Private equity investment in Nepali hydro power

 Those of us who are trying to bring in international private equity investment in Nepal assert that despite huge opportunities in Nepal, foreign investors are still reluctant to invest here  mainly because of the numerous  perceived risks.Here are few highlights of an excellent paper ( Hydropower Financing Options for Nepal: Assessing the Prospect of Private Equity Investment) on what needs  to be done to bring in private equity capital in Nepali Hydro power sector

"The high risk perception of the hydropower investment in the Nepalese socio-political

environment is not likely to attract a particular private equity firm to individually undertake such

huge burden of risk. The government of Nepal (GoN) can initiate cross over funds where 

numerous private equity companies can invest  into this fund for the construction of the 

hydropower plant.  The cross over fund can be  invested either into the existing public listed 

companies or it can be invested into the privately held companies.  

The PPP policy support required for investing into this cross over fund will require the

government to devise policy setup which ensures amendment of the foreign investment policy for

allowing the equity participation of the private equity financiers and develop a centralized unit to

intermediate the transparent channelize of the fund into the hydropower project development. The

policy also need to enforce a higher degree of corporate governance requirement for the recipient

public and private firms, ensuring fair and transparent accounting standards and regulations for

protecting the rights of the minority shareholders along with providing effective tax benefits and

alleviation of supplementary vats to provide higher returns to the private equity financiers.

The major constraint in attracting cross over fund in Nepal is the lack of exit mechanism for the

private equity financiers. The high volatility of the stock market of Nepal and the low depth in the 

market makes it very difficult for a large private equity fund holder to exit through Nepal’s 

domestic capital market. For large hydropower plant investments, the government can facilitate 

foreign listing of the holding company. The foreign listing of the holding company will allow the

private equity financiers to exit the market through the international capital market.  .    

Poor reliability and access to  power are the most serious  infrastructure bottlenecks to

growth. Increasing access to electricity in a timely and cost-effective manner is one of the most

significant development challenges facing Nepal today. Considering Nepal’s recent emergence 

from conflict along with the establishment of a new governance system and emerging banking 

sector investing in micro power plants can be a viable option for private investors. Micro power 

plants which is connected to the regional energy grid is a new concept in South Asian countries. 

For Nepal the macro benefits of SHP are also evident, such as booming the economy of hilly areas, 

improving the rural energy structure, bettering the ecosystem, improving the living situation of 

rural people, promoting agriculture, creating more job opportunities and boosting tourism industry 

etc Although these bring no direct economic profit to investors, the local government and people 

can benefit a lot, who in return, give strong support to station construction and its long-term 

operation, and ultimately brings out a huge invisible profit indirectly(Arya, 2007).

Currently, the Banking sector of Nepal also has the capacity to finance the small hydropower 

plants which requires investment of below USD 300 million as the banking sector has a liquid 

fund base of USD 2 billion. However, the possibility of the asset liability maturity mismatches of 

the banking sector constraints the investment of the banking sector into the long horizon 

investments. The major constraint of the banking sector is the regulatory cap on single corporate

obligor and sector exposure limits, the single corporate obligor limits are 50% of the core Tier 1

capital (Total Capital Fund) and currently the banking sector is targeting 25% due to severe

liquidity concerns and credit risks. Currently the total core capital of the Banking sector stands at

NPR 96.854 billion20 (USD 1.3 BN), hence the total Banking sector of Nepal has funding

capacity USD 300 MN (25% of Total Capital Fund).  

The loans to the hydropower are considered as loans to deprived sectors thus no provisioning is

required in the initial periods, but the liquidity of the Banks has the possibility to face serious

setback when the entire financing of the hydropower is done through the banking sector. However,

given the huge number of financial institution of Nepal and the availability of USD 300, there is

window of opportunity to finance the small micro hydropower plants through bank financing.

In order to attract more local and foreign investment in hydropower sector of Nepal, the Nepal 

government needs to revise the existing power tariff structure of electricity and provide more 

incentive to the investors. Due to political pressure against price increase often regulators favor to

keep the energy price constant. In long run without any subsidy, any possible power purchase price

increase needs to adjust with price enhancement at the consumer level. The tariff is typically fixed

in advance and adjustable over time only in accordance with predetermined contractual terms.

Private investment can be attracted  into a hydropower sector only if investors are convinced that

tariffs will be set and periodically adjusted in a manner that ensures an adequate rate of return to

investors. After the decade long political conflict Nepalese government needs to ensure such

predictable return to the investors to attract private sector investors. Equally important, the public

utility character of infrastructure projects requires that the tariff be perceived as "fair" to

consumers. This balance is not always easy to strike, and disputes over tariffs can delay project

implementation" Source: http://www.nrb.org.np/international_conference/confproc_vol2.pdf (page 268-269)