Indian government company NHPC Limited has sought financial assistance from the Investment Board, saying that it is not financially feasible and that free electricity should also be provided. NHPC, which was awarded the West Seti and Seti River-6 hydropower projects without competition, has demanded Rs 40 billion in Viability Gap Funding (VGF) for the West Seti Hydropower Project.

There is an international practice where the government can provide VGF for the construction of economically important infrastructure that is not financially feasible but can provide positive returns in the long term. In Nepal, the Public-Private Partnership and Investment Act and Regulations have made provision for the provision of VGF. However, so far, there have been no projects and projects built by the government in Nepal with VGF.

Earlier, the government-owned Budhi Gandaki Hydropower Company Limited had made an investment modality for providing and not providing VGF for the construction of projects. However, it could not be implemented due to the lack of consent from the Ministry of Finance.

The Investment Board, Office, has stated that NHPC has requested VGF based on the project's Detailed Project Report (DPR). There is a provision for providing VGF for the construction, operation and expansion of projects that provide positive returns in the long term and are important in terms of infrastructure but cannot provide immediate reasonable returns in financial terms. Section 43 of the Public-Private Partnership and Investment Act, 2075 mentions the establishment of VGF.

Sub-section 1 of Section 43 of the Act states that the government shall establish a low-potential supplementary fund for the construction, operation and expansion of projects that will provide positive returns in the long term and are important from the point of view of infrastructure but cannot provide immediate reasonable returns financially. 

Sub-section 2 of Section 43 states that the fund may provide the necessary amount of capital and operating grants or loans for the projects as prescribed on the basis of the prescribed criteria on the recommendation of the Board. Sub-section 2 of the same section also states that the Government of Nepal may allocate the necessary amount to the fund from time to time.

Sub-rule 1 of Rule 45 of the Public-Private Partnership and Investment Regulations states that the Board shall operate and manage the low-potential supplementary fund. Sub-rule 3 states that the amount of the low-potential supplementary fund shall be used to provide grants or concessional loans for projects as per Section 43 of the Act, as per the decision taken by the government on the recommendation of the Board.

Sub-rule 4 of the same rule mentions five grounds on which the Board may recommend providing capital and operating grants or concessional loans for projects from the Low Potential Supplementary Fund. The Board may recommend for VGF under ‘a’ of sub-rule 4 of rule 45 if a project that is technically suitable but has low competitiveness from an investment perspective needs to be made financially feasible.

Sub-rule 4 of rule 45 if it is analyzed by the public body concerned and it is determined to provide capital and operating grants or concessional loans; ‘c’ of sub-rule 4 if other options for making the project feasible are not sufficient and suitable; ‘d’ of sub-rule 4 if it falls within the policies, plans and programs of the Government of Nepal but cannot be implemented immediately by the government; and ‘e’ of sub-rule 4 on other grounds specified by the Board from time to time. The rules state that the Board may recommend for VGF.

The board may recommend VGF for projects that are technically suitable but have low investment competitiveness under sub-rule 4 of rule 45, if they are financially feasible, and projects that fall within the policies, plans and programs of the Government of Nepal but cannot be implemented immediately by the government, according to sources.

Investment Board, Office Chief Executive Officer (CEO) Sushil Gyawali said that although NHPC has demanded VGF, it has not been finalized yet. “They have said that VGF of Rs 40 billion is required, what to do with it, how to do it has not been finalized,” he said, “It is a reservoir-based project. The project is not financially viable. According to the understanding, 21.9 percent free electricity should also be provided after the project is constructed. If free energy is provided, it means the project is not viable.”

The 64th meeting of the board has decided to further study the detailed report of the West Seti Reservoir-based project with an investment of Rs 160 billion. Gyawali said that an expert team is studying it. “The DPR has been finalized. "There has been a proposal that VGF is necessary based on the DPR," he said, "Our team is studying it. It is not like they will do it as soon as they say." The Investment Board meeting held on 13 Mangsir 2081 had decided to increase the capacity of Paschim Seti from 750 MW to 800 MW.

After the project did not work for a long time after receiving the construction permit, the government terminated the agreement with the Chinese company China Three Gorges International Corporation (CTGI). Immediately, during the investment conference in Chaitra 2075, the government placed the Paschim Seti project in the 'SOCASE' to be connected to SR-6 and taken forward. The Japan International Cooperation Agency (JICA) had conducted a preliminary feasibility study of the SR-6 project proposed to be built with Paschim Seti in 1993. Its detailed feasibility study was conducted by the Department of Power Development. While the JICA study showed the potential for generating up to 670 MW of electricity from SR-6, the department has stated that there is a maximum potential of only 300 MW.

On 2 Bhadra 2079, an agreement was signed between the Investment Board and NHPC Limited in the presence of the then Prime Minister Sher Bahadur Deuba to assign responsibility for the Paschim Seti and SR 6 hydropower projects. Immediately after that, the survey license was issued in Kartik 2079. The agreement was signed to prepare a DPR within two years of obtaining the survey license and submit it to the Investment Board office. Before that, the 51st meeting of the Board held on 23 Jestha 2079 had decided to assign the responsibility of preparing the development and investment blueprint for these two projects to NHPC.

The 52nd meeting of the Investment Board held on 23 Shrawan 2079 had approved the memorandum of understanding to issue the survey license. The final DPR of the project will provide information about the overall social, economic, geological, technical and environmental aspects. Similarly, the DPR will also guide on the estimated cost of the project, the time and work plan for the start and completion of the project, market certainty, construction of transmission lines, availability of financial resources, etc. After analyzing the DPR, if the project is to be taken forward, a Project Development Agreement (PDA) will be signed.