KATHMANDU: The World Bank (WB) will soon provide a cover of up to $100 million to 216-megawatt Upper Trishuli-1 hydroelectric project, in a bid to insulate the project developer from the risk that may emanate from the government’s failure to fulfil various contractual obligations.
The coverage — which works like a sovereign guarantee — will be provided once WB receives a formal request from government.
The Ministry of Finance (MoF) is already preparing to send the request, as it has finalised the decision to extend the coverage to the hydroelectric project being built by Korean investors.
“We will formally write to the WB this week asking it to initiate the process,” Hari Prasad Pandey, undersecretary at the Ministry of Finance, told The Himalayan Times, adding, “We hope the introduction of this insurance tool will encourage hydro project developers, especially foreign, to invest in Nepal.”
The WB will use a product called Partial Risk Guarantee to provide coverage for losses of up to $100 million.
This is the first time the WB is using the product in Nepal — although it is widely used internationally. The product would also be used in other hydro and infrastructure projects being built in the country based on need.
One of the benefits of using this product is that it will expedite the process of mobilising loans required to build the project. The product is also expected to help project developers acquire credit at a cheaper price.
“Since the product works as a sovereign guarantee, it will provide assurance to banks that their loans won’t turn sour even if the government fails to abide by contractual obligations. This confidence, in turn, will help trigger competition among banks to finance such projects, which will help project developers to bargain on lending rates,” a senior official at the MoF said.
Investors have long been demanding for introduction of such a product that can provide cover against offtaker risk, political risk and project termination risk.
Offtaker risk, for instance, has been a major concern for investors who want to build hydro projects in Nepal.
In Nepal’s case, the offtaker is state-owned Nepal Electricity Authority, as it is the sole body that purchases electricity from hydro project developers.
But many fear the power utility company may one day fail to pay for the energy that it is purchasing because of its weak financial condition. That’s why many international financial institutions express reluctance to extend loans to Nepal-based hydro projects that are intending to generate electricity for the purpose of domestic consumption.
“With the introduction of this insurance product, these types of risks, including political force majeure risks, such as expropriation and threats emanating from political disturbances that affect the project, would be covered,” the MoF official said.
In other words, the product covers ‘a range of risks relating to government performance, including changes in law, failure to meet contractual payment obligations, and obstruction of an arbitration process’.
The product also provides cover in case of expropriation and nationalisation of the project, currency inconvertibility or non-transferability, and failure to issue licences, approvals, and consents in a timely manner, among others, says the WB’s website.
The product, however, may not be available to everyone, as projects being developed by the private sector first needs to be approved by government and WB.
If the project is approved, the government first needs to request the WB to extend the product to the developer.
The WB then appraises the project and ‘conducts a corporate review to ensure the WB’s standard technical, environmental, economic, financial criteria are met’. The WB also signs three separate agreements with the government, project developer and the lender.
“Once project documents are finalised and commercial terms of transaction are substantially negotiated, the WB has to obtain approval from its Board of Executive Directors for the proposed (product),” says the WB website.
The project developer then needs to pay one-time initiation fee and one-time processing fee to purchase the product, on top of annual guarantee fee.
Once the product is issued, the WB freezes around a fourth of the coverage amount from the annual loan extended by the WB’s International Development Association (IDA) to government.
“In the case of Upper Trishuli-1 hydroelectric project, up to $25 million will need to be frozen from a particular year’s loan extended by the IDA,” the MoF official said. “This amount provides coverage for losses of up to $100 million.”
Source : The Himalayan Times