFe project due to the developer’s failure to conclude the JVA. Taking into account the fact that the entire relationship is based merely on a Memorandum of Understanding (MOU)18, either party could withdraw from the project at any time. Whether the GoN is seriously contemplating such a step, or whether this is a mere negotiating strategy, is not yet known. In addition, during Year 2 NHDP supported IBN by providing advice on how to select an independent appraiser to assess the value of the existing project documents of West Seti HPP. The value realized from the project documents will be accounted as part of the equity investment from GoN. Table 6 Tamakoshi 3 HPP



Tamakoshi 3

(880 MW)

• This HPP has not yet achieved PDA.

• In 2015 Tamakoshi 3’s major developer, Statkraft of Norway, withdrew from the project for technical reasons.

• IBN has identified this as a priority project and a number of investors expressing some interest.

• IBN will determine how to move the project forward during NHDP’s Year 3.

• Because the structure of the project is not yet known, it is unclear how much support NHDP can provide.

• IBN is currently in the process of conducting geological and technical studies for the purpose of determining the optimum capacity of the plant.

Scenario 1: IBN retains control

• NHDP, working with DFID consultants, provides support to IBN’s work with a transaction advisor (separately procured by IBN)

• Support on compensation and local benefits

• Legal support as required on the PDA and contractual package, with consent of USAID/USG

Scenario 2: GoN allocates the project to MOE (Genco) provides support to MOE in working with a transaction advisor (separately procured by MOE)

• Project supports MoE/NEA Genco on PDA negotiations with consent of USAID/USG.

Scenario 3: If project is sole sourced or EPC-F

• NHDP support may be limited subject to discussions with USAID.

18 Memorandum of Understanding. Under most contract law, an MOU is distinguished from a contract, the latter being legally binding. Typically, an MOU is characterized as being merely an “agreement to agree”, and as such, illusory and unenforceable.


NHDP Activities in connection with the Project In Year 1 of NHDP Statkraft, the Tamakoshi 3 Project’s principal developer, withdrew from the project. The reasons given for the withdrawal describe all of the major risks surrounding HPP development in Nepal.19 At various times during the eighteen months since the withdrawal, NHDP and DFID consultants at IBN have worked with IBN to determine how best to take the project forward. During Year 2, at the request of the GoN, NHDP and DFID consultants provided technical assistance to IBN to carry out its due diligence on other financing models outside of the traditional project finance approach. The specific model to be compared, known as EPC-F (where the EPC contractor brings its own financing), has been recommended by new, interested project developers and has attracted the attention of the GoN. In contrast, both NHDP and DFID have recommended using Tamakoshi 3 as a model for a public tender procurement. Given the progress made during NHDPs first two years in developing a suite of project documents, Tamakoshi 3 could be the first HPP in Nepal where templated project documents could be included in the tender package and the winning bid could be based nearly exclusively on the price term. The GoN is still in the process of determining how the Tamakoshi project will be taken forward. A number of institutions are vying for control of the project, including NEA’s new Genco, the MoE, and IBN. Table 7 Upper Marsyangdi II HPP

Project Overview Progress So far (as on 31 May

2017)


Upper • This project has not yet reached PDA.

• No developments

• No outcomes expected in Y3

19 Including: power offtake issues for wet and dry season; lack of development of power trade mechanisms as foreseen in the India/Nepal Power Trade Agreement; lack of development of a regional power market; poor long-term price forecasts for the Indian market; lack of Nepalese power sector reforms; uncertainty surrounding the effect of the new Nepalese Constitution; uncertainty surrounding local share demands; continuing bureaucratic hurdles; political and social situation (embargo) in Nepal; PDA negotiation fee issues.

Source: http://kathmandupost.ekantipur.com/news/2017-04-07/china-three-gorges-seeks-clarification-before-jv-pact.html


Project Overview Progress So far (as on 31 May

2017)


Mars-yangdi 2 (600 MW)

• Equity breakdown at the present time is GMR 90% and IFC 10%

• This project has lain dormant while GMR focuses on achieving FC on the Upper Karnali Project.

• Successful completion of UK is seen as a pre-condition to moving this project forward.

• This project is also not moving because of the levy of two percent of (2%) of the Project cost that the Developer will have to pay to negotiate and sign the PDA.

to report.

• NHDP support will be put in abeyance until project movement occurs.

• NHDP will provide the same type of support as provided to the Upper Karnali.HPP

NHDP Activities in connection with the Project During Year 1 NHDP worked closely with IBN and the developer to continue the development of this PDA, largely in line with the developer’s previous PDA on the Upper Karnali HPP. This project is stalled, owing to the difficulties GMR has encountered in bringing Upper Karnali to FC, no movement on this project is expected prior to Upper Karnali’s FC.

(b) Plans for All IBN Hydro Projects in Year 3 During Year 3 NHDP will continue to embed the Senior Infrastructure Legal Advisor and resident members of the technical team at IBN. Adopting the approach that “one successful project can change everything”, NHDP’s main focus at IBN will be to provide any and all assistance required to move Arun 3 and Upper Karnali to FC. Much of the work required at this late stage will be to support the Investment Board’s Communications Unit to continue to get the messages out to the districts primarily affected by the projects. In addition, NHDP will, working closely with DFID and its consultants, continue to support IBN in the development of a suite of project documents that are required to achieve FC. First on the “template to do list” is a domestic PPA. NHDP will also provide advice on international practices and approaches for the legal and technical issues that will affect the large HPPs and assist IBN to develop a workable mechanism for the allocation of local shares. Most importantly, NHDP will continue to be instrumental in advising for the implementation of the Power Trade

The Upper Karnali River


Agreement with India. This will entail providing comments to regulations and guidelines that the GoI or CERC may issue in India. Going forward, NHDP will also support the re-packaging of the Tamakoshi 3 project for re-bidding through a public tender. Neither NHDP nor DFID will offer their services as transaction advisor. Because IBN’s focus has migrated away from HPP development and towards other types of PPP arrangements, going forward, requests by IBN for support will be required to satisfy three criteria: First, NHDP support will have to be related to an HPP; second, it must relate to a specific transaction; finally, it must satisfy USAID’s developmental goals. After these criteria have been met and given the project’s budgetary constraints, NHDP will determine whether there are sufficient resources to meet the request, taking into account NHDP priorities and the support that other donors, including DFID, will continue to provide at IBN.

2. Support to the IBN Communications Unit A key element in the success of IBN’s work of moving projects to FC is that of organizing and implementing stakeholder communications. IBN’s Communications Unit is professional and focused. For that reason, much of NHDP’s assistance to the Communications Unit has been administrative and financial in nature, supporting the work they are already carrying out, only on a larger scale. Nevertheless, it is also true that IBN’s Communications Unit can benefit from comparing their ongoing work to best international practices and by developing some standardized templates. In Year 2 NHDP contracted a Communications Specialist who has begun work with the IBN team to develop a comprehensive Stakeholder Engagement Plan and project-specific templates for communications strategy as well. During Year 2 NHDP provided a significant amount of support to the Communications Unit on matters related to progressing the Upper Karnali and Arun 3 HPPs to FC. Virtually all of these activities were conducted on the local and regional level and included the participation of local journalists. Plans for Year 3 During Year 3 NHDP’s support to the Communications Unit will continue to be comprised of four parts:

• Part 1 includes the provision of specialized training to staff of the Communications Unit. For example, in Year 2, NHDP supported specialized training in Dubai for one person on strategic communications and crisis management and had planned to also support a specialized training in London for one person on the use of social media, which is now postponed to Year 3, subject to additional funding.

• Part 2 provides guidance to the Communications Unit on the proper planning and structuring of their interventions. During Year 2 NHDP procured local communications expertise to assist IBN’s Communications Unit to develop a Stakeholder Engagement and Communications Action Plan which can be used as a model for other planning tools related to stakeholder mapping and engagements, resettlement planning, compensation management, and the allocation of local shares.

• Part 3 provides financial, logistical, and some technical support, allowing the Communications Unit to conduct training and stakeholder interventions out in the regions and districts that will be particularly affected by large HPP development. During Year 2 NHDP supported these kinds of activities on a number of occasions near the Arun 3 and Upper Karnali dam sites.


• Part 4 is comprised of study tours. Two separate tours were planned in Year 2 both of which will, subject to project resources, be carried out in Year 3. The first tour, in Vietnam, will be funded by USEA, with NHDP supporting the cost of technical team members’ preparation and participation. The second will be in Tbilisi, Georgia.

3. Compensation and Benefits (Including Local Shares) Year two was a time of study, planning and coalition-building among the Donor Partners, all of which recognize that the satisfactory resolution of compensation and benefits issues is essential to streamlining hydropower development in Nepal. The need to expedite the work was underlined by IBN’s decision to take up the IBN Board’s mandate to develop a policy and a mechanism to ensure fair treatment and equity participation by PAPs in local shares, specifically with respect to the Arun 3 and Upper Karnali HPPs.20 Soon thereafter, the IFC increased the momentum when it began the process of procuring a team of local experts to prepare a comprehensive study which can be used to support not only Nepal, but also other developing countries facing similar issues.

Presentation on Local Shares at the US Embassy The NHDP team led by Chief of Party, Rob Taylor, were afforded the opportunity to present on Local Shares and Benefits at the US Embassy on Thursday, 9 February 2017. Kiran Vergis and Tushar Sud, senior technical advisors on the NHDP project from Deloitte India also presented and participated in the meeting. Participants included the Mission Director, Peter Malnak, and NHDP COR, Dr. Michael Boyd, as well as several other key USAID team members. The meeting was well received and NHDP appreciated the extra visibility and opportunity to connect on this important subject.

Plans for Year 3 During Year 3, NHDP and DFID consultants at IBN will combine resources to support IBN in the development of a mechanism that developers can use to allocate local shares for the Arun 3 and Upper Karnali HPPs. IBN intends to present the findings and recommendations from that work to the Cabinet of Ministers for government action. Taking the lessons learned from the IBN report, NHDP will expand the scope of the work to address wider issues related to compensation (environmental and social), the allocation of benefits, and the mechanisms for the distribution of local shares which will be presented as a policy recommendation to the MoE and for implementation in future MoE-driven projects. Leadership at USAID Nepal and in the US Embassy have also identified the need to develop a coherent policy for Nepal on all of these issues. NHDP will provide periodic updates to USAID on progress at transforming all of these questions into a policy that:

• Ensures transparency • Protects PAPs • Can be adjusted for use by small and large HPPs in Nepal • Meets the needs of the GoN and developers alike

20 The resolution of compensation and benefits issues is time sensitive, although not all HPPs share the same time frames. UT-1’s PDA requires the developer to have relevant policies in place at the time of FC, which is only twelve months after the PDA has been concluded, i.e., by the end of 2017. In contrast, developers of the Arun 3 and Upper Karnali HPPs are not required to have their plans in place before COD, now expected to be in 2022 and 2023 respectively.


4. Social and Environmental Issues As HPP development gains momentum and as the number of projects, both large and small, increases, conflicts arising from the competing interests of hydropower development and the use of water for irrigation and other productive activities is inevitable. During Year 2 NHDP presented on these issues at the Power Summit and at an IFC-sponsored workshop at the Gokarna Resort. In addition, NHDP mobilized resources to obtain the services of local consultants who can assist with environmental and social (E&S) issues, both in the transactional and policy spheres.

Associating with IPPAN and NHDP representation at the Power Summit 2016

On December 15 and 16, 2016, IPPAN, NEPAL held the Power Summit 2016 (the Summit) in Kathmandu, with the theme “10,000 Megawatts in Ten Years,” highlighting the

GoN’s ambitious hydropower infrastructure plans.

The Summit welcomed approximately 350 attendees making this the largest assembly of electricity sector participants and stakeholders during the year. NHDP participated as a conference sponsor, and on the second day, Senior Financial Advisor, Kiran Vergis, delivered a paper on Local Shares: Balancing Shareholder Awareness.” The presentation was well-received, as was the final plenary session, where COR Michael Boyd spoke on behalf of the donor community.

In addition, during the second half of 2017, the Water and Energy Commission Secretariat (WECS) of the GoN produced a draft National Watershed Resources Policy (Watershed Resources Policy) which was presented by USAID’s PANI Project in late April. That policy clearly identifies the need to expand the development of environmentally, technically, and economically feasible hydropower. It also endorses comprehensive river basin planning and the development of a complete, workable legal and regulatory framework governing all aspects of water use management.

Rob Taylor at the Second National River Summit 2017 From 16 through 19 March, NHDP COP, Rob Taylor participated in the Second National River Summit that took place in Kathmandu, Fishling-Theuwataar, and Chhebetar in Gorkha, Nepal. The summit, organized by the Nepal River Conservation Association, the Youth Alliance for Development, Tribhuvan University and the Kathmandu University, had over 160 participants, including students, investors, experts, rights workers, and researchers. International guests represented India, the United States, Pakistan, Bhutan and the UK. USAID’s Program for Aquatic Natural Resources Improvement (PANI), International Water

Kiran Vergis, from NHDP giving presentation at Power Summit in Hayat Hotel, December 2016


Finally, during Year 2 NHDP’s local experts began working with DFID consultants at IBN to undertake specific interventions during Year 3, including to address indigenous peoples’ issues in the area that will be affected by the Arun 3 and other HPPs. NHDP will also undertake interventions aimed at adapting social and environmental policies and processes developed for HPPs to transmission line development, both at IBN and the MoE.

Plans for Year 3 During Year 3 NHDP will support IBN and MoE as they tackle the last M&E issues standing between major HPPs and FC, including: E&S issues and legal representation related to Arun 3 and Upper Karnali HPPs: IBN is currently working with the developer of the Upper Karnali project to finalise the micro-plans related to private land and other assets that the developer will have to acquire to commence construction. Since the developer is seeking to pay compensation to the PAPs in instalments, it will be necessary to acquire the land in stages. Legal oversight will be required to ensure that the transactions comply with the project PDA; there is also a duty to ensure that the transactions protect the interests of the PAPs who cannot afford their own legal advice. Going forward, NHDP will, working with DFID and its consultants at IBN, clarify the issues and deliver the support that may be required to ensure that the land acquisition goes smoothly. E&S issues related to the acquisition of land for transmission lines: The lack of a clear policy in dealing with issues related to the compensation for the taking of land falling within the right-off-way of a transmission line is the one of the major bottlenecks to the expansion of power distribution networks in Nepal. At present, the GoN has no land acquisition, social

Management Institute (IWMI) and Nepal Hydropower Development Project (NHDP) projects were each represented. Convening on the banks of the Trishuli River, the Summit issued a declaration highlighting among other matters, the need for Nepal to develop an integrated watershed management system as well as a comprehensive plan to prioritize Nepal’s river resource uses. A major take-away from the summit was the need to incorporate high level training on the subject of water resource management in NHDP’s continuing training at the MoE and DoED. The project is in talks with Kathmandu University to prepare such a training program.


safeguard, and benefit sharing policy related to transmission lines. However, in addition to ongoing studies, the GoN has formed a committee headed by MoE to recommend necessary policy changes to ease land acquisition processes and to ensure benefit sharing and livelihood restoration of power line PAPs. To further the work, NHDP will support a seminar hosted by IBN to discuss the issues related to compensation, social safeguards and benefit sharing as they relate to transmission line projects. New legislation: With international donor support the Watershed Resources Policy described above is being developed into draft legislation that could go far to improve river basin and hydropower planning. Properly developed and supported, it could also be a major step forward in rationalizing the use of water and institutionalizing transparent hydropower planning. NHDP will support the efforts of WECS to implement wider and more comprehensive water resource legislation. NHDP will, in so far as is possible, seek to incorporate compliance with water resources planning in electricity sector planning in Nepal’s regulatory framework. This will be accomplished first and foremost, in the shepherding of the bill to establish an electricity sector regulator in Nepal. If that work is successful, the work of incorporating water resource planning and electricity sector planning will carry forward as NHDP contributes to making the new regulator operational. 5. Banking and Insurance Sector Support

During Year 2, NHDP and members of IBN staff worked closely to identify and mitigate some of the financial risks encountered by large and small HPPs in Nepal. In late September 2016, NHDP organized a banking workshop attended by nearly seventy

representatives of local financial institutions and GoN administrative bodies. NHDP and IBN followed up the workshop with a report on current and possible roles of Nepal’s banking, financial services, and insurance sector (BFSI) to finance the country’s large number of hydropower projects. This Report focused specifically on domestic sources of funds for one very simple reason: Locally sourced debt avoids risks related to currency fluctuation. When financing is raised domestically, the developer’s debt repayments will also be made in domestic currency. In this scenario the risk of having to repay a loan in a foreign currency never arises. Then, resources that would otherwise go to service foreign debt are preserved for more productive domestic uses. Also, by encouraging the BFSI sector to invest in the nation’s hydropower patrimony, both the BFSI and HPP sectors will grow and prosper. The report observed that the domestic financial sector could be sufficiently robust to finance most of the generation capacity addition required to reach the GoN’s target of 10,000 MW by 2025, provided that structural changes are made to allow and encourage sector participants to increase their lending. This Report also identifies three key barriers to hydropower investment in Nepal: (i) a perception that investments in the sector are too risky; (ii) the existence of information asymmetry generally and a lack of capacity on the part of sector

Discussion during Banking and Financial Institution


participants to conduct due diligence specifically; and (iii) a lack of necessary sophistication in Nepal’s financial markets. Despite these barriers, the domestic BFSI sector has clearly expressed an interest in financing domestic HPPs, ranging from small and mid-sized projects to the very large ones. By removing these barriers, a more efficient flow of funds to Nepal’s HPP sector will naturally occur. The work of removing these barriers will require individual and coordinated action from the Government of Nepal (GoN), project developers, the Independent Power Producers Association Nepal (IPPAN), capital providers, and regulatory bodies including the Nepal Rastra Bank (NRB) and the Securities Board of Nepal (SEBON). Plans for Year 3 During Year 3 NHDP will continue this work, specifically focusing on gaining a more detailed understanding of: (a) insurance products that are typically used by developers; (b) how the insurance is procured; and (c) claims experiences, if any. Further to these studies, NHDP plans to hold a half-day interactive program on the types of insurance products that are typically used in HPPs and on global and Nepal experiences. Participants are expected to include a small number of developers, IPPAN, the Nepal Insurers Association, the Insurance Board, the Nepal Bankers’ Association, some local banks, IFC, and Development Partners.

6. Capacity Building for the Staff and Consultants at IBN, the MoE, DoED, and NEA

During Year 1 the NHDP team identified training needs, both in the MOE and at IBN, and began the process of strengthening capacity through formal training and one-on-one interaction. During Year 2 NHDP, at the request of the MoE, also began a series of multi-session training modules for staff from the MoE, DoED, and NEA. The goal of this training is to provide new staff members (predominantly engineers) with an exposure to some wide ranging issues related to HPP development including among others, the implementation of major projects, sector restructuring, case studies from the region and internationally, and identifying and mitigating risks. In addition, during Year 2 DFID consultants at IBN and the NHDP team also joined forces to offer weekly trainings on issues including project finance, HPPs, PPPs, project development, project related risks, power trade issues. This training occurs on many Friday afternoons and is attended by approximately twenty persons per session.

Tilak Acharya and Samrat Roy giving their presentation during Modular Training, DOED meeting room, December 2016


Modular Training at DOED is Ongoing The NHDP team concluded three Modules for building the capacity of participants from primarily the Ministry of Energy (MOE) and Department of Electricity Development (DOED). On average around 15 participants completed the full course successfully. Participants were trained on various topics under the modules “Understanding Large Hydropower Projects and their Life Cycles”, “Attracting FDI into Nepal’s Hydropower Sectors” and “Comprehensive Risk Analysis and Mitigation”. Based on course evaluations received from those in attendance, these trainings were highly effective and relevant, and their feedback is being factored in to the course content and design for upcoming Modules and subsequent courses. On 18 May, working through NHDP, Professor Sharma began a training module for the engineers at the Department of Electricity Development (DoED) / (MoE) entitled “Hydropower, the Environment, and Sustainable Development.” The module was conducted over the course of 6 weeks at DoED and has approximately 15 participants representing MoE, DoED, and NEA. This marks the first time for many of these trainees to be exposed to the role that environmental science should play in hydropower development.

Plans for Year 3 During Year 3 NHDP intends to continue with formal and informal training at IBN, DoED, MoE, and, as requested, at NEA. Training will be broken down into the following categories:

1. HPP “Basic Training” at DoED: During Year 2, NHDP, at the request of the MoE, began conducting training for new engineers at DoED. These trainings will continue during Year 3 and IBN staff and DFID consultants will also be invited to participate. This training is comprised of modules of six sessions dedicated to relevant topics of HPP development, project finance, risk analysis, tariff setting, sector restructuring, and sector regulation.

2. Side-by-Side Training with IBN Staff and consultants at IBN: As it did during Year 2, NHDP will collaborate closely with IBN, its staff and consultants and conduct side-

Subodh Sharma, PhD, Professor, Kathmandu University, during a presentation, Hotel Yak and Yeti, Kathmandu, May 2017


by-side training on transactional issues as they arise related to, without limitation, following activities:

• Making the PTA operational

• Identifying and addressing risks arising through Risk Matrix Reviews

• Addressing local benefits and local shares issues

• Re-packaging Tamakoshi 3 for rebidding

• Identifying best structures for HPPs 3. Formal Training at IBN: Continuing the program approved by IBN CEO Maha Prasad

Adhikari for continuing education of all IBN staff, NHDP shall, working with DFID, identify and deliver specifically identified training following on from day-to-day transactional issues, as they arise.

4. Specialized training to meet specific needs: NHDP will continue, as it did in Year 2, to identify specific needs of IBN staff and consultants, and to the extent that resources are available, meet that need. Where possible, this training will be held at IBN or in Kathmandu to accommodate as many project stakeholders as possible. In certain instances candidates for specialized training may be sent abroad for specifically identified courses.

5. Strategic Communications Training for IBN’s Communications Unit: Continuing the training conducted for the Communications Unit in Year 2, NHDP intends to support training opportunities for the Communications Team, in keeping with the annual activities plan agreed to between NHDP and the IBN Communications Unit.

6. Study Tours in support of HPP education and awareness: (a) Parliamentarian’s study tour: During Year 2 at IBN’s request, NHDP and

USAID mobilized forces and resources with the United States Energy Agency (USEA) to support planning for a hydropower study tour for approximately a dozen influential Nepali parliamentarians. Meetings were held to identify best locations and relevant topics for specific interventions. The NHDP team, in collaboration with the Niti sub-contractors, identified the Truong Son HPP21 as being the most feasible and relevant location for a study tour. IBN has agreed to the study tour, which is expected to take place in late August, 2017.

(b) Study tour to Tbilisi, Georgia for selected IBN staff: NHDP will take advantage of its longstanding contacts with the decade-long USAID/Deloitte collaboration to promote hydropower investment and sector restructuring in Tbilisi, Georgia.22 Nepal and Georgia share many common attributes, including enviable and largely undeveloped water resources and a need for energy security.

21 The Truong Son Hydropower Project is located on main stream of Ma river, Truong Son commune, Quan Hoa District, Thanh Hoa province; 200 km west of Thanh Hoa city, 175 km Southwest of Ha Noi city, with the installed capacity of 260 MW and the expected annual mean energy production of 1,055.03 million KWh. The project budget is 386 million US Dollars, of which 330 million US Dollars is expected to be financed by the World Bank, with 56 million US Dollars being financed by Vietnam Electricity. The project area comprises a reservoir affecting 1,539 hectares of land and a construction site affecting 394.5 hectares. The project will also affect people living in the project area. The number of affected households is 848 with 4.026 inhabitants, of which 510 households with 2,283 inhabitants requiring relocation. The construction of the project was started in May 2012 and the final generator unit is expected to be in place by second quarter of 2017. 22 HIPP and the 2 follow-on projects in Georgia.


IBN YEAR 2 PRINCIPAL ACTIVITIES In summary, during Year 2 NHDP supported IBN on the following matters:

• Continuing transactional support to Arun 3 and Upper Karnali -- ongoing

• Continuing to address transaction related risks and to continue to update the transactional risk matrices -- ongoing

• Continuing to support other HPPs as requests related to them arose -- ongoing

• Continuing support on Insurance and Banking Sector -- ongoing

• Continuing support to IBN’s Communications Unit -- ongoing

• Continuing to build the capacity of staff and consultants at IBN -- ongoing

Site Visit with PIU team of Upper Trishuli-1, HPP area, Rasuwa District March 2017


HIGHLIGHTS OF NHDP’S SUPPORT TO MOE DURING YEAR 2 AND PLANS FOR YEAR 3 Component 2: Advisory support to the MOE, NEA, and other key sector stakeholders related to the design and implementation of targeted electricity sector reforms Introduction NHDP has two principal work streams at the MoE. The first provides transactional support to bring the Upper Trishuli-1HPP to FC.23 The second assists the MoE to develop and implement policies that will promote and facilitate the realization of all HPPs, small and large. Such policies necessarily include sector restructuring and legal and regulatory changes. During Year 1 and on the basis of the Concept Paper, NHDP assisted the MoE to prepare bill for an act to establish an electricity sector regulator. When the bill reached Parliament in Year 2, NHDP undertook to identify and train local experts on the intricacies of utility regulation. During Year 3 NHDP, employing local expertise, will work intensively to shepherd a strong regulatory bill to passage and then to do everything possible to make the new regulator operational. All of these issues are discussed in detail below.

1. Transactional Support to the MoE with respect to the Upper Trishuli- 1 HPP While the majority of NHDP’s support to the MoE was initially expected to fall under Component 2 (Policy and Legislative support), a great deal of work has also been undertaken on the transaction side of MoE’s ledger. The UT-1 HPP, owing to its 216 MW size, falls under the jurisdiction of the MoE, not IBN. After months of providing negotiation support to the MoE, which culminated in the conclusion of the UT-1 PDA during the last days of December, 2016, NHDP immediately turned its attention to providing transactional support to NEA to finalize UT-1’s PPA. In addition, working with DFID’s hydropower consultants, NHDP is supporting the MoE’s UT-1 Project Implementation Unit, which, since its creation in

23 If other HPP projects find their way to the MoE instead of IBN or NEA Genco, NHDP will also provide transactional support to the MoE as required.

The Trishuli River at Bidur, Nuwakot District


February 2017, monitors the parties’24 progress as they each complete their respective PDA conditions subsequent. During Year 2 NHDP also supported the MoE by providing updates and analyses of the ongoing activities on both sides of the border related to the Power Trade Agreement between India and Nepal, including the GoI Guidelines and CERC draft Guidelines issued pursuant thereto. Finally, NHDP provided comments on the MoE’s Guidelines on Dollar Denominated PPAs, posted rate for PPAs and Transmission Tariff Methodologies, both of which could play a significant part in the finalization of the UT-1 PPA. Table 9 Upper Trishuli HPP



Upper Trishuli 1 (216 MW)

• The PDA was concluded by the MoE for the GoN and the Nepal Water and Electricity Development Company (NWEDC) on December 29, 2016.

• This HPP is expected to generate 1.46 billion units of net electricity per year-(1.15 billion units in the wet season and 306.7 million units in the dry season).

• NWEDC, is a joint venture between three Korean companies, one of which is the Korean Electric Power Corporation (KEPCO) and the International Finance Corporation (IFC), the private sector lending arm of the World Bank Group, and a Nepali investor.

• Under the PDA, the PPA must be concluded within six months of entry into force of PDA.

• IBN, DFID, NHDP and World Bank have mobilized to support PPA negotiations

• PPA is intended to be a template agreement for all subsequent domestic projects.

• Continue PPA support • Continue PIU support

as in Y2 • Support any other

matter arising.

NHDP Activities in connection with the Project During Year 2 NHDP continued to provide direct support to the MoE on the UT-1 HPP on two simultaneous work streams, both of which flow directly from the conclusion of the PDA, approved by the Cabinet on 28 December 2016.

24 NWEDC, the developer, and the MoE on behalf of the GoN.

Shanker Khagi, ACOR, Michael Boyd, COR, Peter Malnak, Mission Director and others during Trishuli HPP site visit, Nuwakot District,


Work Stream One – The UT-1 PDA: Stream One continues to focus all efforts on bringing the UT-1 HPP Power Purchase Agreement (PPA) to conclusion and the project to FC. Under the UT-1 PDA, the parties (GoN and NWEDC) are required to conclude the project’s PPA within six months of the signing of the PDA. During Year 2 the NHDP team, led by Semanta Dahal, worked continuously with other donors (specifically DFID, the World Bank, and the International Finance Corporation), each of which has offered to provide technical support on the PPA, and with project lawyers (procured by DFID) and financial consultants (procured by the World Bank) at pre-negotiation planning meetings in New York City in March, 2017. Preparation for those meetings required the close collaboration of NWEDC, government bodies including the MoE and NEA, and Donor Partners. Prior to the New York meetings, NEA identified the Kabeli HPP PPA as the PPA model for UT-1 and all parties worked to identify gaps in that agreement. Meetings in New York City were held at the offices of McCarthy Tetrault, a law firm, during the first week of March 2017. Back in Kathmandu negotiations have continued, and while the six-month deadline to conclude the PPA offers a tight window, progress is being made and issues for negotiation are narrowing. Work Stream Two - Supporting the establishment of and making operational the MoE’s Project Implementation Unit for UT-1: Stream two, which will also continue into Year 3, is to provide support to the MoE to establish a UT-1 implementation unit. This work was undertaken by NHDP in coordination with DFID-funded consultants at IBN led by Stephen Raggett from IMC, a consultancy. During the second half of Year 2, NHDP met with MOE, the Developers, and IMC, as well as DFID-funded consultants at IBN to develop a plan jointly to provide support to the MoE in this effort. Support includes the provision of a limited number of computers, printers, and software that are required to establish the unit and to provide it the technical support the unit will require to monitor the progress of both parties towards fulfilling the conditions subsequent in the UT-1 PDA. Hardware was delivered to the two engineers identified by the MoE to carry out the work during the final week of February. On March 9th and 10th representatives of the MoE, the Developer, NHDP and IMC met at the Upper Trishuli 1 HPP site for the first monthly progress reporting meeting. Meetings have followed every month since to continue to monitor and discuss the work.

Support to the Ministry of Energy

• Policy and Legislative Support and Capacity Building to: Reduce Load shedding By expanding regional trade By increasing domestic production By improving utility efficiency through

regulation Improve Sector Planning by Making it more organized Making it more transparent

Improve and expand sector service by introducing competition (regulation) Reducing NEA’s control of the market Removing Barriers to market entry Ensuring Open access to network Setting practices through independent

regulation


Project Development Agreement (PDA) Signing Concludes: Upper Trishuli-1 Hydropower Project (UT-1 HPP) - 216 MW Since its inception, USAID’s Nepal Hydropower Development Project (NHDP) has been providing technical and negotiating support to the Ministry of Energy (MOE) to finalize the Upper Trishuli-1 Project Development Agreement (PDA) to be entered between Government of Nepal (GoN) and the developer, Nepal Water and Electricity Development Company (NWEDC). During the first year of NHDP, NHDP conducted two off-site events for the MOE’s negotiating team, dealing with issues such as the structure and purpose of the PDA, GoN obligations under the PDA, the use of Partial Risk Guarantees, force majeure, term and termination, and the interrelation of the PDA with other documents in the contractual matrix.

NHDP support intensified during the summer of 2016 when final negotiations began in earnest. The drafting and negotiating work for MOE was led by local legal specialist, Semanta Dahal with support from Chief of Party, Rob Taylor and the entire NHDP team.

The final PDA between GoN/MOE and NWEDC was

signed and executed on 29 December 2016. Mr. Dinesh Ghimire, Joint Secretary of Ministry of Energy and Mr. Bo Seuk Yi, CEO of NWEDC signed the PDA on behalf of GoN and NWEDC, respectively. The signing ceremony was attended by Mr. Yong Jin Choe, Ambassador of Republic of Korea to Nepal.

The PDA combines the elements of a governmental concession and a master agreement which governs the relationship of the parties during all project phases. While the conclusion of this PDA marks a giant step forward, much work remains to be done before electricity is generated. NWEDC will now begin negotiations with the NEA, the off-taker, to conclude another important agreement in the contractual matrix, the Power Purchase Agreement (PPA). Under the Project Development Agreement (PDA), the parties have six months to sign the PPA. At that point, NWEDC will begin formal negotiations leading to financial close (FC). The project’s participation was instrumental in building the capacity of the GoN negotiating team members to reach final consensus on the PDA terms, and NHDP looks forward to continuing its support to the GoN as it works to bring the project to financial close.


Plans for Year 3 (a) Transactional

Going forward, NHDP will, as a matter of utmost priority, provide all of the support that the MoE and other GoN entities required to finalize the UT-1 PPA and to achieve FC. As such, NHDP’s support to the UT-1 Project Implementation Unit will also be a priority. Should other projects fall within the MoE’s jurisdiction, NHDP will provide whatever additional support is required. The UT-1 PDA will be the basis for concluding PDAs for other HPP projects for domestic consumption.

(b) Project Implementation Unit The MoE’s project implementation unit is collaborative and technical body, formed to monitor the compliance of all parties with their PDA obligations under the UT-1 PDA and to unblock administrative bottlenecks that may be interfering with the achievement of FC. The MoE has appointed two of its staff to support the work. Currently the body meets on a monthly basis at the MoE. NHDP and DFID have supported those staffers and generally provide legal and financial guidance to the parties. During Year 3 NHDP will continue to support the MoE’s Project Implementation Unit by way of limited amounts of hardware, technical assistance, and capacity building. NHDP has also considered the possibility of using a modified version of the Project Dashboard to assist in that work.

NHDP Team Attends 2nd PDA Implementation Meeting of Upper Trishuli-1 (UT1)

With Upper Trishuli-1 (UT1) PDA implementation well underway and following establishment of a UT1 Project Implementation Unit (PIU) at the Ministry of Energy, all with NHDP support, an off-site meeting was held on 9-10 March 2017. The program included a UT1 site visit in the Nuwakot region on Day 1, followed by a progress meeting in Battar on 10 March to discuss issues such as licensing, road construction, one-time approvals from Department of Electricity Development (DOED) and Nepal Rastra Bank (NRB), Peer Review Panel (PRP) appointments and other matters.

The visit and meeting hosted by the developer, Nepal Water and Energy Development Company Pvt. Ltd. (NWEDC), and provided for an excellent gathering of multiple stakeholders. It was well attended by the developer team, including

Mr. Joon Hyung Kim and also included key Government of Nepal (GoN) leaders such as MOE Joint Secretary, Dinesh Kumar Ghimire and DOED representative Nabin Raj Singh. Also in attendance were Senior Divisional Engineer, Sagar Raj Goutam, Joint Secretary, Mon Devi Shrestha, and Sujana Timilsina from the MOE. The NHDP team included Chief of Party, Rob Taylor, Finance Specialist Tilak Acharya, and VROCK consultant Satish N. Joshi, along with participation from DFID-funded work by way of Stephen Raggett. Overall, the meeting was extremely productive and should lay the groundwork for a cooperative and effective collaboration.


Other PIUs During Year 2 a proposition was often mooted to establish a new administrative body to carry out project implementation monitoring and trouble-shooting for all HPPs (and perhaps other types of projects). Whether such a body will exist and if so, where it might be located is not yet clear. Wherever it might be situated,25 NHDP has been asked to support such a unit should it be created. NHDP will be pleased to contribute to the discussions and to provide support to whichever of those institutions may ultimately be selected by the GoN to carry out such work, if at all.

2. Establishment of an Electricity Regulator During NHDP’s first year, Mary Webster, NHDP’s Senior Regulatory Advisor, a twenty-year contributor to Nepal’s electricity sector development, drafted and delivered to the MoE a bill for an act to establish an electricity sector regulatory commission. Subsequently, the MoE forwarded an emended version of that bill to the Cabinet. By the middle of Year 2, the bill was tabled in parliament where soon it is expected to be considered.

On numerous occasions, NHDP has highlighted the difficulties that all donor-supported projects face when trying to influence legislation currently before parliament. Simply stated, outside influences are rarely well received in the rooms where the sausage gets made.26 As such, alternative approaches must be identified and implemented. During Year 2 NHDP engaged well-known and well-respected local electricity sector consultants who were the driving forces in the work of shepherding the PDA’s for the largest HPPs in the country’s history, Upper Karnali and Arun 3, to Cabinet approval. NHDP has mandated these local experts to develop a plan for a similar and far-reaching lobbying effort to move the bill for an act to establish the electricity regulatory commission to improvement and ultimately, passage and promulgation. While much has been said and written about the “probability” of Nepal’s regulatory commission finally being established, very little has been published about how the institution will operate and precisely what its tasks will be. NHDP has reviewed the bill currently before Parliament, and 25 MoE, IBN, DoED, and other institutions have been suggested. 26 “Laws are like sausages — it is best not to see them being made” has popularly been attributed to Prince Otto von Bismarck (1815-1898), first Chancellor of Germany.

The proposed Nepal Electricity Regulatory Commission has moved a step closer to reality with the Cabinet approving the Electricity Regulatory Commission Bill 2017 on March 16, 2017.

The bill will open the way for the establishment of the independent body which will regulate the country’s power sector. The Energy Ministry had submitted the bill at the beginning of March, and its approval by the Cabinet’s Bill Committee means that it can be tabled in Parliament for its endorsement. “The bill will be presented to Parliament after minor language editing,” said a highly placed source at the Energy Ministry. The bill will become law 91 days after it is passed by Parliament, allowing the Energy Ministry to establish the regulatory commission consisting of experts from the energy sector.

Source: http://kathmandupost.ekantipur.com/news/2017-03-17/cabinet-approves-electricity-regulatory-commission-bill.html


believes that although it is acceptable in its current form, the institution’s legal framework needs to be stronger to give it the best possible chance of success.

Dinner with Ambassador Alaina Teplitz On the evening of 21 February, Senior Regulatory Expert Mary Webster and Rob Taylor dined at the US Ambassador’s Residence with Ambassador Alaina Teplitz, Deputy Chief of Mission Michael Gonzales and a number of senior policy makers in Nepal’s energy sector, including Radhesh Pant, former CEO of the Investment Board of Nepal, Khadga Bisht, former president IPPAN, Anil Chhitrakar, President, Siddhartha Inc., Shankar Sharma, former Ambassador of Nepal to the US and Rabindra Adhikari, Chair, Parliamentary Development Committee. The purpose of the evening was to talk about the role of regulation generally, and specifically, the need for a strong electricity sector regulator in Nepal to facilitate power trade and restructuring which will reduce regulatory risk in the country. Reducing regulatory risk will improve the investment environment for future HPPs, and keep the large projects approaching financial close on track. The evening served to demonstrate the support that NHDP has from the Embassy and the Mission, and the good will of America’s diplomatic community to continue to support the Project’s efforts to institutionalize a strong, independent regulator in Nepal. The evening also provided a fitting send-off for Mary Webster who ended fifty years of public service and international consulting with this trip. She has worked in Nepal for more than 20 years.


Plans for Year 3 Much of NHDP’s focus immediately and going forward will be to ensure that all that can be done is done to improve the draft bill and to get it passed as soon as possible. How long the process will take is not known. However long it takes, NHDP will stay fully engaged to realize the biggest prize of Nepali electricity sector restructuring: the establishment of an independent regulator. The moment that the bill is passed, the work of making the new institution operational will begin. Since NHDP is staffed by a number of regulatory experts from India and America, all of whom have experience in making new regulators functional, NHDP will take a prominent role in this work. NHDP will work closely with MCC and other Development Partners to ensure that the new body is given the closest possible attention. Making the new regulator operational will require a great deal of drafting of regulatory instruments27 and continual training, both of senior management and staff.

In close collaboration with sector Development Partner MCC, NHDP has also prepared a work plan to make the new Regulator operational. Implementation will begin from the moment that the bill has passed. NHDP intends to dedicate as much of its Year 3 resources as possible to this work. It is expected that it will be supplemented by additional funding and technical assistance from other donor organizations in the months following the act’s promulgation.

3. Sector Restructuring During Year 1 NHDP worked closely with US Government funded agencies assisting Nepal’s electricity sector, specifically, USAID, MCC, and DoS, in the development of a suite of legislative reforms that were driven by the Concept Paper. This work is discussed in detail in NHDP’s Year 1 Annual Report. NHDP’s restructuring recommendations included:

• Preparation of the power market structuring options and implementation roadmap, recognizing the need for a power trading institution in Nepal, developed by NHDP’s Senior Restructuring Advisor, Tushar Sud, under a separate consulting assignment

27 What those instruments may be will depend on the text of the act, when passed.

The Upper Karnali River


supported by ADB. This plan has been extensively discussed and is also endorsed by the sector’s principle Development Partners.

• Passage of the amendments to the Electricity Act (1992) and the NEA Act required to support the above identified plan. Amendments to the Electricity Act were provided by MCC consultant Ron Binz under a separate contract with MCC.

• Promulgation of new legislation to establish an economic regulator for the sector, prepared by this Project in extensive consultation with the Development Partners.

Unfortunately, During Year 2 the remaining elements of the “legislative package” did not move as rapidly as did the bill to establish the regulator. However, during the fall of 2016 and through February of 2017 NHDP did support the DoS Technical Assistance Project to establish a new transmission company (RP Grid Co.) DoS and to begin the process of unbundling NEA. This work is also supported by all international donors working in the sector, and given tacit approval by relevant government bodies (MoE, NEA, DoED). Workshops conducted for the wind-up of this DoS project provided the NHDP team responsible for regulatory development insights and strategies for the legislative shepherding process.

High Level Regulatory Training for Local Consultants

Since its inception, NHDP has worked with other USG technical teams (MCC and DoS) to establish a legislative framework that will support regional power trade and establish an independent sector regulator. NHDP presented a draft bill for this purpose to the MoE in April of 2016. Now, the bill is in Parliament. To prepare for the time when Parliamentary interventions will be required, NHDP Senior Regulatory Expert Mary Webster, supported by Rob Taylor and Senior Advisor Amitabh Saha, conducted high level training and planning for the local consulting firm, VROCK who will be leading the work of shepherding the bill through Parliament. The firm is comprised of well-known and respected consultants who formerly worked as senior managers at IBN. The training was joined by NHDP staff as well as other local consultants.


NHDP’s Year 3 work of preparing and shepherding the legislation necessary to establish and make the regulator functional, a pedagogic exercise in itself, can also be expected indirectly to further the cause of sector restructuring in Nepal by educating parliamentarians about the role and aims of regulation which include facilitating transparent regional trading mechanisms. Plans for Year 3 The progress of the bill to establish an electricity sector regulator continues to be the most visible and important activity currently under way related to sector restructuring. Other restructuring activities, while not as conspicuous, are nevertheless receiving the attention of donors and GoN entities alike. They include:

• Implementation of the Power Trade Agreement: This is a high priority for the GoN and for the MoE;

• The development of new tariff methodologies: This has been discussed at IBN for quite some time. It is also gaining traction at DoED. It will clearly be a priority when the regulatory commission is established.

• The role of NEA Genco: GoN has transferred the management of new generation projects to the GoN’s new Genco. It too may require technical assistance.

• Federalism Issues: Constitutionally mandated elections point to the eventual devolution of NEA’s distribution activities to provincial distribution companies.

These activities, though perhaps overlooked in the big picture of sector development, point in the direction of significant sector changes in the near future. Functional separation of NEA is specifically called for under the Energy Crisis Policy 2016. Nevertheless, the realization of any policy goal is not inevitable. Even now, while donors seem to be on the same page regarding broad sector goals, on the GoN side, there is generally speaking, a lack of clarity as to what NEA’s role will be and how it will be affected by sector restructuring. For example, some believe that sector restructuring can be achieved merely by creating wholly-owned NEA subsidiaries, rather than by legally unbundling NEA’s transmission function from its generation and distribution and dispatching functions. Likewise, the DoS/MCC efforts to establish and transfer existing NEA Transco assets into a new transmission company are, for the time being, a dead letter. In addition, there is, to date, little agreement about establishing a separate TSO/MO functions outside of NEA. Neither is there any agreement about relocating the dispatch center to the new Transco, RPGrid, or of the need to establish a new trader function outside of NEA. All of these issues were addressed in what has come to be known as “the legislative package, comprised of draft amendments to the NEA Act and the Electricity Act, and a draft act to establish an electricity sector regulator. While the bill for an act to establish the sector regulator has been tabled in Parliament, there has been no movement on the other legislative pieces. Because it is impossible to foresee how much support will be needed, and when it might be required, much of the work under this rubric will be delivered to the MoE on an “as required” basis.


4. Support on Cross-Border Trade Issues India and Nepal concluded a Power Trade Agreement in 2014, a treaty comprised of a broad outline of the obligations of each nation related to cross-border electricity trade. Pursuant to the PTA, late in 2016 the Ministry of Power (MoP), Government of India (GoI) issued its “Guidelines on Cross Border Trade of Electricity”. Subsequently, and pursuant to the directions of GoI, the Central Electricity Regulatory Commission of India (CERC) issued the CERC Cross Border Trade of Electricity draft regulations, which will provide the basis for continuing negotiations between the governments of the two countries, the entities responsible to implement all power trading from Nepal, going forward. In late 2016 and throughout 2017 NHDP provided assistance to IBN and the MoE on cross-border electricity trade with India, and by extension, the region. NHDP has made a number of presentations at MoE and IBN describing how these normative acts will impact HPP investments in Nepal. CERC’s draft regulations call for an institutional framework in Nepal to manage the cross border trade of electricity. The role the System Operator, Transmission Utility, Generating Company, Regulator, Government and the Settlement Nodal Agency are clearly spelled out in the regulations.

Plans for Year 3 NHDP will continue to identify issues related to the implementation of the PTA as and when they arise, and provide guidance to MoE, DoED, and IBN as requested.

5. New Opportunities at DoED With the agreement of the MoE, and upon the request of the Department of Electricity Development (DoED), NHDP will also continue to support the ongoing training activities at DoED, and, subject to the availability of resources, expand that work in areas of mutual interest, including:

• Provision of capacity building on negotiation skills at DoED.

• Under the guidance of the MoE, support the development of a project implementation unit for all HPPs.

• Strengthen DoED’s Licensing Unit. NHDP welcomes the opportunity to work closely with the Licensing Unit and to strengthen its work, harmonize it with best practices and the work of other GoN institutions, and to assist in the streamlining of planning activities for all of Nepal’s water resource related activities. Much work is currently

NHDP team at Year 3 Work Planning Meeting, Dhulikhel, May 2017


under way in other administrative bodies, so the timing for such work at DoED is fortuitous.

• Subject to resources, provide E&S support at the MoE.

• Continue to provide weekly modular training for DoED staff.

• Provide assistance on other issues as they arise.

6. New Opportunities at NEA NHDP is one of the few projects in a position to offer coordinating support both to international donors and to the GoN on issues related to electricity sector development. In mid-May 2017 NEA asked NHDP for technical assistance in support of the UT-1 PPA and to provide additional support in the future on issues related to other PPAs. This work is ongoing. In Project Year 3, as a matter of priority and with full donor coordination, NHDP will provide all of the support that the MoE and NEA may require. It will also provide support to properly template the documents after they have been finalized. NEA has also indicated that after this transactional work is finalized, it may seek technical assistance on the development of a Solar PPA. Other matters may also arise. During Project Year 3, NHDP looks forward to expanding and deepening its relationship with NEA on matters related to the Project’s contractual mandate.

MOE YEAR 2 PRINCIPAL ACTIVITIES/HIGHLIGHTS In summary, during Year 2 NHDP supported MOE on the following matters:

• Negotiations leading up to the conclusion of the UT-1 PDA on December 29, 2016

• Negotiations on UT-1 PPA, begun in February 2017 -- ongoing

• Establishment of the UT-1 Project Implementation Unit, January 2017-- ongoing

• Drafting of a bill for an act to establish regulatory commission, tabled February, 2017 - shepherding support ongoing

• Electricity sector restructuring -- ongoing

• DOED/MoE/NEA modular training at DOED -- ongoing

• Cross-border trading support to the MoE -- ongoing

Participants from MOE, NHDP during UT 1 PIU meeting in Nuwakot, March 2017


PROJECT MANAGEMENT AND ADMINISTRATION NHDP completed the following important activities related to the management and administration of the project over the course of the year.

• Finalized Revised Monitoring and Evaluation (M&E) Plan; • Participated in NHDP’s first Data Quality Assessment (DQA), resulting in positive

scores and no issues requiring immediate correction. Some additional feedback and suggestions on taking data quality to the next level have been noted and will be incorporated in future M&E activities and project design;

• Successfully organized and supported capacity building events for counterparts (including Capacity Enhancement at IBN, MOE Training Modules, journalist training and stakeholder engagement in Arun 3, Domestic Financial Markets workshop)

• Successfully supported and participated in UT1 PIU kick-off activities and events, including procurement of IT equipment for the MOE team and logistical support and participation in the UT1 site visit;

• Supported and arranged ISOC PR Strategy and Communications training for Prabhakar Ghimire in Dubai, to continue building institutional capacity at IBN

• Began planning for possible NHDP involvement in content for study tour(s) for parliamentary committee heads and counterparts;

• Co-sponsored IPPAN-organized Power Summit 2016 • Hosted the USAID Mission Director and team to provide a project overview • Attended several USAID partner meetings to progress integration with other projects • Presented project to US Embassy alongside other water partners, and hosted initial

brainstorming session at NHDP office • Hosted visit of Home Office Project Partner Kathleen O’Dell in January 2017; • Successfully completed annual third party tax-related audit with no material findings • In accordance with Task Order Clause C.1.4(2), finalized subcontract with local

entity, Niti Foundation to provide public relations, communications and related support;

• Finalized procurement and subcontract of VROCK & Company Pvt. Ltd. (consisting of industry experts) to assist with regulatory legislation shepherding activities;

• Finalized procurement and selection of Ujyaalo Multimedia Pvt. Ltd. to support the IBN Communications Unit plan for producing and broadcasting radio Public Service Announcements to educate local populations about facts related to Upper Karnali and Arun 3 primarily, with provision for additional future scopes of work;

• Organized a successful off-site kick-off meeting for the field team and COR, and concluded with a productive off-site team work plan retreat for Year 3 planning

• Worked with USAID to modify the contract with regard to incremental funding, rate approval language, M&E indicators and budget realignment, and obtained one year extension for Director of Finance, Accounting and Compliance

• Submitted timely quarterly accruals, quarterly reports, weekly reports, annual work plan and budget, and other required deliverables;

• Successfully received first full Value Added Tax (VAT) refund, with support from USAID;

• Renewed appropriate leases, vendor contracts, and conducted ongoing procurement and operational daily activities;

• Continued to meet financial obligations, reporting deadlines, and daily activities; • Successfully conducted first round of local hire performance evaluations; • Obtained appropriate client approvals for new resources and international travel • Successfully obtained renewed expat visas;


NHDP Project team with Kathleen with COR in Kathmandu, January 2017

NHDP Project team After Year 3 Work Planning Meeting, Dhulikhel, May 2017


CHALLENGES IN YEAR 2 Uncertainty at IBN NHDP’s principal counterparts, the MoE and IBN, each are emanations of GoN. By the mid-point of NHDP’s second year, there was a kind of “held breath” at both institutions, as some of the recent political upheavals eased and attention focused on March’s “Investment Summit” and approaching elections. The pause gave the MoE time to focus on UT-1 HPP issues, tariff guidelines, MoP Guidelines, and the CERC Draft Regulations on Cross Border Trade. At IBN there was a different perception; one of disillusion and impending transformation, exacerbated by:

(a) The inability of IBN to agree to a reporting structure and org chart for the approximately thirty IBN consultants then being funded by DFID. Under the new structure IBN bureaucrats insulate the current CEO from any direct communication on matters of substance and approve all communications outside of IBN;

(b) DFID’s determination to withdraw exclusive support by its consultants to IBN. In the future they will be offered in support of other large infrastructure projects to other GoN stakeholders, including the MoE;

(c) The departure of some DFID consultants as their contracts expire; and (d) The arrival of an unknown number of government employees at the Investment

Board, perhaps presaging the end of IBN as a semi-independent body. DFID’s new arrangement as well as new contracts with DFID consultants was finalized by mid-July 2017. For better or worse, impacts are expected to be significant. If the new relationship between and IBN and the DFID-funded consultants is successful, it could mark a new chapter in IBN’s story and bring new enthusiasm to its highly qualified staff. During Year 2 IBN devoted much less time to HPPs, focusing instead on PPP projects including solid waste treatment plants, cement factories, roads, and city transport projects. Whether this new focus is politically motivated (intended to phase IBN out and allow NEA and the MoE to manage HPPs and with a de-emphasis on export projects) is not yet clear. On the other hand, in the afterglow of the Investment Summit of 2 and 3 March (sponsored by GoN and managed by the Ministry of Industry and IBN), IBN bureaucrats were enthusiastic about taking on many more projects (including HPPs) than the organization currently has the resources to manage. In addition to the PPP projects described above, there is also talk of moving Tamakoshi 3 forward, and of canceling and repackaging the currently stalled West Seti (a storage project formally or informally under negotiation with Chinese investors under an EPC-F model); also discussions to jump start Upper Marsyangdi (GMR, 600 MW) and even Upper Tamakoshi (456 MW). According to the bureaucracy at IBN, one or two of these HPPs will require re-packaging for public tendering. Such work would entail the allocation of substantial human and financial resources to carry out revised feasibility studies and taking on legal and financial transaction advisors. Probably, all of these putative initiatives will come into focus by end of Year 3’s first quarter, or at the outside, by the end of the calendar year. Sticky Issues Remain Sticky NHDP’s Year 1 Annual Report identified four “Sticky Issues” related to de-risking Nepal’s hydro sector. A year later, while some progress has undoubtedly been achieved, most of those issues are unresolved and remain “sticky”. As such, they bear revisiting.


• The Role of DoED in the licensing process: NHDP’s delivery of formal training for new DoED staff and the chance to work with DoED’s senior management on UT-1 project implementation has opened the door a less formal and more collegial relationship, as well as a request from DoED for NHDP to provide technical assistance starting in Year 3. Subject to resources and eventualities at IBN, the new regulator, NHDP looks forward to a new phase of HPP related work. As task one, DoED has asked NHDP to work with the organization’s Licensing Unit to help it work more efficiently and effectively. This is an excellent opportunity to understand how the licensing and monitoring of HPPs currently is carried out and to make recommendations on how it can be improved. It is also a chance help rationalize the licensing of surveying and construction of HPPs and transmission lines (all of which are DoED functions) with the functions envisioned for the sector regulator, with water resource management, and with electricity sector planning generally. The consequences are clear. In Nepal, one of the keys to establishing an independent regulator is to educate DoED about the advantages of having an independent regulator and to make clear that a regulator will be no threat to the existing work of DoED; when power and jurisdiction are not threatened, reasoned discussions can occur.

• Lack of clarity about the role of NEA in the restructuring process: There are many communication disconnects between the MoE and NEA. The MoE’s conception of its role in sector restructuring seems theoretical and limited to policy and legislative interventions. The bill for an act to establish the regulatory commission is a good example of that. NEA did not become aware of the advantages of regulation until the UT-1 PPA negotiations revealed how convenient it would be for NEA if it were not responsible for setting tariffs. It was a technical and practical epiphany, not a theoretical or legislative awakening. NEA’s great fear has always been that restructuring will inevitably bring a new and less powerful role to NEA. As a tactic to delay unbundling, more often than not NEA defines restructuring in terms of merely ring-fencing NEA’s various functions (Generation, Transmission, Distribution; SO; Trade, etc.); never going so far as legal and financial unbundling. Although there may be some softening on these issues, restructuring to NEA is, considered by many to be at most a restructuring of functions under an NEA holding company. Further, there is little agreement regarding the establishment of separate TSO/MO functions outside of NEA or of relocating the dispatch center to RPGrid, or of transferring existing NEA Transco assets into RPGrid.

• Lastly, clarity on the trader function still has not been achieved. NEA believes that there is no reason that it should not continue to act as the nation’s trader. This is clearly an area that will require more education and definition during Year 3. On the positive side, this issue will be enlivened by the continuing discussions with GoI on making the PTA operational.


APPENDIX 1 MONITORING AND EVALUATION ANNEX 1. NHDP Training Evaluation During Year 2, the NHDP team was heavily involved in training for MoE identified trainees (from DoED, NEA, and MoE). The project also commenced DFID/NHDP training for capacity enhancement modules at IBN. For MoE, the Project completed three modules. Module 4 started on 18 May 2017 and continued through 13 July 2017. Each MoE module has six or seven sessions (two hours for each) once a week. NHDP will continue this training for as long as MoE considers it appropriate, and in Year 3 will open up the opportunity to other counterparts as well, such as those from IBN. The training modules for MOE training were;

• Understanding large Hydropower Projects and their Life Cycles • Attracting FDI into Nepal’s Hydropower Sector • Comprehensive Risk Analysis and Mitigation • Environment, Hydropower and Sustainable Development

1.1 Training Participants

The training participants were employees of the Government of Nepal especially from the Ministry of Energy, Department of Electricity Development, Nepal Electricity Authority, and other relevant government offices. The major topics for capacity enhancement training for IBN staff were, Project Finance, Project Screening and Feasibility Study, Anti-Corruption (0% Tolerance) Policy, Project Management, Utilizing Social Media and Stakeholder Engagement, RAPs and Social Benefits, Procurement-Process and Practice and Taxation etc. The training participants were IBN consultants and staff.

249

9392

39

0

50

100

150

200

250

300

MOE Training Participants(December 2016 to June 2017)

Capacity EnhancementTraining for IBN Staff(January-

June 2017)

Number of Benificiaries of NHDP Training for Y2

Male Female


1.2 Measuring the Learning of MOE training Module Participants To observe the knowledge of participants before and after each training module, NHDP has conducted pre-test and post-test knowledge checks with the participants, wherein they are asked to answer the same questions before going through the course content, and then after completing the course content. NHDP analyzed the pre-and post-test responses from the participants. The following charts show the change in level of knowledge obtained for the training modules conducted by NHDP.

As per the chart above, altogether 13 participants attended all seven sessions of Module 1. NHDP designed an anonymous pre-training and post-training test and collected them before the training and after the training. Based on the “pre”-test and “post”-test responses from the trainees (each person with an individual code to track progress), the training was found to be highly effective. All 13 participants had low levels of knowledge on the training topics before the training and almost all had improved their level of knowledge after the training. Only one participant showed no change in knowledge before and after the training.

3831

5446

3123

3123

4654

46 46

6269

6269 69

8577

69

54 5462 62

6962

0102030405060708090

1 4 5 6 11 12 15 16 18 20 21 22 23

Leve

l of K

now

ledg

e

Individual Code Number of Participants

Level of Knowledge of Individuals Before and After Training in % - Module 1

Pre Training Knowledge in % Post Training Knowledge in %


Personal Code with 4, 6 and 19 did not attend in final session. So, they did not participate in Post-test Survey

Personal Code with 0.4 and 0.9 did not attend in first session. So, they did not participate in Pre-test survey.

The chart above shows that 15 participants attended the training of Module 2. Based on the “pre”-test and “post”-test responses from the trainees, the training was again determined to be effective overall, though perhaps less so than Module 1. All 13 participants had some level of underlying knowledge on the training topics before the training and 30 percent improved their level of knowledge after the training. Only one participant showed no change in knowledge before and after the training, though several showed drops in knowledge after the training, which warrants further investigation.

7581

75

44

69 69

4450

38

88

6369

6363

44

75 75

63

4450

56

44

63

5056

0102030405060708090

100

1 2 3 4 5 6 7 11 13 14 15 16 19 0.4 0.9

Leve

l of K

now

ledg

e

Individual Code Number of the Participants


Pre Training Knowledge % PostTraining Knowledge %


The chart above shows that 16 participants attended the training of Module 3. Based on the “pre”-test and “post”-test survey responses from the trainees, the training was again determined to be effective. All 12 participants had some level of underlying knowledge on the training topics before the training and 63 percent improved their level of knowledge after the training. Only one participant found the same knowledge before and after the training.

56 56

78

56

67

33

22

67

56

44

56 56

67

56 56

44

67 67 67

33

56 56

44

56

67

78

44

67 78

44

56

78

- 10 20 30 40 50 60 70 80 90

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Leve

l of K

now

ledg

e

Individual Code Number of the Participants


Pre Training Knowledge (in %) Post Training Knowledge (in %)


1.3 Training Evaluation by Participants Module 1 1. Ranking of the topics in terms of learning

During the evaluation of training Module 1, participants were asked to rank the training topics in terms of their learning. Table: 10

Training Topics Rank Hydropower Project Infrastructure and Life Cycle 1 Tendering Process 2 Public Private Partnership (PPP) in Hydropower – Models and Learnings 3 Project Planning 4 Basics of the HPP Contractual Framework 5 Project Financing 6 IPP Transaction Structure 7

In terms of learning on the training topics, “Hydropower Project Infrastructure and Life Cycle” got the top ranking comparing to “Tendering Process” and the lowest ranking went to the training topic “IPP Transaction Structure”. (Table 1.10)

2. Rating of the topics in terms of Satisfaction/Effectiveness

During the evaluation of training Module 1, participants were asked to rate the training topics in terms of their satisfaction/effectiveness.

1 1

5

9

7 7 788

45 5

45

1 1

0123456789

10

HydropowerProject

Infrastructure& Their Life

Cycle

ProjectFinancing

ProjectPlanning

PPP in Hydropower –Models and Learnings

IPPTransaction

Structure

Basics of theHPP

ContractualFramework

Rat

ing

by N

umbe

r of P

eopl

e

Training Topics

Rating of the Training Topics by Satisfaction for Module 1

Did not Learn Satisfied Fully Satisfied Did not Attend


In terms of satisfaction and effectiveness of the training topics, the vast majority of participants rated “satisfied” and “fully satisfied” for all topics of Module 1. Based on the responses, we can say that the training was found to be overall effective and satisfied the participants. Only two trainees said that they did not learn from the training topics. (See chart above)

3. Relevancy of the topics for professional development

During the evaluation, participants were asked how relevant the training topics were to their professional development. There were altogether seven topics in Module 1.

In terms of relevancy of the training topics for their professional development, the vast majority of participants said that the training topics are extremely relevant and relevant for their professional development, which also gives us confidence that the right attendees have been nominated for this training module. Only one participant said that just one of the training topics was not relevant for his/her professional development. Based on the responses, NHDP validated its assumptions that the training has been designed effectively, and this learning was applied to planning for Module 2. (See chart above)

21 1

21

3

6

3 34

34

8

6

89

6

9 9

1 1

0123456789

10

HydropowerProject

Infrastructure& Their Life

Cycle

ProjectFinancing

ProjectPlanning

PPP in Hydropower –Models and Learnings

IPPTransaction

Structure

Basics of theHPP

ContractualFramework

TenderingProcess

Num

ber o

f Peo

ple

Training Topics

Relevancy of the Training Topics by Professional Development for Module 1

Not relevant Somewht Relevant Relevant Extremely Relevant Did not Attend


Module 2 4. Ranking of the topics in terms of learning

During the evaluation of training Module 2, participants were asked to rank the training topics in terms of their learning. There were altogether six topics in Module 2. In terms of learning on the training topics, “Single Window Mechanism” got the top ranking comparing to “Electricity Regulator,” and the lowest ranking went to the training topic “Electricity Market Development”. (Table 11)


During the evaluation of training Module 2, participants were asked to rate the training topics in terms of their satisfaction/effectiveness. There were altogether six topics in Module 2.

In terms of satisfaction and effectiveness of the training topics, most of the participants rated fully satisfied for all topics of Module 2. Some participants said that they were satisfied in the training topics. Based on the response, we can say that the training was found to be

1 1

2

3

4

5

4

6

7

5

8

6

8

6

2

3

1

0

1

2

3

4

5

6

7

8

9

Easing CapitalFlows

Electricity MarketDevelopment

ElectricityRegulator

IntegratedEnergy Planning

Single WindowMechanism

StandardizingProcesses &

Documentation

Rat

ing

by N

umbe

r of P

eopl

e

Training Topics


Did not Learn Satisfied Fully Satisfied Did not Attend

Training Topics Ranking Single Window Mechanism 1 Electricity Regulator 2 Standardizing Processes and Documentation 3 Integrated Energy Planning 4 Easing Capital Flows 5 Electricity Market Development 6

Table: 11


effective and satisfied the participants. There were only two instances of participants saying that they did not learn or found some of the training topics less effective. (See chart above) 6. Relevancy of the topics for professional development

During the evaluation, participants were asked how relevant the training topics were to their professional development. There were altogether six topics in Module 2.

In terms of relevancy of the training topics for the professional development most of the participants said that the training topics were extremely relevant or relevant for their professional development, with just a few saying they were somewhat relevant for their professional development. Based on the responses, we concluded that the training was overall relevant and helpful to the participants. (Please see the chart above)

3

2

1

2

1

4

2

3

4

5

4

3

5

8

7

5

7

2

3

1

0

1

2

3

4

5

6

7

8

9

Easing CapitalFlows

Electricity MarketDevelopment

ElectricityRegulator

IntegratedEnergy Planning

Single WindowMechanism

StandardizingProcesses &

Documentation

Num

ber o

f peo

ple

Training Topics


Somewhat Relevant Relevant Extremely Relevant Did not Attend


Module 3 7. Ranking of the topics in terms of learning

During the evaluation of training Module 3, participants were asked to rank the training topics in terms of their learning. There were six total topics in Module 3. In terms of learning on the training topics, “Political and legal Risks” got the highest ranking, with next being “Introduction to Risk Management” and the lowest ranking went to the training topic “Financial Risks”. (Table 12)


During the evaluation of training Module 3, participants were asked to rate the training topics in terms of their satisfaction/effectiveness. There were altogether six topics in Module 3.

In terms of satisfaction and effectiveness of the training topics, the majority of participants rated fully satisfied for all topics of Module 3. Some participants said they were satisfied. There were only three instances where a trainee said that they did not learn new information. (See chart above)

1 1 1

45

6 6 6 6

8 8

4

8

6

10

4

2

5

23

0

2

4

6

8

10

12

Construction andCompletion

Risks

Credit Risks Financial Risks Introduction toRisk

Management

Market Risksand Cross

Boarder Trade

Political andLegal Risks

Rat

ing

by N

umbe

r of P

eopl

e

Training Topics


Did not Learn Satisfied Fully Satisfied DNA

Subject Rank Political and Legal Risks 1 Introduction to Risk Management 2 Credit Risks 3 Market Risks and Cross Border Trade 4 Construction and Completion Risks 5 Financial Risks 6

Table: 12


9. Relevancy of the topics for professional development

During the evaluation, participants were asked how relevant the training topics were to their professional development. There were altogether six topics in Module 3.

In terms of relevancy of the training topics for professional development, most of the participants said that the training topics were extremely relevant or relevant for their professional development, with just a few saying they were somewhat relevant for their professional development. Based on the responses, we concluded that the training was overall relevant and helpful to the participants. (Please see the chart above)

1 1 12

3 34

5

3

9 9

6

10

8

12

4

2

5

23

0

2

4

6

8

10

12

14

Construction andCompletion

Risks

Credit Risks Financial Risks Introduction toRisk

Management

Market Risksand Cross

Boarder Trade

Political andLegal Risks

Num

ber o

f peo

ple

Training Topics


Not Relevant Somewhat Relevant Relevant Extermely Relevant Did not Attend


APPENDIX 2 FORMAL DELIVERABLES During year 2, NHDP produced and submitted various reports which were mandatory and listed in the project contract under section F.5 (marked in bold). This year the major deliverables (SN 1-10) were; Annual Work Plan for Year 2, Revised Monitoring and Evaluation Plan, Year 1 Annual Report, Quarterly Reports and Accrual reports. All reports were submitted according to the specified timelines. In addition to the major deliverables, the reports listed below (SN 11-40 with submitted status) were submitted under “Other Deliverables C.8.7” of F.5. These were delivered according to the deadlines established and agreed with the COR and the Year 2 work plan. Additionally, two reports (SN 41 and 42) were submitted under “Ad Hoc Reports and Communications C.8.10 as determined by COR”.

SN Reports Status

1 Annual Work Plan Year 2 - (C.8.1) Submitted

2 Monitoring and Evaluation Plan-Revised - (C.8.2) Submitted

3 Quarterly Progress Report FY16Q4 - (C.8.3) Submitted



6 Annual Report Year 1 - (C.8.4) Submitted

7 Accrual Reports FY16Q4 - (C.8.5) Submitted




11 Develop a comprehensive training program for MOE and IBN on issues related to major projects, project finance, and other issues related to HPP development in Nepal - (C.8.7)

Submitted

12 Report on financial market depth in Nepal for Investment in Power sector -(C.8.7) Submitted

13 Report on risk premium on investment in Nepal Power sector - (C.8.7) Submitted

14 Report on global case studies and learnings for Nepal - (C.8.7) Submitted

15 Due diligence report on NEA financials Pending

Awaiting GoN Restructuring Initiatives

16 Report on restructuring of Power Sector in India and lessons learned - (C.8.7) Submitted

17 Global examples for cross border power trading - (C.8.7) Submitted

18 Report on cross-border power trading between India and Nepal and implications for Power trading companies in Nepal with Report on global case studies and learnings for Nepal for cross border power trading

Submitted


19 Report on the appropriateness, legality and timing requirements of the required activities within the PDAs (Report and Microsoft Project displaying the timing and tasks)

Pushed to Y 3 Negotiation Training for

MoE, IBN and DoED

22 Analysis report of the gap between PDA obligations and realistic ability to meet those obligations including financial analysis of obligations - (C.8.7) Submitted

23 Reports on Risk and Mitigation Strategies for Political, GESI, Country, Utility, and Regulatory Risks - (C.8.7) Submitted

24 Report on Free Energy and Equity Shares Scenarios Pushed to Year 3

25 Status updates on HPP transaction progress and risk mitigation activities (Ongoing) - (C.8.7)

Submitted and Updated Quarterly

26 Proposed revisions to financial closing documents (as relevant or required) Not Yet Required Pushed to Year 3

27 Draft Framework of Environmental/Social Impact Management for MoE (Part of Compensation and Local Benefits Work) Pushed to Year 3

28 GHG emission report Pushed to Year 3

29 IBN Environmental and Social Management capacity building for MoE (Part of Compensation and Local Benefits Work)

Environmental Training for MoE Completed and

Compensation work pushed to Y 3

30 Forex analysis and recommendations - (C.8.7) Submitted

31 Country Risk Reduction Plan - (C.8.7) Submitted

32 Investment Promotion Plan to include goals, priorities and roadmap for investment promotion (at IBN and in collaboration with other ministries)

Not Yet Required Pushed to Year 3

33 Draft Power Sector Restructuring Plan - (C.8.7) Submitted

34 Proposed Capacity Building Plan (for MOE - MOE Focus areas: Market operator, Transco and Genco and Regulation (including monitoring)

Pending Because of Inactivity in MoE and GoN on Restructuring

Activities

35 Power Sector Restructuring Financial Analyses


Activities

36 Report on Recommendations for improving NEA’s financial performance in coordination with other donors who have conducted this analysis previously


Activities

37 Public-private dialogue event - Dependent on regulatory agency changes occurring

Pushed into Year 3--Await progress on the

Bill in Parliament

38 Presentations for capacity strengthening of IBN, MoE, other government agencies and ministries and electricity sector entities - (C.8.7) Submitted

39 IBN Public Awareness Capacity Plan and Roadmap - (C.8.7) Submitted

40 IBN Public Awareness Capacity Assessment Pushed to Year 3

41 Report on Action Plan for Operationalization of NERC - (C.8.10) Submitted

42 The Questions of Shares in the Development of Hydropower in Nepal - (C.8.10) Submitted


3: Develop Energy Services Associations

USAID’s NEPAL Hydropower Development Project Subarna Shamsher Marga, Baluwatar Kathmandu,

Nepal July, 2017