Investors need to see that the government is committed
30 March 2015 | The Kathmandu Post
KATHMANDU, MAR 29: Last year, Nepal signed a Power Trade Agreement (PTA) with India, providing much-needed headway to hydropower development in the country. It was followed by the signing of a Project Development Agreement (PDA) on Upper Karnali with two Indian companies—GMR-ITD Consortium, a private sector developer, and on Arun III with the Satluj Jal Vidyut Nigam Limited, a government entity. Investment Board Nepal (IBN), a government entity established to facilitate economic development by attacting investment, has been a key stakeholder in the signing of these landmark deals. Akhilesh Upadhyay and Prithvi Man Shrestha spoke to Radhesh Pant , CEO of the Investment Board Nepal, about the possibility of completing these projects soon, progress on the West Seti hydropower project, political interference at the IBN, and calls to ensure local equity in large projects.
The last few months were very important for the IBN, as it was able to secure two much talked-about hydropower projects—Upper Karnali and Arun III. Do you think the projects will actually go ahead given our political volatility?
I am pretty sure the projects will go ahead. We are abiding by obligations laid down by the PDA. As for GMR, the International Finance Corporation (IFC) has joined it, which would possibly ease financing for the project. Arun III, on the other hand, will receive funding from the Indian government. They have already started their resettlement action plan and have tendered out bridge works. Completing the project will not only boost our as well as the developers’ confidence but also that of the locals. I am very sure they will go ahead on time for two reasons. First, there is government obligation and second, there is enough local support.
Let’s talk a bit about National Pride Projects and how much the IBN been able to deliver.
The Investment Board is currently working on the West Seti and the Second International Airport (SIA). In West Seti, we were directed by the Natural Resources Committee of the previous Parliament to make some amendments, which we did. We had a caretaker government then. Developers take such things into account as they would like to have decisions made by a strong government with a Parliament. Even so, West Seti is moving forward. In August 2013, it completed both its financial and technical evaluations. The chairman of the Three Gorges himself visited and we made sure he met with the prime minister, the finance minister, and the energy minister. There’s commitment from both sides. They want to start drilling because they want to complete geological, tectonic, and hydraulic studies before the monsoon begins. The PTA singed with India and PDA signed for Upper Karnali and Arun-III also encouraged Chinese to invest in Nepal.
So you are essentially saying that instead of big Indian investments supposedly alienating the Chinese, it is working the other way round?
Our strategy should really be to diversify our portfolio. Of course, have the Chinese and the Indians come in but we should also try to get the Japanese, the Europeans. That is why I stress that investors are not going to come in until and unless they see a process like the PDA to which the government is committed. We have been blaming politics for too long. At the end of the day, the development mechanism of the government really needs to change. In many countries that are politically unstable, so to speak, things are happening. Just look at Ethiopia. Even until five or ten years ago, it would figure on the cover of Time or Newsweek for its poverty. Now, it is doing really well. In, we now have a window of opportunity.
What about the second international airport?
In the current situation, unless the government does it by itself, I do not think the private sector would be interested. First, it’s a green field project and will not be profitable for the next 15, 20, or 25 years. For anyone to take up that project, they would need a guarantee that a fast track will be built by the time the airport is constructed. Or else, no one is going to fly there and take six hours to come to the Capital. Second, the viability gap funding would be extremely high because they won’t make money. We will probably have to change our laws on the concession period too. Also, five tourism ministers have been changed during this period time, which is also the reason why decisions have not been made.
Can you elaborate on this?
First, we need investments for airports and I am not just talking about the SIA. We also need to upgrade the Tribhuvan International Airport (TIA). International investors/operators should look into both these projects. In other words, we need a competitive bid and these two projects need to be bundled together. The reason being, TIA is a brown field project, it already makes money. So the developer will have cash flowing in from the TIA, which can be invested in the SIA. Second, we don’t want two different operators competing in the country. Third, I believe there are only a dozen or so operators in the world. By having them here, it will be their first priority to get more tourists into Nepal. For example, if the same operator manages Singapore Changi Airport, they can give discounts and attract tourists from Singapore.
You’ve been involved with IBN for a while. Give us a sense of the volume of foreign investment you have been able to attract and what’s in the pipeline.
It takes some time to attract and realise large-scale investments. Basically, we look into anything above $100 million. We have approved FDI close to $900 million in cement industries and two hydro projects—Upper Karnali and Arun-III close to $2.5 billion. We are in the process of approving FDI for West Seti worth $1.6 billion. The SIA will cost about $6.7 billion in three phases. The TIA upgradation should be about $200-400 million. Then, there is $40-50 million for waste management.
Earlier you said that despite political stability, a lot of large-scale development works have been able to proceed elsewhere. Has Nepal progressed despite political instability and how do we insulate ourselves against it?
An institution like the Investment Board should be apolitical. It should not look into any individual party interests. We have to be extremely fair and present things as they are in the country’s best interests. For that to happen, we need extremely professional people and that’s the way our consultants are. There has been a lot of criticism that the Board has young people who are not very experienced. Having young people is beneficial as they can think out of the box and accept new things as they are not influenced by anyone. We need to develop this young generation and instil some sort of excitement in them to challenge them. That’s how I think we can develop.
That is fine, but there is also lot of talk of about political influence peddling within the IBN.
I don’t think so. If you look at Investment Board Act, it is extremely powerful and can be misused. If we were politically driven, those powers would already have been misused.
So why do we keep hearing of the tussle between the IBN and ministries?
I really don’t think it’s a tussle. It is a way of life. If you have a new department even in a small bank, it will get no help from anyone. Once it begins making money, then others will be interested in getting into that department. It’s the same thing.
You’re essentially saying that that worst is over for this autonomous body in terms of defining its turf?
I am very clear about what our turf is. As the law says, ‘to bring in investment’. We are the commercial face of the government. We are qualified people and look at intra-sectoral issues. We also need to focus on contract management, an area where the government is very weak. This leads to cost and time overruns.
Can you explain what kind of expertise the IBN has to our readers?
Right now we have about 27-28 consultants, all Nepalis, in various areas. Their expertise lies in project finance, basically looking into financial models; sustainable environment; social development as in the sort of framework we should have for large-scale projects; public-private partnerships; transport engineering; hydro engineering. These are our regular consultants. Apart from that, we have access to international consultants who have done these kinds of projects in other countries. Our job is to transfer their technical expertise to our people—not just the IBN but also to the Nepal Electricity Authority, the ministries.
One criticism of these large projects has been that there is a lot of disgruntlement about locals not getting enough stakes. There has been some positive activism towards that end and some not-so-positive activism. How do you address that call for local equity?
One of the things we are currently working on is what sort of framework should be in place for locals to participate in the project. We need to make sure that locals get and keep equity shares. In many places, what is currently happening is that locals get shares for Rs 100 and they sell for Rs 120. We need to educate these people and have a modality for it. There is a study currently underway for Upper Karnali and Arun to establish the criteria. Should it be the number of people affected vis-à-vis the project over the entire district? Should it be based on the people’s socio-economic background? One of the things we are trying to do in these two projects is maximise the chances of the affected people getting employed. We are also thinking of asking the developers to deduct 20-30 percent from the salaries of the employed locals and place that in a fund so that by the end of the construction, say five to six years later, people will have enough money to buy shares.
So you are mindful of the fact that in large-scale projects, local stakes should be internalised?
Definitely. But having said that, it shouldn’t be politicised. There has to be mechanism whereby one allows the developer to continue working.