Hydropower Dev Bank: The road ahead
KATHMANDU, JUN 13 -
Nepal is a power-starved country and for the next couple of years the demand for electricity is expected to outstrip supply by a wide margin. Despite enormous potential, hydropower, one of the most viable sources of power, in Nepal has not been properly harnessed largely due to lack of funds for investment in hydroelectric projects. Given that backdrop, the Government of Nepal (GoN)’s recent decision to start a Hydropower Development Bank (HDB) is a noteworthy event.
As per the preliminary reports, the HDB will have an equity base in excess of Nepali Rupees (NPR) 10 billion and the GoN is seeking equity funding from international development partners such as Asian Development Bank (ADB) and International Finance Corporation (IFC) for the bank. The high level commission chaired by Surya Nath Upadhaya is in the process of finalising the exact structure and modalities of the development bank. The proposed HDB, according to the GoN, is expected to bridge the funding gap for hydropower projects, pave the way for hydropower development in Nepal and make Nepal self-sufficient in power.
But keeping aside the rhetoric, at this crucial juncture, one needs to analyse the viability of such a development bank in terms of sources of financing and its structure, especially given the GoN’s dicey track record of running financial institutions.
Hydropower financing—like any infrastructure financing—have long duration. As such the source of financing is the key in any infrastructure financing. As mentioned above, the HDB will have an equity base in excess of NPR 10 billion. This large capital base can help to potentially magnify available loan volume for hydropower projects. Having said that, on the liability side of the balance sheet, what will be the sources of financing to enable such outlay of funds for hydropower financing? This is the most important question.
While public’s deposits are the most stable and cheap form of financing sources, in this context, given the size as well as urgency of requirement, there has to be other alternatives. Also deposits, especially savings deposit, pose asset liability mismatch problem in case of hydropower financing. As per reports in the media so far, the HDB is planning to raise some of its funds by issuing bonds to public. But this is nothing new. I believe, if and when incorporated, an organisation like HDB should adopt best international practices. One such could be securitisation of remittance.
Given the enormous remittance inflow to Nepal, securitisation of remittance can possibly create massive low-cost funding source for the proposed HDB. Although securitisation poses macroeconomic challenges, crisis situation calls for radical actions. The report of ‘Indian Committee of Infrastructure Financing’ chaired by HDFC Bank’s Deepak Parekh had also recommended securitisation as a viable tool to optimally utilise the balance sheet of Non Bank Finance Companies (NBFC) for infrastructure financing.
There also need to be other regulatory changes to ensure long term viability of the proposed HDB. The current regulations don’t allow banks and financial institutions to borrow from outside Nepal. However, on the domestic front, there is lack of long term funds to meet the financing requirement of hydropower projects. In that context, it is imperative for the government to allow the HDB as well as other financial institutions to borrow from overseas markets. Given the vibrancy of foreign markets, it won’t be a problem to find a long term lender. Again, there are macroeconomic challenges to this, but we need to address them and move ahead.
Now, coming to the point of the idea of the proposed HDB being under the aegis of the government, there is both positive as well as negative side to it. On the positive side, the government can expedite the formation of HDB as it has more leverage when negotiating with multilateral partners such as ADB and IFC. On the negative side, the records of the government owned financial institutions are mediocre at best. Most of the government owned financial institutions, due to political interference, are rife with corruption and are saddled with non performing loans.
Already private sector participants have voiced their scepticism about the proposed HDB. Definitely, it would have been better off if the private sector was to be at the helm of things. However, given that private sector-led Infrastructure Development Bank has been in limbo for a long time due to regulatory vacuum, let’s hope that, as this will be the government’s baby, they are more likely to expedite the regulatory changes for the establishment of the HDB. Maybe that will open up avenues for other infrastructure centric development banks.
The writer is associated with a private bank. Views expressed are personal.
Source: Kantipur
Nepal is a power-starved country and for the next couple of years the demand for electricity is expected to outstrip supply by a wide margin. Despite enormous potential, hydropower, one of the most viable sources of power, in Nepal has not been properly harnessed largely due to lack of funds for investment in hydroelectric projects. Given that backdrop, the Government of Nepal (GoN)’s recent decision to start a Hydropower Development Bank (HDB) is a noteworthy event.
As per the preliminary reports, the HDB will have an equity base in excess of Nepali Rupees (NPR) 10 billion and the GoN is seeking equity funding from international development partners such as Asian Development Bank (ADB) and International Finance Corporation (IFC) for the bank. The high level commission chaired by Surya Nath Upadhaya is in the process of finalising the exact structure and modalities of the development bank. The proposed HDB, according to the GoN, is expected to bridge the funding gap for hydropower projects, pave the way for hydropower development in Nepal and make Nepal self-sufficient in power.
But keeping aside the rhetoric, at this crucial juncture, one needs to analyse the viability of such a development bank in terms of sources of financing and its structure, especially given the GoN’s dicey track record of running financial institutions.
Hydropower financing—like any infrastructure financing—have long duration. As such the source of financing is the key in any infrastructure financing. As mentioned above, the HDB will have an equity base in excess of NPR 10 billion. This large capital base can help to potentially magnify available loan volume for hydropower projects. Having said that, on the liability side of the balance sheet, what will be the sources of financing to enable such outlay of funds for hydropower financing? This is the most important question.
While public’s deposits are the most stable and cheap form of financing sources, in this context, given the size as well as urgency of requirement, there has to be other alternatives. Also deposits, especially savings deposit, pose asset liability mismatch problem in case of hydropower financing. As per reports in the media so far, the HDB is planning to raise some of its funds by issuing bonds to public. But this is nothing new. I believe, if and when incorporated, an organisation like HDB should adopt best international practices. One such could be securitisation of remittance.
Given the enormous remittance inflow to Nepal, securitisation of remittance can possibly create massive low-cost funding source for the proposed HDB. Although securitisation poses macroeconomic challenges, crisis situation calls for radical actions. The report of ‘Indian Committee of Infrastructure Financing’ chaired by HDFC Bank’s Deepak Parekh had also recommended securitisation as a viable tool to optimally utilise the balance sheet of Non Bank Finance Companies (NBFC) for infrastructure financing.
There also need to be other regulatory changes to ensure long term viability of the proposed HDB. The current regulations don’t allow banks and financial institutions to borrow from outside Nepal. However, on the domestic front, there is lack of long term funds to meet the financing requirement of hydropower projects. In that context, it is imperative for the government to allow the HDB as well as other financial institutions to borrow from overseas markets. Given the vibrancy of foreign markets, it won’t be a problem to find a long term lender. Again, there are macroeconomic challenges to this, but we need to address them and move ahead.
Now, coming to the point of the idea of the proposed HDB being under the aegis of the government, there is both positive as well as negative side to it. On the positive side, the government can expedite the formation of HDB as it has more leverage when negotiating with multilateral partners such as ADB and IFC. On the negative side, the records of the government owned financial institutions are mediocre at best. Most of the government owned financial institutions, due to political interference, are rife with corruption and are saddled with non performing loans.
Already private sector participants have voiced their scepticism about the proposed HDB. Definitely, it would have been better off if the private sector was to be at the helm of things. However, given that private sector-led Infrastructure Development Bank has been in limbo for a long time due to regulatory vacuum, let’s hope that, as this will be the government’s baby, they are more likely to expedite the regulatory changes for the establishment of the HDB. Maybe that will open up avenues for other infrastructure centric development banks.
The writer is associated with a private bank. Views expressed are personal.
Source: Kantipur
