Capital budgeting; ARR/ROE; attract private sector

Capital budgeting decision

Capital budgeting is the process of planning, evaluating and selecting long-term investment projects whose benefits come over several years (such as a new plant, road or building), by comparing the cash outlay with the expected future returns. The capital budgeting decision is the decision to accept, reject or rank such investments on the basis of their expected cash flows and return.

ARR or return on equity

Accounting rate of return (ARR) (also return on investment or return on equity) measures the average annual accounting profit as a percentage of the investment.

$$ARR = \frac{\text{Average annual profit after tax}}{\text{Average investment}} \times 100, \qquad \text{Average investment} = \frac{I_0 + S}{2}$$

Accept the project if ARR is more than the minimum required rate. It is simple and uses accounting data, but it ignores the time value of money and uses profit instead of cash flow. Return on equity (ROE) is similar: net profit after tax divided by shareholders' equity.

Example: investment Rs 100, salvage Rs 20, average profit Rs 12 gives average investment = 60 and ARR = 12/60 = 20%.

Measures the Government should take to attract the private sector in hydropower

1. Keep a stable, clear policy and law (Electricity Act, Hydropower Development Policy) that will not change suddenly.
2. A one-window system for licence, EIA, land and approvals, to reduce delay.
3. Bankable PPAs with fair tariff, annual escalation and payment guarantee by the Nepal Electricity Authority; a clear power export policy.
4. Transmission lines and access roads built by the government or shared in time.
5. Tax incentives: tax holiday, reduced royalty in early years, VAT and custom duty relief on equipment.
6. Easy financing: concessional long-term loans, hydropower bonds, a currency-risk hedging scheme and guarantees from the government.
7. Land acquisition and security support, and help with local community issues.
8. Risk-sharing: support for geological, hydrological and political risk, with insurance schemes.
9. Transparent licensing and protection of investors' rights, with dispute settlement.
10. Local benefit sharing (royalty to local government and shares to locals) to reduce local opposition.