USAID-Funded Nepal Hydropower Development Project (NHDP)

China is a major funder of developing country infrastructure, lending approximately $40 billion annually through policy banks. The Belt and Road Initiative (BRI), launched in 2013, consists of two major components: the Silk Route Economic Belt and the 21st Century Maritime Silk Road. The BRI aims to create a network of overland and seaborne trade routes connecting China to Europe and other parts of Asia. Developing countries are increasingly turning to Chinese financing due to a growing appetite for debt and infrastructure spending. The demand for additional funds is driven by factors such as budget deficits and infrastructure needs. Chinese financing is preferred due to its flexibility and willingness to provide funding in situations where other traditional countries are not willing to provide finance. Chinese government interaction with developing countries does not prescribe solutions and presents itself as a partner in infrastructure cooperation and multilateral engagement. Chinese funding provides business opportunities for Chinese contractors, creates a situation where countries get into debt with China, and enables faster and cheaper transportation of natural resources to the Chinese economy. The financing also facilitates the penetration of Chinese goods deeper into the continent and further its geopolitical control over the region. However, countries have often considered this as a "debt trap." The Engineering, Procurement, and Construction and Financing (EPC-F) model is a project financing mechanism in which the EPC contractor also arranges financing for the project through tie-ups with financing institutions. This model has been implemented for project development, especially in developing countries, where EPC contractors have better access to low-cost financing, including EXIM financing. In Nepal, some examples of proposed EPC-F financing include the 48.8 MW Khimti-2 hydro power project by Chongqing Water Turbine Works and the 1200 MW Budhigandaki Hydroelectric Company by China Gezhouba Group Corporation. The EPC-F model differs from traditional project finance in several key areas. In EPC-F, the EPC contractor is responsible for arranging financing, and the project financing is tied to the EPC contract. The EPC contractor is also responsible for providing security and credit comfort to the lenders. In contrast, traditional project finance models rely on the project developer to arrange financing and provide security guarantees. In Nepal, the EPC-F model is considered suitable for various types of projects, including hydroelectric power plants. The evaluation of EPC-F proposals involves assessing the technical and financial capability of the EPC-F contractor. Technical capability is evaluated based on expertise in managing similar EPC contracts for hydroelectric power plants, while financial capability is assessed based on the historical net worth of the EPC-F contractor and its historical average annual turnover. The EPC-F model offers several benefits, including reduced project costs and faster project implementation. However, it also poses risks, including the potential for escalated costs and conflicts between the EPC contractor and the project company. In Nepal, the EPC-F model is being considered for various projects, including the Khimti-2 hydro power project and the Budhigandaki Hydroelectric Company.