Getting a bigger bang for each buck of the promised line of credit from India

Let us hope that Indian Prime Minister Narendra Modi’s speech to the Nepalese Parliament on August 3, 2014 will be a game changer in the existing relationship between Nepal and India.  Stepping aside from the political implications, I want to focus on the promise he made to provide Nepal with a concessionary loan equivalent to almost one US billion dollars which he urged be used towards investment primarily in infrastructure projects.  We can look at this as part of his support on the “HIT” (Highways, Infraways and Transways) initiative with respect to Nepal. I am glad that India has explicitly agreed to provide this despite the fact that it could use the funds herself to build her own infrastructure.  What it boils down to is that essentially India is using its own “line of credit” with other countries to give us this line of credit.  It would therefore be stupid of us not to use it or misuse it and there is no guarantee that both could not happen.

What I propose is that we take this opportunity that India has given us to multiply the effect of the line of credit (LOC) to create a larger fund targeted towards major “pipeline’ type infrastructure projects.  So how do we go about doing this? Let us start by creating a legal entity which we shall call Nepal Infrastructure Fund I. This legal entity would be registered in a location where potential investors feel comfortable with.  This legal entity would then issue three types of securities (a) equity, (b) mezzanine debt, and (c) senior debt.   Government of Nepal would be the sole owner of the equity which will be financed by the concessional line of credit provided by India.  The mezzanine debt would be sold to multilateral agencies and senior debt to international investors targeting primarily insurance and pension funds who have the capacity to invest in long-term debt.  The senior debt could be made more attractive by having it structured such that it is rated AAA by one of the global rating agencies.  If we assume that equity will be 25%, mezzanine debt another 25% and senior debt the remaining 50% of the structure, we will have taken the USD 1 billion line of credit and leveraged it into a USD 4 billion dollar fund.  Nepal then could use the fund to finance major pipeline projects such as an east west 4 lane expressway with link to Kathmandu, an east-west double track railway with link to Kathmandu and one or two major hydro power projects.  The investments from the fund should go entirely to cash generating infrastructure projects and not wasted in pork and barrel development projects.

Nepal could seek the help of IFC, ADB or one of the global investment banks to structure such a fund so she can get a bigger bang for each buck of the promised LOC from India.  This fund could then serve as a model for future funds for investment in Nepal's infrastructure space.  Despite the hype given to private sector participation, no matter which country you turn to, large infrastructure projects are owned and constructed (with private sector participation) by the government primarily because it is the most effective borrower, gets the most economic benefit from their development, and has the least required rate of return.  I sincerely hope our government has the vision and the will to make the best and most effective use of the financing facility that India has decided to grant us.  It would be a dereliction of duty to the Nepalese people not to do so.