Funding gaps in Hydro projects in Nepal ¶
By: Kapil Deb Subedi on Feb. 28, 2019, 5:14 a.m.
This paper examines the current status of hydro power development and availability of financing in hydro projects of Nepal. Using pooled cross sectional data of NEPSE listed hydro power companies; it examined the effect of capital markets constraints on investment decisions of hydro projects. Standard neoclassical model of investment as developed by Fazzari, Hubbard and Peterson (1988) served as the basic model for this study. The regression specification for examining the investment cashflows sensitivities in asymmetric information framework is obtained using the least square equation in which internal cashflows served as an important explanatory variable in causal relation.
The study results indicate that internal cashflows and leverage are the major determinants of investment decisions in Nepalese hydro companies. Moreover, the coefficient of internal cashflows is found significantly strong and positive indicating the interdependency of hydro companies over their internal funds in financing new investment projects. This relationship supports the financing constraints hypothesis that indicates the capital market frictions are embedding obstacles of hydro investment in Nepal. Meanwhile the companies have access to banks and foreign capital, still the financing gaps persist and dependency over internal finance has not yet substantially reduced. Additionally, the volatility of sales, cashflows and operating income of hydro companies, restrictions and quotas on long term lending due to maturity matching problem etc present significant financial exposures to banks and lending institutions that hinder them to provide as much credit as they demand. Besides, the cyclical variations of net worth and collateral values of hydro companies during the tough economic period also resist them to obtain enough finance for further investment. Further researches on policy barriers, market structure and regulatory provisions in hydro investment will provide plausible explanation of financing frictions in hydro sectors of Nepal
Keywords; hydro projects, internal finance, cashflows, capital investment, market imperfection