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Dinesh Karki

About Dinesh Karki

Dinesh Karki is an independent researcher. He has Economics degree from Xi'an Jiaotong-Liverpool University, Suzhou, China.

Panama Papers and the offshore holdings delusion

Estimated reading time: 3 minutes, 22 seconds. Contains 676 words

The world is abuzz with the articles published by The International Consortium of Investigative Journalists (ICIJ) based on one of the biggest data leaks in history. The articles dubbed as ‘Panama Papers’ are based on leaked data of the Panamanian law firm Mosack Fonseka. The internal documents of the firm were leaked by an anonymous source to the German Newspaper Süddeutsche Zeitung which passed them to ICIJ. The scandalous leak contains about 11.5 million files covering 40 years of operations of offshore accounts and shell companies in tax havens like Panama, British Virgin Islands and the Seychelles. The offshore holdings have been linked with international figures including current and former presidents, prime ministers, monarchs and celebrities. Among the repercussions of this probe have been resignation of Iceland’s Prime Minister Sigmundur Gunnlaugsson to concession of UK’s Prime Minister David Cameroon that he benefited from an offshore trust fund in the Bahamas set up by his father.

The articles claim that high profile politicians and their close associates have used tax havens to hide their wealth. The other accusation that is tied with these offshore holdings is using them for tax evasion. But the fact that not all offshore holdings are linked with illegal activities evades most people. Similarly, most media have focused on the theme of ‘tax evasion’ while the revelations are mostly linked with hiding wrongdoing by corrupt officials not just tax evasion.

The New York Times reported,

“Holding money in an offshore company is generally not illegal, although such financial arrangements can be used in illegal ways — for example, to facilitate tax evasion or money laundering.”

Though the Panama Papers exposed cases where people have used offshore holdings for hiding assets and evading taxes, there is a myriad of legitimate reasons for setting up offshore accounts and shell companies. Generally, people use shell companies because of government restrictions on certain transactions and capital controls. Companies may also use offshore companies for tax efficiency through legal tax planning. Moreover, multinationals use shell companies to reap the benefits of flexible corporate regimes and investment diversification opportunities abroad. The New York Times describes some of the legitimate reasons behind shell companies in the article titled “The Panama Papers: Here’s What We Know,” as follows:

“There are many valid uses of offshore shell companies for multinational corporations, joint ventures and wealthy individuals. Many countries restrict the sale of real estate to their citizens or to companies registered there. American retirees looking to purchase homes in such countries form offshore companies that buy the properties to abide by the law.”

“Companies establishing joint ventures in countries with weak or corrupt legal systems also create offshore companies, based in a jurisdiction like the British Virgin Islands or the Cayman Islands, that own the enterprises.”

The Kathmandu Post reported that the statistics of Department of Industry (DoI) shows that 20 percent of FDI entered Nepal from tax havens till last fiscal year. The government officials suspect that FDI from tax havens may be linked with money laundering. However, the reason why FDI is entering Nepal from tax havens like the British Virgin Islands could be because of our corrupt system and capital restrictions like mentioned above.

One important aspect about ‘tax evasion’ is the case when tax rates cross the threshold that people are willing to abide by. When taxes are excessive, people naturally tend to try to find ways to evade them—whether through offshore holdings or other ways. The other aspect is whether the taxes you are paying to a government are reflected in the services it provides. People may be willing to pay even high taxes if they are satisfied with the way the government uses taxes. Else, even if taxes are low, people may want to evade them. For instance, if a government is not efficient and transparent while handling taxpayers’ funds, people will not be willing to pay taxes even when tax rates are low.

If you are interested in learning other legitimate reasons for setting up shell companies, here’ s the link to Huffington Post’s article titled “5 Legitimate Reasons to Have an Offshore Company

Dinesh Karki

About Dinesh Karki

Dinesh Karki is an independent researcher. He has Economics degree from Xi'an Jiaotong-Liverpool University, Suzhou, China.

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कालाबजारीया कि उद्यमी ?

– अब्यय न्यौपाने, अशेष श्रेष्ठ, दिनेश कार्की

नेपाल अहिले पेट्रोलियम पदार्थको चरम अभावबाट गुज्रिरहेको छ । नेपालको एकमात्र पेट्रोलियम पदार्थको आपूर्तिकर्ता नेपाल आयल निगमले भारतको “अघोषित नाकाबन्दी” तथा मधेश आन्दोलनका कारणले गर्दा बजारको माग अनुसार सोको आपूर्ति गर्न नसकेकाले देशको अर्थतन्त्रलाई ठुलो धक्का पुग्न गएको र आम नेपाली जनताको जीवन दिनानुदिन कष्टकर बन्दै गएको सबैमा अवगत नै छ । यस्तो अवस्थामा सबैले देशको आर्थिक लगायत अन्य सम्पूर्ण क्रियाकलापनै ठप्प हुने अनुमान गरेको भएता पनि निकै अचम्म लाग्दो तरिकाले सारा मानिसहरु आ–आफ्नो दिनचर्यामा लागिपरेका छन्, आफ्नो गन्तव्यमा पुगिरहेका छन् । “त्यसो भए यी प्रयोजनका निमित्त मानिसहरुसँग पेट्रोल र डिजल चाहिँ कहाँबाट आइरहेको छ त?” भनी तपाई–हाम्रो दिमागमा प्रश्न आउनु तसर्थ स्वाभाविक नै हो । यसको जवाफ “कालो बजार”को संज्ञा दिईएको व्यापार र “तस्कर” कहलिएका व्यापारीहरु नै हुन् । त्यसैले पनि उप–प्रधानमन्त्रीले कलोबजारीयाका कारणले गर्दा नै इन्धनको चरम अभाव हुन नपाएको भन्ने खालको वक्तव्य दिनु त्यति आश्चर्यजनक कुरो भएन ।

कानुनी रूपमा हेर्ने हो भने प्रचलित कानुन विपरित व्यापार व्यवसाय गर्नुलाई कालो बजारी भनिन्छ । त्यसो भए कानुनी दायरामा नरही व्यवसाय संचालन गर्नु पर्ने बाध्यताको किन जन्म हुन्छ त ? साधारणतया जब कानुनी दायरा बाहिर रहेर भन्दा भित्र रहेर व्यवसाय गर्दा महँगो र झन्झटिलो हुन जान्छ, तब “कालोबजारी”को जन्म हुन्छ ।

कानुनी बाटो महंगो हुने कारण कानुनी प्रावधानहरु नै हुन् । जस्तै, कुनै पनि नयाँ कम्पनी सुरुवात गर्दा व्यवसयीलाई आफ्नो व्यवसाय दर्ता गर्ने प्रकृयामै धेरै समय र पैसा खर्च लाग्छ र करको महसुल पनि उच्च छ भने उसले सकेसम्म साना व्यवसायहरु दर्ता नै नगरी चलाउन थाल्छ । नेपालमा अनौपचारिक अर्थतन्त्र फस्टाउनुको एक मुख्य कारण पनि यही हो । जब कुनै क्षेत्रमा सरकारी बाधा–अड्चनले गर्दा नयाँ व्यवसयीहरु प्रवेश गर्न सक्दैनन्, त्यहाँ गैर कानुनी रुपमा व्यापार हुने प्रवृत्तिको विकास हुँदै जान्छ । नेपालमा अनौपचारिक रुपमा पेट्रोलियम पदार्थको आपूर्तिको कहानी पनि यही नै हो । एक पटक कानुनी रुपमा एकाधिकार सम्पन्न सरकारी आपूर्तिकर्ता तय गरिसके पछि सोको अप्रभावकारिताका कारण बाजारमा माग बढ्न जाँदा बढ्दो माग र यस सँगै जोडिएर आउने उच्च प्रतिफलको सम्भावना देखेर त्यसको परिपूर्ति गर्न खोज्ने साना पेट्रोलियम आपूर्तिकर्ता स्वभाविक रुपमा नै सबै कालाबजारीया हुनेनै भए ।

कालोबजारबाट उपलब्ध हुन आउने सामानहरुमा मानिसले साधारणतया व्यक्त गर्ने प्रमुख गुनासो भनेको “कालाबजारीयाहरुले उच्च मूल्य लिए।” भन्ने हो र यसको दोष हामी सम्पूर्ण रुपमा कालाबजारीयाहरु माथी नै थोपर्ने गर्छाैं । यद्यपि यसको लुप्त तर मुख्य दोषी कालाबजारीया नभई उद्यमीलाई कालाबजारीया बन्न बाध्य पार्ने एकाधिकारमुखी नियमनहरु नै हुन् । सरकारी संस्थानले एकाधिकार कायम गरेपछि उक्त वस्तुको अन्य सबै आपूर्ति गैरकानुनी हुने भए । यसरी गैरकानुनी भएपछि स्थापित व्यवस्था छलेर व्यापार गर्न व्यापारीले जोखिम उठाउनुपर्ने हुन्छ । उदाहरणको लागि, गैर कानुनी कहलिने कुनै पनि काम गर्दा विद्यमान कानुन बमोजिम सो व्यापारी प्रहरीको फन्दामा पर्न जाने खतरा ठूलो हुन्छ । समाजबाटै पनि उसले ठूलो आलोचना/अपहेलना भोग्न पर्ने जस्ता सम्भावनाहरु हुन्छन् । यी सबैका बावजुद सो व्यवसाय गर्ने हो भने उसलाई कमसेकम यति आमदानी चाहिन्छ जसले उसको कानुनको कारवाहीमा फस्ने, सामाजिक आलोचनाको भागिदार बन्न पर्ने ईत्यादि जोखिम/अवस्थाको क्षतिपूर्ती समेत होस् । तर व्यवसायी नै भएको नाताले उसले यो सारा लागत आफैले कदापि उठाउँदैन । उसले यो लागत अन्ततः वस्तु वा सेवाको खरिदकर्तामा नै स्थानान्तरित गरिरहेको हुन्छ । बैंकहरुले पनि धेरै जोखिम व्यहोर्न पर्ने प्रकृतिका ऋणहरुमा अन्य भन्दा उच्चतम ब्याज दर तोक्ने कारण यस्तै हो । जति धेरै जोखिम, त्यति नै धेरै मूल्य । यो पछिल्लो उदाहरणको फरक यति हो कि बैंकले ऋण दिँदा उसले विद्यमान कानुन मिचिरहेको छैन तर जोखिम धेरै उठाईरहेको छ । यही “रिस्क प्रिमियमले” गर्दा मूल्य उच्च हुने हुन्छ । फर्केर पेट्रोल व्यवसायीको कुरा गर्दै गर्दा यदि नियम कानुन सहज भएको भए यसरी कानुनको दायरा भन्दा बाहिर रहेर व्यवसाय गर्नु पर्ने बाध्यता हुने थिएन र “रिस्क प्रिमियम” पनि जोड्नु पर्ने थिएन ।

अर्को गुनासो भनेको गुणस्तरको सन्दर्भमा हो । गुणस्तरको प्रत्याभूति महत्वपूर्ण विषय हो तर सरकारले मात्रै कुनै पनि कुराको गुणस्तरको प्रत्याभूति दिन सक्छ भन्ने सोच मित्था हो । सरकारी निरीक्षण हुँदाहुदै पनि मिसावटयुक्त इन्धन सरकारी लाइसेन्सप्राप्त पम्पहरुले बेचिरहेको कुरा सर्वविदितै छ । सरकारी निगरानी भन्दा पनि बजार समन्वय मार्फत नै गुणस्तरको निगरानी स्वतः हुन पनि सक्छ । जब इन्धन व्यापार–व्यवसाय प्रतिस्पर्धात्मक हुन्छ, उपभोक्ताहरु मिसावटयुक्त इन्धन बेचबिखन गर्ने ब्यवसयी सँग किन्दैनन् र यस्ता ब्यवसायिहरु क्रमशः पाखा लाग्दै जान्छन् । यसै प्रकृयाबाट जो व्यवसायीहरु उपभोक्तको माग अनुसारको गुणस्तरयुक्त इन्धन आपूर्ती गर्छन्, ती व्यवसायीहरु बजारमा टिक्छन् र बजार स्वस्फूर्त रुपमा चलिरहन्छ । यसरी उपभोक्ता आँफैले गुणस्तर र मूल्यको निगरानी गर्छन् र व्यापारीले माग अनुसारको गुणस्तर उपलब्ध गराउँछन् । तीन चार जना फरक फरक व्यवसायीसँग पेट्राल खरिद गरिसके पछि जसले उच्चतम गुणस्तरको पेट्रोल दिएको थियो उसैकोमा फर्केर उसँग मात्र पेट्रोल खरिद गर्न थाल्नेहरुको उदाहरण पाउनको लागि हामीले आफ्नै साथीभाईहरु भन्दा अन्य व्यक्तिहरुको मा धाई रहने पर्ने आवस्यकता आज छैन ।

यसैगरी हामीले कालोबजारलाई कानुनी रुपमा मात्र नभएर आर्थिक सामाजिक पाटोबाट पनि हेर्न जरुरी हुन्छ । अहिलेको अवस्थामा पेट्रोलियम पदार्थको व्यापारलाई कानुनी रुपमा अवैध भन्न मिले पनि कालोबजारकै माध्यमबाट नागरिक, कलकरखाना लगायत अरु अत्यावश्यक क्षेत्रमा इन्धनको आपूर्ति भएको छ । चिकित्सकहरु समयमै अस्पताल पुगेका छन्, शिक्षकहरु स्कुल-कलेज पुगेका छन् । कालोबजारकै साहयताले धेरै मानिसहरुले आफ्नो कर्तव्य निर्वाह गर्न सफल भएका छन्।

अहिले इन्धन ब्यापारको क्षेत्रमा अवसर देखेरै मानिसहरु यो अवसरबाट फाइदा लिनको लागि यसमा लागिपरेका छन् । यसमा उनीहरुको संलग्नताको कारणले गर्दा समाजलाई नै टेवा पुगेको छ । यस्तो अवस्थामा कालोबजारीको उपमा दिइएको यस आर्थिक गतिविधि अपराध हो कि उद्यमशीलता? नेपाल सरकार र यसको एकाधिकार सम्पन्न संस्थान नेपाल आयल निगमले झन्डै ४ महिना बितिसक्दा पनि इन्धनको सहज आपूर्ति गर्न नसकेको अवस्थामा कालोबजारीयाको उद्यमशिलताले देशमा इन्धनको माग केही हदसम्म पुरा भइरहेको छ । त्यसैले अहिलेको परीस्थितिमा कालोबजारी नियन्त्रणभन्दा यसलाई कालोबजारको घेरामा पस्न बाध्य नपारी कसरी वैधानिक व्यवसायको सीमाभित्र राख्न सकिन्छ भनेर हेर्नु उचित होला । विगत चार महिनाले इन्धन आपूर्ति गर्न सरकारैमात्र सबल छ वा आवश्यक छ भन्ने धारणालाई त गलत साबित नै गरिसक्यो । यस्तो अवस्थामा यस्तो अत्यावश्यक वस्तु आपूर्ति गर्ने आर्थिक गतिविधिलाई गैरकानूनी बनाइराख्नुको कुनै औचित्य छैन । बरु उद्यमशिलतालाई प्रवद्र्धन गर्दै इन्धनको सहज आपूर्ति कसरी गर्न सकिन्छ भन्ने कुरालाई प्राथमिकता दिनुपर्छ । यसका लागि प्रतिबन्धात्मक सरकारी सन्धि तथा नीतिलाई हटाई, इन्धन आपूर्ति खुल्ला भएको घोषणा गरी प्रवेश बाधा हटाएर उदार ढंगले प्रतिस्पर्धात्मक तथा सुरक्षित रुपमा इन्धन व्यापारलाई अगाडी बढाउनुपर्छ । यसो गर्नाले कालोबजारले निम्त्याउने महँगाई तथा मिसावटका समस्या स्वतः सम्बोधन भई सहज आपूर्तिको वातावरण सुनिश्ति गर्न मद्दत पुग्नेछ ।

 

Dinesh Karki

About Dinesh Karki

Dinesh Karki is an independent researcher. He has Economics degree from Xi'an Jiaotong-Liverpool University, Suzhou, China.

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The burden of reconstruction

The legislative parliament has passed the Reconstruction Authority Bill for executing the rebuilding program by disseminating the targeted $2 billion reconstruction fund plus $ 4.4 billion pledged by foreign governments and donors as grants and soft loans. The National Planning Commission (NPC) estimates the cost of reconstruction to be as high as $ 6.7 billion. The obvious question to ask now is ‘Who is going to bear all this cost?’ The obvious answer is us – the taxpayers. And if so, why is there a need for such huge government assistance in the first place? One plausible answer is that protective measures like buying insurance could have lowered the fund needed for reconstruction. However, such voluntary adoption of protective measures as buying insurance is very low in Nepal. In fact, some serious regulatory hurdles have constrained the growth of insurance industry!

Insurance penetration is very low in Nepal – a mere 1.42% of the GDP as per the Insurance Board of Nepal (IBN) data. The same for emerging markets averages 1.75% of the GDP. The compensation amount post-earthquake from insurers stands at Rs. 3.519 billion, a mere fraction of the required reconstruction costs. Apparently, there would be no need for such costly reconstruction assistance from the government had there been more structures been insured against earthquake-induced damages.

Rigid Solvency and Investment Requirements

In the name of prudential regulation for protecting consumers in case of insolvency, the IBN heavily regulates the insurance companies. There are strict solvency requirements and rigid investment requirements that limit the insurance companies from devising their own risk-management strategies.

The board has laid out solvency ratios and their consequent corrective actions. These solvency controls are uniform rule-based quantitative requirements without incorporating the risks undertaken by the insurers. It leads to a restrictive atmosphere where insurers are forced to meet inappropriate capital requirements even when the riskiness of their portfolio is low. Swiss Solvency Test (SST) in Switzerland and Solvency II Directive in the EU, for instance, align capital requirements with their specific risk profile.

The IBN has also laid out quantitative (mandatory minimum) requirements for investment in limited asset classes (for example, government securities, treasury bills, fixed or short term deposits of commercial banks, etc.) in the name of minimizing risks from uncertain losses. As per the recent IBN data, only 16.4% of the actual investments made by providers of no medical exam life insurance are under unregulated category which further proves how restrictive the requirements are. Such highly restrictive solvency and investment requirements are detrimental to the insurance industry as they stifle product development, innovation and competition.

Price-setting and Confidentiality of Premiums

The premiums charged for different categories of houses are set by the Insurance Tariff Advisory Committee (ITAC). The tariff and the premium rates are rendered confidential and are not available to consumers even when demanded. Such provision of price setting and confidentiality creates a problem of asymmetric information and further distorts the coordination of the insurance market through prices. Further, such price setting could lead to ‘cartel-type market arrangement’ imposing higher costs to insurers as well as consumers. Another problem is that they are not based on any actuarial methodologies; meaning, they are not based on specific risks of the policyholder. The basic principle of insurance dictates that equal risks must be treated equally while unequal risks must be treated differently. When unequal risks are pooled together and levied a uniform premium rate, this gives rise to the classic problem of ‘adverse selection’. In other words, such policies become more attractive to high risk consumers and unattractive to low risk consumers.

Disincentives for Purchasing Insurance: Earthquake Deductible and Low Claim Settlement

As far as the purchase-decisions are concerned, one clear disincentive for people while buying insurance is not being eligible for compensation. According to the latest IBN data, about 20% of the claims (i.e. 3499 out of 17,400 claims are ‘no claim’) related to earthquake are either ineligible or withdrawn by the homeowners. One of the reasons for the case of ‘no claim’ is because the claims are either equal or lower than the amount that insurers are allowed to deduct while settling claims. When we compare this to Japan’s case for instance, insurers are required to reimburse 100% of the insured amount. Another constraint for purchase and post-purchase decision can be attributed to the ineffective claim settlement process. The probability that an insurance claim will receive some compensation after being evaluated by a supervisor stands at just 3.28%.

The Reconstruction Bill and the Moral Hazard Problem

Even before people decide to purchase an insurance policy, they should recognize the need for it and evaluate other alternatives. When there is a strong assumption that the government will provide grants and soft-loans in case of an earthquake, there would be no financial incentive for people to purchase insurance. Inference from history suggests that post-disaster government responses play the role of the substitute to disaster preparedness. For example, loans provided during the reconstruction and rehabilitation program after the earthquake of 1988 were later converted into grants. Further, lobbying for total loan forgiveness in the past is a testimony for rent-seeking and vote-bank-securing behavior from politicians and interest groups. Though meeting immediate needs of the earthquake victims can be justified from the humanitarian aspect, outright grants and low-interest loans would only make things worse in the present and the future.

Tying It All Together

Removing these regulatory supply constraints will create room for the disaster insurance market to expand and thus cover more properties. This expansion will shift the risks of disasters like earthquakes to the homeowners themselves. The government will not have to redirect huge amounts of taxpayers’ funds to rebuilding efforts. Removing these constraints should in no way be viewed as a magic-wand; insurers will not magically cover all nooks and crannies of the country right away. Like all market processes, this will be a continuous process and will see scores of adjustments along the way. Having said that, this is in every way, a move in the right direction – letting the market thrive, giving choices to the people, and most importantly, reducing the burden to the government – the government that has not been very efficient in handling the relief and reconstruction activities to say the absolute least.

This article was originally published on Setopati on the 8th of January, 2016. The article was authored by Dinesh Karki. For the original version of the article, please click here

Dinesh Karki

About Dinesh Karki

Dinesh Karki is an independent researcher. He has Economics degree from Xi'an Jiaotong-Liverpool University, Suzhou, China.

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Three lessons from these recurring blockades

Image Sources: India Today, 1989 (top and bottom left); AFP, 2015 (top right); The Himalayan Times, 2015 (bottom right)

More than two months into the “unofficial” blockade now, it is no surprise that blockade is what (almost) everyone is talking about; be it some casual chit-chat or some blown-up rant on the social media. An interesting observation here is that quite some of these regular people here appear to understand, and be able to scrutinize the geo-politics as soon as the supplies get disrupted. It must be noted that these are not mere hollow outcries; these informal discourses sometimes lead to some meaningful recommendations that could benefit our economy in the long-run. This disruption could be the harbinger of the change – the opportunity for us to reform our economic policies and trade strategies – that can lead us to prosperity. It all depends on how we take lessons from this crisis:

1. Let ’em do it!

The state-owned Nepal Oil Corporation (NOC)’s monopoly, stemming out of the NOC-IOC (Indian Oil Corporation) partnership has barred the private sector from partaking in the industry and exploring alternatives elsewhere. This has further constrained the choices that the public has in terms of procurement of petroleum products. Today, we even pay higher prices for the petroleum products just to cover NOC’s inefficiency. Even after having proved its inefficiency through repeated shortages and bankruptcy, why shouldn’t the government let the private sector do it?

Although the private sector is technically “allowed to import” petroleum products, and even allowed to open a refinery, the paid-up capital requirement is a ridiculously high Rs. 20 billion – equal to 1% of the GDP and multiple times higher than that for the commercial banks. Such high regulatory capital requirements pose a barrier to entry for the private sector. Had we had more flexible policies, and thus private companies bringing in petroleum products from other sources, we would not have been facing this petroleum crisis today. It is unfortunate that even after all of this, the government has instead created a ‘black market’ by banning the entrepreneurial individuals from “smuggle”-ing these basic supplies. Pun intended!

2. Don’t put all your eggs in one basket!

“Self-reliance” has also made it to one of the most discussed issues amidst current political-economic crisis. The people in favor of this “self-reliance” however seem to forget the very reason trade exists. Trade benefits consumers the most through competition in prices and qualities, and giving choices to the people. It is important we be clear that the havoc this disruption has created is because of lack of diversification in our supply-chain, and not trade. Our foreign policies and trade policies have not been liberal enough. Relying on just one source for most of our essential supplies has handicapped us. The answer to guaranteeing an uninterrupted supply of goods and services lies in diversifying our import portfolio instead of relying on one country to supply us almost everything. Had there been a competitive and diverse supply chain, who knows we might even have been importing crude oil from Russia and cooking gas from Kazakhstan!

3. Treat your friends equally, because if you don’t, you don’t see them as friends – Michiyo Yamashita

Free trade in goods, labor and capital would help Nepal from both uninterrupted supply of necessity goods and prosperity perspectives. Otherwise, treaties can be detrimental when they are exclusive. They will divert trade from cheaper goods of non-member countries to more-expensive goods from member countries.

Nepal has signed a transit treaty as well as a treaty of trade with India and some other nations. However we haven’t been able to capitalize on them for mutual benefit. We need treaties that lower the tariffs, reduce and standardize the documentation and provide access to each other’s markets. It is important here that Nepal treats its neighbors at par with each other. Another important factor for free trade is free connectivity. The recent turn of events has paved way for trade and transit treaties with more partners. Nepal, as a landlocked nation needs to secure connectivity through multiple accesses to sea ports. Nepal has already agreed with China to open more transit points, but we also need a transit treaty with China. There is equal need to institutionalize transit treaty with Bangladesh.

The Bottom Line

The above lessons should be one of the defining norms of our economic and trade policies even at normal times – not just when supplies get disrupted. The ability of the free market to coordinate itself through entrepreneurial discovery process is second to none. And when it comes to diversification of imports, what it means is that the government should facilitate, without direct participation, the process of market discovery for our imports from producers worldwide. Such facilitation is only possible by ensuring better connectivity and access through trade and transit treaties that are non-exclusive.

Dinesh Karki

About Dinesh Karki

Dinesh Karki is an independent researcher. He has Economics degree from Xi'an Jiaotong-Liverpool University, Suzhou, China.

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Many Heads Creating Hurdle in Hydropower

loadsheddingNepal achieved multiparty democracy in 1990 and a series of liberal and private sector friendly policies were formulated then after. Hydropower Development Policy, 1992 and Electricity Act, 1992 also came into effect which paved the way for foreign and domestic private sector participation in generation side. Electricity Act, 1992 made a provision whereby even the private sector could acquire licenses for undertaking survey and generation purposes.

In the beginning, survey license was very cheap to acquire; for eg., NRs. 100, 150 and 200 for 1-5 MW, 5-10 MW and 10-15 MW respectively. The bureaucrats were quick to act at this. Majority of licenses were acquired by the employees working at the Ministry of Water Resource (MoWR), Water and Energy Commission Secretariat (WECS), Department of Electricity Development (DoED) and Nepal Electricity Authority (NEA), or by their relatives. What’s more, the licenses were distributed on first-come-first-serve basis without conducting sound financial and technical analysis. The license holders did not even have to construct the project, but could sell it to developers at higher prices. Thus, began the license-holding culture. These people who held licenses cited cases of landslides, local issues and others to renew their licenses time and again, without really conducting any survey. Due to this, real investors did not get a chance to construct hydropower projects. Interested parties had to buy it from these license-holders, which increased the time and cost of projects. In order to discourage pseudo license-holding, the license acquisition fee has been reviewed three times till date.

Commission for the Investigation of Abuse of Authority (CIAA) recently directed Ministry of Energy (MoE) to revoke the licenses of 10 different hydropower projects as the promoters of these projects could not complete necessary procedures such as signing Power Purchasing Agreement (PPA), making financial closure, etc. Once the license is repealed, the entire process of development of these projects starts from the beginning i.e., acquiring survey license, conducting feasibility study, finalizing Environment Impact Assessment (EIA) and so on, which costs additional time and money. Therefore, it may not be a good step to scrap licenses of projects that have already initiated pre-construction works as this will further delay the development of hydropower projects. In case of Upper Khorang Khola Hydropower Power Project, the developers could not conduct PPA in time due to delay in decision-making process of NEA. The delay in signing PPA has further delayed managing investment from financial institutions for the project. Although the license period of Kabeli “A” has matured, it has already given Letter of Intention (LoI) to contractors, issued right shares and acquired land to construct the project. A lot of initial investments made in these projects will go in vain if the licenses are nullified and the construction of projects will be further delayed. The solution to these problem lies in initiating competitive bidding process instead of issuing survey and generation licenses for construction of hydropower projects because the nation gets more benefits as it receives free energy and equity ownership along with royalty through international bidding. For example, GMR, the company that won the bid on Upper Karnali Hydroelectric project, has promised to give 12 percent free energy and 27 percent free equity. Likewise, Satluj Jal Vidyut Nigam got permission to construct Arun III after providing 21.9 percent free energy. Additionally, the public limited company of India agreed on providing 20 units of free electricity to each house of Sankhuwasabha district, where the project is located. Furthermore, the promoter of the project has agreed on issuing shares to local people. The system of providing share to the local people helps to reduce level of inequality in society to some extent as they also get return from their investments. They can further utilize that sum of money for starting other income generating works, educating children, receiving vocational training and much more.

Developing hydropower by awarding a project through international competitive bidding is the most scientific way to solve the issues related to license regime in Nepal as it creates win-win situation for all stakeholders.

Dinesh Karki

About Dinesh Karki

Dinesh Karki is an independent researcher. He has Economics degree from Xi'an Jiaotong-Liverpool University, Suzhou, China.

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