Nepal Needs Project – Financing Policy, Laws For Large-Scale Investment

    Project_FinancingKATHMANDU, April 6: It has been a long time since the country opened its doors to foreign investment. But such investors have been putting their money in only a limited amount of equity and manage the rest of the capital through loans. International banks and financial institutions have not invested in Nepal and experts blame the lack of project financing policies and laws for this.
    Gandhi Pandit, a corporate lawyer, says that a major problem that international lenders have cited regarding projects in Nepal is that investors depend mostly on ‘recourse financing’ — a type of loan in which lenders depend on the personal guarantee of the equity investors and the lenders themselves, though they make up up to 80 percent of the fund injection, have no say in the project development.
    Such foreign investment is expected in infrastructure projects, particularly in hydropower, as domestic bank and financial institutions (BFIs) do not have the needed capacity or cash to invest in long term projects their deposits are short-term.
    Moreover, even domestic BFIs say that they find it risky to invest against ‘personal guarantee’ or on whatever the investors’ collateral is.
    Pandit further says the international BFIs look for laws of non-recourse financing in which lenders enjoy the right to intervene if the developers fail to carry the project ahead. Pandit argues that even GMR, the developer of Upper Karnali, will face an unfriendly law in project financing when it starts.
    Currently, the government only recognizes rights of the developers and not those of the lenders. Khimti (60 MW) and Bhotekoshi Hydropower (45 MW) projects were the only projects developed in recourse project financing model but with a ‘sovereign guarantee’ by the government.
    Moreover, the lack of a risk-sharing mechanism in foreign currency exchange-rate fluctuation, outdated provisions in the Civil Code that is yet to recognize any loan agreement that is made abroad for a project in Nepal, and no legal provision for project transfer as a collateral to another party when problems crop up during execution are some of the major problems encountered in the existing financing model in the country. For large scale projects in Nepal, lenders often demand assurance from the government because of the unpredictability in the political situation, possibility of strikes and protests from the locals, and lack of essential laws in project financing.
    “Hydropower project developers are facing such problems largely as lenders cannot invest just on the back of the Power Purchase Agreement (PPA) alone,” Gandhi says, adding that Nepal needs to bring in a Secure Transaction Act and loan recovery laws that enables transfer of project to another party.
    Keshav Dhwaj Adhikari, the spokesperson of the Ministry of Energy, says that it has been over a decade since Khimti and Bhotekoshi Hydropower Projects, the last large-scale projects to be developed through project financing.
    Adhikari also blames the political unpredictability and recurring strikes behind project financing staying away from the country.
    But local bankers are also to blame for a lack of good governance in project financing in the domestic market.
    Upendra Paudel, the President of Nepal Banker’s Association, says that Nepali bankers are lending in the project financing model but they often encounter doubts in transparency in the financial reports of such projects.
    As part of a risk-sharing measure, local banks are financing the projects by forming consortium even for small hydropower projects valued at few billion rupees.
    Source : Republica