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close this book Local Experience With Micro-Hydro Technology
View the document 2. FINANCE


The lack of financial means is one of the principal factors limiting technological development and its dissemination in general. This is particularly true in hydropower development for two reasons: First, hydropower is of a capital intensive nature, which cannot be reduced beyond certain limits. Second, the benefits of hydropower in rural areas are often more on the social side.

Money-wise returns are slow, and in situations where there is open competition for capital, scarce financial resources tend to be absorbed by technologies that promise quicker returns. Commercial money therefore is likely to make up only a relatively small part of finances in all the areas of hydro development. The substantial part should rather come from sources as used for other infrastructural development projects, such as, but not limited to, the regular state budget, development funds, and bilateral and multilateral donor agencies.

Activities that will affect the long-term future of a country must be regarded as an investment which cannot be recovered in financial terms. Specific to hydro development this may include meteorological, hydrological and topographical service, potential-assessment surveys, information-processing, training and the construction of pilot plants for this purpose, and also initial financial assistance to potential equipment manufacturers and contractors. The first few items of this list are usually regular activities in the charge of a government department. Within the framework of overall priorities, these should get appropriate budget allocations.

Assistance to entrepreneurs may be in the form of grants and could well turn out to be very effective. If, for instance, a few prototypes are financed along with the provision of design blue-prints, this may result in sufficient buildup of capability, which could a manufacturer make self-supporting without having to bear the initial risk. In addition, some equipment for production and testing might be required which could be financed with a grant or a soft loan. Exactly this was done from bilateral co-operation sources in the case of the manufacturer BYS in Nepal, where in addition to finances for prototypes, equipment was provided for a testing-facility, since no national laboratory of the kind required was in existence. The result of this relatively limited input is by now a manufacturing capacity of around twenty turbine-units per year, including accessories and auxiliary items, in part replacing previous activities in general mechanical-and structural-engineering.

Persuading the concept of on the job training, financing in this area would consistently have to be included in actual projects. If such a project is of a pilot-nature or is destined to be a demonstration unit, it may be considered as a long-term investment, financed on a non-recoverable basis.

Regular project financing finally, requires a high degree of flexibility in its approach. Loans in particular should be adapted to the long-life characteristic of hydropower stations with corresponding grace periods and repayment terms. Depending on internal resources, external funding will often have to be sought in the form of grants or long-term soft loans. It is clear that in the interest of self-reliance, the portion of external financing should be as small as feasible. Whether grants or loans are desirable, will depend on the nature of the particular project. If extensive productive use of power is feasible, it may be the consumers themselves who are able to repay a loan, given a long enough period. If benefits, on the other hand, are intangible in monetary terms - in a project that is justified by its expected social impact -an outright grant-component will be more realistic than a permanent obligation of subsidising.

Local involvement in financing is very desirable and should be taken advantage of to the largest extent possible. This is apt to foster interest in efficient station-operation and management, even if the local component of overall funding is relatively small. It is obvious, however, that local participation is not possible in many cases. An uniform policy is unlikely to be satisfactory. Indeed there is no reason to treat different situations equally.

One way of generating internal funds for small hydropower development may be quoted here as a practical example: A "Rural Electrification Fund" has been established in Ecuador, supplied with money of a surtax on electricity bills for commercial and industrial consumers. Under this plan, 10 percent of the invoiced value of electricity consumed by industrial clients, with an installed load greater than 10 kW, and by commercial clients, with a monthly consumption of more than 2'500 kWh, goes to the Rural Electrification Fund. The money so collected is used by the concerned government agency for project activities, and is expected to amount to 5.6 million U.S. $ in 1981 and more than 7.5 million $ in 1982.

Such a tax seems sensible due to the fact that the industrial and commercial consumers utilise electric power to derive profits from processing goods, largely consumed in urban areas and it is just, therefore, that they should contribute in this way to the development of rural areas.

International financing agencies, with the World Bank ranking at the top, intend to make several billion dollars available for the development of energy resources in the next few years, worldwide.

Individual small hydropower stations may not be an attractive proposition in this context, so it might be necessary to seek funding for a package, comprising a number of projects. To make the formulation of such programs possible, preceding action should be in the fields of working out policy guide-lines, in institution-building and in implementing pilot-scale projects.

In conclusion, it seems credible to state that the development of small hydropower has a great potential in aiding rural development. It is technically and economically feasible in a great number of situations and socially desirable. Where potential exists, it is perhaps the best alternative in more than one sense, and there is no reason why this sector should not invoke substantial efforts from the side of governments and local institutions, and interest from private, national and international development agencies. Basic technology required for a plan of action is mature and available today.