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Hydropower Development Linkages

Indra Kumar Maharjan

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.

(Energy is a major source of
Environmental Stress)

Economic Social
(Energy is a key motor of (Energy is a principal prerequisite for
Macroeconomic Growth) 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

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

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

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

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

Royalty Rates &Taxes Downstream Benefits

Employment FISCAL LINKAGE Industrialization


and Services -Agriculture
-Construction -Industry
materials -Transport
-Services -Tourism
-Plant & -Health
Equipment -Education
Infrastructur Infotainment
e -Domestic


Environment formation
Increase in Enhancement

Increased Purchasing power Capital Formation

Figure 2: Types of Linkages

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

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.


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