International Finance Corporation (IFC) — the private sector wing of the World Bank Group — has been supporting the private sector and infrastructure development here to put the country in higher and sustainable growth trajectory.
As Nepal has expressed commitment to move forward economically by ending the political instability, the international community is closely watching developments here. Commitment made by political parties to deliver constitution this time around has encouraged international and domestic investors to invest in the country. Nepal has received foreign direct investment commitment worth Rs 64.71 billion so far this fiscal. In this scenario, a high-level delegation from IFC recently visited Nepal to observe the opportunities and challenges here. Following the visit of the IFC delegation, Pushpa Raj Acharya of The Himalayan Times caught up with Valentino S Bagatsing, IFC's Resident Representative to Nepal, to know more about IFC's immediate plans and progress of projects in which IFC is involved.
Recently, a high-level delegation of IFC led by Global Director Sujoy Bose visited Nepal. What was the main purpose of the visit?
We all know that IFC operates in 180 countries and has been supporting the private sector for economic development in the respective countries. Subsequently, we are helping develop infrastructure in those countries that sorely lack it to help them grow. The visit of the high-level delegation of IFC shows the level of importance that IFC has accorded to Nepal. We can say that we were lucky to have our Global Director Sujoy Bose here, last week. We had put in a lot of effort to have him here to show him the opportunities and challenges in Nepal as we are trying to help the country. So hopefully, this visit will provide better opportunities of getting approvals from the IFC headquarter to help Nepal.
What was the view of the delegation on Nepal?
As the country head, I am pushing them to look at Nepal first before other countries. But the fact is that foreign direct investment (FDI) flows to those countries that have made the investment environment better. Nepal is not the only country in the region that is vying to attract FDI; there are other countries like Bangladesh, Sri Lanka, Myanmar and Pakistan in the race. IFC has very limited resources so we have to compare and channel our resources to countries that can and that do demonstrate the willingness to attract FDI. The question is whether Nepal is creating a conducive climate to attract FDI. So the delegation focused on whether Nepal is putting in efforts to create a better environment to attract FDI. Nepal will lose the opportunity to attract FDI if political instability continues.
As part of its support, IFC has been lending a hand in arranging funds for some hydropower projects like Upper Karnali and Upper Trishuli 1. And the IFC delegation also talked about concluding project development agreement (PDA) of Upper Trishuli 1 (that is going to be developed for domestic consumption), during a meeting with Energy Minister Radha Kumari Gyawali. Can we expect the PDA negotiation to be concluded sooner?
We are not so worried about export-oriented projects like Upper Karnali and Upper Marsyangdi. GMR, the developer of the Upper Karnali project, has already signed PDA with the Investment Board Nepal. Negotiations on Upper Marsyangdi PDA are also likely to take place soon. Yes, the delegation did talk about expediting the PDA negotiation of Upper Trishuli 1 project. IFC owns 15 per cent stake in Nepal Water and Energy Development Company (NWEDC) — the developer of Upper Trishuli 1. The 216 megawatt project is technically a very sound project. The run-of-the-river (ROR) project will have 50 per cent winter efficiency. Normally, ROR projects have 20-30 per cent winter efficiency. Investors of this project have invested a lot so far in building the access road to the project site among other components. And IFC has also made arrangements of financing for the project. The cost of the project is expected to be at around $550 million. The Asian Development Bank has already signed a letter of financing mandate with the project developer and other financers — European Investment Bank, CDC-UK, DEG- Germany, Proparco-France and FMO-Netherlands are ready to come and we have played our part in convincing them. We can achieve financial closure of the project in the next four months. However, the PDA is yet to be finalised despite several rounds of negotiations between NWEDC and the Ministry of Energy.
It has been reported that PDA negotiation of Upper Trishuli 1 has been stuck due to the debate on whether to purchase electricity in dollar terms or in the local currency. What is your take on power purchase agreement (PPA) in local currency?
I have mentioned above that Nepal is not the only country and that there are countries like Bangladesh that are trying to aggressively attract investment. These countries are signing PPA in dollar terms. Even Pakistan is doing the same thing. It is easy to sign PDA for export-oriented projects because the buyer lies outside the country, but the same thing is not applicable for projects that generate electricity for domestic consumption. We hope the PDA for Upper Trishuli 1 will be signed soon. Financers who are ready to come under IFC leadership are seeking bankable PDA. What we have to understand is that investors would like to get returns in the same currency that they made investment with. In my opinion, there should not be a problem for a PPA in dollar terms. If you look at the movement of the Nepali currency vis-a-vis US dollar over the past two decades, you will see that the Nepali currency has depreciated by only 3.4 per cent per year on an average. If you look at the money spent on importing diesel to meet energy demand then you will realise that it would be cheaper to invest in hydropower projects. The annual revenue that the Upper Trishuli 1 project will generate is estimated to hover around 0.001 per cent of current gross domestic product (GDP). Besides, the power developer will also have to pay taxes to the government in dollar. Apart from that, Upper Trishuli 1 will generate 1,000 jobs during construction phase. Nepali economy is paralysed due to acute power shortage and the project will also create multiplier benefits. If the government is able to supply power abundantly more investment will come in various sectors and the country's GDP will rise.
It is said that apart from hydropower projects, IFC is also interested in arranging financing for the Kathmandu-Tarai Fast Track road. Is it true?
We're interested in all infrastructure projects. We're also mulling over how we can lend support for transmission line projects in the Karnali and Marsyangdi corridors as well as the big projects that are going to be built there. Yes, the delegation had met Minister for Physical Infrastructure and Transport Bimalendra Nidhi and talks have just begun. IL&FS is trying to come to us and we have told them to wait. It would be too early to say anything regarding arranging financing for the Kathmandu-Tarai Fast Track road project.
Lastly, what is progress on issuing local currency bond? The government has already approved IFC's proposal of issuing bonds worth $500 million?
We are waiting for an approval from Securities Board of Nepal, which first has to change the regulation because there is no provision for multilateral agencies to issue bonds. We may invest money collected from bond in Upper Trishuli 1 to lower amount of money spent in dollar terms. However, banks and financial institutions have very low capacity to invest in local currency bond we plan to issue. Financial institutions in Nepal have total deposits worth $10 billion and 80 per cent of that amount is already sanctioned as loans. So, they have only $2 billion and certain portion of it must be maintained in reserve. This is the reason why we are planning to issue the bond in a span of five years.