• Is the idea of state running large buses the solution to improve public transport experience?

    Every one of us commuting in public vehicles in the city can recognize the awful experience in travelling by heavily crowded unmaintained buses while being squeezed up among commuters in most uncomfortable ways. The chronic victims are in fact the ones traveling to work on busy commuting hours when this recklessness is at its peak. For such commuters as we know, travelling between home and work has mostly been the area of tension besides work.

    In recognizing the tragedy of the commuters, the central government has made a decision to urge the municipalities of Kathmandu Valley to jointly form a company to operate 50 large buses running around the city. And, given our common belief that state is somehow responsible for taking care of our fundamental necessities like proper public transport system, this decision can easily be perceived as virtuous effort. After all, this government commitment to provide better public commutation service to people seems as a move to rescue us from the daily bad commutation experience. However, this common logic doesn’t draw the complete picture for this matter. There are actually relatively unaddressed but severe realities that can lead us to come at more thoughtful conclusions.

    In digging deeper down in search of the root cause of the terrible realities of our public transport service, one has to come across the existence of mafia-like transport syndicate. The transport syndicate being formed by influential associations of transport operators has enabled them to dominate the public transport sector in Nepal despite the horrible transportation service they are providing since decades. By preventing the entry of new transport entrepreneurs in the public transport sector by means of coercion and vandalism, the syndicate of public transport associations has heavily protected the limited number of below standard service providers from the mechanism of free competition that guarantees quality service. Meanwhile, their strong political connection and presence in regulatory committee (i.e., Transport Management Committee) that awards permits to new entrepreneurs in this sector has retained their impunity from law despite their illegal attempts to maintain monopoly.

    The idea of government running its own bus fleets to put competitive pressure on the syndicate is understandable. But, it may not be the most sustainable solution to the benefit of public vehicle commuters and taxpayers at large. To clarify such contention, one can always refer to the misery of the state-run enterprises in having to hugely rely on state coffer financed by taxpayers to somehow run its inefficient and loss making operations producing below standard services. Though they carry the objective of running in a profit-model concept that expects them of surviving on their own revenue, the state-system instead offers them the facility to encroach on tax payer’s wealth indefinitely as they lose track of profits. And, given the upcoming transport company is to be functioning within the same system and incentive, we can logically expect same fate for this transport based public enterprise too. Alas, state could be only adding another avenue to leech taxpayer’s wealth in name of providing so-called “basic transport service” to the people without considering the financial burden it generates among the very people.

    Having said this, utilizing regulatory tools to establish competitive market environment in the public transport sector can instead lead the state to create an effective solution that doesn’t require manipulating taxpayers’ wealth. By neutralizing the condition generated by the syndicate to keep new transport entrepreneurs away from the market, such measure will compel service providers to compete among each other to provide competitive service efficiently to survive in the market on profits. Most importantly, besides preventing taxpayer’s from the burden of financing transport service, it will enable commuters to travel more conveniently with impressive solutions that yield out of continuous innovation through sustained competition.

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  • Impediments to hydropower development in Nepal

    This article was originally published in The Himalayan Times on 8 January, 2017

    Hydropower development has been a matter of huge discourse and discussion for years in Nepal – a country distressed by hours and hours of load shedding – now. Earlier last year (in February), the Ministry of Energy came up with an action plan on National Energy Crisis Prevention and Electricity Development Decade, 2016 (NECPEDD 2016). This 92-step strategy provides steps to increase electricity production to 10,000 MW in the next decade. However, in retrospect, the government’s plans and strategy have seldom proven to work. The 10,000 MW production had already been envisioned in 2008, almost a decade ago, and still no progress can be seen, let alone achieving the target. Seeing the dismal state of various other plans and strategies of the government in terms of achieving the desired results makes one doubt the efficacy of “this” strategy as well. A number of policy and practical aspects of hydropower sector will have addressed if we are serious about hydropower development.

    Political and Policy Problem

    For the generation of high volume of electricity, a huge level of investment is required in hydro power sector. As the government cannot finance all hydro power projects, a large part of the investment has to come from private sector and foreigners. Greater degrees of foreign and domestic private investment requires stable political and sound policy environment. These factors reduces risk and enhance profitability of the investment. However, unstable political environment, frequent changes in government, inefficient and extremely politicized bureaucracy and unclear regulations in Nepal have increased the risk and uncertainty of the return on investment and thus made the investment climate in Nepal unfavorable. Once the government changes, the strategies and policies brought by the preceding government is not followed by the successor. This has hindered the development of hydropower sector in Nepal.

    Furthermore, multiple government agencies involved in the whole process of hydro power development is a major problem. Under the current policy framework, seven ministries and 23 government departments are involved in the development phase; a total of 36 Acts and Regulations guide hydropower development. The involvement of various government agencies and lack of coordination among them delays the development of the project and further increases the uncertainty.

    Benefit Sharing

    One of the biggest problems faced by independent power producers is the problem of benefit sharing. The idea of benefit sharing is to make sure that part of the benefits that power producers derive out of their hydropower projects also accrue to the locals in some way for what they have to give up; for example, land, access to water, access to forest, environmental safety and sources of livelihood like farming and fishing.

    Electricity Act (1992) requires projects larger than 1 MW to obtain license and pay royalty to the government. The Local Self Governance Act and Local Self Governance Regulations in 1999 required central government to allocate 10 percent of the royalty received to be used in districts where projects are located. This was increased to 12 percent by the amendment in 2004. However, these provisions have not worked as planned.

    On the other hand, locals expect the hydropower projects to provide basic infrastructure and service like schools, hospitals, roads etc. They also seek shares in the project and have at times been accused to have floated other unreasonable demands. But, as hydropower developer seeks profit and always tries to reduce cost, they cannot fulfill all the demands of the locals. In this scenario, locals group together to halt and obstruct the hydropower project and force the developer to fulfill their demands. The obstruction of the locals delays the projects and increases the cost. There are also chances that the project would be stopped.

    There is no clear answer to what the locals can demand from the developers, what the developers are supposed to give back to the locals, and what role the government is supposed to play in terms of mitigating conflicts of interests between the two former groups, should they arise (and many a times, they do). Hence, the lack of proper regulatory framework regarding benefit sharing mechanism has increased uncertainty and risk. This discourages and demotivates the investors to invest in the hydropower sector.

    Availability of finance

    The cost of generating 1 MW of electricity has been estimated to be about Rs. 180 million. Taking this into consideration, if we calculate the cost for 10,000 MW, it would be Rs. 1.8 trillion, which is pretty much close to our GDP of Rs. 2.3 trillion. Apart from this, hydropower projects have long gestation periods, so they need long-term financing. For commercial banks on the other hand, short-term investments with greater returns would appear to be more lucrative.  Hence, financial deficit is a major problem. In order to cover the deficit, investment from the foreign investors can have a good deal of contribution. Greater degrees of foreign investment would mean that Nepal can harness more and more of its hydropower potential in the future, if not 10,000 MW in 10 years.

    These are three out of many problems faced by hydropower sector of Nepal. Several studies have figured out many other problems. Underdeveloped capital market, lack of adequate transmission lines and insufficient capacity of existing and planned cross-border transmission lines for evacuation of electricity are some other major problems. As there are lot of problems to be addressed, we might not be able to solve all these problems at once. However, if we are committed to development of Hydropower sector, we could resolve one issue at a time. Breaking these bottlenecks is the need of the hour for Nepal, in terms of Hydropower development.

     

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  • Dissecting the Industrial Enterprise Bill 2073

    This article was originally published by Prience Shrestha on December 25, 2016 in The Himalayan Times.

    The Minister of Industries has been making a number of headlines lately. One of the latest ones was when he directed the Department of Industries (DoI) to complete the registration of local industries within 30 hours and those with foreign investment within seven days of having submitted the documents for registration. Similar good news is the fact that the Ministry is currently engaging in drafting the new Foreign Investment and Technology Transfer bill which has a lot of welcome developments for Nepalese economy. Furthermore, the Minister has been very vocal in his other public appearances where he has committed to improving the doing business scene.The new Industrial Enterprise Act has also recently been endorsed, and its potential contribution to enterprise development seems promising.

    In short, the reform initiatives being undertaken by the ministry are commendable. There however are areas that seem to have been overlooked in the midst of all of these reforms initiatives. Here I dissect the newly-endorsed Industrial Enterprise Bill from this very lens of how some of the provisions could create nuances in the future or even yield unintended consequences, and hope that these issues will be addressed as we move towards the implementation of the bill (in the form of an Act).

    Limitlessness in directives

    The bill requires registered enterprises to follow the forthcoming directives of the registration office without specifying its limit. Such limitlessness of what can be ordered by the office will ultimately create uncertainty and confusion among enterprise operators/owner about how they may be influenced in future, thus demotivating them to register their business formally. Laws should be able to give a clear picture to the entrepreneurs in terms of what all they are expected to comply with – offer predictability – so that they can then plan their activities under such clear regulatory framework.

    No Maximum Time Limit for Initial Environment Examination (IEE) and Environment Impact Assessment (EIA)

    The bill does not stipulate the maximum time limit for the IEE/EIA committees to give clearance to the submitted IEE and EIA reports which are essential for registering certain enterprises.

    There have been cases where getting an EIA (say) clearance from the committee has stretched for years for some businesses in the past. While there is a provision that stipulates that the enterprises be registered within seven days of having produced the EIA clearance, the Bill still fails to offer a mechanism on who should, how, and by when to communicate the shortcomings in the EIA should the committee find such shortcomings in the report.Setting a time limit by which the committee should communicate the limitations of the EIA reportwith the entrepreneur/industrialist citing the specific limitations could further hasten up thebusiness registration process. This would allow the applicants to address those issues at the earliestand complete the process sooner. Failure to hold the committee accountable on this front is boundto keep registration of a number of businesses in limbo, and worse even, create room for corruption.

    Composition of the Industry and Investment Promotion Board (IIPB)

    Though it is mentioned in the Bill that IIPB should decide on whether or not to permit the establishment of certain kind of enterprise within 30 days, the ex-officio status of the board members can likely not allow them to make decisions even within 30 days. Their ex-officio status will often hold them with primary responsibilities leaving less time to meet regularly, or timely carry out the functions that they are required to, as members of the board.  This can slow down permission, and consequently, the registration process.

    Secondly, the necessity to obtain permission from the IIPB in altering any policy that influences the operation of the industrial enterprise adds an additional layer of bureaucracy (which is further worsened by the former problem of composition).

    Thirdly, the composition of the board creates room for conflicts of interest. Having representatives of business associations in a body that grants permission to new entrants gives undue power to the existing business operators to influence who can and who cannot enter the market. The Bill does try to exclude members from partaking in the decision-making process whose interests might come in conflict in cases like these. However, once a party has been conferred such influential powers, there can be alternative means to exercise that power.

    The unintended consequence of privileges

    The Bill offers a number of benefits and exemptions based on gender and special areas without specifying any time frame until which the benefits will prevail. For instance, certain businesses established in technology-park recognized in Nepal Gazette and Special Economic Zones (SEZs) are bound to receive different forms of tax exemption indefinitely. Women entrepreneurs are given greater priority in terms of granting permission to establish their business in the SEZs while retrieving exemption in different registration fees indefinitely. While such pro-enterprise and pro-gender equality initiatives of the government are praiseworthy, the unavailability of time limit can yield unintended consequences.

    Once these kinds of benefits are offered indefinitely for special groups or operators stationed at specific locations, it already creates a situation where different rules apply within the same country. Also, removing these special benefits (say 10 years down the line when the initial goals have been achieved) in the future will have political ramifications. There will be a massive political price to pay for overturning the benefit system, which will perpetuate the benefits, which will further put one group at an advantage over the other. Therefore, it is very important that these benefits be tied up with some specified time frames.

    Besides, indefinite tax exemption for business inside the SEZs can create environment of discrimination for businesses operating outside of SEZs. Such discrimination can hinder the idea of enabling equal platform for free competition. In not criticizing the intention of the Bill to offer such privilege for the sake of industrial development, would it not be much better if such provisions applied all over Nepal?

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  • Economic prosperity through free market

    This article was originally published by Prience Shrestha on The Himalayan Times in December 11, 2016.

    Price system in a free market enables producers to gauge supply and demands of specific products or services in the market and consequently produce those demanded items. In the process, the price system helps the market guarantee an optimal utilization of resources. Following this notion, the idea of encouraging free market while limiting the role of the government in commerce and infrastructural services has remained valid, and has also delivered prosperity in different societies.

    The drive towards liberalizing the economy in the 1990s where the private sector took charge of the economy while the government played the role of a facilitator and a monitor sparked impressive economic growth in Nepal in its consecutive years.

    However, it should not be taken to mean that Government is a hindrance to prosperity, and therefore deserves to be completely extricated. Instead, Government has a strategic role of framing and enforcing laws and regulations that allow effective functioning of the market in the society. After all, free market relies on rules of just conduct that assures security of certain rights (private property, engaging in free enterprises) and enforcement of contracts for it to prevail and yield prosperity.

    ‘Strong and limited’ versus ‘weak and unlimited’

    Economic prosperity through free market occurs in presence of a strong government that keeps itself to playing the role of a facilitator and only administers justice and provides protection to people lives and properties while allowing the private sector to thrive. On the contrary, unlimited government that participates in all such activities that the private sector could do more efficiently, but is weak in performing its role of enforcing foundational rules of the market is disastrous to economic prosperity.

    Renowned economist Tom G. Palmer makes similar assertion as he attempts to range government effectiveness from the lowest scale of “weak and unlimited” to the highest scale of “strong and limited” in his essay called ‘20 Myths of Market’. Interestingly, this continuum offers an opportunity to scale the effectiveness of our own Nepal Government on the very measure of “strength” in enforcing market propelling rules and “limitedness” in keeping itself away from practicing commerce and providing public services and infrastructures – things that can be better taken care of through private sector under clearly laid down regulatory framework.

    Weak government

    In judging the strength of our Nepal government on this regard, its success in being able to enforce the legislated rules and regulation impartially among all participants of the market is definitely one of the important deciding variables. Given how it has remained exclusively lenient in imposing commercial regulations among large business houses, it only reckons double-standard and weakness from the side of the government in effectively enforcing rules and regulations. The latest running probe against Patanjali Ayurved Group of India regarding its unauthorized investment of more than NRs 150 crore in Nepal without retrieving permission as per our Foreign Investment and Technology Transfer Act (FITTA) is definitely a relevant illustration for it. Though this case scenario has especially charged the Indian Herbal FMCG company as guilty for skipping Foreign Investment regulations, the influence of the company and its founders’ strong stature on our government’s enforceability cannot be undermined either.

    Besides, similar concern of lack of government enforceability has also been observed in regards to outbound foreign Investment from Nepal. Speaking of it, people that can exercise influence on the government havemanaged to make foreign investment outside of Nepal despite such practice being barred by the law. In no way could a layman have succeeded in practicing Foreign Investment as such.

    The idea here is not to favour the capital control intention of our Investment regulation. It is in fact to highlight the partiality in enforcing the laws and regulation on different individuals and institutions based on stature and political connections. Ultimately, this lack of objectivity only pictures the inability of our government to enforce the legislated regulation.

    Except for the inability of the government to enforce laws and regulation objectively, dearth in institutional capacity of the government is also known to have hindered strong enforcement of law and justice. While this issue has infected all areas beyond commercial affairs, unfocused diversion of limited institutional capacity of the Government can be mostly found culprit for it.

    The unlimited government

    In turning towards evaluating the limitedness of our Nepal government, the boundless extension of ever-ballooning budget of the Nepal government is self-explanatory. After all, it is quite clear that the Government has chosen to remain limitless regarding its scope of influence in the economy. Economic Survey Report FY2015/16 published by the Ministry of Finance (MoF), shows clearly that the growth rate of fiscal budget, and the ratio of Government Budget to National GDP are observing rise in approximate average of 19.77% and 28.26% respectively; in other words, Government of Nepal has adopted the principle of unlimited government in terms of its role in the economy.

    If we now revisit the aforementioned scales in terms of measuring the government effectiveness, Government of Nepal unfortunately appears to lie close to the ‘weak and unlimited’ category (as against the more favoured ‘strong and limited’). Therefore, it is advisable for the Nepal government to gradually strengthen its role in areas of law enforcement and justice by curtailing its presence in commercial activities. Gradual divestment of State-owned enterprises mostly involved in commerce is one of the many widely favoured measures prescribed on this regard.Such measure allows the Government to concentrate its unnecessarily dispersed institutional resources in fundamental areas (i.e., administration of justice, contract enforcement, protection of lives and properties, and market monitoring) that support Free market and liberalization.

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  • The subsidy that doesn’t work

    Upon general reflection, the state subsidy programs of Nepal Government to expand the affordability of certain fundamental goods & services such as basic education and health, or to improve competitiveness in agriculture sector, etc. haven’t been quite successful. In fact, the inability of the state to efficiently administer its costly subsidy programs, and the consequent compromise of value-adding investments to other sectors of the wider economy seem to be doing more harm than good. The programs have not only hindered the access and growth of targeted sectors, but also have widely distributed the massive cost of operating such programs among wider participants such as taxpayers and other economic sectors that have very little stake on administered programs. In this write-up, we will scrutinize the state subsidy in fertilizer trading to validate our claims.

    Fertilizer sector observed a deregulation of the state monopoly in fertilizer import and distribution from 1997/98 to 2007/08. While the deregulation did allow free competition against the state-owned Agriculture Inputs Company Limited (AICL), the persistence of state-subsidy in fertilizers unfairly challenged the profitability for private players. After all, the prices of the state-subsidized fertilizers were still below the cost they were procured at, thus leaving no profit potential and room for competition. So, the opportunity for enhancing competitiveness & innovation in the fertilizer trading business through free competition was refused by the state-subsidy system even though deregulation took hold. Besides, given the fact that this subsidy program cost a whooping NRs 23.19 billion in last 7 years (FY2065/66 to FY2071/72), the intensity of this burden among the taxpayers and the overall economy also appears to be phenomenal.

    In general, state subsidy in agriculture or fertilizer is basically motivated with the convention that economic prosperity in Nepal can only initiate through Agriculture development. Thus, the idea of competing & substituting cheap foods imports from India and third countries through domestic produces supported via state-subsidy programs is well subscribed to by the state. But given the assertion by Nepali Times in an article published in Jan 2016, agriculture productivity has only increased by 3.36% on an average in the last five years (from 2010 to 2015) even though the subsidies to farmers have risen by almost 500% within the same period. And this statistical figure resonates acute failure of agriculture subsidy program of the state to assist agriculture development.
    Furthermore, the purpose to externally preserve an incompetent sector by spilling other people’s hard-earned fruits of labour (via taxing) is self-defeating. After all, submitting to cheap food imports will instead generate more wealth saving that will eventually enable greater investment in areas where the market would find more economic value and comparative advantage. So, prosperity seems to be more promising in letting wealth channel in areas of actual economic potentialities with comparative advantage than attempting to rescue a sector dogmatically while denying the opportunity of cost saving.

    In countering the argument that enough food should be produced domestically to maintain food security or buffer, encouraging higher consistency in cross-border trade to assure continuous supply would be more efficient than simply employing more wealth unproductively. Given that our neighbouring food exporting countries are producing more food than their internal demands at the brink of continuous technological improvement, they will definitely carry on with the incentive to export them for economic value after all.

    However, it would be highly unrealistic to expect the state to scrap the entire agriculture subsidy program – mostly due to populist reasons. So, why not reimagine it as a voucher system that can replace direct subsidy programs as it is designed to minimize certain unwanted implications while sustaining the original purpose? Given the fact that voucher systems work on the principle of allowing grants to the ultimate consumers to purchase certain goods/services, it at least assures free competition, grants efficiency, and maintains true reflection of the market by minimizing price manipulation. After all, the vouchers distributed on a need based assessment will let demand-supply mechanism of the market determine the prices, and the private players can gain equal footing to compete with the state. (Potential for voucher systems to achieve such mentioned benefits in area of education in Nepal is well discussed in here and here.)

    The potentiality to trigger a similar mechanism also exists in sectors including agriculture & fertilizers. In fact, the Agriculture Development Strategy (2015-2034) has even envisaged the implementation of the voucher system for similar purposes. However, unless a strategical framework and working procedure is devised for its implementation, it will only be another empty promise of the Nepal government.

    Nevertheless, the voucher system and subsidies are an act of forced wealth redistribution to fund state-support programs, and therefore costs taxpayers despite their lack of direct willingness. In fact, prosperity without state support is possible and New Zealand’s case has been a great evidence for it. While the country experienced overnight scrapping off of its farm subsidies in mid 80s only to witness more farm prosperity, New Zealand has proven that economic sectors can prosper on its own if the sector is adding value to the end consumers. Therefore, state-support system as subsidy to plan development is just a half-baked logic that needs to be reconsidered from a broader perspective.

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  • The unseen cost of Public Expenditure

    It is now a commonplace in Nepal that the public services are in state of despair – the roads are dilapidated, public education & health services are well below par, the civil service is infuriating, and the State-Owned Enterprises are at a sorry state to say the least. And yet, every successive government is obsessed with collecting more and more tax from the people against their hollow over-promising claim of fixing things. This is straight unjust; and very few people have any expectations from the government. If you are any concerned at all, it only provokes you – the taxpayer – to disregard the government entirely.

    The cause of this frustration is not just the bad public service we are receiving – the public service that does not acknowledge the sacrifice of the taxpayers’ fruits labour. There actually is a larger unseen economic loss that each of us is facing. Government generally has to bear a huge administrative cost before it can deliver whatever level of services or public goods it is “supposed to”, and, this inefficiency is even more severe in case of our own government that has to spend as much as 80% of what we pay as tax in order to only fulfill its administrative (to run different administrative units that collect taxes, plan where to send that money, then channel the disbursement of that money, etc. – assuming there is nil corruption) and financing expenses. Thus, it only leaves mere 20% as residue to actually finance its promises of public welfare and services. It is a huge opportunity cost that we are all bearing with. Imagine in how many different ways you could have put the NRs. 100 (say) you pay as tax to use if only you were able to use it as per your own preferences. That NRs. 100 could have been used to serve your own needs and the needs of those others whom you’d have dispersed your wealth across in case you could choose freely where your tax money could be spent.

    But then the government has a justification to that as well. It generally uses the false claim of having generated so much employment (directly and indirectly) through public sector as a pretext to keep its clutches on the wide varieties of services and sectors it is taking charge of. Read the Yellow Book (annual performance review of the state-owned enterprises) produced by the Finance Ministry annually to see how the government often cherishes employment generation as one of the major successes through State-Owned Enterprises despite their sorry state. But in all this fanfare, very less of us realize that genuine employment would be generated anyway in letting the free choice of the taxpayers take hold. After all, Government is simply holding up Human Resources in grossly unproductive sectors that could be mobilized in other industries able to generate output that market values. So, it ultimately means that the effect of doing away with some of the unnecessary service responsibilities undertaken by the state is not plain unemployment, but it is the transition from the kind of employment generated for the sake of generating employment to the kind of employment generated for the sake of generating wealth and employment essential for economic progress. However, it is also obvious that the laid-off employees of the public sector have to get around with self-enrichment if they have to shuffle to industries outside of their former industry.

    Allowing free choice to individuals in terms of how their fruits of labour are consumed has more to offer compared to entrusting the government to fix all our problems, even more so in case of our own country. One of the possible ways to obtain this advantage of free choice would be to reconsider the role of our government, i.e. what services does the government provide to the people If the government has lesser things to do, then it only needs to collect lesser tax, and thus, lesser waste of resources in the form of administrative costs to sustain its structure. This could be a double bonus for Nepal given the government’s weak capacities – it frees up more resources to be spent on other areas, and the government can solely focus on the limited number of jobs that it has to deliver.

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