Hedge fund delay threatens hydropower projectsThe government’s inability to establish hedge fund, an insurance-like mechanism to cover the exchange rate risk, is affecting the progress of hydropower projects backed by foreign debt.
The government’s inability to establish hedge fund, an insurance-like mechanism to cover the exchange rate risk, is affecting the progress of hydropower projects backed by foreign debt.
The lack of hedge fund is mainly affecting 216MW Upper Trishuli-1 Hydroelectric Project pushing back its construction date.
Almost a year ago, the NEA signed a PPA with Nepal Water and Energy Development Company (NWEDC) to develop the Upper Trishuli-1. 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 exchange rate risks while making payment in US dollars, the developer and the NEA agreed to hedge the investment. In the absence of hedging service in Nepal, the project developer is unable to raise funds for the scheme.
“If the government fails to introduce the hedging service on time, we might have to abandon the project as we are finding it difficult to find lenders for the project,” said a NWEDC source.
The hedge fund Nepal government plans is a kind of insurance to cover additional liability investors or the government may face due exchange rate fluctuations.
While introducing guidelines for dollar-denominated Power Purchase Agreement (PPA), the government included the caveat of insuring the foreign debt portion of the investment against exchange rate risks.
As per the same guideline, the government, the project developer and Nepal Electricity Authority, the sole off-taker of electricity in the country are required to allocate a certain amount of money to pay the premium. However, the guideline is not clear about the amount each party must contribute. This has confused many.
Due to this confusion, the government has not been able to set up the hedge fund although almost a year has gone by since the guidelines came into effect.
Nepal Rastra Bank (NRB), the central monetary authority the government assigned to prepare the terms to establish the fund, has already submitted its draft to the Finance Ministry. The ministry is unable to introduce the mechanism because the stakeholders that include the NEA and the project developers disagreed at a meeting called by the ministry.
The NRB mechanism requires the developer to contribute 50 percent of the premium. The developers opposed this saying this would significantly increase project cost.
A Finance Ministry official said it might take several months to set up the hedge fund.
Finance Ministry Joint Secretary Uday Raj Sapkota said, “The hedge fund is a complicated mechanism. It would take some time to establish it.”