Econ-ity » January 10, 2016

Daily Archives: January 10, 2016

The flaw of government enterprise: The case of Chameliya Hydropower Project

Image source: raymondpronk.wordpress.com

 

Supporters of government enterprises claim that the government “can” price its services and allocate its resources efficiently. This, however, is incorrect. There is a fatal flaw in the concept of government enterprise. The flaw is the fact that government can obtain virtually unlimited resources by means of its coercive power of taxation. And because of this flaw government enterprise cannot achieve the goal of efficient allocation of resources and government enterprise can never be operated like a private enterprise no matter what the government’s intentions. There might be an argument that that the government could simply tell its bureau to act as if it were a private enterprise and conduct their business accordingly. However simply telling its bureau to act like as if it were private enterprise is not going to work. Successful enterprise requires ingenuity to deal with risk, to identify opportunity, to make sound investment and to operate efficiently for profit. This is not the case when it comes to government enterprise even though it may be labelled government “enterprise”.

 

Chameliya Hydropower Project (CHP) offers a classic example of this fatal flaw and failure of government enterprise to allocate its resources efficiently. The Public Account Committee (PAC) has alleged massive misuse of national revenues in 30 MW under construction CHP located in Darchula district. The project is being developed by Nepal Electric Authority (NEA). Construction of the project began in mid-January 2008 and the project was scheduled for completion by mid-June 2011. The project is still under construction.

 
Initial cost of the project was estimated to be NRs 8 Billion, but the cost of project has reached NRs 15.6 Billion. The cost overrun in this project is almost 100% of the initial estimated cost. Normally the cost of 1 MW capacity costs around NRs 150 Million but in the case of Chameliya the cost per MW has now reached NRs 540 Million.  PAC investigating the cost over-run in the project found out that cost of construction materials, man power and equipment were highly inflated along with variation orders to contractors of civil and electro-mechanical workers. For example: Under one Variation Order- The monthly payments to foreman and skilled worker were NRs 116,337 and NRs 64,699 respectively. The payment was far-higher the normal market rate of NRs 35,000 and NRs 25,000 respectively.

 
Chameliya Project is not the only project that is facing massive time and cost overrun. Other projects like- Kulikhani III, Middle Myarsangdi and Kali Gandaki- all projects being developed by NEA are also facing unnatural time and cost overruns.

 
On the other hand, unlike government, private businesses must obtain their funds from investors. Private firms can get funds only from consumers and investors. In other words they can get fund only from people who value and buy their services and from investors who are willing to risk investment of their funds in anticipation of profit. When it comes to hydropower projects developed by private developers in Nepal, none of the projects have faced such problems of massive cost and time over run.

 
Unwillingness to be efficient is ingrained in the system of government. When revenue comes from power instead of ingenuity, there is no incentive to be efficient in resource allocation. The result is misuse and mis-allocation of resources as illustrated by Chameliya Hydropower Project.

Dhruba Bhandari

About Dhruba Bhandari

Dhruba Bhandari is Research Fellow at Samriddhi, The Prosperity Foundation. He joined the Foundation in July 2015. He completed PhD in Development Economics from Oklahoma State University (USA) in 2013. Prior to Joining Foundation, he worked as Research Associate at Oklahoma State University.

Published by: