Three years after it began privatising its stake in one of Nepal's best-run hydropower organisations, the government is still at it. This could easily have been a shining example of Nepal's seriousness about privatisation. But Butwal Power Company is now emerging as a horror story of official bungling, ineptitude and delays that is turning potential investors away.

This week, the government gave it one more try. By 11:00 AM on Monday representatives of the two bidders were already waiting at the Ministry of Finance. There was still an hour to go before their bids were opened. A consortium bidding with Norway's Interkraft and the Chaudhary Group (CG) from Nepal, were both there. The opening of bids was supposed to happen on 8th August, but the ministers had failed to show up.

This time, Finance Minister Ram Sharan Mahat and Water Resources Minister Bijaya Gachhedar were in Mahat's chamber upstairs. The secretaries of water resources and finance were summoned for consultations. The Chaudhary bid was returned unopened, disqualified for failing to secure enough points. Bimal Prasad Koirala, finance secretary, read the qualifying offer: Rs730 million. Mahat then said the government was worried about the tardy pace of privatisation, and added: "We'll decide quickly on BPC one way or another."

But it may be easier said than done in these times of extreme sensitivity to allegations of corruption. The Chaudhary Group appears determined to prevent Interkraft's chances-this time by showing that it was disqualified even though while it was offering Rs 90 million more, and insinuating hanky-panky. Why else would Mahesh Raj Pant, representing the CG, be giving assembled journalists a peep at its bid of Rs820 million-70 percent cash, rest to be paid within two years secured by pledging 50 percent of the acquired shares with government.
Padma Jyoti, one of the Nepali partners in the consortium with Interkraft, said: "This is the third time we're bidding in two years and nine months we hope this time there won't be any hiccups." Mahat now has up to 13 October, the date when the bid bond expires, to decide whether or not to take the valid offer. On that also rests the future of privatisation, all of which has been effectively held up by BPC.

He can choose to seek fresh tenders-for the fourth time-or get on with the deal. The question is: will he take the Rs730 million cash or hope to get more as promised by the disqualified bidder? How sensitive will he be to a media campaign against him for taking a bid from Interkraft that is Rs 90 million less? How will Minister Gachhedar's supposed "close ties" with the Chaudharies affect the deal?
Mahat will need a very good reason to reject the Interkraft bid as that would mean going against Clause 13 (ii) in the bidding document which says: "Where only one Bid is received and is evaluated as being satisfactory technically and financially HMGN may proceed to negotiate and conclude the sale of the Sale Shares to the Bidder."

Sources in the Finance Ministry told us they have no doubt which way it should go: "Get along with the sale and show those wanting to invest in future privatisations that Nepal can be businesslike." Nepal's bilateral donors and the multilateral lenders privately agree.

Privatisation in Nepal has never been straightforward. The early divestitures were bungled largely because the government was unclear about what it wanted to do. Then it failed to effectively tell the public what it was doing and why. It then became politicised by the left and this has made privatisation a bad word. Some state enterprises were privatised amidst whiffs of corruption, and the post-privatisation experience has been mixed at best. Later privatisations like the hand over of Nepal Tea Development Corporation fared better.

BPC, however, has remained a tough nut to crack. The government has been unable to sell its 75 percent holdings for three years. Every time the deal has looked possible, it was wrecked because of the rivalry of the two main bidders: the CG with the British Independent Power Company (IPC) and a group of seven business houses which have a joint venture agreement with Interkraft Nepal, a Norwegian company.

A brief recap of the story so far:
l Both IPC and Interkraft applied for majority shares in round one. Both qualified . Interkraft submitted two prices, Rs135 per share (conditional on the power purchasing agreement with the Nepal Electricity Authority (NEA)) and Rs 90 without the PPA. CG/IPC's offered Rs109 per share, 90 percent payable in seven years.

l Government asked the companies to submit fresh bids without conditions. Interkraft offered Rs115 per share, CG/IPC offered Rs 109, same conditions. There was intense lobbying by Americal and British officials to disqualify Interkraft, while the Norwegians backed it. The government finally cancelled the bids.

l The entire process was repeated in November 2000 and was delayed by government's desire to get a PPA with NEA, which has agreed to buy power from BPC at about Rs3 per unit. Interkraft offered Rs 116 per share, CG was disqualified.

This time, the Chaudharies are said to have failed to muster the basic 75 points needed for pre-qualification. What seems to have worked against them is the fact that IPC is no longer involved, and CG has no prior experience in hydropower, which carried 40 points. The CG bid also lacked signatures on Parts 1 and 2 of the bid and did not have a covering letter. CG does not accept the disqualification. "We realised that our joint venture agreement was in the envelope with the financial bid and informed the privatisation committee accordingly," Binod Chaudhary of CG told us. "How can they give such flimsy excuses, and disregard a bid higher by Rs 90 million?"

Interkraft's partners say that is crying over spilt milk: "I can quote any amount in a bid that is not valid," says Gyanendra Pradhan, managing director of Trishakti Cable Industries, one of the eight in the group. "How can a serious bidder put in an unsigned bid when he knows fully that won't be valid?" he asked. "I can offer double his amount without a valid bid bond."

The money in the CG bid is also not what it is made out to be. "Comparing Rs 730 million and Rs 820 million is like comparing apples and organges," says Ratna Sansar Shrestha, chartered accountant. "But what is true is that today's value of the Chaudhary offer is more than that of Interkraft by Rs 30 million," he adds. That is because the deferred payment first has to be revalued in future dollar terms and then discounted to calculate the present value.

A technical committee will now review the bid and make a presentation at the Privatisation Committee. Sale can be completed only after a cabinet decision. And everybody is waiting, the donors, investors and a partially informed public, largely unaware of intricacies of modern-day business. And what must be worrying Mahat: the opposition parties are watching like hawks.

"Had it been a private company, I would take the money offered by the qualified company and walk," an independent business source told us. "Because BPC is a public entity, I know the decision will be a tough one for government, but is the right thing to do."

What the two are fighting over is a company whose privatisation could reset the future thrust of electricity generation and management in Nepal. BPC is a company that already has experience selling directly to customers and could serve as competition to the state-monopoly NEA whose inefficiencies are reasons for today's high tariffs. BPC is also a business already operational, whose efficiencies can be improved through proper management. Its other investments serve as icing on the cake: particularly the Khimti project.

The replacement cost of BPC is about Rs1.18 billion (depreciated) and is among those companies that still make a profit, even though the returns have been sliding after the privatisation process began. The price offered for BPC factors the decreasing returns from its power sales and other risks, including political instability and the Maoist insurgency.

The BPC bundle includes Andhiknola 5.1MW in Syangja and Jhimruk 12MW in Pyuthan. Andhikhola had cost $5 million and Jhimruk $20 million to build, and both have 50-year licenses for power production and sale. BPC owns about 14.9 percent of stock in Himal Power Limited, the promoters of Khimti, 20 percent in Hydrolab P. Ltd and 48.6% in Nepal Hydro & Electric P. Ltd. Last year BPC had 13,171 consumer connections.

Despite that BPC books of the past three years-about the same time talk about its privatisation began-has been on a downslide: Return on investment slipped from a little over 14% in 1997/98 to about 11% in 1998/99. Similarly the return on equity slid from 13% in 1997/98 to about 9% in 1997/98. And earning per share came down from a little over Rs20 to Rs15 in the same period.

Interkraft's Nepali partners say they are not sure if the Norwegians will bid with them again should there be a fourth round. Interkraft had wanted majority control in the first and second rounds, that has come down to 15 percent in the third.
"In the first two rounds we had to negotiate hard to get them to give us more shares, in the third time we had to plead them to stay on," says Pradhan of Trishakti Cables. "Unlike us they cannot keep aside money for investing in a project that takes so long to materialise."

So for now, it is wait-and-see. Interkraft Nepal and partners argue the government's best choice would be to take the money and move on. CG would like another chance. The ball is in Mahat's court.