‘Problems related to offtaker risk need to be addressed to protect interests of investors’


    Kenichi YokoyamaA Cabinet meeting held several days ago allowed the Asian Development Bank to float local currency bonds worth up to Rs 50 billion. With this, the Manila-based multilateral donor agency has become the second international financial institution to receive permission from the government to raise money from the domestic market by issuing local currency bonds. The practice of raising funds from the domestic market will reduce the country’s reliance on dollar-denominated loans, which tends to raise the debt burden whenever domestic currency weakens. The availability of these securities will also add another tool for liquidity management, as they can be used to mop up excess funds from the market. Rupak D Sharma of The Himalayan Times spoke to ADB’s Country Director Kenichi Yokoyama on how the multilateral donor agency is planning to use the funds raised from sales of local currency bonds. 

    The government recently allowed the ADB to float local currency bonds. How are you planning to use the funds?

    Local currency bonds will be issued to support private sector investment. In ADB’s case, the money raised from sales of these bonds will go towards various hydro projects. Many private investors are currently holding negotiations with Nepal Electricity Authority on development of various hydropower projects. We can consult with the government on supporting these projects using funds raised through sales of bonds. We are hopeful that this tool will contribute to the development of the hydro sector and the entire economy.

    Could you please name the projects that would absorb funds raised through local currency bonds?

    At this moment, we are eyeing seven to eight hydro projects. But to protect the interest of these developers, we do not want to disclose their names, as it could create distortions in the market.

    How much would the ADB invest in each of these projects?

    The total investment would be around $50 million per project. But it will depend on the size of each project and its funding needs. The ADB generally finances up to 25 per cent of the total project cost; and we won’t cross that limit. So, on average it would be $50 million per project.

    How would the bonds be issued? Would it be based on funding need of individual project, or are you planning to float these bonds at one particular time of the year to raise funds for all the projects in your list?

    We won’t be issuing bonds unless we see all relevant agreements and approvals, including implementation plan. So, information like scope of the project and implementation timeline must be finalised beforehand. Due diligence assessment by the ADB on the project’s viability is also needed. We will float bonds upon achievement of these milestones.

    What would be the maturity period of these bonds?

    It will depend on the scope of the investment and the market condition. But basically the maturity period would be anywhere between two to 10 years.

    And how would you fix coupon rates (or returns) on these bonds?

    We would use government bonds with similar maturity period as a benchmark to fix returns on bonds. Around 50 basis points would be added to this while fixing coupon rates. But it would also depend on market conditions.

    By the way, what is the timeline for flotation of these bonds?

    We won’t be floating all the bonds in a single tranche. We have recently received green signal from the government to issue these bonds, but we are still waiting for clearance from regulatory bodies like Nepal Rastra Bank and Securities Board of Nepal. Once we receive these clearances, and once we complete all the legal processes with our borrowers, we will take around four to six months to float the bonds. But first issuance may take additional one to three months because we may need time for further consultation and may even need clarification on certain issues from the government. So, the first tranche of bonds would be floated as early as 2015.

    What processes should project developers follow to qualify for ADB financing?

    Our private sector operations department has already started receiving requests from investors in this regard. Most of these investors are foreign investors, but lately we have also been holding discussions with state-owned Hydroelectricity Investment and Development Company Ltd. Currently, the government is interested in channelling funds raised through issuance of bonds to large-scale hydro projects. Many of these developers have already contacted the ADB. Others who want to qualify for ADB financing should contact our private sector operations department and discuss financial viability, and environmental and social due diligence aspects. We would be more than willing to extend support to project developers, if we are convinced that ADB’s presence would help those projects.

    The ADB is planning to use all of the funds raised through sales of bonds in hydro projects. But you have time and again raised the issue of offtaker risk. (In Nepal’s case, the offtaker is the NEA as it is the sole body that purchases electricity. But many fear it may one day fail to make payment for electricity that it is purchasing because of its weak financial condition.) Doesn’t this problem bother you anymore?

    How to mitigate the offtaker risk is a major concern from investors’ perspective. In neighbouring countries like Bangladesh and Pakistan, this risk is covered by the government. They have done this to lift the confidence level of investors. But in Nepal this remains an issue to be resolved. Problems related to offtaker risk, political risk and project termination risk need to be addressed so that interests of investors are protected. But nowadays risk-mitigating financial products are also available in the market and these instruments could be used to cover a part of these risks.

    Many also argue that NEA is a state-owned entity and if it defaults on payment, the government would step in and extend financial support. Isn’t that a genuine argument?

    In that case, the government may provide a written commitment to assure private investors that their investments are safe. I’m not saying the government should provide guarantee to each and every investor, but it can certainly demonstrate its commitment to protect NEA if the state-owned body’s financial condition deteriorates. Such assurance would give further boost to investor confidence.

    The government has expressed commitment to separate NEA into three separate units. Once that it done and all the units are adequately capitalised, would the issue of offtaker risk still remain a concern?

    Restructuring NEA and its transformation into financially sound entities would send a positive message to private investors. This would show presence of a financially viable power purchaser, which would not default on payments. Also, a strong regulatory body should be established to ensure that power purchase price and consumer tariff are properly fixed. This would ensure financial sustainability of the utility company and protect the interest of both consumers and investors. Once these reform initiatives are taken, the issue of offtaker risk would not pose a big problem. But until that is done, some form of guarantee must come from the government to assure that the financial obligation of NEA will be duly met. In this regard, a provision could be inserted in the power purchase agreement stating that the government would back NEA if its financial condition deteriorates.

    One of the major reasons why losses are piling up at NEA is its inability to control electricity leakage. What is your take on the issue?

    NEA’s distribution loss still hovers around 26 per cent. Efforts are being made to minimise this loss. In this regard, the ADB has introduced a programme to help NEA modernise its distribution system, and possibilities of public private partnership in power distribution and building of transmission lines are also being explored. Definitely, loss reduction, leakage reduction and collection of dues from various consumers are important elements of NEA restructuring.

    Source : The Himalayan Times