HIDCL taking the initiative to create a ‘hedging fund’Hydroelectricity Investment and Development Company Limited (HIDCL) has taken the initiative to establish a “hedging fund” in order to mitigate the foreign exchange risk that comes along with foreign direct investment (FDI) in public infrastructure project.
Hydroelectricity Investment and Development Company Limited (HIDCL) has taken the initiative to establish a “hedging fund” in order to mitigate the foreign exchange risk that comes along with foreign direct investment (FDI) in public infrastructure project.
Hedging is a risk management strategy used to reduce the risk due to fluctuation of asset price. The hedging fund that HIDCL wants to establish is a kind of insurance that will cover additional liability created to any party (investor or government) due to the fluctuation of exchange rate.
In order to be eligible for coverage by the fund, the investor or the government has to pay a fee or premium determined by the volume of the investment as well as the time period.
The company has outlined a guideline document on the basis of which the fund will be created and operated.
The HIDCL has also started the conversation with Finance Ministry and Energy and Water Resources Ministry to establish such a fund.
Two weeks back, HIDCL officials gave a presentation before the Finance Minister and ministry officials. And last week, they had a discussion with the Energy and Water Resources Ministry.
According to Mukti Bodh Neupane, deputy general manager of the HIDCL, both ministers were positive about the company’s initiative.
The draft document prepared by the company will see further amendment after consultation with various stakeholders before finalising it with the approval from the central bank.
As foreign exchange management is the prerogative of Nepal Rastra Bank (NRB)—the central monetary authority of the country—the company plans to get its approval before finalising the guidelines.
The NRB has also prepared a concept note on operation of the hedging fund and is planning for the stakeholder’s discussion. As per the concept note prepared by the central bank, energy projects with installed capacity of 100MW or more, transmission line projects and metro and monorail projects which will be developed by foreign investment, qualify for the hedging service.
There is an urgent need for hedging service in Nepal, especially in developing hydropower projects in the country. Due to lack of hedging service, the Nepal Electricity Authority (NEA) is currently facing difficulty in signing power purchase agreement (PPA) in convertible currency with the projects being developed under foreign debt.
Recently, the NEA signed power purchase agreement (PPA) with Nepal Water and Energy Development Company (NWEDC) for the development of the 216 MW Upper Trishuli-1 Hydroelectric Project. As per the PPA, the power utility has to make payment in US dollars for the portion of the investment made with foreign loans. In order to mitigate the exchange rate risk while making such payment in US dollars, both the developer and the NEA have agreed to hedge the investment, according to the PPA. In absence of hedging service in the country, the project developer is facing difficulties in arranging funds for the project.