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Ashesh Shrestha

About Ashesh Shrestha

Ashesh Shrestha is an independent researcher. He has an Economics background and is interested in Monetary economics and Public finance.

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.

 

Ashesh Shrestha

About Ashesh Shrestha

Ashesh Shrestha is an independent researcher. He has an Economics background and is interested in Monetary economics and Public finance.

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The Cost of Starting a Business in Nepal

The higher the cost of entry, the lesser the number of new enterprises.

The cost associated with starting a business is a very important factor in determining the number of new businesses that enters a market. The higher the cost of entry, the lesser the number of new enterprises in the industry. Entrepreneurs then tend to prefer the non-formal economy to the formal. The effects of such is far-reaching.

On one hand, the entrepreneurs are forced to compromise any prospects of growth as operating in the non-formal sector means that their access to finance, volume of business, protection of properties, enforceability of their agreements with other parties are null to limited (at best). On the other hand, the consumers are also worse-off because now the competition in the formal sector is effectively curtailed and as a result, the consumers’ choices in terms of quality of products and prices are also reduced. Clearly then, it is on every party’s best interest to have a low cost of starting a business.

What are the costs associated?

First, there is the monetary cost, and then, the non-monetary. According to the World Bank’s Doing Business Report (2016), the monetary cost of starting a business in Nepal is 28.4 percent of GDP per capita (which is more than twenty thousand rupees). And that is only considering the cost of registering at the Office of Company Registrar, the Inland Revenue Office, getting a company rubber stamp, and enrolling the employees in the Provident Fund. But, for an entrepreneur to be able to operate his business (from the moment he starts his company registration process), he needs to get permission from the department of industry/cottage and small industry under concurrence of the associated ministry (say, agriculture or tourism, depending on the nature of the enterprise), register at the local agencies like the municipality/VDC, do an Environmental Impact Assessment (EiA), manage electricity supply for his enterprise, etc. So there is a whole host of other things that the report does not look into, and yet, the monetary cost of starting a business is massive.

Then, there is the non-monetary cost. For example, there are cases in Nepal where it has taken more than three years for an aspiring entrepreneur to get a clearance on EIA from the Department of Industries. With this, comes a huge opportunity cost. Also, if entrepreneurs got EIA clearances in (say) two weeks, instead of anything between a few months to a few years, the entrepreneur could have already started his business and started making money. The amount of time, energy and forgone revenue are also his costs. And then there are costs associated with acquiring professional/legal services should the aspiring entrepreneur choose to save his personal time and effort – costs that could have been avoided with a clear and simple process.

Apart from the cost to entrepreneurs, the government also has to bear the cost of administration of the works related to registration of businesses. As there are multiple number of government agencies that are involved in the process of business registration, it has increased the cost of regulating entry (of new businesses into the industry).

The agencies that are involved in the business registration process are Office of the company registrar, Office of Cottage and Small Industries, Commerce Office and Inland Revenue Office.  Excluding the cost of operation of Office of the Company Registrar, the operation costs of other agencies regarding business registration (which includes only salaries paid to the government officials for the amount of labour hour they have spent on business registration) is more than 250 million rupees. As the government meets all these expenses from tax payer’s money, the ultimate incidence lies on the heads of tax payers.

Some of the best practices and reforms

If we look into the World Bank’s Doing Business Report, the best performers share some common features. In these countries the cost of starting a business is very low. It ranges from 0.3 to 2 percent of the GDP per capita. It takes maximum of two days to officially complete the works of registration. The procedures are limited to 2 to 3. Furthermore, an entrepreneur can apply for business incorporation online. This has made business registration process easy and cost efficient.

Apart from these top performers, some of the average performers have (in recent times) made reforms that have helped them reduce the cost significantly. Azerbaijan made an important reform – it started the operation of one window shop in 2008 for business registration. This single reform reduced the time and cost in starting a new business by half and business registration increased by as high as 40% in just 6 months. Similarly, in 2010 Mexico established an electronic platform for company registration and, in 2011, launched an online one-stop-shop for business registration.

Lessons that we can draw

As mentioned above, one potential reform can be establishing a one window shop which administers all the works related to registration. Given the current status of business registration, i.e. having to go to a multiple number of agencies to complete business registration, one stop shop is a good initial target. This can save a lot of time and energy of entrepreneurs, reducing the opportunity cost. Moreover, it reduces the cost of operation of multiple number of offices. The next level reform can be made by initiating electronic registration. Currently, the problem with electronic registration, is lack of agency to verify and regulate the digital signature and lack of provision of electronic payment. Only if these two things are made available, the next level reform will be possible. Registration through electronic platform is more convenient, requires less effort and saves time and money. These reforms will also encourage entrepreneurs operating in the non-formal economy to formalize their businesses.

This article was originally published in The Himalayan Times on September 11, 2016.

Ashesh Shrestha

About Ashesh Shrestha

Ashesh Shrestha is an independent researcher. He has an Economics background and is interested in Monetary economics and Public finance.

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The Crowding Out Effect

Of late, the fiscal budget of Nepal has been growing at an alarming rate — about 27 per cent in the fiscal year 13/ 14; 19.5 per cent in 14/ 15; almost 33 per cent in 15/ 16. As the trend continues, the size of the budget has increased by more than two trillion rupees ( 28 per cent) with the total estimated outlay reaching an all- time high of 10.5 trillion rupees ( which is about half of the GDP of Nepal).

Such high levels of government spending can have many adverse effects on the economy. One of them is the negative impact on private investment. Here we specifically focus on the undesirable effect of high public spending on private sector investment.

Crowding out effect

Economists come to a mutual ground when it comes to the issue of crowding out effect — when the level of public spending rises, it crowds out private sector investment. When there is a large escalation of government spending, it is financed through borrowing out of the total savings ( investable amount) in the economy. Given the total pool of investable amount in the economy at a given time, if the government’s share out of the pool increases, the private sector is left with less money to invest, thus reducing their share of investment in the economy.For example, if the total saving in the economy is Rs 1000 and the government borrows Rs 200, the private sector is left with the investable amount of Rs 800. Now, if the government spending increases and their borrowing increases to Rs 500, private sector is left with only Rs 500. Hence, private investment is crowded out.

Furthermore, increase in borrowing from the internal market leads to increase in the demand for available funds, thus raising their price that is rate of interest ( in the same manner by which price of any goods increases because of increase in its demand).The increase in the real interest rate makes investment dearer, and discourages people from investing, thus again reducing the total share of private investment in the economy.

Inflation makes investment unfavourable

The apparent impact due to highly expansionary budget is high inflation. The increase in social security spending, salaries of government officials and other routine expenses upsurges the recurrent expenditure of the government. This can lead to high inflation as people will have more money to spend in their hands. This leads to an increase in the demand for goods and services. Given the supply side constraints in the short run ( the supply of goods cannot be increased in a short span); it will lead to high rise in the price of goods and services, hence high inflation. The high level of inflation does not only reduce the purchasing power of consumers but also affects producers.

The problem with public investment

An argument regarding investment is that, it does not matter where it comes from, either Large government spending and its effects on private investment. Increasing the size of government expenditure to bring about growth is not the way forward breaking views Getting meaningful access betsandreturns. ca government or private sector ( as both bring economic growth and generate employment). However, this might not be true in the case of Nepal. If we look at the capital expenditure of the government for the past years, it has been below the target.The spending capacity of the government is low. For example, in the fiscal 2014/ 15, the government allocated a budget of Rs 116,755,042,000 for capital/ development expenditure, but was only able to spend Rs 88,754,708,000. Similarly, in the fiscal year 2013/ 14, the targeted capital expenditure was Rs 85,099,731,000; however the actual spending was limited to Rs 66,694,726,000 only. Also, out of this, a large portion has been spent only at the end of the fiscal year in rush. Apart, from this, the inefficiency of the government is another factor. There are numerous bureaucratic hurdles, red tape, et cetera that exist in government projects, making them costlier and time consuming.

This inability of the government to make capital spending and inefficiency is enough to prove that high allocation of public expenditure cannot bring positive changes in the economy. In contrast, it bars efficient private investment limiting the growth of the economy. Hence, increasing the size of government expenditure to bring about growth is not the way forward. Instead, the government should reduce its share of expenditure in the economy, and thus remove all hurdles that come in the way of private investments arising due to increase in public spending.

This article was published in The Himalayan Times on July 31, 2016.

Ashesh Shrestha

About Ashesh Shrestha

Ashesh Shrestha is an independent researcher. He has an Economics background and is interested in Monetary economics and Public finance.

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Violation of the Property Rights by the Budget

Property rights as defined by James D. Gwartney – Florida State University, Richard L. Stroup – Montana State University, Dwight Lee – University of Georgia in the article ‘Importance of Private Property’ involves ensuring three important criteria: 1. the right to exclusive use, 2. legal protection against invaders those who would seek to use or abuse the property without the owner’s permission, and 3. the right to transfer to (that is, exchange with) another. If the owner is barred from exercising any one all of these aspects, it is the violation of the property rights.

The state has the primary responsibility of warranting all these criteria to the citizens and thus, protecting their property rights. However, what if the one that is supposed to protect the right of the citizen is itself involved in the violation. Here, the context directly relates to provision in the recently formulated budget of Nepal. In the section related to Land Reform, the budget specifies that all the lands will be classified on the basis of their use and the land classified for the specified purpose shall not be used for other purposes. Additionally, the budget has also provisioned that no agricultural land should be left barren. In case it is left barren, there is the provision of imposing penalty of 25 percent of the potential average production of such barren land.

This budget is unswervingly trying to infringe on the property rights of the citizens. After the implementation of the budget, no citizens will have liberty to use their piece of land as according to their preferences. The use of land will be directed by the state itself. This directly bars the citizens from enjoying the very first criterion, the right to exclusive use of the property (land in this case). Furthermore, as the provision limits the use of land, market value of the land will get reduced. For example, if a piece of land can be used for multiple purposes like making residential house, commercial building, cultivation etc., its market price will be high because of high demand from multiple sector. But, if its use is only restricted to, say agriculture, there will be reduction in the demand, which reduces it market price, thus adversely affecting the land owners and their property rights.

Ashesh Shrestha

About Ashesh Shrestha

Ashesh Shrestha is an independent researcher. He has an Economics background and is interested in Monetary economics and Public finance.

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What do the taxes on vehicles say?

A quick look into custom duties of vehicles is enough to tell us how discouraging it is for any individual to purchase a car. For the vehicles that run on fossil fuel, the customs duties on 9 categories stand at 30% while that on the ‘Jeep, car and van’ category is almost three times that of other categories. Similar is the case with the electric vehicles. The customs on Jeep, car and van is 40% which is much higher than the 15% customs in other categories. The general belief that cars are luxury goods and should be taxed high seems the logic behind this. But, are cars luxury or high taxes have made them a luxury?  Higher taxes resulting into higher prices have made the cars less affordable to the middle and lower income class and thus only providing privilege to the rich. And, even if we regard them as luxury, are the rich only the ones who get to enjoy this luxury?

In the midst of current fuel crisis, promoting the use of the electric vehicle has become talk of the town. The customs on electric vehicles are definitely lower when compared to the vehicles that run on fuel, however, this rate seems still high for encouraging its use. If the uses of electric vehicles are really to be encouraged and promoted, the custom duty along with other taxes must be further reduced.

Ashesh Shrestha

About Ashesh Shrestha

Ashesh Shrestha is an independent researcher. He has an Economics background and is interested in Monetary economics and Public finance.

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Market at work amidst Nepalese political-economic crisis

A little over two months into the blockade of supply of basic necessity goods and services including the petroleum products from India to Nepal, Nepal is facing a severe economic as well as humanitarian crisis like one it has never seen before. Hospitals are running out of medical supplies, households are running out of cooking gas, industries are running out of fuel (which has led to the shutting down of hundreds of thousands of enterprises – big and small), majority of the people have been forced to resort to either walking or commuting on crammed buses that are carrying two to three times their capacity of passengers. During the second week of November, Nepal Oil Corporation (NOC) which is the government-owned enterprise with the monopoly of acquiring petroleum products for supplying to the entire country even asked the private consumers to not queue up in the fuel pumps for its stock had come down to a level where it could only supply to operators of emergency services, and even that was only for a few days.

Not a single citizen has been spared from facing the brunt of this crisis. Presumably, everything would have come to a standstill. But amazingly, people are still managing to continue to do what they do. Of late, the traffic is even getting heavier than what it used to be about a month ago. So what is this source from which people are getting fuel for their motor-cycles, cars, public buses and taxis despite the failure of the government monopoly that was responsible to do it?

The answer once again, when the government fails to deliver, is the market. Yes, it is the market. Or as the government likes to call it, “the black market!” Entrepreneurial private individuals around the Nepal-India border (from both sides) are coming together to “smuggle” the basic necessities into Nepal and then send them across Nepal; against all restrictions imposed by the state and risking being caught and charged for committing a crime. And why crime? Because the government has prohibited anyone other than its very own failure of an enterprise from importing petroleum products in Nepal. However, it is this black market that has helped us in our endeavor to live a normal life and do what we do. Yes, we can only do some 25-30% of what we would otherwise do, but still much better than the nil that we would be doing in their absence.

This might raise another question in our minds. How can the market arrange all these things so smoothly while the almighty government is having a hard time doing it? Fortunately, market makes necessary adjustments whatever the situation of the economy be, the very capacity the state lacks. After the supply shock of the petroleum, the higher demand couldn’t be catered to. But the people still needed fuel which resulted in people willing to pay higher prices. The willingness of the people to pay higher prices was communicated to other players in the market (people who did not have to be previously associated with the petroleum industry at all) to divert their resources to ensuring supply of petroleum. The higher returns incentivized them to devote their time, money, energy and most importantly to bear the risk of playing in the “illegal” market of petroleum and supplying them.

The people who valued the petroleum product more and were willing to pay more came in contact with the suppliers and thus made a deal in which both of them mutually agreed and benefitted in their own personal ways. The suppliers who were willing to risk it all got higher profits, and the consumers who needed fuel to carry on with their regular businesses got to use the fuel to do what they do and earn a livelihood by selling other goods or service that they produce. And this is exactly how the market works. Each individual consumer and producer based on his/her knowledge that he/she has acquired from the market, acts and reacts to the market situation in order to achieve personal expectations and benefits.

So what lesson do we draw from this real-life example? What we need to do at the moment is acknowledge and institutionalize this automation in the economy. If the private sector is allowed to enter into this business of petroleum trading freely and fairly easily, the possibility of another economic crisis will be substantially reduced. The government has to loosen all restrictions barring private sector from coming into the petroleum trading business. For instance, the minimum paid-up capital regulation should be dropped. Meanwhile, it should be ensured that exclusivity should not be offered to any private company in order to prevent private monopoly which is much worse than the government monopoly. Furthermore, the international companies interested to enter into the petroleum supply business should also be encouraged by eliminating various discouraging restrictions to them. For instance, tariffs on the import of petroleum product could be reduced to minimum. In this way, competition between various national and international companies should be encouraged. Hence, each and every player in the market will compete against each other trying to gain a large share of the market and therefore will try to supply qualitative product at cheaper price. In the long run, the players who cannot survive the fierce competition and are performing quite bad will exit the market.  So, NOC wither will have to be really competitive and function efficiently or, it will have to be shut down.

Ashesh Shrestha

About Ashesh Shrestha

Ashesh Shrestha is an independent researcher. He has an Economics background and is interested in Monetary economics and Public finance.

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