With some landmark agreements over the last few years, energy has become the most lucrative sector in Nepal for foreign direct investment (FDI).
The signing of the Project Development Agreement (PDA) of two major FDI projects—Upper Karnali and Arun III—and the signing of Power Trade Agreement (PTA) with India has boosted investors’ confidence.
This is reflected in the FDI commitment in the first 10 months this fiscal year. The sector accounts for around 83 percent of the total investment pledge, according to the Department of Industry.
FDI commitments rose 250 percent to Rs 65.09 billion as of mid-May 2015, up from Rs18.61 billion in the same period a year ago. The pledges in energy sector amounted to Rs53.99 billion, up from Rs1.44 billion a year ago. Four foreign investors—KSK Energy Ventures Limited (India), Byucksan Engineering (South Korea), Shiva Ganga Hydropower (India) and Sinohydro Holdings (Hong Kong)—have pledged to develop projects with a combined capacity of 644MW.
The services sector stood a distant second, with investment pledge of Rs5 billion.
“Nepal has the potential of attracting FDI in two major sectors—energy and tourism. The commitments in hydropower development seem to have accelerated significantly,” said Pashupati Murarka, senior vice-president of the Federation of Nepalese Chambers of Commerce and Industries (FNCCI).
He attributed the rise to a huge power demand, availability of resources and improving investment climate, with the successful completion of PTA and PDA.
The PTA has opened the way for Nepal to trade electricity like commodity with India. This has enthused a large number of developers who had been sceptical about market access.
Nepal Electricity Authority (NEA), the state-owned power utility responsible for generation, distribution and transmission of electricity, has been reluctant in signing Power Purchase Agreement (PPA) with large hydropower plants as Nepal is expected to become self-reliant in electricity during the wet season, while it will have to still rely on power imported from India during the dry season.
Khadga Bahadur Bisht, president of Independent Power Producers’ Association Nepal (IPPAN), said though the FDI commitment in energy has remained overwhelming, the April 25 earthquake and aftershocks have raised doubts whether the commitments would translate into actual investment.
“A number of developers have started re-accessing project sites and they are considering reducing the capacity as the earthquake has seriously impacted hills,” Bisht said.
He, however, the prospect of foreign investment in energy, in the long-run, looks bright because of ever increasing demand and opening of a larger market by the PTA with India.
Murarka said there are possibilities of rising FDI pledges in the infrastructure sector next year, after the earthquake. “The government needs to ease policies and get fast-track things to bring in investments,” he said.