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Published by Winrock InternationalPolicy Analysis in Agriculture and Related Resource
Management
A Review of the
Biogas
Programme in
Nepal
Bishnu Bahadur Silwal
RESEARCH REPORT
SERIES NO. 42
NOVEMBER 1999
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A REVIEW OF THE BIOGAS PROGRAMME
IN NEPAL
BISHNU BAHADUR SILWAL
Winrock International
Policy Analysis in Agriculture and Related Resource Management
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Bishnu Bahadur Silwal is a freelance agricultural and rural development consultant.
Views expressed herein are the personal opinions of the author and do not necessarily
reflect those of HMGN, Ministry of Agriculture/Winrock International, or either of the
donor agencies supporting the Program (viz USAID and the Ford Foundation).
Winrock International acknowledges the generous help received from Mr Felix EW ter
Heegde, Programme Manager, BSP/SNV-Nepal in preparing this report.
Price: Rs 100
Winrock International
Policy Analysis in Agriculture and Related Resource Management
PO Box 1312, Kathmandu, Nepal
Telephones: 255109/255110/254687
Fax: 977-1-262904
E-mail: winrock@wlink.com.np
Anil Shrestha, Language Editor
Printed in Nepal at Mass Printing Press. November 1999.
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TABLE OF CONTENTS
List of Tables v
List of Maps V
List of Figures v
List of Abbreviations and Acronyms vi
I. HISTORICAL DEVELOPMENT AND CURRENT STATUS
OF BIOGAS IN NEPAL 1-2
Historical Development 1
Current Status of Biogas Programme in Nepal 2
II . ROLE OF TA-SUPPORTED BIOGAS SUPPORTPROGRAMME IN DEVELOPMENT OF BIOGAS IN NEPAL 2-11
Advent of External Support for Biogas Programme 2
Biogas Support Programme 7Advent of Biogas Support Programme 8
BSP: Project Design 8
Current Status of the BSP: Evaluation Findings 10
III. ROLE OF PRIVATE SECTOR IN BIOGAS
DEVELOPMENT IN NEPAL 12-17
Entry of Private Sector Construction Companies 12
IV. BIOGAS QUALITY CONTROL:
CURRENT PRACTICES AND ITS SUSTAINABILITY 17-21
Current Practices 17Aspects of Quality Control 17
Quality and Uniformity of Design 17
Quality of Construction 17
Quality of Operation and Maintenance by the Users 18
Present Practices of Quality Control 18
Agreement of Standard 18
Agreement on Penalty 18
Process of Quality Control 1:9
Sustainability 20
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V. SUBSIDY, ITS ROLE IN PROMOTION OF BIOGAS PLANTS,
PLAN FOR PHASING AND POSSIBLE EFFECTS 21-25
History of Subsidy to Biogas Plants 21
Economic Rationale for the Subsidy 22
Impact of the Subsidy on Installation of Plants 23
Plan for Subsidy Phase-out 24
Possible Effects of the Phase out of the Subsidy 25
VI. FINANCING OF BIOGAS 25-27VII. INSTITUTIONAL ARRANGEMENTS 28-32
Biogas Companies 28
Weaknesses and Problems of Companies . 29
Association of Biogas Companies 30
VUI. IMPACT OF BIOGAS PLANTS 32-35
IX. SUMMARY AND RECOMMENDATIONS 35-40
Summary 35
Recommendations 39
Annex Number of Biogas Plants Installed up to 31 August 1999 41-42
Annex List of Recognized Biogas Companies in Nepal
BIBLIOGRAPHY 43-44
Winrock International Policy Analysis in Agriculture and Related Resource Management List
of Publications 45-49
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LIST OF TABLES
Table 1: Trend in the Share of the Private Sector 9
Table 2: Classification of the Companies and their Corresponding Shares in the
Total Plant Construction in FY1997/98 10
Table 3: Market Shares of the Companies Participating in the BSP 11
Table 4: Biogas Plants Installed under Various Subsidy Schemes by Year t9Table 5: Subsidy Rates for 1999/2000 (2056/57) 20
Table 6: A Typical Costs Structure Trend for 10 M Biogas Plant
(1991/92-1996/97) 22
Table 7: Finance and Financing Sources for the Biogas Plants Constructed under BSP
22
Table 8: Percentage of Solely-Equities Financed and Equities and Loan
Financed Plants 23
Table 9: Trend in the Entry of Companies 24
LIST OF MAP
Map: Biogas Plants Installed in Nepal by Districts 3
LIST OF FIGURES
Figure 1: Annual Biogas Plant Installation 4
Figure 2: Cumulative Biogas Plant Installation 5
Figure3: Number of Biogas Companies in Nepal 6
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LIST OF ABBREVIATIONS AND ACRONYMS
ADB Asian Development Bank
ADBN Agricultural Development Bank, Nepal
AEPC Alternative Energy Promotion Centre
AEPDF Alternative Energy Promotion and Development ForumBSP Biogas Support Programme
cu.m. Cubic Metre
DGIS Directorate General for International Co-operation
DM Deutsche Mark
EIRR Economic Internal Rate of Return
FIRR Financial Internal Rate of Return
FY Fiscal Year
GGC Gobar Gas Company
ha hectare
HMGN His Majesty's Government of Nepal
KfW Kreditanstalt fuer Wiederuafbau (German Financial Cooperation)It litre
MT Metric Ton
MTR Mid-term Review
NBE Nepal Bank Limited
NBPG Nepal Biogas Promotion Group
NGL Netherlands Guilder
NGO Non-government Organization
O&M Operation and Maintenance
R&D Research and Development
RBB Rastriya Banijya Bank
Rs Rupees
SFDP Small Farmer Development Programme
SNV Netherlands Development Organization
TA Technical Assistance
TCN Timber Corporation of Nepal
UMN United Mission to Nepal
UNCDF United Nations Capital Development Fund
UNDP United Nations Development Programme
UNICEF United Nations Children's Fund
USA1D United States Agency for International Development
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A Review of the Biogas Programme in Nepal
I. HISTORICAL DEVELOPMENT AND
CURRENT STATUS OF BIOGAS IN NEPAL
Historical Development
The first biogas plant in Nepal is believed to have been installed in Godavari School in
the year 1955- After that, a few plants were installed on an experimental basis in various
parts of the country. Following the energy crisis of 1973, biogas drew some attention of
the authorities concerned and in the fiscal year (FY) 1975/76a year designated as the
Agriculture Year, some 290 plants were installed with interest-free loans from the
Agricultural Development Bank of Nepal (ADBN). Encouraged by the results, the
authorities established the Gobar Gas Company (GGC) as a subsidiary of the ADBN and
the Fuel Corporation of Nepal in 1977, with a mandate to promote biogas technology in
the country. Subsequently, a need for offering incentives to the plant owners was
realized. This led to the provision of a subsidy of Rs5,500 per plant in FY1982/83 as part
of a special rice programme in four Tarai districts.
Planned efforts were introduced from the Seventh Five-Year Plan (1985-1990), which
had a target of 4,000 plants, and provisioned 25per cent subsidy on investment costs and
50 per cent subsidy on bank loans. The programme, however, was not regularized, and,
as a result, the subsidy was provided only during the last two years of the plan period.
The GGC was somehow able to construct 3,862 plants during the plan period. With the
restoration of democracy in 1990, biogas was able to draw greater attention of the
authorities, who .by that time had recognized the importance of the sector and werecommitted to initiating measures to accelerate the pace of plant installation. As the first
step in this direction, the provision of a consistent subsidy was considered to be an
appropriate tool. So, in 1991, His Majesty's Government of Nepal (HMGN) announced a
subsidy scheme, which has been in effect until now. The rate of subsidy, initially, was
Rs7,000 for the Tarai and Rsl0,000 for the hills. Since 1995/96, a subsidy of Rsl2,000
has been added to the hill districts whose headquarters are not connected with road.
From FY1999/2000 onwards, the subsidy rates have been reduced by Rs 1,000: to
Rs6,000 in the Tarai, Rs9,000 in the hills and Rs. l 1,000 in the remote hills. However,
the 15 m3 and 20 m3 plants are not eligible for the subsidies.
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To farther promote plants of smaller sizes, an additional subsidy of Rsl,000 has been
offered for 4 m3 and 6m3 plants.
Current Status of Biogas Programme in Nepal
As to the current status ofthe biogas programme in Nepal, the following aspects arenoteworthy:
About 60,321 plants have been installed in 64 districts of the country (see map,figures 1 and 2, and Annex I).
A total of 50 companies are engaged in the installation of the biogas plants (seefigure 3 and Annex II).
The Alternative Energy Promotion Centre (AEPC), responsible for promotion andextension of all alternative energy, including the biogas, has been established.
The Biogas Support Programme (BSP), created as a part of external assistance, hasprotected the interests of the plant owners through the implementation of quality
control.
II. ROLE OF TA-SUPPORTED BIOGAS SUPPORT PROGRAMME
IN DEVELOPMENT OF BIOGAS IN NEPAL
Advent of External Support for Biogas Programme
With the increasing realization of importance of biogas as an alternative source of
energy, external sources of assistance were explored, initially for the provision of
subsidy. In this process, the first external assistance was obtained from the United
Nations Development Programme (UNDP) for the community biogas plants under the
Small Farmer Development Programme (SFDP) of the ADBN (Silwal, et al 1995).
Later, some community plants were also funded through the United Nations Children's
Fund (UNICEF), United States Aid for international Development (USAID) and United
Mission to Nepal (UMN). The first external assistance for household level biogas plants
was received from the United Nations Capital Development Fund (UNCDF), which
provided 25 per cent subsidy on the investment costs of 6 m3 and 10 m3 plants. Similarly,
an Asian Development Bank (ADB)-funded forestry project also incorporated a
component to provision subsidy for about 5,000 plants.
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.
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All these assistance offered subsidy to the biogas plant owners on their capital
investments as well as on interests on loans taken from the ADBN. These instances of
assistance, however, were characterized by irregularity and lack of concrete policies.
Biogas Support Programme
Established in 1992 as a part of the BSP project supported by the Netherlandsgovernment, the BSP is a project staffed and operated by two expatriate experts and 18-
19 trained Nepalese personnel, and is responsible for the overall implementation of the
biogas programme in Nepal.
Advent ofBiogas Support Programme
Notwithstanding the establishment of the GGC in FY1976/77 for the development of
biogas and its modest achievement in terms of number of plants installed, the progress
was considered to be far below the potential. Therefore, some concrete actions were felt
necessary. In this context, the ADBN, through HMGN, approached the Netherlands
Development Organization (SNV) for some technical assistance and, in response, the
latter made available the services of two development associates to the GGC. After
working a little over one year, the development associates in 1990 offered their
conclusions and recommendations, among which, the following highlight the present
status of the biogas sub-sector in Nepal (Van nes 1997):
Major cost reduction through research & development (R&D) was not furtherpossible without compromising on the quality of plants; and
Reduction in private costs was possible only through provision of subsidies.Although subsidies on investment costs and on interest on bank loans had been in effect
since FY1975/76, their efficacy remained questionable due to their irregularity as well asinconsistency of policy. By the end of FY1990/91, the number of biogas plants installed
in the country totalled 6,615, most of which were owned by richer farmers located in the
Tarai. Another interesting study concluded by the development associates was on the
biogas potential in Nepal (Van nes 1992). Considering the cattle and buffalo populations
and their distribution, the study estimated the technical potentiality of about 1.5 million
biogas plants in the country. This means, in the beginning of the 1990s, only 0.4 per cent
of the potentiality was exploited. Similarly, a number of studies carried out by both
individual researchers and institutions indicated a need for framing plans and
implementing projects to exploit this vast potential. As a result, the development
associates in co-operation with HMGN, ADBN and GGC, prepared a proposal, namely
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Biogas Support Programme (BSP), and submitted it in May 1991 to the Directorate
General for International Co-operation (DGIS) of the Government of Netherlands for
financial support. Thereafter, in November 1992, an agreement was concluded between
the Ministry of Finance on behalf of the HMGN and the SNV-Nepal on behalf of the
DGIS. This is considered to be a milestone in the history of biogas in Nepal.
BSP: Project DesignThe first BSP had, among others, the following long-term objectives:
Reduce environmental deterioration by substituting fuelwood and dung cakeby biogas.
Improve the health and sanitation conditions of the population by substituting thesmoke stoves by smokeless biogas stoves as well as by reducing the time spent in
collecting fuelwood.
Increase agricultural production by increasing the nutrients contents of the slurryobtained from the digester.
The total cost of the BSP was estimated at Rs492 million, of which Rs202 million was
granted by the Government of Netherlands and the rest was borne by the farmers either
in the form of equities or by borrowing loans from the bank. The first grant from the
Netherlands government was uti lized for providing technical assistance as well as
subsidies to the plant owners. The project was designed in such a way that it accelerated
the pace of biogas installation through the involvement of the existing GGC and the
ADBN in the installation of plants and in making loans to the borrowers respectively and
at the same time it allowed the participation of the various private companies willing to
construct the, plants as per the standards and norms of the project. Similarly, series of
negotiations, seminars and workshops were held with the commercial banks, specially
the Nepal Bank and the Rastriya Banijya Bank, for providing credit access to the
potent ial biogas plant owners. In order to achieve these object ives, the project was
divided into two phases. BSP I, implemented from November 1992 to July 1994, had the
following specific objectives:
Construction of 7,000 plants. Make biogas more attractive to the smaller farmers and farmers in the hills. Conduct necessary 3tudic3 to induce the participation of the private sector In the
construction of biogas plants.
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The first two objectives were met through provision of a flat rate of subsidy of Rs7,000
for the Tarai and Rsl0,000 for the hills. Higher subsidy in the hills was meant for
covering the higher transportation costs incurred in the transportation of construction
materials and appliances. The objective of participation of private sector was met by
instituting studies through consulting firms, which provided in-depth analyses of the
existing scenarios and offered recommendations (Karki, et al 1993a and 1993b). Based
on those studies, series of workshops, seminars and meetings were conducted, and
necessary arrangements were made for the participation of the private constructioncompanies. In the meantime, a mid-term evaluation carried out in May 1994 (HMGN &
SNV-Nepal 1994) offered the following recommendations:
Instead of a single GGC, the BSP should try to develop the biogas sub-sector as awhole.
More banks should be inducted in loan access. Research and standardization of biogas should be apart of the project. Training of masons and staffs of the companies and banks should be emphasized. In order to make the best use of the slurry obtained from the biogas digester,
extension work should be initiated and implemented immediately.
Monitoring and evaluation of the programmes should form an important part of the
project,
BSP II had the following objectives:
Construction of 13,200 plants. Make biogas more attractive to the smaller farmers and farmers in the hills. Support the establishment of an apex body to co-ordinate the different actors in the
biogas sector.
Encouraged by the results of Phase I and Phase II of the BSP, Phase III was designed in
1995 and proposals submitted to the governments of Netherlands and Germany. Unlike
in the past, where all the technical assistance and the subsidies were borne by the
Government of Netherlands, Phase III has been designed to involve the Government of
Germany as well. The overall objectives of Phase III of the BSP are as follows
(HMGN/SNV 1995):
Develop a commercially viable, market-oriented biogas industry. Increase the number of biogas plants by installing 100,000 additional plants during
the project period.
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Ensure the continued operation of the installed plants. Help in the production of quality gas valve, tap and lamp. Help in the establishment and strengthening of institutions related to the biogas sub-
sector for rendering sustainability to the biogas programme in the country.
An agreement was signed between the HMGN, Kreditanstalt fuer Wiederaufbau (KfW)
of German government and SNV-Nepal on 17 May 1997. The agreement laid downarrangements for the funding of the programme until July 1999. Further extension to
meet the set target is contingent upon the findings of the recently concluded evaluation
study (de Castro, et al 1999). According to the above-mentioned agreement, the funding
arrangements are as follows:
HMGN will contribute 10 per cent of the financing of investment subsidies in thefirst year of the programme (FY1996/97) and increase it by 2 percentage points
annually to reach 20 per cent in the last year of the project, ie FY2001/02.
For Part I (first three years) of BSP III, KfW will contribute up to DM14 million, ofwhich DM7.1 million will be used for providing subsidies to the plant owners and
DM6.9 million will be made available to ADBN for onlending to the borrowers for
installing plants.
SNV-Nepal will contribute up to NGL11.23 million, of which NGL8.83 million willbe used for technical assistance and the rest for providing the subsidies.
Current Status of the BSP: Evaluation Findings
A recently concluded mid-term review of Part I of BSP III has come up with the
following findings (de Castro, et al 1999):
Numerical Objective
There has been some lag in the installation of plants during Part 1 of Phase III of theBSP. As against the target of 35,500 plants by mid-July 1999, the production over that
period has been only 29,304 plants83% of the target with a lag of 6,169 plants. The
study attributed the low demand for biogas plants to the economic recession that has
been creeping for the past few years.
Size of the Biogas Plants
Invariably, all the past studies have pointed out the need to reduce the average size of the
biogas plants. Phase III has duly incorporated measures to address this objectivethe
flat rate of subsidy being one of the most effective ones in this regard. In turn, the
average size of the biogas plants is found to be decreasing. In 1990, the average size
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was found to be 12.86 m3, which declined to 9.6 m3 in 1993. This, obviously, was the
result of the flat rate of subsidy, which encouraged plants of smaller sizes, as the net
cost to the owners decreases with the decline in the size. From 1995, another strategy
adopted by the BSP to encourage plants of smaller sizes was the introduction of bonus
to the companies that constructed plants of smaller sizes. This resulted in further reduction
of the average size to 8.2 m3 in 1997. During 1998/99, the average plant size has come down to
7.39 m3
.
Technical Quality of the Plants
Quality of plants constructed under the BSP has been receiving due consideration for the overall
sustainability of the biogas programme in Nepal. Quality of biogas plants implies a package of
benefits perceived by its user in terms of the total costs incurred in its installation. The
determinants of technical quality include: (a) quality of design, (b) quality of construction, (c)
quality of operation and maintenance of the plant by the users, and (d) quality of after-sales
services rendered by the construction company. The evaluation study, based on various annual
surveys, has concluded that the design of the plan was satisfactory to 88 per cent of the users.
Similarly, 92 per cent expressed their satisfaction over the location of the plant. Regarding
the materials used in the construction of the plants, 96 per cent of the users viewed that they
were up to the standard. After-sales services provided by the construction companies were
satisfactory to 95 per cent of the users. In sum, the present quality standard fixed by the BSP is
believed to be up to the standard.
The evaluation has also pointed out that the overall success of the biogas programme has been
possible because of:
Provision and continuity of subsidy for the plant owners. Creation of a conducive policy environment for the entry of significant number of private
construction companies. .
Protection of the interests of the plant owners through the provision of quality controlof the plants constructed by the companies, including the GGC. and
Building of the institutional capability of the various actors involved in the biogasprogramme in Nepal.
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III. ROLE OF PRIVATE SECTOR IN BIOGASDEVELOPMENT IN NEPAL
Entry of Private Sector Construction Companies
Although the GGC played a pivotal role in the dissemination of biogas technology in the country,
its capacity to meet the demand was considered inadequate since not long after its establishment in
1977. Being a subsidiary of the ADBN, the only source for channelling the subsidies provided
under various programmes, the GGC, however, enjoyed a monopoly status and displayed inherent
weaknesses in its operation, especially in terms of work-force, cost of plants and flexibility in
pricing. The pace of progress that the GGC was recording necessitated some thoughts on the entry
of private companies to provide competitive atmosphere and hence explore the vast potentiality
that existed in the sub-sector. Recognizing this fact, some private companies were approaching the
ADBN for getting permission to construct plants and avail of the subsidies. What was lacking was
a mechanism to establish standards and norms to be applied to the private companies and monitortheir work in terms of design, construction, pricing, after-sales services, and repair and
maintenance. Experiences from other sectors and sub-sectors were enough to warn the illusive
nature of private sector entry in activities that lacked well-defined standards and norms. Very
often, the motive was to reap benefits from certain packages and then switch over to some other
business.
In spite of these weaknesses of the private companies, the ADBN had started issuing permission to
a couple of companies to install plants from FY1989/90 on an experimental basis. Their work,
however, was found to be flawed in a number of ways and the Bank even detected cases of fraud.
With the implementation of the BSP, however, the subsidy was effectively controlled by the BSPand it did not issue permission until the privatization studies were carried out as per the agreement
between the HMGN and SNV-Nepal (BSP 1991). An independent consulting firm carried out the
studies (Karki, et al 1993a and 1993b) and it was closely steered by a committee composed of
representatives from the ministries, departments, banks and relevant agencies.
Following the recommendations made by the studies, private companies were invited to
participate in the BSP since the beginning of BSP II. Of the various rules and regulations laid
down by the studies and confirmed by the mid-term evaluation carried out in May 1994
(HMGN/SNV-Nepal 1994), the following are the major aspects that the companies,
including the GGC, are to follow:
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Establish a standard design to be adopted by all companies, including the GGC1. Ensure the provision of trained masons for the construction. Guarantee quality appliances. Provide guarantee on structure and appliances. Submit plant completion report and annual maintenance report to the BSP. Visit the plants annually. Comply with the quota of construction based on office network and availability
of trained work-force.
The entry of the private companies, which number 50 at present, has had a positive
impact on the progress of the biogas plants. As can be seen, from a mere annual
average of approximately 400 plants constructed by the GGC since its inception to
1992/93, the numbers since the entry of private companies have averaged at
approximately 6,000. This is, indeed, a remarkable achievement of the BSP
programme. With the entry of the private construction companies, there has been a
steady decline in the share of the GGC, a para-statal organization. The market shares
of the private companies and the GGC over time are presented in Table 1.
Table 1: Trend in the Share of The Private Sector
YearCate-
goryUp to
91/92
92/93 93/94 94/95 95/96 96/97 97/98 98/99 Total
In Number
GGC 8 824 3 321 3 508 2 952 3 267 2 369 2415 2 203 28 859
Private 96 846 2 145 2 165 3 894 6018 7 454 8 844 31 462
Total 8 920 4 167 5 653 5 117 7 161 8 387 9 869 11 047 60 321
In Percentage
GGC 99 80 62 58 46 28 24 20 48
Private 1 20 38 42 54 72 76 80 52
Total 100 100 100 100 100 100 100 100 100
Sources: Van nes 1997, SNV-BSP and.
As can be seen from Table 1, the private sector has gradually built up its share in
the total plants. With a mere share of 1 per cent until 1991/92, it has been able to
increase its share to 80 per cent by the end of 1998/99. Numerically, this is a welcome
1
All the companies at present are to follow the model, namely GGC2047.
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measure. In order to explore the vast potentiality that exists in the biogas sub-sector, the
participation of the private sector is extremely important. Of the total 60321 plants
installed up to the end of1998/99, the private sector's share is approximately 52 per
cent. There are, however, certain aspects regarding the private sector companies
that need some discussion. Based on the performance index, the Annual Report 1998
(BSP 1999) has classified all the companies, including the GGC, into five categories,
ie A, B, C, D and E, The performance indicators are measured in terms of number of
plants constructed, average size of the plants, average defaults, average penalty and
feeding of the plants. For FY1997/98, the categories and the corresponding numbers
were as shown in Table 2.
Table 2: Classification of the Companies and their Corresponding Shares in the
Total Plant Construction during FY1998/99
Distribution of
Companies by Type
Percentage of Plants Constructed by the
Companies by Category
Category
Type
Number ofCompanies
Percent
Number of PlantsConstructed
Per cent of thePlants Constructed
A Very Good 18 47 8 808 80
B Good 8 21 1 402 13
C Average 4 11 445 4
D Poor 6 16 333 3
E Very Poor 2 5 57
Total 38* 100 11 045 100
Sources: BSP 1999b and BSP.
* Data for BGG Company was not available.
This analysis has been carried out to indicate the quality of the plants constructed by theprivate companies that emerged in response to the privatization efforts made by the
sub-sector. The findings also indicate as to what extent the interests of the plant
owners as well as those of the exchequers are protected. The percentage of companies
falling into the very good and good categories was 68, while that belonging to the
average was 11. Similarly, 21 per cent belonged to the poor and very poor categories.
Now, in terms of percentage of the plants constructed by these companies, the very
good and good categories together constructed 93 per cent, while the average category
shared 4 per cent. Similarly, the poor and very poor categories shared 3 per cent of
the total. Now, if average is considered as within the acceptable range, then 97 per
cent of the plants constructed by the GGC and the private companies are within the
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range of acceptance, and only 3 per cent calls for some corrective measures. Thus,
overall the performance of the companies involved in biogas can be considered to be
highly satisfactory.
Although one of the major factors attributable to the success of the biogas programme
in Nepal is the rational decision regarding its privatization (especially for the work of
plant construct ion), the rapid entry of a large number of companies rai ses somedoubts regarding their sustainability. At present, the companies are finding the
business lucrative because there are demands for the plants due to, on the one hand,
provision of subsidy and, on the other hand, the safeguarding of the interests of the
plant owners by the BSP through its quality control activities. Once the subsidy and
BSP are phased out, the companies will have to work under a perfect competitive
market, ie (a) in the absence of subsidy the demand for plants will decrease and their
corresponding shares in the market will decline; (b) in the absence of a strong
institutional mechanism to substitute the existing quality control work of the BSP,
credibility towards the mushrooming companies will diminish. In order to answer the
question: "Will all the companies working at present in the biogas sub-sector be able to
sustain their business after the subsidy and the BSP are phased out?," an attempt hasbeen made to measure their current strength in terms of their volume of business in the
sub-sector. Based on a recently concluded study (de Castro, et al 1999), it is assumed
that companies that are installing less than 100 plants per annum are either weak or
need a lot of efforts to sustain themselves. For analytical purposes, the companies that
installed less than 100 plants have been classified as small ones while those with 100-
500 plants and more than 500 plants have been classified as medium and large
respectively. The market shares of participating companies are given in Table 3.
Table 3: Market Shares of the Companies Participating in the BSP, FY 1998/99
Size of the Companies Number ofCompanies
Percentage
of
Companies
Total Numberof Construction
Percentage of
Total
Construction
500 Plants (Large) 5 13 6 453 58
Total 39 100 11 047 100
Source. BSP 1999b.
As can be seen from Table 3, of the 39 companies operative during FY1998/99, five
major companies were able to occupy 58 per cent of the market. Eighteen companies had
the market share of 35 per cent, the remaining 7 per cent being shared by 16 smaller
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companies. This shows that despite the rapid increase in the number of companies the
main business is still in the hands of about 23 companies. The study also shows that
about 40 per cent of the existing companies were not breaking even in the business.
Moreover, two companies are reported to have exited from the business. It is likely that
more will do so in the near future.
In this regard, the findings of the mid-term evaluation of Phase III, Part I (de Castro, et al1999) has classified the companies into: (a) public sector companies (GGC is the only
public sector company owned by ADBN) (86% share) and Timber Corporation of Nepal
(TCN) (14% share); (b) private sector companies - (i) big players, (ii) small and medium
players, and (iii) 'fly-by-night operators'.
/. Public Sector: The GGC is the oldest company in the sub-sector. Its share has
gradually been decreasing over time (see Table I). The company has been passing
through a number of problems, including political interference, over staffing, high staff
turnover and lack of staff motivation.
2. The Big Players: This includes a small group of companies that have demonstratedrapid growth in their volume of business. This group, however, lacks required
managerial capability, as 'technicians' previously working with the GGC own most of
the companies.
3. The Small and Medium Players: This group also seems to have strong commitment toremain in the business. But, like their big competitors, they also have management
weaknesses.
4. The Fly-by-night Operators': The mid-term review draft has observed that there areseveral companies among the 39 recognized ones with very few staff and little office
facilities. They are believed to have been established to reap the benefits that they saw in
the business. They do not have long-term strategy and are likely to switch over to other
businesses once the sub-sector stops offering good opportunity, ie once subsidy and BSP
are phased out.
Mere establishment of companies does not ensure their sustainability. Sustainability in
simple terms can be defined as the capacity/ability of an organization that enables it to
continue even under an unfavourable situation. In case of most companies, the ability
seems to be lacking. Their volume of business as reflected by the market share is small;
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managerial capability is weak; they are most vulnerable to the adverse situation of
subsidy phase out.
IV. BIOGAS QUALITY CONTROL:CURRENT PRACTICES AND ITS SUSTAINABILITY
Current Practices
Of the various factors attributable for the overall success of the biogas programme
in Nepal, the quality control implemented by the BSP, perhaps, has been
instrumental in achieving the current status of the programme to a greater extent.
Since its implementation, the BSP has paid special attention to ensure the quality
of the plants constructed under the programme. The objectives of the qualitycontrol programme are as follows:
Protect the interests of the plant owners. Ensure proper utilization of the subsidy. Enable the companies to become competitive and hence sustainable Level the playing field for the involved companies.Aspects of Quality Control
In order to achieve the stated objectives of quality control, the BSP follows the
following aspects of quality control:
Quality and Uniformity of Design
Although initially there had been some debate regarding the design of the biogas
plants, the BSP has adopted the GGC2047 model. All the companies wishing to
construct plants under the BSP projects are required to strictly comply with the
standard and failure to comply with the standard results in heavy penalty.
Quality of Construction
In order to follow the design, the construction needs to be based on the design and
all the materials need to be up to the specifications, such as size and quality of
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bricks, rods, cement and sand. Use of sub-standard materials leads to heavy
penalty in the quality control check.
Quality of Operation and Maintenance by the Users
The masons during the construction give basic instructions on the maintenance of quality
of the operation and maintenance to the users. As the users gain experience over the first
six months of operation, they are further given a one-day training. So, the companies thatemploy untrained masons, who in turn are unable to instruct the users properly, which
would result in poor performance of the plant, would again invite a penalty.
Present Practices of Quality Control
Based on the annual programmes and budget of the BSP and the institutional capability
of the recognized companies, quota is fixed for the latter, for which the process is as
follows:
Agreement on Standard
The BSP and the companies first enter into a co-operation agreement containing area ofoperation, quota for biogas installation, plant sizing, subsidy and channelling
mechanism, after-sales and maintenance requirements, quality aspects, staff
development, reporting requirement, termination and suspension clauses. Then the
company also needs to enter into an agreement with the BSP. Plants that are constructed
outside the agreement cannot avail of the subsidy provided under the ongoing BSP
project. Under the agreement, the company should strictly follow that:
No family has more than one biogas plant. It offers guarantee for certain appliances and at the same time ensures after-sales
services, at least for six years.
Plant is not fed with night soil only. Design is based on the GGC drawing, 2047. All the construction materials are up to the standard. Construction is up to the engineering standard. All the fittings are properly done. After-sales services are carried out routinely as well as on as and when needed
basis.
Agreement on Penalty
Upon agreeing on the quality standard, the next agreement between the company and the
BSP is regarding the penalty to be paid by the former in case it fails to comply with all
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or some of the covenants reached in the agreement. BSP thinks that the word 'penalty' is
not essentially a penalty.
It is just a mechanism to withdraw that part of the subsidy that has not been properly
utilized or in other words has been misused (Lam & Van nes 1994). The penalties
are based on the type of default. The defaults are broadly categorized into three:
Defaults causing withdrawal of all subsidies. Default causing a penalty. Defaults not causing a penalty. No default and improved performance earning a bonus.The defaults such as (i) construction of second or third plant in a family, (ii) plant owner
has no cattle/buffalo and the digester is fed with night soil only, (iii) no provision of the
one-year guarantee on appliances, (iv) absence of the six-year warranty on structure, (v)
lack of after-sales services for six years, (vi) plant constructed by untrained/uncertified
masons, and (vii) design not consistent with the GGC2047 are liable to be barred from
subsidy. Similarly, defects in the construction materials and appliances as well as errors
in construction lead to penalty. Defaults that are not liable to penalty include aspects
regarding the construction materials and construction that are less serious in nature.
Process of Quality Control
As per the agreement, the BSP carries out a detailed quality check of about 5 per cent
randomly selected plants. During this act, all the points related to the general
information, the specification of the plants, construction technique, operation, gas output
and so on are thoroughly verified by the BSP technicians who have been trained by the
expatriate and Nepalese technicians in this field. With a representative of the
construction company, the technical staff visit the sample plant and verify each point asoutlined in the agreement. Defaults are listed, discussed, agreed on right in the field so
that no controversy remains. Based on the default, penalty is calculated and charged to
the company, and deducted from the subsidy amount to be made available to it on behalf
of the plant owner.
Regarding the quality control activities, the mid-term review (de Castro, et al 1999)
observes that it has the following advantages and disadvantages:
Advantages
It allows a very high level of construction.
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Because of after-sales services provision, the operative continuity of the plant isensured.
It is used for the accreditation of the companies. Frauds regarding subsidy are minimized.
Disadvantages
Most of the companies still feel it as unnecessary imposition from the BSP. It is a very expensive procedure.Similarly, about the design, the mid-term review considers that because of the
standard, it has been less complicated. Had there been more than one design, the work
would have been rather very complicated. The one-model approach has greatly
simplified the work. It is, however, not devoid of criticisms. The main reason is the
blockage on the development of less costly technology. Experts believe that the
GGC2047 offers little chance for cost reduction. In this regard, the mid-term review
1994 (HMGN/SNV-Nepal 1994) has made some recommendations, which are still
valid. The mid-term reviewstates:
Biogas plants being installed in Nepal as part of the BSP are of fixed dome type having a
fiat cement concrete bottom/floor, a brick or stone masonry cylindrical tank and a
dome shaped cement concrete roof an inlet pipe connecting the digester with
feeding tank and a rectangular outlet tank. The fact that cement concrete and brick
masonry structures have much lower tensile strength than their compressive strength
indicates the possibility of either making the biogas plants stronger or reducing their
costs by employing shell structure for the digester and gas storage (the so-called
Deenbandhu model). A few plants of this design that have been developed in India
having segments of two spheres of different radii of curvature joined at their base to
form the digester and the gas storage have already been ins tal led in Nepal by an
NGO (South Asia Partnership-Nepal) atlower costs.
. . Sustainability
Undoubtedly, the adoption of the one-model approach by the BSP has simplified the
process of quality control in reaching the present status to a great extent. The model has
helped in establishing uniform standard and norms to be followed by all the players in
the sub-sector. It can be considered as a very prudent measure in the beginning. Had
there been more than one model, the quality control process would have been
rather cumbersome and more expensive than the present one.
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The model, however, is considered to be more expensive as compared to one
mentioned above. Failure to offer alternative to this model could considerably reduce
the demand in future once the subsidy is phased out and the richer strata of the
population are saturated with biogas plants. Studies show that unti l now, almost al l
of the plant owners belong to economically richer strata of society (CMS 1999; Dev
part 1998; East Consult 1994; Lam & Van nes 1994). And, there is nothing wrong with
this result. It is quite in concert with the stated objective of the biogas programme, iecheck the environmental deterioration by substituting fuelwood, agricultural waste and
dung cake to meet the rural energy deman d. Th e pro gramme is nota nd should no t
be as long as th ere is enough demandpoverty-oriented. At the same time, the
BSP a lso has a very important objective of developing the biogas as a market-oriented
viable industry. This means, all the interventions, ie subsidy and external assistance,
would cease sometime in future. This would increase the cost of the GGC2047 model,
considered to be already expensive and out of the reach of the poorer strata of the
population.
In order to make the present biogas programme sustainable, there is needed some R&D
work so that the technology becomes cheaper and within the access of the poorer peoplein the rural area.
V. SUBSIDY, ITS ROLE IN PROMOTION OF BIOGAS PLANTS,
PLAN FOR PHASING AND POSSIBLE EFFECTS THEREAFTER
Quality control work and subsidy on investment combined with privatization of the plant
installation are considered to be three major factors contributing to the overall
development of the biogas sub-sector.
History of Subsidy to Biogas Plants
Application of definitional subsidy to the biogas plants began in the Agriculture Year
(1975/76) when the government provided interest-free loans to about 290 plants.
Similarly, in FY1983/84, an incentive of Rs5,500 per plant was provided under special
rice crops launched in four Tarai districts2. Planned efforts to develop the biogas
beganfrom the Seventh Five-Year Plan (1985-1990) when some 4,000 plants were
planned for the plan period and 25 per cent subsidy on investment and 50 per cent subsidy
2 In order to promote the biogas, it was a linked up with the special rice crops in the four
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on interest were provided. This, however, was implemented only during the last two
years of the plan period. The subsidy on capital investment received continuity
after the implementation of the BSP.
Economic Rationale for the Subsidy
The economic rationale for any subsidy scheme for production of goods and services liesin the benefits that accrue to society as a whole from the activities undertaken. Because
of the existence of price distortions and lack of perceived benefits from the goods and
services, private benefits fall below the social benefits and do not become attractive to
the private entrepreneurs, while from the social point of view, production of such goods
and services yields benefits exceeding the costs and becomes desirable for society as a
whole. Such activities require external inducement so that the private sector takes up the
activity and the social benefits are maximized. In case of biogas, the economic rationale
for the subsidy was investigated in a study conducted in 1991 (Silwal 1991). As usual,
the presence of price distortions, absence of perceived benefits, such as the value of the
increased nutrients content from the slurry obtained from the digester, resulted in
financial internal rate of return (FIRR) lower than the prevailing market rate of interestand an economic internal rate of return (E1RR) higher than the social opportunity costs
of capital, which justified the subsidy. Another study, which was conducted to evaluate
the effectiveness of the ongoing subsidy, came up with the following findings and
recommendations (Silwal & Pokharel 1995):
Due to the presence of a distortive pricing mechanism and lack of perceivedbenefits, FIRRs for all sizes of the plants were lower than the market rate of interest.
The prevailing rates of subsidy (Rs7,000 in the Tarai and Rsl0,000 in the hills)resulted in FIRRs ranging from 15.89% to 33.35%.
The average E1RR for all sizes was 23.82% and hence the subsidy wasrationalized.
In addition to rationalizing the ongoing subsidy, the study also recommended one more
subsidy to the inaccessible hill districts at the rate of Rs 12,000 per plant.
Similarly, a recently conducted study (Kandel 1999) has the following findings:
districts of Terai.
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The EIRR is higher than the FIRR mainly because of the subsidies on kerosene andurea, and the low pricing of firewood.
The other benefits that are s ti ll missing in the private benefits stream are the healthbenefits accruing from the use of the biogas.
The benefits accruing from the improvement in health, however, are not easy to quantify.
Both the studies have strongly rationalized the subsidy.
Impact of the Subsidy on Installation of Plants
The impact of the subsidy on increasing the number of plants has been remarkable. Even
before the BSP was implemented, the subsidy showed its distinct role in the promotion
of the biogas, ie there was direct correlation between the number of plants installed and
the provision of subsidy. Table 4 shows the impact of subsidy on installation of the
biogas plants before the BSP.
Table 4: Biogas Plants Installed under Various Subsidy Schemes
by YearYear Up to
85/86
86/87 87/88 88/89 89/90 90/91 91/92 92/93
Number of
Plants
2 166 405 676 1 108 1 403 862 2 304 4 173
Source: BSP.
As can be seen, there was a gradual increase in the number of plants installed over time,
for during this period there was some type of subsidy except during 1990/91 when a
capital subsidy of 25 per cent was provided on plants of 6 m 3 and 10 m3 only. Then,
from 1991/92, the number of plants installed picked up as the newly elected
government of the Nepali Congress announced the subsidy at the rate of Rs7,000 for
Tarai andRsl0,000 for the hills. In this way, the present programme is a subsidy-driven
one. With the implementation of the BSP and continuation of the subsidy, the effect has
been quite satisfactory.
Besides the increase in the number of plants over lime, another desirable impact of the
subsidy has been the tendency towards installing plants of smaller sizes. Because of the
flat rate for a particular geographical region, ie Rs7,000 in the Tarai, Rs10,000 in the
hills and Rs 12,000 in the hilly districts not connected with road, the plant owners have
been found to be inclined towards installing smaller plants as this reduces the ir
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costs considerably. For instance, the average size of plants during 1989/90 was 13.7 m ,
which decreased to 9.6 m3 during 1992/93 and further declined to 8.2 m3 during 1996/97
(de Castro, et al 1999).
The current subsidy scheme, however, is not without defects. For instance, all the
villages of Kathmandu, Bhaktapur and Lalitpur receive subsidy at the rate of Rs7,000
whereas Pokhara receives Rsl0,000. This is reported to be discriminatory against thepeople of remote areas of the former districts (there are places in Lalitpur requiring two
to three days of trekking).
Plan for Subsidy Phase-out
The general policy of the government has been to phase out all the subsidies that are
currently in effect. In this regard, subsidies on fertilizer and irrigation have been reduced
considerably. As to the biogas subsidy, no timeframe has been laid down for the phase-
out. The mid-term review (de Castro, et al 1999) considers that the present level of
subsidy is reasonably high enough to attract the users who have not yet perceived the
benefits. Once they perceive the benefits, the programme can keep on going even when
subsidy is gradually phased out. The subsidy rates for 1999/2000 for all the three
geographical regions are shown in Table 5.
Table 5: Subsidy Rates for 1999/2000 (2056/57)
In Rs
Size (cu.m.) Tarai Hills Remote Areas
4 7 000 10 000 12 000
6 7 000 10 000 12 000
8 6 000 9 000 11000
10 6 000 9 000 11 000
15 and 20 No Subsidy No Subsidy No Subsidy
Source: BSP.
In terms of discouraging larger sizes, the implementation would be able to achieve itsgoal to a great extent. This will minimize the current problem of underfeeding of the
plants, which is reported to be very common among the larger plants. Better-off farmers
consider the larger plants as status symbol and insist on installing them despite the limited availability of dung that they get from their animal stock. It must, however, be
noted here that the amount of subsidy for the larger sizes and invariably installed by
bet ter-off farmers will be so small and meaningless that they would hardly opt for it.
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Instead, they would construct from their own resources, including bank finance. In this
case, they will be out of the quality control fold and the market may be distorted beyond
control. Instead of provisioning very little for the larger sizes, it would be better to ban
altogether installation of plants of sizes of 15 m3 and 20 m3. Then the four sizes, ie 4 m, 6m3, 8 m3 and 10 m should get the flat rate of subsidy as at present. This arrangement
would natural would naturally bring down the average size to less than 8 m3, which is
the target of the present BSP.
In the context of the government policy of gradual phase-out of the subsidy for all the
sectors of the economy, it would be very rational on the part of the biogas programme to
formulate a policy of phase-out by certain period of time. The timeframe would provide
time for preparation for all the stakeholders.
Possible Effects of the Phase-out of the Subsidy
As no timeframe has yet been decided for the phase-out, it would be premature to assess
the impact of the phase-out. No matter what timeframe is decided, the reduction/phase-
out of subsidy in the absence of proper R&D leading to cheaper technology, ie
considerable reduction in the existing costs of biogas plant, could adversely affect thebiogas sub-sector, especially in terms of demand. If the mid-term review-recommended
reduction of subsidy is implemented, it would reduce the demand for the biogas plants.
A total phase-out would further decrease the demand. So, the phasing out should not be
implemented before models of technical competence and lower costs are developed.
VI. FINANCING OF BIOGAS
Biogas installation, under the current technology, is not a cheap proposition. A typical
costs structure trend for a 10 m biogas plant over a period of six years is given in Table
6.
The figures are for the total costs. The sources of financing these costs are three:
equities, subsidy and loans from the ADBN. Some farmers may bear some costs in the
form of equities, while others may prefer to borrow all the costs less the subsidy from
the banks. Table 7 provides information on the amounts of equities, subsidy and loans
for all the three phases of the BSP.
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Table 6: A Typical Costs Structure Trend for a 10 M Biogas Plant
(1991/92-1996/97)
InRs
Item/Year 91/92 92/93 93/94 94/95 95/96 96/97
To be managed by farmers
Cement 4 180 4 180 3 990 4 465 5 320 6 080
Other building materials 5 500 5 500 5 500 5410 6 340 8315
Unskilled labour 1575 1 575 1 575 1 575 2 100 2 100
To be managed by company
Pipes and appliances 4 696 5 277 4 945 5 070 4 696 5 460
Overhead + 1 year service 3 950 3 950 3 950 4018 4 600 4 800
Additional service period 1 150 1 150 1 050 1 000 1 000 1 500
Total 21 051 21 532 21 185 21 713 24 056 28 255
Source: Van nes 1997.
Table 7: Finance and Financing Sources for the Biogas Plants
Constructed under BSPIn Rs Million
Phase Phase I Phase II Phase III Part 1
Year Equities Subsidy Loans Equities Subsidy Loans Equities Subsidy Loans
1992/93 2.56 28.60 49.38
1993/94 6.20 30.48 37.64
1994/95 14.90 44.17 53.95
1995/96 29.96 61.86 77.96
1996/97 11.85 10.04 5.77 51.00 63.27 90.17
1997/98 74.00 84.96 120.88
1998/99 80.00 94.27 129.94
Notes: (I) Equities calculation is based on actual cash/loan shares and assumption of net cash
investment being approximately 85% of net loan investment.
(2) Subsidy calculation represents actual subsidy expenses.(3) Loan calculation is based on average estimated net loan amount by ADBN of NRs 20,667
per plant and actual loan/cash shares in production.
Source: Castro, et al 1999; Van nes 1997;BSP.
In the first year of Phase I, the total investment was Rs80.54 million, of which 3.17
per cent was financed from the equities, and subsidies and loans contributed to 35.5
per cent and 61.30 per cent respectively. In the second year of Phase II of the BSP,
the total investment amounted to Rsl69.78 million. Of this, 17.64 per cent was
equities financed, and 36.43 per cent and 45.91 per cent were financed from
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subsidies and loans respectively. Similarly, in the third year of Phase III Part I,
the total investment was Rs.5304.21 million, of which 26 per cent was financed from
the equities, 31 per cent and43 per cent from the subsidies and loans respectively.
Thus, over the three phases of the BSP programme, the share of equities has increased
while the shares of subsidies and loans have declined. The analysis on the financing
discussed so far is based on the amount of finance from different sources. In order to
assess the percentage of plants that have been financed from the different sources,Table 8 has been constructed.
Table 8: Percentage of Solely-Equities Financed and Equities and
Loan Financed Plants
In per
cent
Year/Types Solely Equities-financed Equities- and Loan-financed
1992/93 6 94
1993/94 16 84
1994/95 23 77
1995/96 30 70
1996/97 40 60
1997/98 42 58
Source: Castro, et al 1999; Van nes 1997.
Being applicable to both the categories, ie equities-financed and equities plus loan-
financed, all the plants are subsidized and hence there is no need to indicate them
separately. Regarding solely equities-financing, the trend is quite impressive. There has
been a general tendency towards financing the plant from equities plus subsidy. Loan
does not seem to be a constraint for the plant owners (CMS 1999; Devpart 1998; East
Consult 1994; Lam & Van nes 1994). Moreover, since the second phase of the BSP,besides ADBN, NBL and RBB also are providing loans. On the repayment front also,
the performance is reported to be satisfactory.
ADBN, being the pioneer of biogas promotion in Nepal, is still found to be the most
favoured source of credit, and over 90 per cent of the loans to the biogas are disbursed
through this bank. Despite the higher rate of interest charged by the ADBN (16%),
plant owners preferred to have loans from it than from NBL and RBB, which charge
11.5% and 15% respectively. The latter two are relatively new in this field and have to
establish themselves as friendly banks among the rural borrowers, especially in case of
biogas loans.
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VII. INSTITUTIONAL ARRANGEMENTS
The first institutional set-up for the promotion of biogas technology began with the
establishment of the GGC, an undertaking of the ADBN, TCN and UMN, back during
1976/77. Over time, there has been a gradual growth in the institutional aspects, Besides
the BSP, the following types of institutions are involved in the biogas sub-sector:
Biogas Companies
On the supply side of biogas, the companies are the major stakeholders operating as a
business entity in a competitive manner. With the implementation of the BSP, there has
been a steady increase in their number. Table 9 provides information on the number of
companies working in the biogas sub-sector.
Table 9: Trend in the Entry of Companies
In Number
Year Working with BSP Working outside BSP
Phase I
1992/93 1 6
1993/94 1 10
Phase II
1994/95 17
1995/96 23
1996/97 36
Phase III
1997/98 41
1998/99 391999/00 50
Source: BSP.
The number of companies at present is 50, including the GGC. One of the guiding
objectives of the privatization of the sub-sector has been to bring in private companies
working in a competitive way so that the potential plant owners have a choice in
constructing the plants from the company they consider appropriate. This objective
seems to have been met to a great extent.
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Weaknesses and Problems of Companies
Except the GGC, which has been in the business for more than 20 years, the
emergence of private companies is relatively new. When staff working in the GGC
saw an opportunity in the sub-sector, they decided to form companies in line with the
BSP requirements. Similarly, the private companies also started losing some of their
staff and workers, who, after working for sometime in the companies they wererecruited, saw it more profitable to establish their own companies. In this way, most of
the staff and workers of the existing companies have had some links with the GGC or
the private companies established in the beginning. And there does not seem to be
anything wrong about it. In an open and democratic society this is a proper way of
developing institutions. These companies, however, are reported to be facing the
following problems at present (Castro, et al 1999; Van nes 1997):
' : -
Biogas Companies in General
One problem of biogas companies in marketing their product is the fierce competition.
Especially in the traditional biogas areas in the Terai (Bharatpur, Pokhara, Butwal)
where a relatively high number of biogas companies are operating in an increasinglysaturated market, this has in a number of cases led to unhealthy and intolerable practices.
Examples documented are companies slandering each other, robbing of loan applications
submitted to the bank by another company, up to the point where the farmer has been
pursued to change company after construction has commenced.
Another serious problem is the weak liquidity position of many companies, hampering a
smooth and continuous operation. The capital base of many (smaller) companies does
not allow taking loans from banks, and even larger companies are found to be unable to
obtain adequate loans to cover their working capital requirement. The new subsidy
channelling procedure, introduced with the start of FY2056/57, is aggravating this
problem. SNV/BSP, recognizing the dilemma, is therefore with the star t of this fiscal
year providing working capital to companies. The eligible amount depends on the
preceding year's production of the company in combination with its performance
quality, and companies are required to cover the advance with a bank guarantee.
Despite being the oldest company, the GGC has been facing a series of problems. One of
the serious ones has been the frequent change in the chief executive. Other problems
include bureaucratization, overstaffing, high turnover of the staff and lack of staff
motivation.
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The steady slide in the market share is a clear indication of the problem (see Table 1)
Association of Biogas Companies
Nepal Biogas Promotion Group
An entity, namely the Nepal Biogas Promotion Group (NBPG), consisting of
representatives of all the biogas companies, was established in the year 1995. Since it
was a democratically established entity for promoting the biogas technology and at the
same time protecting the common interests of its members, the move was very much
welcomed from all corners. Some of the identified activities for the NBPG include: (a)
facilitate the import of biogas appliances, (b) solve the problems with the banks, (c)
avoid unhealthy competition among the member companies through preparation and
implementation of a code of conduct, (d) gradually take over the activities of the
promotion of biogas, training and extension activities being carried out by the BSP.
Because of a serious division among the members, since not very long after its
establishment, the organization has shown little performance; staff is not empowered
adequately and lack desired level of dynamics (Van nes 1997). Strengths of the NBPG
include: (a) it is recognized as an agency by the AEPC, BSP and other related agencies,
(b) it has been associated with BSP and has received technical assistance for its
institutional capability building, (c) it has a separate secretariat manned by full-time
staff, (d) it has initiated some of the work of BSP such as quality control and after-sales
services, (e) its membership is larger than that of AEPDF, and (f) it has aimed at gaining
Financial autonomy through import of some appliances, membership fees and
consultancy services.
As discussed above, the organizations also have certain weaknesses, which is likely to
threaten their sustainability. They are: (a) clash of interests among the members has
already resulted in its downsizing through division, which may occur in the future aswell, and (b) it lacks trained manpower and other necessary facilities to take up the work
of quality control and after-sales services and at the same time run the group as a
business entity.
Alternative Energy Promotion and Development Forum (AEPDF)
Although it would be premature to evaluate the strengths and weaknesses of this new
entity at this juncture, some of these aspects have been outlined by the mid-term review.
On the strength front, the organization is reported to have been able to attract over 30
companies out of 50 working in the sub-sector up to 1 November 99. It has also indicated
some possibility of working in the field of biogas promotion, training and even some
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quality control work. Regarding the weaknesses, prominent one is its dispute with the
NBPG. Another serious weakness is the 'dual loyalty' of its members, ie members of this
organization are also the members of the NBPG.
Alternative Energy Promotion Centre (AEPC)
Based on the mid-term evaluation (mid-term review), May 1994 (HMGN/SNV-Nepal
1994), which recommended that "HMGN should establish as soon as possible an apexinstitution for the development of the biogas sector. As long as such an institution is not
established, ADBN and SNV/Nepal should work closely together for the implementation
of the Programme,' after much discussion and debate, the Ministry of Science &
Technology in August 1996 formed the Alternative Energy Promotion Centre (AEPC)
under the Development Board Act. As the name implies, it is related to all the alternative
energy sectors, including biogas. The AEPC's functions include the following (HMGN
& SNV 1995):.
Analysis of policy issues and advice on policy matters. Co-ordination with other sectors and ministries. Preparation of sector-wise plans and targets. Elaboration of regulatory frameworks: setting of standards and guidelines, criteria
for registration and licensing of companies.
Mobilization of funds and liaison with donors. Review/approval of annual work plans in respect of donor-funded projects in
alternative energy.
Monitoring of development in the alternative energy sector as a whole. Organize and/or participate in programme and project evaluations.A recent evaluation (de Castro, et al 1999) shows that being an entity established under
the Ministry of Science & Technology and funded by the government, it has a number of
advantages in becoming an effective organization for the promotion of alternative energy
in the country, including biogas. On the strengths of the organization, the noteworthy
aspects include: (a) government's commitment is reflected through its provisioning of
budget for the operation of the centre, (b) being a new entity, it does not have a history
of incompetence, (c) all stakeholders have recognized it as a national body for policy
formulation, (d) it has gradually started taking up some of the BSP's work like some
quality work and monitoring and evaluation, (e) it has qualified and competent staff to
run the centre, (f) being a government undertaking, it has easy access and links with the
NPC, l ine ministry and donors, which other stakeholders do not have, (g) it has recently
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entered into an agreement with DANTDA for institutionalization and capacity building of
the AEPC so that it can take up more and more responsibilities in future, (h) it has the
potentiality of attracting more donors in future.
It is also not without weaknesses. They include: (a) being a government undertaking, it
needs to comply with the rules and regulations that are not flexible enough to allow it to
run the centre, (b) like other government organizations, it may face political interference,(c) the low salary and incentive structure may cause high turnover.
Institutionally, the biogas sub-sector cannot be considered as a strong one. Leaving the
BSP aside, it remains with three organizations, ie AEPC, AEPDF and the NBPG, which
have not been able to demonstrate the desirable capacity. The BSP is just a project office
and temporary in nature, which will be phased out in future. At present, it has been
playing a vital role in the promotion of biogas in the country. It initiated, designed and
got government approval on a number of policies, including the subsidy and the
privat ization. It has been implementing the most acclaimed work of quality control,
which has been a key to the overall success of the biogas programme. Once the BSP is
phased out, there needs to be a strong entity to take up the work of policy formulation,
regulation, and monitoring and supervision.
VII. IMPACT OF BIOGAS PLANTS
The BSP, through its consultants, conducts periodic surveys of the users. The main
objectives of the surveys are to assess the overall impact of the biogas plants, mostly in
terms of fuelwood and kerosene saving, saving on time that would have been required
for collection of fuelwood and cleaning of utensils used for cooking in fuelwood in the
absence of the plants. In order to know the impact of the biogas plants on its users, five
studies have been found to be relevant. Their findings are summarized as follows:
The User Survey 1994 (East Consult 1994) conducted in the year 1994 revealed the
following 'other' benefits that were reported by the users, among others:
On an average a plant saved an equivalent of 3 metric tons (MT) of fuelwood and
40 litres (It) of kerosene annually.
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Time savings from the collection of fuelwood and cleaning of utensils averaged 3.10hours per day.
Respiratory diseases very common among the fuelwood users were reported to below among the biogas user households.
Some of the recommendations made in the study are:
Increase the frequency of training of construction masons and operation andmaintenance (O&M) training to the users.
Improve the after-sales services. Introduce a consistent policy to incorporate small and marginal farmers in the biogas
programme.
Provide additional subsidy to cover extra transportation costs in the far and remote
areas.
Conduct research to ensure adequate gas generation during the cold season. Induct other banks to disburse biogas loans. Conduct R&D to replace the concrete dome in the hills.Similarly, the 1995 survey (Lam & Van nes 1994) revealed the following impact:
The majority of the biogas owners were medium or large farmers. As against the national literacy of 40 per cent, literacy among the plant owners was
80 per cent.
On an average, use of biogas saved 3.5 MT of fuelwood and 56.6 It of kerosene perplant per annum.
More than half of the plants were underfed, ie there was no sufficient dung to putinto the plants.
It recommended:
GGC's after-sales services should be enhanced3. Masons should not be allowed to construct too many plants. GGC should open branch offices to provide services to the potential owners. ADBN's practice of charging interest on subsidy until it is adjusted in the
borrower's account should be discontinued.
User training should be initiated.3 Until this survey, the sample included plants constructed by the GGC only.
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Provision of incorporating small and marginal farmers should be introduced.Similarly, the User Survey 7998 (Devpart 1998) reported the following findings:
Unlike the findings of the previous survey, the users also consisted of a few smalland marginal households.
Literacy among the plant owners was 77 per cent.
In all 36 per cent of the plants were attached with latrines. The O&M services provided by the construction companies were considered to be
satisfactory in most of the cases.
Altogether 68 per cent borrowed from the banks (64 per cent from ADBN, 4 percent from RBB) and the rest constructed on cash down payment.
Compared to other types of loans, the repayment of biogas loans was good. Saving of fuelwood and kerosene was reported to be 1.6 MT and 24 It respectively.Recommendations made by the same survey are:
For maintaining the current reliability and efficiency of the biogas plants, BSPshould continue the current practice of monitoring.
Social awareness programme is necessary to maximize the social benefits from theplants.
For maintaining the current reliability and efficiency of the biogas plants, BSPshould continue the current practice of monitoring.
Efforts to downsize the plant should be continued so that cases of underfeeding areminimized.
Problem of after-sales services could be minimized by the companies throughinvolvement of local NGOs.
The BSP should consider inducting the staff of government line agencies so thatthey can participate actively.
The User Survey 1999 (CMS 1999) reported the following findings:
The literacy rate of the sample households was about 75 per cent. Altogether 69 per cent of the plant owners used dung as the primary feeding material
for bio-digester and 27 per cent of the plants were attached with latrines.
In all 77 per cent of the plants were installed for cooking conveniences due toshortfall of fuelwood.
A total of 86 per cent of the users reported of sufficiency of gas for cooking andlighting.
Quality control was found to be satisfactory by about 95 per cent of the plantowners.
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Altogether 48 per cent were found to be using the slurry after making compost. About 98 per cent of the plant users reported to have savings on time after the use of
biogas.
Decrease in respiratory diseases by 53 per cent was reported. Approximately 55 per cent expressed their satisfaction over the bank loan
procedures.
Surprisingly, the latest survey has not quantified the amount of fuelwood and kerosene
saved from the use of biogas plants.
From all these findings, it can be safely concluded that biogas has been a very useful
technology that has impacted the life of its users in a positive way.
IX. SUMMARY AND RECOMMENDATIONS
Summary
History of Biogas and Advent of BSP
Although the history of biogas in Nepal dates back to 1955, HMGN's efforts began only
from the Agricultural Year (1975/76) when some 290 plants were installed with interest
free loans from the ADBN. With the restoration of democracy in 1990, biogas was able
to draw greater attention of the authorities, who by that time had recognized the
importance of the sector and were committed to initiating measures to accelerate the
pace of plant installation. So, in 1991, the HMGN announced a subsidy scheme, which
has been in effect until now. Initially, the rate of subsidy was Rs7,000 for the Tarai andRsl0,000 for the hills. Institutionally, there is one parastatal and 38 private construction
companies engaged in the plant installation. An apex body, namely Alternate Energy
Promotion Centre (AEPC), has been established with the responsibility of overseeing the
overall development of alternate energy, ie biogas, micro-hydro, solar, etc. The Biogas
Support Programme (BSP), a Netherlands government-assisted project, has been
carrying out all the activities related to the promotion and selection of biogas companies,
subsidy administration, quality control, and monitoring and supervision of the biogas
programme.
Recent evaluation studies have revealed that, on numerical aspect, the BSP
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implementation so far has been able to meet the target. On the average size of the plant
also, there has been a steady decline since 1993. The average size in 1990 was 13.7 nr,
which decreased to 9.6 m3 during 1993/94, 8.2 m3 during 1997/98 and 7.49 m3 during
1998/99. All this is due to the flat rate of subsidy, which has decreased the total cost
through adoption of plants of smaller sizes.
Entry of Private Sector Construction Companies
Implementation of a sensible and consistent subsidy policy combined with the
development of a liberalized policy and procedures forprivate sector part icipation
triggered the entry of the private sector in the construction of biogas plants. This has
had a significant impact on the progress of the number of plants. With a mere 1 per
cent share in the total plants constructed during FY1990/91, the private sector
continued to record higher share, which reached 80 per cent during 1998/99. In
aggregate the GGC and private companies are found to have about equal share in the
total plants installed so far.
None of the 8 companies engaged in the plant construction is found to be up to the mark.
BSP classification has (a) very good (47 per cent), (b) good (21 per cent), (c) average
(11 percent), (d) poor (16 per cent) and (e) very poor (5 per cent).
Quality Control;
The quality control aspect is a well-steered programme that has protected the interests of
the plant owners and hence elevated the image of the programme to a credible position.
The quality control process is quite lengthy and hence costly. Once the BSP is phased
out, its continuity may pose some problem, as other institutions have not demonstrated
required institutional capability to handle the job.
Another serious aspect of the present quality control is the need for strict adherence to a
single model of the biogas plant, which has seriously blocked the possibility of
development of cheaper and affordable models through R&D. The socio-economic
status of the owners of the existing plants warrants that until and unless low cost models
are developed and implemented, the aim of making the plant accessible to the poor may
remain just a dream.
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Subsidies
The driving force behind the entry of the private companies is the provision of subsidy.
The phase-out of the subsidy at any point of time may have some adverse effects on the
survival of the private companies, as there will be a drastic reduction in the demand for
plants.
Studies have shown that the EIRR is higher than the FIRR, which justifies continuation
of the existing subsidy. The impact of the subsidy on increasing the number of plants has
been remarkable. Even before the BSP was implemented, the subsidy showed its distinct
role in the promotion of the biogas, ie there was direct correlation between the number of
plants installed and the provision of subsidy. The present programme is a subsidy-driven
one. With the implementation of the BSP and continuation of the subsidy, the effect has
been quite satisfactory.
Besides the increase in the number of plant over time, another desirable impact of the
subsidy has been the tendency towards installing plants of smaller sizes.
The current subsidy scheme, however, is not without defects. For instance, all the
villages of Kathmandu, Bhaktapur and Lalitpur receive subsidy at the rate of Rs7,000
whereas Pokhara receives Rs 10,000. This is reported to be discriminatory against the
people of remote areas of the former districts.
Within the framework of the government's policy to phase out subsidy to all sectors, the
BSP also is planning to reduce subsidy on plants of larger sizes from FY1999/00, with
an objective of discouraging larger size plants. It is, however, necessary to give a
timeframe for the phase-out of the BSP subsidy.
As no timeframe has yet been decided for phase-out, it would be premature to assess the
impact of the phase-out. No matter what timeframe is decided, the reduction/phase-out
of subsidy in the absence of proper R&D leading to cheaper technology, ie considerable
reduction in the existing costs of biogas plants could adversely affect the biogas sub-
sector, especially in terms of demand. It should, however, be noted that the achievements
made in terms of the number of plants installed so far and the impact on the life of the
users, the biogas programme can be included among the few successful programmes in
Nepal. Moreover, of the various subsidized programmes, biogas has multiplier effects. It
not only substitutes fuelwood and saves the nutrients lost through the use of dung cakes,
but also has effects on the reduct ion in the fuelwood consumption, thereby reducing
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environmental degradation, and reduction in the respiratory diseases. Use of biogas for
lighting facilitates the children to study at night and helps rural men and women to carry
out some cottage industries.
Financing of Biogas Plants
On the financing front, there has been a very encouraging trend on the proportion of
equities-financed plants. For instance, during the first year of the BSP (1992/93), the
number of equities-financed plants was reported at 6 per cent, which increased to 30 per
cent during 1995/96 and to 42 per cent during 1997/98.
Regarding the source of credit, the ADBN has been playing a pioneer role. Until the BSP
I, it was the only source. Now, some loans are reported to have been disbursed through
NBL and RBB as well. Despite lower rates of interest on biogas loans offered by these
two commercial banks, the borrowers' preference is reported to be still the ADBN,
which disburses more than 90 per cent of the total annual biogas loans. The apparent
reason for this is the simpler procedure and more familiar atmosphere.
Institutions
Institutionally, the biogas sub-sector cannot be considered as a strong one. Leaving the
BSP aside, it remains with three organizations, ie AEPC, AEPDF and the NBPG, which
have not been able to demonstrate desirable capacity. The BSP is just a project office
and temporary in nature, which will be phased out in future. At present, it has been
playing a vital role in the promotion of biogas in the country. It initiated, designed and
got government approval on a number of policies, including the subsidy and the
privatization. It has been implementing the most acclaimed work of quality control ,
which has been a key to the overall success of the biogas programme. Once the BSP is
phased out, there needs to be a strong entity to take up the work of policy formulation,
regulation, and monitoring and supervision.
Impact of the Biogas Plant on the Life of its Users
There has been a remarkable impact of the biogas plant on the life of its users. Surveys
have revealed that the tangible impact in terms of savings in firewood, kerosene and
savings in time that would be required in the absence of biogas plant, and the
intangible benefits such as the reduction in the respiratory diseases plus other benefits
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ail are perceived to be quite significant by the users.
Recommendations
Although very encouraging in absolute terms, the number of biogas plants may not be
considered commensurate with the efforts and resources being geared towards this sub-
sector. So far, the total number of installations in any year has not crossed the 10,000
mark, indicating the maximum capacity of the existing mechanism. The present supply
capacity consisting of an apex body (AEPC), 50 construction companies and the BSP
project office, has been able to install a maximum of 11,047 plants during FY1998/99,
which is only 3 times of the plants installed single-handedly by the GGC during
FY1993/94 (3,508). So, the BSP target of installing up to 25,000 plants a year remains
doubtful. In order to achieve
Recommended