The government has decided to provide Rs94 billion as viability gap funding (VGF) for the development of the Budhi Gandaki Hydropower Project with domestic resources. 

A Cabinet meeting held on February 9 decided to issue the grant which is equivalent to around one-third of the project’s estimated cost. VGF is provided to important infrastructure projects that may not be financially feasible. 

Budhi Gandaki, a 1,200 MW storage type hydropower project, is located in Dhading and Gorkha districts in central Nepal. The estimated cost of the power plant is $2.6 billion (approximately Rs270 billion). Construction is expected to take eight years. 

Dinesh Kumar Ghimire, spokesperson for the Energy Ministry, said the Cabinet had informed the ministry about the decision. “However, we are yet to receive a formal letter from the Prime Minister’s Office,” said Ghimire. “Once we receive the formal letter, the ministry will initiate the project development process and look for other sources of funding.”

Recently, a report prepared by the National Planning Commission (NPC) had suggested to the government to provide gap funding covering around one-third of the project’s development cost. The NPC submitted the report to former energy minister Kamal Thapa who took the proposal to the Cabinet.

If the project is built through a special purpose vehicle, the government may provide VGF of Rs94 billion to the developer, according to the NPC report. This money is needed to acquire land for the project and resettle locals who will be displaced by the project. If this amount is deducted from the project cost, the developers will have to invest only Rs176 billion. This will also raise the return on the investment, according to the report.

The NPC started looking for implementation and funding modalities for the construction of the Budhi Gandaki Hydropower Project after the Sher Bahadur Deuba-led government terminated the memorandum of understanding signed with China Gezhouba Group Company to build the scheme under the engineering procurement construction and financing (EPCF) model.

After cancelling the agreement with the Chinese company, the government decided to build the project using domestic financial resources via state-owned Nepal Electricity Authority. Subsequently, a committee was formed under NPC Vice-Chairman Wagle to look for financing options to build the power plant. 

With a new government in place under the leadership of Prime Minister KP Oli, it remains to be seen whether it will give continuity to the previous administration’s decision. Oli had publicly criticized Deuba’s decision to scrap the memorandum of understanding with the Chinese company, and had pledged to reinstate the deal after becoming prime minster.