False peaks... an arduous climb to privatisation in Nepal15 October 2001
Hydro-rich Nepal is known as the roof of the world, and the Nepalese government claims privatisation can help companies gain access to the ground floor. However, as the privatisation of Butwal Power Company has shown, stepping through the front door is proving to be the greatest challenge. Navin Singh Khadka reports
IT HAS not been an easy privatisation process for the Butwal Power Company (BPC) of Nepal. Bidding for a 75% share of the state-run utility has taken place twice in the past three-and-a-half years. And, amidst controversies, the government has cancelled both privatisation tender processes.
BPC has an installed capacity of 17MW and was originally formed as a private limited company in 1966. Converted into a public limited company in 1992, it operates the 12MW Jhimruk and 5MW Aandikhola power plants. It also owns 14.9% of Himal Power, which operates Nepal’s first build, own, operate and transfer project – the 60MW Khimti hydro power plant.
Even though Nepal has allowed independent power producers to generate electricity, transmission and distribution still remains within the government’s domain – supplying electricity to only 15% of the total 2.3M Nepalese population. The national grid has an installed capacity of around 400MW and Nepal Electricity Authority (NEA) has more power plants in mind, such as the 144MW Kali Gandaki hydro scheme which is expected to come on line sometime this year. Meanwhile private operators continue to join in.
In the near future, the country is expected to have around 40% excess electricity during the wet season, while the peak load demand by 2008 is likely to exceed 820MW. What’s more, some estimates suggest that northern India – bordering southern Nepal (where BPC is also situated) – will suffer from an 18,000MW power deficit.
This is where water resource-rich Nepal, with the potential of 83,000MW of power (half of which has been considered technically feasible), can cash in on the situation. BPC could use this to its advantage as well, but so far privatisation is proving to be a troublesome process.
The first round of bidding for BPC shares stoked the fire of controversy. Interkraft Nepal (a consortium of seven Nepalese investors and a Norwegian company) bid alongside a UK-US association between Independent Power Corporation (IPC) and the Chaudhary Group (CG). IPC was the principal bidder supported by CG but this association was to later generate controversy. Interkraft Nepal (IN) had quoted US$1.8 per share (conditional) and US$1.2 per share (unconditional), with the IPC-CG consortium offering US$1.4 per share. Then, when the government asked both parties to revise their bids, IN quoted US$1.5 per share but IPC chose not to change its earlier offer.
While the government was mulling over both the bids, IPC pulled out of the bidding process crying foul over what it claimed was the Nepalese government’s favouritism for IN. In a letter addressed to the Finance Minister, the London-based power developer had charged that the renewal deadline for IN’s bid bond had lapsed before it was renewed on 30 November 2000.
The Ministry dismissed the allegations claiming that the privatisation process had been fair and transparent but then the government cancelled the entire bidding process. Hence, the second bidding process this year. Even then things did not move smoothly.
Second round bids
The bidders interested in BPC’s shares were almost identical the second time around. IN was there again but this time the Chaudhary Group was supported by IPC. However, in August 2001, CG's technical bid was disqualified when Finance Ministry officials said the group did not have experience of producing at least 30MW of electricity – a mandatory provision for the bidders. Since CG was already disqualified in the technical bidding, its financial bid was returned unopened on the same day the government opened the financial bid of IN.
IN had offered US$9M for the 75% of BPC, presently valued at US$13.1M. That way, the bidder was offering US$1.6 for each BPC share – tagged with the price of US$1.3 by the government.
‘The offer was too low,’ says Dilli Raj Khanal, a member of the privatisation committee. So, on the basis that IN’s bid was not high enough, on 10 September 2001, the committee recommended the government retender BPC’s privatisation for the third time.
Dismissing the officials’ claim that IN’s offer was too low, IN’s Nepalese partners expressed concern about BPC’s power purchase agreement with Nepal Electricity Authority (NEA). The company has signed the PPA with NEA at the electricity-selling rate of US$0.03 per unit. ‘And the PPA is only for two years,’ says Gyanendra Pradhan, co-ordinator among the Nepalese investors in the IN consortium. ‘What happens after that? Where do we go to sell the power then?’
The prolonged privatisation of BPC, a company which employs around 300 people and made a profit of nearly US$4.5M in 1998, has left the bidders of the power company frustrated.
‘Enough is enough,’ says Gyanendra Pradhan. ‘We were patient enough to wait for more than three years and take part in the bidding twice. Now, even our Norwegian partner has no willpower to go for one more round of bidding.’
Balaram Pradhan, local agent of Norwegian Company Interkraft, echoes the same sentiments. ‘Several years to buy the shares of one company and still it is not done. How much more patient can we be?’
The latest episode of the BPC privatisation has also left the other bidder – CG – grumbling. ‘We were disqualified on flimsy grounds,’ says chairman Binod Chaudhary. ‘This seems to be the result of the unfair game our rival group has resorted to.’
On the day when Finance Ministry officials opened the financial bid of IN and returned the financial package of CG unopened, the latter claimed that it had offered US$10.8M for the shares on condition that it would make 75% cash downpayment. The rest would be paid within 24 months.
After the Finance Ministry declared they had disqualified CG's technical bid there were confusing claims and counter-claims from CG and officialdom. While government officials said CG was alone in the bidding process, the latter claimed that it was there with IPC. ‘IPC is in the consortium with CG for the Butwal Power shares,’ Chaudhary asserted.
The London-based company echoed CG’s voice. ‘Yes we are there as a bidder but this time with a secondary role,’ said Sue Laker, a senior official at IPC’s headquarters in London.
But officials at the Finance Ministry maintained that if CG had bid together with IPC for the BPC shares then it (CG) would have surely qualified in the technical round. It appears as there were no documents to prove that IPC was a bidder as well, CG could not make it.
The terms of reference for the BPC bidders required them to have experience of having produced at least 30MW of electricity. But in CG’s case, officials said it did not have any experience in power production. IPC has experience of generating 1800MW of electricity but that experience could not help CG in the bidding because there was no documentation proving the joint technical collaboration between the two companies: the only way to make CG technically qualified to get through this part of the bidding.
The only document in connection with IPC was its statement that it would technically support CG if the latter was successful in the bidding process. ‘We had stated that we would support CG if it becomes successful to get the IPC shares,’ Laker says.
And it was the same big ‘if’ that led to disqualification of the CG-IPC technical bid, Finance Ministry Officials said. ‘How can you say you have already reached an agreement of being partners on technical grounds when there still is such a big if?’ they asked.
Such a conditional agreement does not win recognition as a legal entity between the two establishments, as demanded by the terms of reference of the bidding process, officials explained.
‘I wish we had included the necessary documents in the technical bid that could have presented us as an equity partner in the bidding process,’ Laker then admitted.
But that was not the end of it. Even after disqualifying CG’s technical bid, officials took six weeks after the bids were submitted to open the financial bid of Interkraft Nepal. Several times during the second and third week of August 2001 the scheduled meeting to open Interkraft Nepal’s bid was postponed.
Third time lucky?
So BPC still remains unprivatised, and with cabinet ministers set to announce retendering at any time, further delays may occur. Now that the decision has been taken to retender once again, the question is: will there be any bidders this time?
Yes or no, the BPC saga has certainly sent out the wrong signal in the world of privatisation.