IFC calls for more safeguards on hydro project shares to locals

Published On: September 19, 2018 03:45 AM NPT By: Republica  | @RepublicaNepal

KATHMANDU, Sept 19: There should be more community education and improved regulation to maximize opportunities and minimize risks for locals who want to invest in hydropower projects in Nepal, according to a recommendation made by a study report by the International Finance Corporation (IFC).

The study report 'Local Shares: An In-depth Examination of the Opportunities and Risks for Local Communities Seeking to Invest in Nepal's Hydropower Projects' released by the IFC, the World Bank Group's investment arm, on Monday found that investment model in Nepal's hydropower projects offered a great potential to create local ownership and increase public support for hydropower projects.

However, it also found a widespread lack of understanding of how the market mechanism worked, and a lack of effective safeguards to reduce risk to investors. The new findings and recommendations of the IFC come in the wake of recent rise of hydropower companies who have to float their shares to the locals affected by their projects.

Hydropower projects are required to provide 10 percent of their shares to the locals affected by their projects. The IFC estimates that from the government's goal to develop 10,000MW in the next ten years, as much as $439 million in equity could be raised from project-affected communities alone.

The study also shed light on some of the impacts that the share offering has brought in the local communities. The study showed that many poor rural households borrowed at high interest rates or sold primary assets to invest in local shares. They often had unrealistic expectations of returns, and were unclear on the risk of loss, according to the report. "That could explain why, despite a fall in value since their peak in 2014, demand for local shares continues to grow," read the report.

To address this problem, the study has recommended simplification of the financial information by the hydropower developers to be more easily understood by non-experts. The report also calls for defining the local share requirements in project bid documents, creating low-risk mechanisms for vulnerable households to finance their share purchases, computerizing the share allocation process and improving transparency and accountability by making it mandatory for all projects to put their information online.

"Nepal's local shares model is unique. It recognizes the importance of communities in private sector hydropower investment," a statement by the IFC quoted Wendy Werner, IFC Country Manager for Bangladesh, Bhutan and Nepal, as saying. "IFC aims to ensure the private sector contributes to sustainable power development and that this investment opportunity is within reach of every citizen, balancing the potential returns with the project risks."

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