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FDI and Hydropower Projects in Nepal

  • 22 MAR 2013

The total approved foreign investment by the Department of Industries has reached around USD 122 million in the first half of this fiscal year according to recent press reports. This has surpassed the total approved foreign investment in the whole of last fiscal year, which is a positive sign for the economy.

As per the data, investors from 33 countries have pledged to invest in 149 projects. The approved investment commitments in the same period last year was USD 39 million for 107 projects. These figures include both equity and debt investments from foreign investors and banks.

However, it is unclear on what the reason for such increase is, there is a hit that some projects have signed agreements with foreign lenders to finance energy and infrastructure projects, and some joint ventures for proposed projects have been set up. However, the increase in the approved investment amounts could be a consequence the minimum investment capital was been increased from USD 20,000 to NRS 5,000,000 (est USD 60,000) just recently. The percentage of service sector industries amount to 42% of the investment approvals, this is followed by energy (hydropower) and manufacturing, also suggests that increase in the minimum investment capital and some joint ventures in the the energy sector, has played a role in the increase.

187 valid hydropower survey licences equal to to 12,169MW has been granted to project developers by the Government of Nepal. Hydropower generation licence has been issued to 87 projects with a combined capacity of 1,841 MW. Current estimates are project and construction costs are USD 1.8 million per 1 MW. This means USD 3.3 billion capital is required in the coming years to construct the projects with generation license, and to construct all projects in the survey stage USD 21.9 billion of capital is required over the coming years. The GDP of Nepal is estimated to be USD 18 billion and banks in Nepal only have an estimated USD 1.5 billion deposits, which means Nepal does not have capital even to finance one-third of the projects with generation licenses.

Therefore, projects cannot be built without foreign capital. However, a major problem for foreign capital to enter this sector is the lack of market in Nepal. But this problem can easily be solved if more projects can export energy to India (and enter into PPAs with Indian buyers directly). However, there are no cross-boarder transmission line to enable this.

Therefore, there is no alternative, if these projects are to be developed and constructed in the coming years, two minimum requires have to be met – first, direct energy export to India should be possible and second, good regulatory environment of foreign loan and equity financing be created. Without these, project developers in the hydropower sector are heading into trouble.

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