Econ-ity » May 27, 2014

Daily Archives: May 27, 2014

Power Trading Between Nepal and India

Trend of Power Trading

Trend of Power Trading

There is a free flow of electricity in Nordic countries and prices are determined by free interaction of supply and demand. This mechanism has helped new players to enter the market which eventually reduces the price and brings new innovation. Additionally, it has created energy security in the region. Learning from the success of the Nordic region, East African countries like Rwanda, Tanzania, and Kenya are also reforming their energy policies so as to aid the formation of a common market for energy exchange. All this has been possible in the South Asian region because various sources of electricity are available in different countries—Nepal and Bhutan have rich hydro resources, Bangladesh has a substantial amount of gas reserve and India generates vast amounts of cheap energy from coal.

Power exchange seems much more favorable in case of India and Nepal as there exist a complementary relationship in demand and supply of electricity in these neighboring nations. Electricity production in Nepal is high during summer season due to maximum flow of water in the rivers. Additionally, majority of the projects which are under construction are also run-of-the-rives as such requires low cost and has lesser environmental impacts. As a consequence, there is energy surplus in Nepal during the wet season. At the same time, the demand for energy in India may be higher due to use of refrigerators, coolers, air conditioners, and other electrical appliances that are used for lowering temperature. Moreover, the hydropower potential of Nepal is substantial than its population size and expected needs. On the other hand, energy demand in India is growing at the rate of 9 percent due to rapid economic transformation. Therefore, electricity trade between these countries can be beneficial for both the countries.

Nepal’s hydropower potential which is concentrated in far western region is difficult to harness if it is used only for domestic purpose because demand of electricity in that area is relatively low due to sparse population and less availability of industries. Therefore, lengthy transmission lines should be constructed to bring power to the load center. Building such transmission lines, however, is very costly and sometimes costs more than the construction of hydroelectric project itself. Additionally, it significantly increases technical losses. In this case, it is beneficial to export power to various adjacent parts of India, including Uttarakhand, Uttar Pradesh and even Haryana which makes more economic sense. However, for the execution of such a plan, Nepal needs Power Trading Companies that exchange electrical power in commercial manner considering water as a market commodity instead of a political good. This mechanism will further facilitate buying and selling of electricity at different times of the day. Prices will be fixed according to market signals and this is very essential for the development of hydropower.
Power Trading Companies like Power Trading Company-India were established in India as its energy market was liberalized. It makes energy integration much easier as Power Trading Company is an essential body for trading power in a competitive market. Due to presence of it, power markets seek to maximize competition in generation and compete on price instead of cost. Thus, it creates value for power by discovering market for power which is crucial for introducing innovative products according to need of customers. Additionally, it provides a single window service to take care of all intermediate requirements like transmission agreements, metering, accounting and other necessary things.

Furthermore, integration of energy market through formation of Power Trading Companies helps to optimize existing energy resources and provides commercial outlook to the sector by catalyzing investment especially from domestic and foreign private sector. It identifies and promotes opportunities for mutually beneficial cooperation projects in the power sector. The countries of Greater Mekong Sub-region (GMS) like Cambodia, Lao PDR, Myanmar, Vietnam and two provinces of China, namely Yunnan, Guangxi Zhuang have already practiced this principle. This ushered in much needed prosperity in the region through exchange of energy and further led to integration in other economic activities.

Nepal also needs to initiate similar work by holding a series of dialogues and discussions with the state governments of Uttarakhand, Uttar Pradesh, Haryana and Bihar which are neighboring states of India as people living in this region have been suffering from acute shortage of power for a long time. The invitation from Narendra Modi to Nepalese counterpart during his sworn in program provides a wonderful opportunity to raise such issue for the betterment of both countries. If Nepalese Prime Minster is able to float this idea during his formal and informal meeting, it might pave the way for detailed discussion in secretarial and ministerial level as follow up process, and a long term agreement will happen for power exchange. This leads into construction of mega projects which have been waiting for a long time for suitable environment and the adequate availability of energy will surely bring higher economic growth with rapid industrialization and modernization process in the region and remove people out of vicious circle of poverty in massive number.

Pramod Rijal

About Pramod Rijal

Pramod Rijal is a Research Associate at Samriddhi, The Prosperity Foundation. He is also a lecturer of Economics at Mega National and Unique College of Management and has contributed a number of articles in various national dailies.

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Framework for Foreign Investment Policy for Nepal

IMG_0352On May 23, 2014, Samriddhi Foundation held a round table meeting to discuss the Framework for Foreign Investment Policy in Nepal. As the latest draft of Foreign Investment Policy (2014), proposed by the Ministry of Industry, has been receiving mixed feedback from stakeholders and experts, it had become important to outline a framework that clarifies the objective of the policy and outlines the application of sound measures and tools to achieve the goal.

International Finance Cooperation (IFC)’s investment policy specialist, Mr. Roberto Enchandi was the speaker for the program and he shared his knowledge and expertise during the discussion. Mr. Enchandi specializes in legal and political economy dimensions of investment issues, dispute resolution and regional trade, among other trade-related subjects. He has also served as the Chief Negotiator for Costa Rica in numerous international negotiations on investment, trade in services and dispute settlement.
The meeting was attended by senior bureaucrats, experts, business community leaders, economists, editors & columnists and foreign investors. The event was held at Hotel Yak & Yeti and here is a brief summary of what was discussed during the event.

Mr. Roberto Echandi commenced the discussion by giving a presentation on ‘Improving Investment Climate in Nepal’. He stated that the starting point for Nepal would be making a broad, but concrete and realistic policy framework which prioritizes short term reforms and can be realized within a government’s time; i.e. 2-3 years. He brought to attention that wealth creation is non-linear; simply receiving investment does not ensure growth as can be seen from countries like Nigeria where investment has not resulted in proportional growth or development. Hence, proper investment policies are crucial for managing FDI. His presentation highlighted three key ideas about investment. T

They were:
• “Investment policy is not about choosing between FDI and domestic Investment, it is about connecting            them.”
• “Investment is not a transaction: it is a relationship.”
• “Not all investment is the same, nor has the same impact on economic development.”

Mr. Echandi emphasized that while it is very important to promote and attract FDI, retaining existing investors is equally or even more vital. Keeping investors happy is key to successful FDI management. There are four kinds of investments namely: natural resource-seeking, strategic-asset seeking, market seeking and efficiency-seeking. Therefore, Nepal has to recognize this, decide why it wants investments and create different policies according to the nature of investments. For example, a country rich in natural resources like oil does not have to provide heavy incentives for investment in those sectors. The difference in development between Nigeria and Norway was that while Nigeria failed to differentiate between the types of FDI investments and so its Foreign Exchange appreciated till it was too expensive to produce anything else; Norway realized this difference and started investing in development factors like education.

Lack of transparency and arbitrary changes in the government were responsible for a country losing 25-30% of its existing investments. Thus, sound policies is the secret to success. In making policies, governments need to realize that while efficiency seeking investments might be sensitive and strong bilateral treaties might be required for their attraction and retention; host countries have more power while negotiating natural resource seeking investments which can be used to the countries’ benefit. Currently, Nepal has not been able to attract efficiency seeking FDI. Wealthy countries have diverse export portfolios and this is a phenomenon that is already taking place in Nepal; however, for Nepal is that pie of exports is very small. Even small industries have the potential to make a big difference in terms of export oriented industries, and it is important to start thinking in terms of a Global Vision and where we can fit in that picture.

Following the presentation, there was an open floor discussion moderated by Senior Advocate Anil Sinha.

Some of the key discussion points are summarized below:
• The proposed FI policy only focuses on bigger hotels. Restrictions on promotion for boutique hotels have to  be removed. Training and quality of these smaller hotels also need equal attention. Furthermore, FDI    approval time of 3-9 months is simply too long and needs to be reduced.

• The foreign investment policy of the 90’s and the drive of the government officials then were encouraging to     foreign investors. Now no large foreign investors are interested in investing in hydropower due to political        instability, problems relating to import duty and licenses, difficulty for market access (lack of the power trade agreement), changing laws and policies hence not honoring agreed upon contracts and threats of  nationalization. While problems of larger investments are settled through the investment board, the smaller  investors have no such agencies to solve their problems.
• Strengthening the procurement act is crucial since it is creating havoc in the construction industries.
• Reducing red tape and educating bureaucrats on what the laws are, is important so that discretionary           interpretation of the laws can be avoided, corruption is reduced and the process can move forward quicker.
• Political stability, uninterrupted electricity supply and tackling labor issues will help attract FDI in Nepal.       Furthermore, entering the global value chain area is something Nepal should aspire to.

• Delays in the approval process and discretionary decision making stems from unclear and conflicting regulations. Some policies in the Industrial Enterprise act are not in the Tax Law and so that causes a problem. Furthermore, there are two different agencies doing the same work, which additionally creates unnecessary confusion. This type of system benefits rent seekers. We also have unnecessary environmental clearance hurdles which benefits no one. Moreover, our policies have not been able to change in a timely manner. The Foreign Investment policy is closely related to the labor, foreign exchange and other kind of laws, thus harmonization of such laws is important.
• Information asymmetry exacerbates the problem of opportunists who thrive on the asymmetry. Therefore,        there is little incentive to resolve the information asymmetry problem amongst government bureaucrats.
• It is very important to focus on improving infrastructure, to attract FDI and also to make the tourism sector     more attractive.
• The policy does not address all kinds of investment activities and hence some businesses not listed in the     policy become illegal. Business people thus have to focus their resources on solving matters like this             through loopholes instead of focusing on running their businesses.
• Policies do not focus on retaining investments which is problematic.
• Putting minimum thresholds in sectors like IT, significantly discourage investments in those upcoming           sectors which do not need a lot of investments but have huge growth potential.

The discussion was commented upon by Mr. Echandi and also summarized by Mr. Sinha. The concluding remarks reflected upon the following: Perception is very important for a small country like Nepal thus building a positive image in the international community will help in attracting more foreign investments. As a small country working in the global framework of continuous interaction through mechanisms like World trade Organization and United Nations, one of the major avenues for Nepal to raise and protect its interest is through international agreements and bilateral trade and treaty agreements. Along with building international agreements to defend our interests, a watchdog mechanism to monitor the role and responsibility of government organization is also very important. The process of repatriation and visa requirements need to be hassle free. Conflicting policies and agencies need to be tackled and a harmonization of laws is required to curb discretionary power of bureaucrats. Finally, the Commission for the Investigation of Abuse of Authority needs to not only question but also take affirmative action and be an active and effective agency.

 

Sarita Sapkota

About Sarita Sapkota

Ms. Sapkota is the Coordinator of Communication and Development at Samriddhi Foundation and was previously engaged with the Foundation as a Research Associate for more than three years. She is a graduate of political science and also contributes articles for Samriddhi's column at The Himalayan Times' Perspectives supplement.

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Taxi Troubles

taxi troublesIf there’s something that has been common across the urban streets of the world, it would sure have to be taxi troubles. From the joyous streets of New York to the bustling Melbourne corners to the chaotically maddening streets of Kathmandu—taxis have grabbed headlines many a times.

Like governments elsewhere around the world, the government of Nepal took it upon itself to correct the marketplace imperfection that would have been caused if private players were allowed to take over the taxi industry sans the much needed regulation. And hence, in May 2000 A.D., the government banned registration of new taxis in Kathmandu Valley. Prior to the halt, about 8,000 taxis were registered to run in Bagmati zone and this amounted to about 80% of the total taxis in the country. According to the most recent data from the Taxi Unit, Bureau of Standards and Meterology, 4,834 of these ply on the valley roads and these are over 15 years old. With quite a percentage of them being out of order and the existent ones being run down and battered over the decade, the halt on registration raises some serious issues.

For starters, the idea of restricting entry means that the interests of rent-seeking taxi industry incumbents were valued over taxi customers. Restricted entry meant that the cost of licenses went up (quite unnaturally) and few held those licenses for their own benefits in the shadows of this artificial shortage. Also, over the last decade, the population of the valley has gone up at unprecedented rates—people from all walks of life have been drawn to this epicenter of dreams, opportunities and possibilities. But with this growth, the number of taxis has only fallen down—the ones that remain are a witness to the wear and tear that comes over time of repeated usage. These reasons combined have led the customers to pay higher prices for services that do not meet the quality standards as they are left with no other choice—after all, an over paid ride in a battered taxi is better than having to walk back home after a long day at work.

Instead of letting the market forces be at play, the already regulated industry is further scrutinized by the government’s price control mechanisms. The government has a ready-made rationale behind it—taxis have been charging exorbitant rates from passengers and there have also been reports of tampering with the meters. So, on July 16th 2013, the government raised the fare by 15.6 percent. The meter starts from NRs. 14; the fare has been raised to NRs. 37 per kilometer from NRs. 32. In earlier years too government has been raising the taxi fares according to the rate of inflation, increasing fuel prices and changing wage rates for the drivers.

While the government tries to justify the regulation citing reasons as private players monopolizing the market and public safety, it is easy to understand how competitive taxi markets and unfettered entry and fares for taxi providers would mean lower fares, higher level of services to the customers and possibly service innovations. If nothing else, this would mean entrepreneurial opportunities for many interested. Because of their flexible services like 24 hour-a-day availability and capacity to provide door-to- door service taxis have become an added element of a modern-urban lifestyle and the regulations have not only restricted the much needed competition but have also killed whatever little incentive they might have had to innovate and provide better services at much cheaper rates.

 

Anita Krishnan

About Anita Krishnan

Krishnan holds dual degrees--in law and sociology. Currently, she works as a Research Associate at Samriddhi, The Prosperity Foundation.

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