Global Perspective on Nepal’s Infrastructure Financing; Perspective of AD Capital Group

Nepal needs to invest ~8-12% of GDP (~$3B) annually to bridge its infrastructure deficit and achieve its medium-term goal of graduating from the LDC (Least Developed Country) status by 2022 and into a middle-income country by 2030.

Major infrastructure sectors in Nepal that require investments include telecom, energy, transportation and water. While our country has made commendable improvements in accessibility of water, electricity, telephone lines and fixed broadband, it is important to remember that increased access does not accurately represent an increase in the quality and reliability of these infrastructures. According to World Economic Forum’s Global Competitiveness Index 4.0 - Nepal ranked 109^th out of 140 countries, with infrastructure at 117^th out of 140

Government of Nepal has encouraged Public-Private Partnerships and introduced relevant policies to facilitate private investments. Due to the lack of familiarity of investors with such projects, they’ve allocated a smaller portion of their portfolios into infrastructure.

Major PPP financing methods include:

• Government Funding - Government provides funding and delegates private sector to “Design-Build-Operate”
• Corporate Finance - Private sector finances some capital investment for the project through corporate finance
• Project Finance - “Limited recourse” and “non-recourse” financing for project specific SPV

Commercial banks are currently the most common infrastructure investors in Nepal. Commercial Banks invest mostly through senior loans and revolving facilities. Development Finance Institutions (DFIs) have also contributed to the infrastructure in Nepal through long term debt, equity and other sources of financing through funds and fund of funds.

There has also been a rise in growth equity capital flowing into infrastructure in the recent years. Growth equity and VC investors such as Dolma Impact Fund I, with an AUM of ~$36.6 million and BO2 with an AUM of ~$14 million have contributed immensely towards infrastructure development.

Another source of infrastructure financing that’s catching steam in the emerging markets are sovereign wealth funds. Singapore’s GIC has committed (INR) Rs.4,400 Crores towards an infrastructure investment trust to finance 9 road projects in India. Sovereign wealth funds are expected to manage over $10 trillion in assets by 2020.

The capital markets have been a major source of financing up to date, mostly through equity in hydropower projects. Hydropower has been dominating public-private partnerships due to easy access to the capital markets. Total market capitalization of the hydropower sector is currently Rs. 106 billion.

An unchartered territory for infrastructure projects within the capital markets is through issuance of publicly traded debt. Traditionally, in most of Asia and in Nepal, projects have been funded by the government through a combination of loans from multi-laterals and commercial banks.

Other public debt sources are corporate bonds and municipal/sub-sovereign bonds. Corporate bonds (also known as debentures in Nepal), provide financing for infrastructure companies that are taking on specific projects with the freshly raised resources. Governments can also borrow from public debt markets at federal, local and sub-sovereign level to finance infrastructure projects. It’s essential to issue local and sub-sovereign bonds in the local markets to build awareness, develop capital markets and create liquidity before issuing euro-bonds.

In order to meet our infrastructure needs, we need to explore various methods and sources of financing, allocate resources appropriately and develop projects diligently.

To view AD Capital Group’s full presentation on Infrastructure Financing, please visit: https://www.adcapgroup.com/media