PPA in US dollar is again a hot debate

Nepal Electricity Authority (NEA) has expressed its interest to sign PPA in dollars if it is allowed to hike the retail tariff in order to balance the foreign exchange risk.

With bitter experiences with Khimti and Bhotekoshi projects, NEA has been reluctant to sign PPA in dollar terms. It says it spends around 40 percent of its revenue to pay these two projects.

During the interaction program held in Kathmandu, private sector representatives stressed on the need for PPA in dollar terms to attract foreign investment in the hydropower sector.

Now, NEA has put forward conditions for PPA in dollar terms, including development of a foreign currency risk sharing mechanism in large project with foreign investment. It proposed a separate fund by government to mitigate exchange risk due to American dollar power purchase agreement (PPA) with foreign project developer. It says the PPA rate has to be fixed in both foreign and domestic currency terms based on such a mechanism.

The basic modality for PPA in US dollar is for a period of Loan repayment,  i.e. 15 years. However, the proportion of PPA in dollars shall not exceed more than 50 percent of the total payment. That means, 50 percent of the payment shall be in US dollars and the rest will be in Nepali currency. After 15 years, the payment will be only in Nepali currency. The basic intention of PPA in US dollar module proposed by NEA is to allow foreign developers to re-pay their foreign loans.

On the contrary, Governor of the Nepal Rastra Bank (NRB) Dr Yuba Raj Khatiwada has advised to think seriously before signing power purchase agreement (PPA) with promoters of big hydropower projects stating that the country cannot afford to sign PPA in US dollar.

Stating that the country has to meet several necessities through the limited foreign exchange reserve, he warned that the whole economy can unravel with exhaustion of the foreign exchange reserve while signing PPA in foreign currency. “We have foreign exchange reserve of Rs 650 billion. We will not have any foreign currency left if we were to sign PPA for big projects and make payment in foreign currency accordingly,” he told the Public Accounts Committee (PAC) of the parliament on Saturday.

While conceding that domestic investment alone does not suffice for big projects, he advised for good analysis about the problems that can arise after signing PPA with big projects in foreign currency. “We have to strengthen Nepali currency and the national economy,” he urged. He opined that the country should not be destroyed by pegging everything with dollar. “We may have to need foreign currency at a level unaffordable by our foreign exchange reserve while exporting electricity to India through big projects. We cannot say what will happen to the exchange rate of Rs 160 (for IRs 100) in such situation,” he stated. He revealed that Rs 450 billion out of the current reserve of Rs 650 billion should always be there. “That is our baseline,” he quipped.

Stating that unlimited exchange facilities have been provided for Indian currency, he advised that we should not do PPA in dollar with Indian investors. “We do business with India in Indian currency. We are guided by different agreements with India. The bilateral trade agreement among the countries should be amended if we were to sign PPA with Indian investors at a changing exchange rate of foreign currency. It is, therefore, not necessary to do PPA in dollar for Indian investment,” he elaborated. “Why should we sign PPA in dollar if we are capable to return investment to Indian investors in Indian currency?” he asked. He claimed that many bilateral agreements including the 1950 treaty will have to be changed to do PPA with Indian investors in dollar.

He explained that Nepal will face problems when the investors from the other countries, who sell electricity to India by developing projects in Nepal, take back the investment.  Contractors for hydromechanical, electromechanical, consultancy, and import of cement, iron rods and other materials are also foreign companies. Stating that the saving of Nepalis is just Rs 160 billion a year, he clarified that the annual saving cannot all be invested on energy sector as there are many competing demands. “We have allowed investment of up to 50 percent which is around Rs 70-80 billion. There will be problem in returning investment if more investment is allowed as two-third of investment return back,” he reasoned.