Asian Infrastructure Investment Bank okays first loan to Nepal

KATHMANDU (The Kathmandu Post/ANN) - To facilitate investments in the energy sector, US$647.4 million hydel plant has been setup that would increase the country’s power generation by almost 20 percent.

The Asian Infrastructure Investment Bank has approved its first loan to Nepal since the China-backed institution was established in 2014. Nepal will receive $90 million for the construction of the 216 MW Upper Trishuli 1 hydropower plant in Rasuwa.

The anti-dollar alliance, hailing its first investment in Nepal as an example of how to facilitate investments in the energy sector, said that the $647.4 million hydel plant would increase the country’s power generation by almost 20 percent.

“The AIIB’s investment will provide much-needed, long-term financing for a vital infrastructure project,” said the bank’s Director General Dong-ik Lee. “We are confident that our investment will demonstrate the viability of Nepal’s sustainable energy sector to other potential private-sector investors.”

The Asian Infrastructure Investment Bank plans to start disbursing the pledged amount from October 2019. The project, being developed under a 35-year build-own-operate-transfer model by Nepal Water and Energy Development Company, is financed with a mix of debt and equity funding. The total debt stands at $453.2 million and is entirely financed by foreign capital with funds from sponsors including International Finance Corporation, Asian Development Bank and others.

According to International Finance Corporation, a stakeholder and lender to the developer, the plant has a capacity to provide 40 percent of the country’s expected annual output during the dry seasons including the peak winter demand months.

The hydel plant with three units, each churning out 72 MW of electricity, is expected to be commissioned in October 2024.

The developer and the Energy Ministry signed a project development agreement in December 2016. As per the terms of the agreement, the sponsors—a Korean consortium, local promoter and International Finance Corporation—will be responsible for the design, engineering, financing, construction, completion, commissioning, ownership, operation and maintenance and transfer of the project.

The project will be developed and commissioned in line with two modalities—engineering, procurement and construction by a joint venture of Daelim and Kyeryong, and operation and maintenance by Korea South-East Power.

The electricity generated by the plant will be sold to the Nepal Electricity Authority. The parties signed a 30-year power purchase agreement in January 2018. The state-owned power utility has agreed to buy the energy under a take-or-pay arrangement.

Earlier, the project had sunk into uncertainty after the developer threatened to pull out from Nepal over a foreign exchange hedge row with the government after it asked the developer to contribute a hefty sum to a hedge fund which would be used as a cushion against exchange rate risk.

When the Nepal Electricity Authority signed a power purchase agreement with Nepal Water and Energy Development Company a year ago to purchase the electricity generated by the project, the state-owned power utility agreed to pay in US dollars for a period of 10 years or until the portion of the investment made with foreign loans is recovered by the developer, whichever comes first.

According to the electricity authority’s estimate, it will be exposed to a foreign exchange risk of around $300 million if the exchange rate of the US dollar rises at the rate of 3 percent annually. And in line with the estimate, the government had asked the developer to contribute $150 million to the fund which it refused to do, an anonymous source at the electricity authority said.

“After the row over the hedge fund, the developer agreed to provide 17 percent of the energy to the utility for free after 14 years of commercial operation if it agrees to absorb the risks for the stipulated time,” the official said.

“Unlike dollar billing for power purchased from other projects under the build-own-operate-transfer model, billing for electricity produced by the plant will be done in Nepali currency after 10 years of commercial operation which will result in financial benefit to the Nepal Electricity Authority whenever the dollar depreciates. Also, the developer will absorb risks in equity which amounts to $194.2 million. If the company does its financial closing and manage funds in time, the electricity authority and the government will not be exposed to heavy risks,” the official said.

According to Energy Ministry officials, just before the Investment Summit in March, the Cabinet accepted the developer’s offer to provide free energy after 14 years of operation and asked the electricity authority to implement the agreement with the amended terms.

“As per the hedge fund agreement, the developer will contribute one-third of the amount and the electricity authority and the government will put up two-thirds of the required fund maintained by Nepal Rastra Bank,” said Prabin Raj Aryal, spokesperson for the Energy Ministry without disclosing the size of the hedge fund.

According to Aryal, the developer is ready to get the project off the ground, and has been developing infrastructures at the site. “Apart from mobilising heavy equipment, the developer has been taking care of prerequisite structures to execute the project,” he said. The electricity generated by the plant will be evacuated to the Upper Trishuli 3B hub over a 10-km 220 kV transmission line connected to the national grid.

Apart from the $90 million loan, the Beijing-based bank has also provided Nepal with $900,000 for the proposed Tamakoshi 5 hydroelectric project and $1 million for a power distribution system upgrade and expansion project from its project preparation special fund. The special fund helps eligible Asian Infrastructure Investment Bank members to mobilise grants for preparation of various projects.

Nepal is one of the 22 signatory countries that signed a memorandum of understanding to establish the bank in 2014. In January 2016, Nepal was elected to the bank’s board of directors.