Hydro Power Development Linkages Indra

Hydropower Development Linkages Indra Kumar Maharjan [email protected]

1. Introduction Energy is the basic necessity for survival. Energy is one of the most essential factors for economic development. The per capita electricity consumption is considered as yardstick of economic development. Nepal is a developing country and the pace of development is determined by the efficient use of energy. In other words the demands of energy, the consumption of energy, are the indicators of the economic growth of the country as it is directly linked with other factors of economic development. Hence we consider a) energy as a source of environmental stress, b) energy as a principal motor of macroeconomic growth, and c) energy as a prerequisite for meeting basic human needs. These three dimensions correspond to the three dimensions of the usual triangle of sustainable development: environmental, economic, and social. There is a clear linkage between energy and each of the three dimensions of sustainable development.

Environmental (Energy is a major source of Environmental Stress)

Economic

Social

(Energy is a key motor of Macroeconomic Growth)

(Energy is a principal prerequisite for basic human needs)

Figure 1: Energy and sustainable development: Deep linkages

Nepal begun to realize the economic potential of hydropower only after 1950s.The government to Nepal promulgated the hydropower policy 1992(amended in 2001) and related laws to promote private sector investment in the hydropower development. Some innovative approaches have been taken to reduce the

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risk and uncertainty and encourage local banks, entrepreneurs. Today, there is a growing consensus that local stakeholders should share the benefits of such hydropower projects in addition to being compensated for the inevitable environmental and social costs. The concept of sharing of benefits is still maturing and a more flexible model needs to be explored in the days to come. Today the nation has emphasized the role of electricity in contributing towards the primary purpose of poverty alleviation through people’s participation. But the contribution made by each project to the national economy is still an undermined issue. These issues make us realize the need to have clear understanding on hydropower development linkages. Nepal has no other fossil fuel sources so energy generation through hydropower is the only available option. Hydropower projects are mainly constructed to quench the growing energy demand of the nation. With the surging demand we have very less time for a detail analysis about the impacts of the project on various economic and non economic sectors. So in order to achieve maximum benefit from a project all linkages should be analyzed thoroughly. The economy of the nation and the livelihood of the people should become better after the project is being accomplished. The benefits of the projects are basically determined in terms of percolation into the economy or how much benefit seeps into the system with the commencement of the project. The amount of benefits that trickle down into the economy or absorbed by the economy depends on linkages of the project to the economy. We have various types of linkages namely: 2. Types of Linkages Backward Linkage: This is described as the benefits that come along with the construction of the project. This leads to employment generation, increased industrialization, capital formation, capacity enhancement and increase is foreign exchange. Infrastructures such as roads and transmission line are constructed and ancillary industries and services may be promoted. To achieve this, use of local resources is must and national economic picture must be viewed in order to find the marginal supply that determines the backward linkage. Forward Linkage: The benefits achieved due to the use of electricity are considered here. The local use of electricity is must in order to achieve forward linkage. The results may be employment generation, better livelihood of the people, industrialization, environmental improvement etc. All these benefits achieved have multiplier effect i.e. the effects may be found in various sectors that are not directly benefited by the project. The effects are multiplied as they flow. Investment Linkage: Hydropower projects require huge investments. The benefit from these investments is considered as investment linkage. The return on investment assists in the increment of purchasing power of the investors, some portion of the return goes into the saving with the greater possibility of reinvestment. The increment in purchasing capacity benefits the economy as a whole. But to achieve this, the investment should be done by local investors. Fiscal Linkage: It is considered as the benefits to government treasury through royalty, rates and taxes and downstream benefits such as irrigation, flood control, navigation, drinking water, watershed improvement and industrial use. The project needs to pay certain royalty and taxes to the government which is surely going

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to boost the economy of the country. No mechanism has been devised to capitalize downstream benefits from India till date.

Royalty

Rates &Taxes

Employment

Ancillary Industries and Services -Construction materials -Services -Plant & Equipment Infrastructur e Development -Road -Transmission lines

Downstream Benefits

Industrialization

FISCAL LINKAGE

LOCAL NATURAL RESOURCES

BACKWARD LINKAGE

HYDROPOWER PROJECT

LOCAL LABOR & SKILLS

LOCAL CAPITAL

Environment improvement

INVESTMENT LINKAGE Increase in FOREX reserve

Increased Purchasing power

FORWARD LINKAGE

-Agriculture -Industry -Transport -Tourism -Health -Education Infotainment -Domestic

LOCAL USE

Capital formation Capacity Enhancement

Capital Formation

Figure 2: Types of Linkages

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3. Conclusion All these linkages are interrelated with each other. The combination of all these linkages contributes to the national economy and can be seen as the total benefit of a particular project. The use of local natural resources, local capital, local labor and skills and the local use of electricity are the key determining factors. The absorption capacity of economy is directly linked to backward economy since the major portion of the project is the construction phase. It is crucial to distinguish between the apparent absorption and actual absorption in order to clearly visualize the backward linkage. As most of the materials needed for the project are not available in the country, exemption of import duties results in no backward linkage. With no backward linkage, a vicious cycle starts with no other significant linkages. If the generated electricity is exported, then there is a total absence of the forward linkage. This is even dangerous with the exemption of import duties as it makes the initial investment cheap, the results is cheap electricity and this cheap electricity is exported, then we have neither forward linkage nor revenue. This is even worse if the exemption on income tax is given. If the investment on the project is foreign, then investment linkage disappears. The revenue is lost if the exemption on income tax is given. There will be neither capital formation nor increase in purchasing power and savings. With the low royalty and rates and taxes and no benefits achieved from India for downstream benefits, the fiscal linkage has less contribution in the economy. So a best project with all linkages to occur use of local natural resources, local capital, local labor and skills and the local use of electricity must. This will have a maximum percolation in the economy of the country. Without all these factors, the project is considered as not beneficial in terms of absorption by economy with none of the linkages functioning. If the investment in any project results in the increase in Gross national Product (GNP), it can be said that all linkages are functioning properly.

References Poudel, Bharat Raj. (n.d) Innovative Approaches for Hydropower Development in Nepal, Winrock International, Nepal. Shrestha, Ratna Sansar. (2007) Slides for Financial Aspects of Engineering Techniques, Kathmandu University, Kavre. Suarez, C.E. (1995) Energy needs for sustainable development: Energy as an instrument for socioeconomic development, in T.B. Johansson and J. Goldemberg (eds.) Energy for sustainable development: A policy agenda, United Nations Development Programme, New York, pp. 18-27. UNDP (2006) Human development report 2006, United Nations Development Programme and Oxford University Press, New York. WCD (2001) Dams and development: Report of the World Commission on Dams, Earthscan Publishers, London.

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