Project Finance Criteria and Governance of Public-Private Partnership Hydropower Project in Nepal

Project finance arrangement has obvious need for contract management during its life cycle. Contract management for private sector hydropower projects generally include Generation License, Project Development Agreement, Power Purchase Agreement, Financing Agreement, Construction Contract Agreement, and Operation Contract Agreement. Markets, hierarchies and hybrids are the forms of governance structure under the Transaction Cost Theory, while debt and equity often regarded as a basis for determining governance structure. Fundamental criteria for project finance arrangement include establishing a special purpose vehicle to undertake a project, using debt and equity in capital structure, debt capital obtained based on projected cash flow without collateral except if the project created assets given to the lender against the security of loan by the sponsors. This paper analysed project finance criteria as the determinants of governance structure in hydropower projects. In Nepal, private sector developed hydropower projects and supply generated energy to the only off-taker under Public-Private Partnership (PPP) and Project Finance (PF) arrangement. The chi-square test was utilised to assess the association of fundamental criteria of PF with the governance structure of hydropower projects. The results indicate strong association between PF criteria with the governance structure of sample hydropower projects in Nepal.