Analysis of Contractual issues in Hydropower Construction

of Nepal

(Er. Abhushan Neupane)

(The Author is a Civil Engineer from Nepal, practicing hydropower development and
management. He has extensive experience in Procurement and Contractual Management
of Hydropower projects in Nepal. He had worked in different Contract Management
positions in Upper Tamakoshi HEP-456 MW, Super Dordi HEP-54 MW & Upper Trishuli I
HEP-216 MW. He currently serves as Technical Team Leader for Hydro Solutions Pvt. Ltd.)

Abstract

Nepal is blessed by enormous hydropower potential with more than 43,000 MW of Techno-
economic potential. However, as of 2021, Nepal has only a 1998 MW installed capacity.
But, the story is going to change very soon as there are more than 220 hydropower projects
with an installed capacity of more than 7000 MW currently being constructed. Thus, it is
high time that the players in this industry shall be acquainted with the different contractual
issues in Hydropower construction in Nepal. Adequate exposure, practice, and research
need to be provided in this sector such that the overall economic development of the
country could be done by skilled manpower in the Project Contract Management area.

Keywords

Hydropower, Contract Management, Unforeseeable conditions, Risk Mitigation

1. Hydropower Scenario of Nepal

Nepal is a landlocked country in South Asia and is surrounded by China and India. It is
located in the Himalayas and contains eight of the world's ten highest peaks. There are lots
of perennial rivers flowing from the North to the Southern flat planes, making the Country
ideal for Hydropower development on a massive scale.  

The government system is a federal democratic republic; the chief of state is the president,
and the head of government is the prime minister. Nepal has a traditional economic system
in which the majority of the population is engaged in agriculture, and the allocation of
available resources is made based on primitive methods.
However, Nepal is blessed with significant hydropower resources.

According to the UGS website(Hydroelectric Power Water Use | U.S. Geological Survey
(usgs.gov), online retrieved date 120722), Hydropower is a form of renewable energy that
uses the water stored in dams, as well as flowing in rivers to create electricity in hydropower
plants. The falling water rotates the blades of a turbine, which then spins a generator that
converts the mechanical energy of the spinning turbine into electrical energy. Hydroelectric
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power is a significant component of electricity production worldwide. Regardless of the
exact mechanism behind each hydropower source, the basic principle of hydropower is that
we can use moving water to spin turbines and generate electricity. 
The driving force behind most hydropower applications is the water cycle. Water
evaporating from rivers, lakes, and oceans condense in the atmosphere and returns to the
surface of the earth as precipitation, which flows through streams and rivers. This moving
water contains energy that can be harnessed to generate hydroelectricity by spinning
turbines. A typical hydroelectric plant brings in flowing water through a pipe (known as a
penstock) that funnels the water to turbines. This flowing water forces the turbines to spin a
generator and produce usable electricity. 
We can also harness hydropower from sources like the tides (tidal power) and ocean waves
(wave energy). These sources don’t rely on the water cycle directly; rather, tidal power and
wave energy come from the gravitational pull of the moon and wind blowing across the
ocean’s surface, respectively.
(https://www.energysage.com/about-clean-energy/hydropower/, retrieved date 120722)
Nepal is rich in hydro-resources, with one of the highest per capita hydropower potentials in
the world. The estimated theoretical power potential is approximately 83,000 MW. However,
the economically feasible potential has been evaluated at approximately 43,000 MW. As per
the NEA website, the peak load on 12 th July 2022 is 1688 MW in INPS, while the production
by NEA is 10647 MWH, Subsidiary 12922 MWH, and IPPs 18772 MWH. (NEPAL
ELECTRICITY AUTHORITY (nea.org.np), retrieved date 120722). According to the
Hydropower Status report 2022, prepared by the International Hydropower Association, in
the year 2021 Nepal has added 684 MW of installed capacity ranking the second position in
the South and Central Asia region after India. According to the same source, Nepal has an
installed capacity of 1988 MW in the year 2021. ( www.ich.no, retrieved date 120722)

Although Nepal can export its Wet energy during the monsoon, it still relies on imports from
India during the dry seasons. The majority of projects owned by the IPPs are of Run of the
River (RoR) technology, which is very seasonal since nearly only 40% of design discharge
is available in the Nepalese river in the dry season, while at present only operational
storage project is Kulekhani Storage project of capacity 60 MW. No Pumped hydro projects
are currently being constructed in Nepal.

2. What is Contract Management?

A construction management contract is a legally binding agreement between the project

owner (referred to as the principal) and the Contractors where the Contractor is charged
with the responsibility of engaging with the sub-contractors and supervising the construction
while providing the owner with a warranty as to the quality of the work. There are four major
types of construction contracts. These specific types of contracts are determined by how the
owner makes disbursements to the contractor. The types of Contracts are:

(a) Lumpsum/Turnkey (b) Cost reimbursable (c) Unit Price (d) Short forms (Time and
Material) & quotations

3. Types and Forms of Contract used in Nepal

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In Nepal generally, 2 approaches adhere when selecting the Contract Forms, firstly the
common form in practice is the use of Standard Bidding Documents used by the Public
Procurement Monitoring Office of Nepal (PPMO). PPMO has published several standard
bidding and consulting documents. The project Proponent can choose the right document of
its choice and edit it directly to the template SBD prepared by the PPMO.

While another common approach is the use of the FIDIC rainbow suite of Contracts. The
major FIDIC form used in the Nepalese context is the Red book for the Construction works
designed by the Employer, which is generally used for Civil construction works. The Plant
and design book also referred to as the Yellow book is used for Electromechanical,
Hydromechanical, and Transmission line components. Another approach that is adopted for
Turnkey projects is Fidic Silver Book, which is generally designed for Lumpsum Turnkey. All
of the above forms are available in either the 1999 edition or recently 2017(second edition)
editions. However, for a modern approach to dealing with underground works or works
encountering uncertainties, FIDIC has just published the FIDIC Emerald book 2019, which
can be used in conjunction with Geotechnical Baseline Reports, for our other projects in the
pipeline.

Additionally, the projects utilizing the funds from multinational donors use the Multinational
Development Bank Harmonized edition 2010 of FIDIC. For all of the Fidic standard forms,
the project proponent can introduce Particular conditions of the Contract, matching the
exact construction scenario of the project.

4. Hydropower Construction status in Nepal

According to the investopaper journal ( www.investopaper.com), as of 18 Feb 2022, there

are 220 ongoing hydropower construction projects above 1MW in a different phase in Nepal
with a combined production capacity of 7110.23 MW.

5. Major contractual issues in Nepal

There is some Hydropower Project in the Construction phase at present in Nepal. The
projects which are ongoing in construction are suffering from a different kind of Contractual
problem. This paper tries to analyze in general, the Contractual problems faced by
Construction ongoing Hydropower projects in Nepal, which are as below:

i. Unclear Contractual documents:

The Documents like the technical specification, conditions of contracts, and drawings are
unclear to cater to the contractual problems. Some of the reasons are, roughly prepared
and signed without a thorough review, and some of the clauses related to compensation
and payment to the other party are created on the biased footing

ii. Payment disputes:

As hydropower projects are often associated with high construction costs, it is a general
tendency in Nepal to provide payments to the Contractor late, sometime creating many

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issues related to severe cash flow problems. In addition, the Contractor always claims for
more than what it has performed. Thus, the Client/ The Consultant wants to delay or
decrease the items to be certified. Furthermore, the timing of payment is usually prolonged
by the clients citing different reasons like their issues with Financiers and Shareholders.

iii. Changed circumstances during working

As everybody knows, the circumstances anticipated during the project planning, designing,
and Contracting changes during the construction of the Project. However, due to improper
investigations and lack of use of modern knowledge and experimentations the original
planning before construction changes significantly during construction. The changed
circumstances often require lengthy Variation order procedures. The Approval and payment
are often laden with difficulties from different watchdogs and authorities

iv. The encounter of Unforeseeable conditions:

Nepal is a mountainous country, with rugged terrain and varying geology. The project
proponents have limited funds for geological investigation and subsequent research and
analysis. Thus, Underground works are often encountered by Unforeseeable conditions
during Construction. Since thorough investigation before construction and tendering are
lagging by the Client, the subsequent design changes are lengthy and often encountered
different risks. Hence, proper Geophysical, Seismic, Core drilling, and hydraulic modeling
shall be added as a ritual before commencing the construction works, to minimize such
Construction and Contractual risks.

v. The contractual ability of the Parties under Contract:

Since the Construction industry in Nepal is moving at a very slow pace, there is yet no full
professionalism developed with the Contractual parties. Hence, due to the limited capacity
of the Consultants and Clients, the financial position of the Contractual party is not
assessed properly and The volume of works in Hand is not properly estimated. The
situation is even getting worse due to an incomplete assessment of the Technical and
Managerial experiences of the parties and proper understanding of the Litigation condition
of the Contractor. It is high time for the stakeholders in the Construction industry of Nepal to
train their human resources insufficient capacity, such that they can properly prepare,
assess and handle the Contractual problems in the international standard.
 
vi. Force Majeure Conditions

Nepal is often associated with different types of Force majeure events like landslides,
earthquakes, floods, GLOF, and Landslide damming. Lots of construction works remain at a
halt for a prolonged period due to such natural disasters. It is often very difficult to resume
work after temporary demobilization due to FM conditions. The assessment of Payment of
delay due to force majeure events is very vague and needs higher contractual inputs, which
in general is often unavailable in the Nepalese market.
 
vii. Disputes and Claims Handling Mechanism

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The Construction industry often encounters various Disputes and Claims. Hence, proper
record-keeping, investigation, and assessment are needed to resolve such Contractual
problems. However, during the assessment of claims proper Protocols are not followed and
sometimes not followed properly. As the Contractor intends to claim more than an actual
loss and the client often tries to ignore the Claims from the other party; it is often very hard
to find a Win-Win compromise with our existing capabilities.

6. Solving the Contractual issues in our context

To resolve the above-stated Contractual issues and risks, firstly a thorough understanding
of Contractual documents and terms and conditions by all parties ( The Client, the
Contractor, and the Consultants ) is essential. The parties shall carry out enough pre-
construction investigations as envisaged by the Contract such that Unforeseeable risk could
be aborted to the extent possible. Undoubtedly the parties involved in the Contract
management shall have thorough and practical exposure to the contemporary contractual
problems and their amicable treatments. Last but not the least, alternative dispute resolution
like expert determination, mediation, and Dispute adjudication shall be engaged from the
beginning of the project cycle. Due attention shall be provided to mitigate the Contract risks
from the beginning of the Project Cycle.

7. Conclusion/Recommendation

Although Nepal has a large potential for hydropower development, only a fraction of it has
been exploited so far as Hydroelectricity. Although many hydropower constructions are
ongoing in Nepal, some of the major challenges like the ability to handle the Contractual
problems is not a sufficient degree; as required by the industry. Hence, it is the right time for
the stakeholders in the Construction industry of Nepal to train their human resources
insufficient capacity, such that they can properly prepare, assess and handle the
Contractual problems in the international standard.
 
References:
1. Nepal Electricity Authority website: www.nea.org.np
2. https://www.energysage.com/about-clean-energy/hydropower/ , retrieved date
120722)
3. Hydroelectric Power Water Use | U.S. Geological Survey (usgs.gov)
4. International Hydropower Association website (www.ich.no)
5. The Investo paper website ( www.investopaper.com),
6. Corporate website of FIDIC, www.fidic.org
7. Website of Public Procurement Monitoring Office ( www.ppmo.gov.np)
8. (https://www.energysage.com/about-clean-energy/hydropower/, retrieved date
120722)
9. Website of Sierra Group (https://callsierra.com/construction-management-contract/)

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