Project financing in Nepal

The Nepalese economy has seen surplus liquidity in the recent years.  Banks and financial institutions (BFIs) are currently sitting on a big pile of cash due to a heavy increase in deposit mobilization without much expansion in loan advancement. According to the first nine-month data released in the Economic Survey 13/14, deposit collected by BFIs stood at NPR 1,398.9 billion while the lending was NPR 1,095.4 billion. The large amount of loanable money is idle.

This surplus liquidity scenario has encouraged domestic investors to look for new investment avenues. Sadly, hydropower companies have not been able to soak up the excess liquidity due to lack of proper policies.

There is "chicken and egg" situation in Nepal when it comes to arranging funds. Be it equity investment or debt from banks & financial institutions, hydropower developers are always struggling to arrange the much needed capital.

Usually, hydropower developers have to invest at least 51 percent of the total equity from their pocket to get funding from banks. 51 percent of the total equity is quite a lot in a country like Nepal. Very few developers actually possess this much amount. On the other hand, there are no market instruments to support hydro developers to raise this 51 percent. Our capital market is still at nascent stage.

Secondly, the project financing concept in Nepal works in a strange way. Hydropower project needs 70 to 75 percent of the total cost as debt. The developers have to assure the equity investment at first in order to get the funding. This is fair enough. 

But the developers have to provide personal guarantee (PG) covering entire loan backed by their Net Worth. There is no way developers can get loan from banks by considering the project itself as collateral. This is the fundamental requirement for any hydro loan which is very funny.

In simple words, the developers must have adequate Net Worth equaling to the total project cost. This is hard to imagine since per MW cost is around NPR 150 to NPR 180 millions. It contradicts the flexible policy of Nepal government that encourages hydropower investment.

Central bank of Nepal has given directives to BFI to disburse at least 12 percent of the total loan portfolio in the priority sectors (less than 20 percent of the total allocated amount for hydro sector has been invested in reality). On the other hand, the same regulatory body is tightening the loan disbursement by imposing irrelevant/unachievable conditions. 

These kind of irrelevant hurdles have to be removed. It is an impossible task for many developers to show their Net Worth. Just to give you a rough idea, a project with 10 MW capacity will cost around NPR 1.5 to NPR 1.8 billion. So is it possible for developers to show the Net worth of NPR 1.5 to NPR 1.8 billion to get project loan in a country like Nepal where per capita GDP is less than US$ 700?

Thus, the pure project financing concept should be applied for hydropower projects. This is an utmost requirement. 

Secondly, SEBON should allow capital market to collect the promoter shares for hydropower projects in order to mop up the excess liquidity. The recent IPOs of Century Bank and Ridi Hydropower Development Company Limited can be taken as an instance which shows how much money Nepalese investors have. It collected NPR 37 billions combined while the actual needed amount was about NPR 1 billion. 

This can be utilized for hydropower construction if SEBON allows to raise promoter shares for hydropower companies through proper private placement. Investment in meaningful purpose like hydropower construction can be a better solution for the excess liquidity in the market when Nepal is facing power outage of 12 hours per day. On top of that, hydropower business is a pure physic with a scientific financial twist that guarantees minimum return throughout the life. 

In order to make this happen, there should not be any differentiation between hydropower promoter and public share. Typically, promoter shares in Nepal are traded in half the price of public share. Also, it is very difficult to find buyers as it needs a lot of formal approvals before selling off. Normally, this is applicable for Nepalese bank and financial institutions.

For hydropower, the lock-in period is three years from the date of listing in stock exchange. After that, there is no price differentiation between the two. However, many investors are afraid that the same regulation as in banks and financial institutions may come into force in future. This fear is restricting general investors to invest their hard earned money. 

The regulatory body should understand the fundamental difference in operation of hydropower projects and banks. Unlike banks and financial institutions which collect deposits from general public for its operation, hydropower needs investment during construction only. It does not need additional investment to operate once the project is constructed. This has to be communicated. On top of that, Government of Nepal should give assurance to the investors regarding the lock-in period for promoter shares.