Econ-ity » Blog Archives

Author Archives: Dhruba Bhandari

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.

Private hydropower developers’ take on Benefit Sharing

On March 24, 2016 Samriddhi Foundation hosted an ‘Econ-ity’ discussion on the cost imposed on private developers of hydropower project due to lack of a clear benefit-sharing policy framework, at Hotel Himalaya. The parliamentarians, policy makers, bureaucrats, academicians, economists and journalists present at the event discussed over the following issues related to benefit-sharing:

 

Who is the affected and the beneficiary?
When to share the benefits?
How to share the benefits?

 

Due to lack of clear policy framework regarding Benefit Sharing, the burden of all of these issues falls on the private developers of hydropower project. These issues ideally should fall on the government’s shoulder, and clear and enforced policies should have taken care of it.

 
When it comes to issue of- how to share benefit, the existing mechanism of energy royalty being redistributed to the area where project is located, should have taken care of the problem but it is not working effectively. The mechanism has provision of distributing 38% of total royalty to the development region where the project is located and 12% of total royalty to the district but due to the weak governance the royalty amount gets lost in the system. That is why, locals demand all the services like roads, health clinics, schools from the private developers- these basic services could have been provided in the area with the re-distributed royalty.

 

One of the panelist in the Econ-ity discussion was Kumar Pandey, General Secretary of Independent Power Producers’ Association of Nepal (IPPAN). His take on the issue, especially focused on when to share benefit, was– We are private developers and thus we are guided by the profit. Benefit sharing is big and burning issue, and we agree, it should fall into our business plan. But the big question is-

Popular practice today, due to the lack of clear regulatory framework and strong governance, is we have to share the benefit with locals before any benefit from the project is realized as without sharing the benefit with locals, it is difficult to develop any project.

 

Against this background, his argument was that if there were some clear guideline on pre-benefit Benefit Sharing, it would greatly facilitate private developers. Once the construction is completed and the project goes into operation, energy royalty should then take care of the after-benefit Benefit Sharing.
Going by Pandey’s deliberation, it appears that the private developers are still willing to spend benefit-sharing with the locals but they want stable business environment . Our study also shows that private developers are willing to spend 0.5% to 2% (depending on the size of the project) of total cost of project on benefit sharing.

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:

Another empty promise!

Image source: writingserviceye.dynu.net

With load shedding up to sixteen hours a day, it is indeed an energy crisis in Nepal. Government of Nepal (GoN) has done what it does best, make a headline worthy declaration. It has declared “National Energy Crisis Reduction and Electricity Development Decade, 2016 – 2026”. Though this may seem encouraging to us, it is a sad fact that such energy crisis and energy development announcement has been made many times in the past ( 2008, 2011 and 2012), making this plan nothing more than an empty promise, as previous declarations and plans have not delivered any results.

 
What is this new plan proposing anyway? With this new plan- the energy ministry has claimed that load shedding will end within three years, projecting the demand for electricity will be around 1,837 MW and the supply will be around 2,300 MW after three years. The implication of this being within three years the supply of energy in Nepal will increase three fold (Current supply is 791 MW). This does seem unrealistic, as there are not many projects that are close to completion, capable of supplying total of 1500 MW of electricity.

 
In the short run importing electricity from India will solve the problem to some extent, provided there is better transmission line. Dhalkebar- Muzaffrapur transmission line can allow us to import up to 600 MW of electricity if charged at full capacity (400 kV), but the transmission line is currently charged at 132 kV which will allow us to import only 80 MW of electricity. Still this plan, provided we import required electricity to get rid of power shedding, will only be a short term remedy. In the long run, it is essential to develop hydropower projects in Nepal to end the energy crisis permanently.

 
Nepal requires real policy changes instead of such empty declarations. Policies that will make an investment in hydropower in Nepal attractive especially FDI (this can’t be emphasized enough in light of Statkraft backing out of 650 MW Tamakoshi III), one stop policy (currently a hydropower project has to deal with 7 ministries, 23 departments and 36 acts) and ending the monopoly of Nepal Electric Authority (NEA) on distribution and transmission, to name a few policy reforms. Without these policy reforms, all promises and declarations no matter how impressive they may sound, energy crisis in Nepal will persist.

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:

Regulatory challenges in hydropower development in Nepal

 

Image Source: www.proofpoint.com

Out of 40,000 MW of economically feasible hydropower potential in Nepal only about 791 MW is currently developed. The reason for underutilization of hydropower potential is that there are various challenges to developing hydropower projects in Nepal, namely- technical, financial and regulatory. Foreign Direct Investment (FDI) in hydropower sector in Nepal can be a solution to the technical and financial challenges as developed countries interested in investing in Nepal have necessary finances and have technical knowhow, but they still face regulatory challenges imposed by the government of Nepal. Regulatory challenges arise due to lack of co-ordination among ministries (industry, energy, forest, water, etc.) and political parties. A hydropower project has to deal with 7 ministries, 23 government departments and comply with the terms and conditions of thirty-six Acts. In case of FDI there is additional bureaucratic hurdles on issues related to visa, ownership of capital and exchange rates.

 
In Samriddhi’s new study “Benefit Sharing in Hydropower Projects in Nepal,” which looks into the cost imposed on private hydropower developers due to lack of clear benefit sharing regulations, we  asked private developers to list the major actors and causes that obstruct development of hydropower project in Nepal.  They responded local politics and political leaders along with co-ordination among the parties involved, lack of transmission lines and Power Purchase Agreement (PPA) as major agents and causes.  These agents and causes not only obstruct the construction and operation of projects but also hinder the projects at planning phase from coming into the fruition.

 
Tamakosi III (650 MW) project would have been the biggest FDI in Nepal with estimated cost of $1.5 Billion, but Norwegian company Statkraft decided to back out from the project. The company had been working on the project since 2007. The company cited increased bureaucratic hurdles, fragile political situation, insufficient transmission capacity and absence of necessary policies and regulatory frameworks for operationalizing power sales as causes for backing out of the project. Few years ago, the Australian Snowy Mountain Engineering Corporation (SMEC) also pulled out of the export-oriented West Seti (750 MW) hydropower project in western Nepal after battling bureaucracies for two decades.

 
While Nepal is facing power shortages and lacks sufficient funds and technical skills to build mega hydropower projects, FDI in hydropower sector will be reasonable alternative to solve the current problem. In order to attract FDI for such projects, there must be an environment of ease of doing business so that the investors can feel confident to invest in Nepal. This objective can be achieved with well thought out regulatory framework and well-coordinated bureaucracy. Careful amendments to the Industrial Enterprise Act 1992, the Foreign Investment and Technology Transfer Act 1992 and the Electricity Act 1992 can create favorable environment of  doing business and can attract FDI for mega hydropower projects in Nepal.

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:

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:

Rise of government as paternal authority

As soon as someone hears of something that has happened or is happening that s/he doesn’t like, s/he goes, “The government ought to do something about it!”. Where does this idea that government can solve all of our problems (especially the economic ones) we face, come from?

This characteristic is a remnant of a thought from the past – before modern freedom, constitutional government, representative government, republicanism or federalism. For centuries, there was a doctrine accepted by everyone in this world, that a King, an anointed king, was messenger of the God and he had more wisdom than his citizens. King had supernatural powers and was able to provide and protect his citizens. As recently as the beginning of the nineteenth century, people suffering from certain disease were expected to be cured by the royal touch, by the hand of the king. Doctors were usually better; nevertheless, they had their patients try the touch of the king. Same reasoning can follow as to why a king should overlook other aspects besides the health of his subjects; other aspects like education, food and shelter. The very aspects of life that are best governed by the market interactions rather than decision of some king or benevolent government. One of the relevant examples from the context of Nepal is nationalization of education (both private and public) in 1971. Before 1971, schools were autonomous and functioned in a decentralized fashion.

Today most countries have democratically elected governments and very few monarchs have survived. But has the doctrine of the superiority of supernatural kings with inherited powers that can solve all problems of their subjects disappeared? At present, most of the government bodies consist of elected officials and not an anointed king, but the idea that there is someone wiser and more powerful that could govern and solve all problems of society has not gone away. This is evident from both the wishes of people for government intervention to solve problems, even if markets can provide better solutions, and also the wish of the governing body to try to expand its horizon to solve all problems that societies face by regulating, banning and subsidizing.

This is not to imply that a government does not have any role in the economy. It has very important roles, namely: maintaining law and order, and enforcing property rights so that it can create space for markets to function. Apart from its limited but very important roles, other actions like regulating prices, wages, rents and profits are beyond the scope of government because it does not lead to the desired result. Prices, wages, rents and profits are best determined by the market forces (demand and supply) and any attempt by government to regulate or control distorts the market and leads to unintended consequences like formation of cartels, shortage of goods and services, to name a few. This is also very evident in current crisis of fuel (apart from the Unofficial Blockade) that stems from the government being the sole provider of petroleum based fuel instead of allowing markets to work it out.

Why is it that government actions to intervene and regulate any aspects of the market, even if it arises with the best of intentions, like the minimum wage so a poor can make more money, rent control so a poor can afford a decent living space, price control on gasoline, milk, eggs and other basic goods so that an average earner can afford, banning of alcohol so that people will not be addicted to alcohol etc. do not lead to the intended outcome and only lead to negative unintended consequences instead? It is because in the centrally planned economy, everything depends on the talents, and gifts and perception of very few people that hold the decision-making power. That which the kings/dictators or governing committees do not know is never taken into account in the planning and decision-making and hence always the negative unintended consequences. Even if all the information that is required for sound policy-making is available to the king/dictators or government committees, their plan will never match the invisible hand of the market and the result of millions of interactions of households and businesses driven by self-interest and incentive.

Inspired by readings of Ludwig von Mises

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:

Where is the trust in the market?

It is somewhat consolation to us all, that the constitution was eventually ratified and a long political process came to an end. But when it comes to prosperity and growth, the constitution does not have enough ground work for better environment for entrepreneurs. Ultimately, it is not the government that is going to be the engine of economic growth of our country. What government can and should do is to lay out ground rules that encourages innovation and protects entrepreneurs. Government should create an environment that promotes competition by reducing barriers to entry and by preventing the formation of cartels.

This is preamble of the Constitution of the Federal Democratic Republic of Nepal:

Nepal is an independent, indivisible, sovereign, secular, inclusive, democratic, socialism-oriented, republican, multiethnic state which shall be called Nepal in short

That sentence without the word ‘socialism oriented’ is still perfect to describe new Nepal under the new constitution. Since the word is there, what is its implication now? Is government going to take responsibility of providing goods and services for its citizens, even if the market is perfectly capable of doing so?

The constitution guarantees all sorts of rights for individuals for example: right to health, right to clean environment, right to education, right to employment etc. Among the rights that is provided for individuals, labor right and right of consumers provides interesting insight into how policy makers think of private sectors. Following are some excerpts from the constitution:

Every worker and employee shall have the right to form and join trade unions and to engage in collective bargaining for the protection of their respective interests, as provided in law

Every consumer shall have right to get quality goods and services. Victim of loss incurred from low quality goods or services shall have right to compensation as provided by the law

These clauses have an underlying assumption that business are always looking at every opportunity to take advantage of their consumers and workers. And these clauses also have the assumption that government is the big brother which is going to protect us (consumers and laborers) all. Another assumption in those clauses is that the government is benevolent saint that has public interests at its core. Well it could not be further from the truth. The fact that it took this long for the constitution to be drafted and ratified (it took eight years) proves that legislative bodies, political parties and bureaucrats have their own self-interest namely: securing votes, re-election and securing budget. Public interest is the least of their concern even if they make us believe it is.

It is true that businesses look for every opportunities to maximize profit. It is also true that there can be incidents of business malpractices. The way out of this problem then is to create an environment of competition driven by efficiency and innovation. In an environment of fair competition, the businesses that engage in mal-practices will not survive and will have to exit the market. The government should let the force of market work its magic rather than imposing iron clad regulations on businesses, which can lead to many unintended consequences and are very hard to change even if the regulations are not leading to desired outcomes.

This lack of trust in the role of market and entrepreneurial spirit (core of which is competition, efficiency and innovation) is very tragic for Nepal, a country which is in desperate need of rapid economic growth. Rapid economic growth does not come from regulating the private sectors. And policy makers should be very mindful of this.

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: