Harnessing Nepal’s Hydropower Potential for the Benefit of All

In Nepal’s rural communities there are few opportunities to invest for the future beyond land and livestock. That’s why the purchase of ‘local shares’ in hydropower projects has been such a hit, especially among women and other marginalized groups. However, despite strong demand, investors often face undue risk because of a lack of education and safeguarding regulations.

Nepal has led the way in benefit-sharing with a law that gives communities a constitutional right to invest in hydropower companies developing a project in their area. To date, 17 companies have issued local shares, with over $10 million in equity raised in the last three years. With a goal to develop 10,000MW in Nepal in the next ten years, there’s the potential to raise as much as $439 million in equity from project-affected communities alone.

For poor rural people, it’s not only an opportunity to take ownership of development in their communities, but also a chance to dream of something more for their families. “Investment in shares was very beneficial for me,” according to a resident of Rasuwa who purchased shares in the company that built the Chilime Hydropower Plant in northern Nepal. Unlike most hydropower projects, it was already generating health profits and distributing dividends when local shares were made available to investors. “I sold all my shares and bought three ropanis of land,” he said. “Now I am building a house as well. I believe that shares provide us great security as we can sell them when we want and use them to fulfill our needs.”

Many women are investing too, giving them a more active financial role in their families. “I was 16 years old when I got married,” says one woman from Ilam District. “Shares in Sanima Mai [Hydropower Plant] is the first asset I ever owned in my name. My husband and I have an equal amount of shares. I feel proud of it.”

Despite the enthusiasm for local shares, the reality is not quite as bright. According to the IFC study Local Shares: An In-Depth Examination of the Opportunities and Risks for Local Communities Seeking to Invest in Nepal’s Hydropower Projects, only three projects have paid dividends so far, and the value of local shares across the market has fallen since 2014.

The study found demand continues to grow because many investors have unrealistic expectations for profit, and a lack of understanding of the concepts of risk and return in general. “Shareholders are not really investing long term, they are just seeking a short-term premium,” according to Kumar Pandey, Vice President of the Independent Power Producers' Association of Nepal. “But not all hydro projects are the same: risks and returns vary.”

Pandey points out that risk is very high at the beginning of a project, and that investors need to be sure they can afford to wait for a return. In some cases, already vulnerable families have sold assets like gold and farm animals or taken loans to buy shares, only to find themselves in debt due to project delays or cancellations.

The IFC study, supported by the governments of Australia and Japan, makes several recommendations on how policy makers and developers can address these gaps to try to ensure that the huge potential benefits of hydropower development in Nepal are shared by all. These include more guidance for developers on how to implement local shares, increased investor education, the creation of low-cost financing mechanisms, increased use of mobile phone technology in trading, and improved government regulation.

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