Financing capacities of Nepali banks

The total loan and advance of Nepalese commercial banks stood at NRs. 1,801.567 billion at the end of Ashwin 2074 or mid October, 2017 (source: NRB). With 5% minimum lending requirement in hydropower sector as provisioned by Central Bank of Nepal, the total loan available is NRs. 90.078 billion. On the other hand, hydropower projects with install capacity of 2,043.6 MW have done the financial closure while 910.31 MW are in the process of securing debt (NEA’s Annual Report 2017). Assuming NRs. 180 million per MW as the construction cost, and 70:30 as Debt equity ratio, the total loan requirement is NRs. 372.19 billion. Even at the 10% as minimum lending requirement (assuming that Central bank will increase the provision), the total funds available will be around NRs. 180.157 billion.

Projects at various stages

Details	MW
FC completed	2,043.613
Under FC	910.311
Total	2,953.924

Source: NEA’s Annual Report 2017

Required fund

Details	Amount in NRs. Billion
Fund required @ NRs. 180 million per MW	531.71
Total Loan Requirement (70%)	372.19
Total Equity Requirement (30%)	159.51

Available fund

Details	Amount in NRs. Billion
Total Loan of Commercial Bank as of Ashwin 2074	1,802
5%	90.078
10%	180.157

The figures clearly show that there is a huge deficit in domestic financing for hydropower projects.

In such situation, FDI seems to be the only option if we are to develop the projects that have done the financial closure and the projects that are in the process of doing so.

Well, there are some positive signals for foreign investor such as introduction of dollar PPA for projects above 100 MW. However, majority of the projects (2,953.924 MW) are below 100 MW, and every Nepali hydropower professional by now knows ‘without dollar PPA, no investor (loan investor) will invest’.

Policy makers of Nepal should understand the technicality of hydropower revenue stream. Unlike foreign investors in hotels and trading businesses where the business owners have the advantages of increasing their selling price and sales volume in order to mitigate the forex risk, hydropower owners lack such benefits.  Its revenue is fixed for the entire PPA period. Any fluctuation in the foreign exchange rate will directly affect the repayment schedule. On top of that, our currency is peg with Indian currency (IRs. 1 = NRs. 1.60). What if in one fine morning, the peg is revised to IRs.1 = NRs. 2? I don’t think anyone who opposes dollar PPA has answer to this question.

For years, our policy makers have urged not to sign dollar PPA but one thing I never understand. When everything we import is paid in USD, why there is so much fuss when it comes to dollar PPA?

The equation is very simple. If we do not sign dollar PPA then forget about constructing 17,000 MW in 10 years. We will not be able to realize all the projects (2,953.924 MW) that have done the financial closure and the projects that are in the process of doing so.  

 In addition to dollar PPA, the PPA regime that we are now adopting needs some modifications if we are to attract investment in fast track. Many foreign investors do not want to lock their investment for a long period of time. In order to better understand what I am trying to say, let me throw some figures.

Projects	Capacity	Investor	Per MW construction cost
Upper Marsyangdi	50 MW	Chinese	NRs. 320 million
Upper Trishuli 1	216 MW	Korean	NRs. 280 million
Kabeli A	37.6 MW	World Bank	NRs. 297 million

The above projects are owned/invested by foreign investors. If we look at their per MW cost, they tend to construct the projects in the range of NRs. 300 million per MW against NRs. 180 million per MW by the local developers. The figure suggests that foreign investors are not here to collect dividend after the operation.

Fair enough! If this is the case, why not to give another option to those investors who do not have patience to wait for a longer period to recoup their investment? For instance, 10 years PPA option.

                                                         

Currently, the PPA rate for RoR project is NRs. 5.88 per kWh (NRs. 4.80 x 0.7 + NRs. 8.40 x 0.3) in the first year of operation. There are 8 escalations at 3 percent (simple). From the ninth year of operation, it reaches to NRs. 7.29 per kWh and remains constant until the project is handed over to government of Nepal at free of cost (after 30 years of operation from Commercial Operation Date, the project has to be returned to Nepal Government).

Year	Existing PPA rates per kWh (NRs.)	Proposed PPA rates per kWh (NRs.)
1	5.88	12
2	6.06	12.36
3	6.23	12.72
4	6.41	13.08
5	6.59	13.44
6	6.76	13.80
7	6.94	14.16
8	7.11	14.52
9	7.29	14.88
10	7.29	14.88
11	7.29
12	7.29
13	7.29
14	7.29
15	7.29
16	7.29
17	7.29
18	7.29
19	7.29
20	7.29
21	7.29
22	7.29
23	7.29
24	7.29
25	7.29
26	7.29
27	7.29
28	7.29
29	7.29
30	7.29
Total	212.39	135.84

Let’s introduce 10 years PPA model in addition to 30 years. Although the rate seems to be more than double, the actual amount Nepal government is going to pay will be reduced to almost half (NRs. 212.39 vs NRs. 135.84).

Now the question lies, will they be attracted? For this, let’s do a simple assessment.

 Practical Assumptions.

Plant Factor	60%
Debt: Equity	80:20
Repayment	8 years
First Year Revenue per MW	Annual Royalty + O&M per MW
NRs. 63,072,000	NRs. 2,361,440

Repayment of Loan

Loan Amount per MW (NRs.)	Annual Average (P+I) @ 4%	Annual Average (P+I) @ 5%	Annual Average (P+I) @ 6%
300,000,000	43,881,391	45,575,712	47,309,149
DSCR	1.38	1.33	1.28

Loan Amount per MW (NRs.)	Annual Average (P+I) @ 4%	Annual Average (P+I) @ 5%	Annual Average (P+I) @ 6%
350,000,000	51,194,956	53,171,664	55,194,007
DSCR	1.19	1.14	1.10

By looking at the figures, I am pretty sure we will be able to attract a lot of investors by this adopting model. It is not a bad model, is it?