A recent study by International Finance Corporation (IFC) revealed that many poor rural households were borrowing money at high interest rates or selling primary assets to buy local shares in hydropower projects.
Such investors often have unrealistic expectations of returns and are unclear on the risk of loss, the private sector arm of the World Bank Group said in its analytical report. For this reason, demand for local shares continues to grow despite a fall in value since their peak in 2014, according to IFC.
Although the multilateral lender has termed the benefit sharing policy that allows communities to invest in hydropower projects through the purchase of local shares ‘innovative’, it has also recommended more community education and improved regulation to maximize opportunities for investors while protecting them from undue risk.
The government requires hydropower developers to offer up to 10 percent of their shares to communities affected by the project. According to the report, in the last three years, more than $10 million was raised from the project-affected communities alone. As the country’s goal is to develop 10,000 MW in the next decade, as much as $439 million in equity could be raised from project-affected communities alone.
The study—Local Shares: An In-depth Examination of the Opportunities and Risks for Local Communities Seeking to Invest in Nepal’s Hydropower Projects—also found that the investment model offers 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 works, and a lack of effective safeguards to reduce risk to investors. This is especially true for women and others who are socially, economically and culturally disadvantaged.
“The comprehensive consolidation of this report is very timely and will hopefully enable informed discussions at the policy level to improve and strengthen the local shares mechanism as a viable model of equity participation involving local people,” said Kulman Ghising, managing director of the Nepal Electricity Authority, the state-owned power utility. Among the study’s recommendations are simplifying financial information to be more easily understood by non-experts; 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,” said Wendy Werner, IFC Country Manager for Bangladesh, Bhutan and Nepal. “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.”