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“National Priorities, Nepal, Narendra Modi”; “Kenneth Arrow’s Condition I” and “Why Nations Fail”

The past week has been packed with 3 events in Nepal that test our fundamentals as a nation which are as the following (chronologically):

  1. Landslide in Jure and subsequent flood in Sunkoshi River (Saturday, 2 am)
  2. The visit of Indian Prime minister Narendra Modi (Sunday, 10:50 am)
  3. The death of Dinesh Adhikari, alias – Chari (Wednesday, around 6 pm)

As Former President of the Philippines quotes, crisis is the crucible that forges a nation’s destiny. That huge a destiny shaping event might not have been in case for Nepal this week, but a lot can be said from these three events about the path we are heading to, our social mindset and the flaws of our prioritization.

Chronologically, it’s really interesting how our parliament was tested on the prioritization between relief efforts in Sunkoshi and the visit of Narendra Modi.  There were a few prominent issues like the fact that Chief Secretary Mr. Leelamani Paudel, cancelled his trip to the landslide affected area and unfortunately, even the media overlooked this issue.

The book Why Nations Fail (James A. Robinson and Daron Acemoğlu, 2012) quotes a very valid argument:

 “The idea that rich Western countries should provide large amounts of “developmental aid” in order to solve the problem of poverty in sub-Saharan Africa, the Caribbean, Central America, and South Asia is based on an incorrect understanding of what causes poverty. Countries such as Afghanistan are poor because of their extractive institutions — which result in lack of property rights, law and order, or well functioning legal systems and the stifling dominance of national and, more often local elites over political and economic life. The same institutional problems mean that foreign aid will be ineffective, as it will be plundered and it is unlikely to be delivered where it is supposed to go. In the worst-case scenario, it will prop up the regimes that are at the very root of the problems of those societies.”

So, does our government also function as an extractive institution? And does this render in a larger picture that, the USD 1 billion given as soft loan by the Indian Prime-Minister will prove to be “ineffective”? The answers to these questions can be found in last element of the previous chronology- the killing of ‘the Don’ Dinesh Adhikari, alias- Chari.

CA

Parliament in Session

The very question of our political parties being based on the mafia culture and our politicians doing their dirty work with the help of goons has been floating in our mainstream media for a very long time. But when the news of CPN-UML leaders (Gangalal Tuladhar, Rajendra Pandey and Bhumi Tripathi) presenting themselves in the official residence of the Minister of Home Affairs to advocate the death of Mafia Chari came, the answer to these questions surface themselves.

This point is economically valid because it gives color to the social preferences we have. In any other nation, be it India or the USA, has any political leader gone to the government and advocated for the extortionists’ (on the run) human rights?

Arrow’s impossibility theorem has this famous condition I – the Irrelevance of the Irrelevant or “independence from irrelevant alternatives”. Indeed, this proves that no system in the world is ever perfect.  But it seems, in majority of systems working efficiently, this condition is well covered – the irrelevant alternatives are rendered irrelevant. Unfortunately again, in Nepal, it’s the exact opposite –  they are relevant. Arguing the human rights of Chari when other major issues are at stake in the parliament is an irrelevant alternative – if this is given weight than the bias towards this agenda is promoted and the relevant alternatives like the relief to Sunkoshi victims are pushed aside.

This creates a beautiful link between the extractive institutions and irrelevance. Simply, extractive institutions are irrelevant to the functioning of a nation. Prioritizing extracting institutions hinders growth, and the turn of events during this week proves that we are making this exact mistake. As rightly quoted before, the dominance of national and local elites over political and economic life is exactly what is emerging out of these issues – which again offers a huge political backing to the youthful population, consequently dragging them  into burning a college library to ashes and the likes.

We have to get our priorities right, and we have to declare the irrelevant issues irrelevant once and for all.

Serene Khatiwada

About Serene Khatiwada

Serene Khatiwada is a Research Intern at Samriddhi, The Prosperity Foundation. He did his Economics Honors from Hansraj College, University of Delhi.

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Discussion on Indo-Nepal Power Cooperation Agreement (Draft) – Discussion Summary

With the recent visit by Indian Minister of External Affairs Sushma Swaraj and the forthcoming visit of Prime Minister of the Republic of India, Mr. Narendra Modi, Power Trade Agreement between Nepal and India has become a concern for many in the Nepalese political-economic discourse. The recently proposed draft Agreement between Government of the Republic of India and Government of Nepal on Cooperation in Power Sector has been subject to immense political scrutiny for a number of reasons making the discussion on the proposed power cooperation agreement imperative.

Samriddhi, The Prosperity Foundation thus conducted its latest round of Econ-ity tilted “Discussion on Indo-Nepal Power Cooperation Agreement (Draft)” on the 31st of July, 2014. The event was held at Hotel Himalaya, Kupondole, Lalitpur and the panelists/speakers were:

• Dr. Prakash Sharan Mahat- Nepali Congress
• Mr. Lila Mani Pokharel- UCPN Maoist
• Dr. PC Lohani- Rastriya Prajatantra Party
• Mr. Dharmendra Bastola- CPN-Maoist

This edition of econ-ity was moderated by Mr. Kuvera Chalise.

Discussion on Indo-Nepal Power Cooperation Agreement (Draft)

Discussion on Indo-Nepal Power Cooperation Agreement (Draft)

Here is a snippet of what the speakers said during the forum.

1. Dr. Prakash Sharan Mahat

Dr. Mahat commenced his deliberation by stating why it is high time that Nepal enter into a Power Trade Agreement PTA with India. He shared that hydropower is a highly capital-intensive industry and all investments are made before the generation begins. Therefore, developers shy away from entering the industry until a prospect for market has been established. This market can be secured by a PTA.

In the mean time, he also expressed that Nepal’s domestic needs should be fulfilled first. There is immense amount of water flowing throughout the country and with right investments this water can be converted in to economic goods. He talked about the need to guarantee that small projects cater to domestic demand and only large projects export electricity to fulfill the needs of the neighbor. There is seasonal fluctuation of water supply in Nepal. Therefore, storage-type projects are must for Nepal. Given the high costs associated with these types of projects, due to high expenditure in building dams, relocating locals of the land, environmental impacts etc., he shared that the state should lead the construction of such high capacity projects. If the state guarantees that investors get a respectable return, he further hinted towards the possibility of channeling the remittance money into construction of these mega-projects.

He further clarified that this proposed PTA, if agreed upon, would mean that Nepal sells only the excess (otherwise spill-over) electricity and it does not mean selling electricity while Nepalese people remain in darkness. With the pace that hydropower developers are investing in Nepal, after 2017 we are all set to face spill-over and this PTA guarantees that such excess electricity can be sold to India. He further added that the Nepali side must be cautious about whether or the not the condition – that Nepal can also import electricity from India when it faces shortages – makes it to the agreement. This is a must, he shared.

Responding to the allegations that India plans on controlling the entire water resource of Nepal and dominating Nepal, he said that the proposal sent by Indian side is just a draft and it is open to negotiations. Nepalese side should table their own conditions and take the discussion forward rather than alleging India of trying to dominate Nepal, he added. The proposed agreement opens possibilities of further cooperation between India and Nepal and at the moment we should carefully analyze the proposed clauses and try to earn a better deal for ourselves than doing nothing about it.

Then he went on to say that the proposed agreement sets Nepal into a path of changing the way Indo-Nepal cooperation moves forward. He shared that Indian political leadership is trying to make real cooperation with Nepal after 17 years and this is the best possible situation for Nepal. We should extract the best out of this opportunity. He added, we have borne the brunt of handling this responsibility to bureaucracy in the past and today, we have the opportunity to change this.

Dr. Mahat then talked about the benefits this PTA offers to Nepal. He said that this PTA opens the way for Nepal to make PTAs with Bangladesh, China and others in future. Furthermore, removing tariff barrier, as proposed, is a great deal for Nepal. Removing tariff barrier means that Nepal’s electricity will be cheap and there will be more demand for our electricity in India. There is a clause that secures non-discriminatory treatment for our electricity.

He concluded his deliberation by warning all political and opinion leaders that this PTA should not be taken into an ideological debate.

2. Mr. Lila Mani Pokharel – UCPN (Maoist)

Mr. Pokharel talked about how problems that have surfaced following the 1950 treaties have made us think about the consequences of this proposed PTA as well. Therefore, it is important that we take this fact into consideration. He further expressed his dissatisfaction over how the details regarding the proposal by the Indian side was kept under-cover.

Then he spoke about how selling raw materials has never made any country rich. He said that we need to use our water resources to fulfill our own needs. Therefore we should not be too dependent on selling electricity.

He then went on to talk about the motives of India behind this power agreement. He explained how energy is not the primary concern or India. He said that there are alternative sources of energy for India. It is not energy that India wants. They want control of our water.

He also highlighted some of the issues that were not included in the PTA but which should have been there. There is no mention whatsoever of the downstream benefit sharing in this draft. He said that current PTA proposal compromises Nepal’s irrigation projects, while India gets surplus water.

He concluded his deliberation by mentioning that Nepal should also ask India for right to sell electricity to Bangladesh.

3. Dr. PC Lohani – Rastriya Prajatantra Party

Dr. Lohani started by acknowledging that in any bilateral agreement, both countries have their own national interests. Likewise, India and Nepal have their national interests. The right thing to do under such a situation is to openly discuss the interests and strike a deal with mutual benefit.

He then went on to pointing out the shortcomings of the proposed cooperation. The proposal fails to acknowledge the concept of value added water. When Nepal builds dams to store water so that India can have enough water during their dry season, it offers them a lot of benefits. Nepalese side should table this issue while discussing PTA. He then shared that we should be transparent with our bilateral issues. We cannot do a deal under cover without allowing enough public discourse over the deal . Other relevant ministries should also be on the same page.

On the bright side, he said, Indian side is ready to negotiate the terms and therefore need to expedite the process. He suggested that we should put in the concepts of sub regional grid common market mechanism without government intervention in the PTA.

He concluded his speak by mentioning that there should be a different framework policy in dealing with water resources. A high-level committee could be created to prepare a draft report within 3 months.

4. Mr. Dharmendra Bastola: CPN-Maoist

Mr. Bastola began his speak by saying that PTA should happen, but the terms and conditions and modality need to be discussed further. He also warned that India wants to exercise control over Nepal’s water. India needs water for various reasons such as irrigation and flood control. They need to deal with their dry season shortage and this is what guides this PTA, he said. Therefore signing this PTA under current terms and conditions will make Nepalese people poorer and force them to live in the darkness forever, he added.

He then went on to talk about how the Nepalese government should take up the responsibility of constructing larger scale projects. If we do not have enough funds, one option is that we take loans and pay interest. Another alternative is that If the government can channel the remittance money (which amounts to over $ 5 billion) into hydropower sector, we can invest $ 4 billion in Upper Karnali. Then we can build hydro projects and still have 1 billion dollars’ worth of saving.

He then added the benefits of developing hydropower projects by Nepal itself. We could then concentrate on bringing in foreign investments on the ground that production costs are cheaper in Nepal due to cheap energy. If we have enough energy, we could lure foreign companies into Nepal.

He then shared that the economic model of Public Private Partnership (PPP), which we are practicing at the moment is a wrong economic policy. We need Public Private Cooperative Partnership (PPCP).

Coming back to the prospect of PTA with India, he shared that storage-type projects should be the priority. Record Keeping on how much electricity flows out and how much electricity flows in should be done properly. Prices should be fixed by Nepal. Tariffs should be made applicable. If all these issues are included in the PTA, then we can move on with the proposal and sign a deal, he said.

Interaction with the audience

The participative and interactive audience then further talked about price fixing mechanisms including that for import in the short and medium term, need and prospects of a power trading company for Nepal, transmission lines provisions and other pertinent clauses in the proposed (draft) agreement. Some of the highlights of the interaction session were:

• This proposal is silent about the prices that will be charged to Nepal when Nepal has to import electricity from India. This could cause problems in future. This issue needs to be worked out.

• This PTA is similar to Bilateral Investment Protection and Promotion Agreement (BIPPA) that Dr. Babu Ram Bhattarai, former Prime Minister of Nepal did with India. Signing this PTA will open avenues for making PTAs with other neighboring countries like China and Bangladesh for Nepal.

• Agreements like the one that has been proposed by India affects not just the Ministry of Energy, but the Ministry of Agriculture and Ministry of irrigation as well. In order to smoothen the policy making and ease up the monitoring of different activities related to water resource management, agriculture and harnessing hydropower, these ministries could be accommodated into one.

• Unfair terms of trade are bundled together and proposed here. We should separate these and discuss them one by one. A team can work that out. A consensus base model is what is required.

• We do not have a Power Trading Company in Nepal right now. Even in India Power Trading Company, India is a near-monopoly institution. We have to make a PTCN and a new transmission company. Then only, both countries will be on balanced terms.

Akash Shrestha

About Akash Shrestha

Akash Shrestha is Coordinator of the Research Department at Samriddhi, The Prosperity Foundation where his focus areas are petroleum trade and public enterprises. He also writes newspaper articles, blogs and radio capsules, based on the findings of the studies conducted by The Foundation.

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Economic Policies in Emerging Markets

Samriddhi, The Prosperity Foundation organized a Nepal Leaders’ Circle meet on the topic “Economic Policies in Emerging Markets.” Rt. Hon. Hugo Swire, MP, MInister of State, Foreign and Commonwealth Office, UK was the speaker for the event. While Nepal is looking to graduate into the status of Developing Country by the year 2022, this program sought to bring out valuable inputs from the participants on how Nepal can benefit from the global trends of cross-border investments by setting the right kind of policy environment that offers profitable prospects to the investors.

Attendees discussing Economic Policies for Nepal

Attendees discussing Economic Policies for Nepal

The event was organized at Hotel Himalaya, Kupondole on the 3rd of June, 2014. The meeting was attended by senior bureaucrats, experts, business community leaders, economists, editors & columnists and foreign investors. The following is a summary of the entire session:

Rt. Hon. Hugo Swire

Rt. Hon. Hugo Swire commenced the session by talking about why, despite all natural, geographical and human endowments, Nepal has not been able to transform itself into one of the major players in the global economy. He acknowledged how Nepal has been a land of peace in the past and reinstated the same peace in the present, albeit having gone through a period of insurgency in the last decade. He then went on to iterating how Nepal cannot afford to be complacent in being a least developed country in the pretext of the same old civil war and waste its resources like hydropower and tourism, and killing the entrepreneurial spirit in the people in the meantime. He expressed how Nepal needs to acknowledge the need of FDI to uplift itself from the Least Developed Country status. There seems to have been discussions over whether Nepal intends to be under aid and assistance all the time, or change it and shift its focus towards bringing in investments. However, not much action has been done in this regard. Similarly, constitution drafting has taken too long a time already. While Nepal is spending much of its time debating and discussing its political and economic agendas, Nepal has utterly failed to reap the benefits of it resources; the opportunities they provide for attaining Nepal’s economic transformation.

The speaker then went on to justifying his statements by giving examples from international experiences. In India, BJP overthrew the ten-year reign of Congress and UPA by selling hopes of economic reforms. Narendra Modi’s Gujarat reforms were the building blocks of BJP coming to power. In China, despite the communist roots, they have liberalized their economy because they realize that they have to allow economic freedom to the people to protect their own political dominance. Currently, they are planning building hundreds of newer cities. Similarly, in the UK itself, they have acknowledged the fact that in order to keep the pace with globalization and international investments, they have to become more and more inward investment friendly. They need to revamp their infrastructures like the airports, the energy sector and more. For this they need capital investments and they are turning to more international investments in these regards.

The speaker concluded his opening remarks by reiterating how there is no alternative to being open to foreign investments to boost the Nepalese economy. The private steers the market while the public sector caters to the needs of the most vulnerable groups in the society. But he also mentioned that foreigners will not come in just by debating in favor of Foreign Investments (FIs). Investors are mobile these days. They create job opportunities and contribute to economic growth; but in the mean time they look for certain pre-conditions before making investments abroad. Some of such necessary pre-conditions that Nepal needs to be guarantee the foreign investors, as highlighted by Rt. Hon. Hugo Swire were,

  • Clarity in economic polices
  • Certainty in terms of being free of risks that a host country can impose; like nationalization, change in rules of engagement in a retrospective manner
  • Accountability in government
  • Transparency
  • Predictability in the markets
  • Rule of law
  • Fair tax environment

General Discussion

After the speaker concluded his deliberation, the floor was set open for interaction among the participants. Some of the key issues discussed during the interaction session are:

  • A functioning government is a must for allowing the private sector to grow. Government should encourage private sector. When there is wealth creation, that is which can then be redistributed by the government by delivering public services. But if the government hamstrings the private sector, it is not beneficial for any group.
  • Capitalism is being redefined globally. After the 2007/08 economic recession, capitalism has had a bad reputation. The key issue is to get the right balance between regulation and promotion of private sector.
  • The domestic market of Nepal is being over-protected in the fear of its resources being exploited by foreigners and Nepal being converted into a dumping-ground. But the reality is that with foreign investments, the economic sectors of Nepal will be modernized, made more productive and will create more job opportunities. Then Nepal will in fact be able to supply its goods and services to the international market.
  • Nepal needs to send out signals to the rest of the world that it is welcoming FDI. International giants already have lots of places to go to. So Nepal should go to other countries and promote its own market. The foreigners need to be convinced that there is a demand and substantial market for foreign products in Nepal. For example, Oxford University could be lured by selling the prospects of great market by selling the idea of Nepal’s geographical proximity with India and China, both of which are going out for higher studies.
  • Nepal has a minimum threshold on the amount of permissible FDI. Then there is corruption, which in turn creates unpredictability for investors. Things like these discourage investors. Peru, Chile, Brazil, they are all going to London, promoting their markets and negotiating terms of doing business in their respective countries.
  • In the UK, government tries to make sure that the taxpayers’ money is used wisely and optimally. If there is something that the private sector can do better than the government can, the government pulls out.
  • The presence of donor agencies like USAID, DFID, Gtz and many more have turned Neal into a welfare state itself. There seems to be no shame in asking for aids and assistance when seeking the same to support the people who need help, but the idea of FDI is suddenly perceived as a threat to national sovereignty. This needs to change. No country will colonize Nepal. Nepal should open up its markets.
  • Nepal faces severe challenges in terms of having high numbers of rural population and low human capital. But this is not a unique problem in the world. Mongolia a faced similar challenge. But they have found a way around it by using there mineral resources. In Nepal, there is high potential of hydropower generation. This should be tapped in.
  • Political parties need to come together for a economic transformation of Nepal.

Hon. Minendra Rijal, Minister of Information and Communication, GoN

After general discussions Minister of Information and Communication, Hon. Minendra Rijal delivered concluding remarks to formally end the session. Some of the highlights of his deliberation were:

  • Competition is the pre-requisite for economic growth. He used the example of NTC and NCell, one 92% government owned company while the other, an over 80% foreign investment have been competing with each other, delivering better and cheaper services to the consumers than in the days when NTC had a monopoly in the telecommunication sector of Nepal. NTC is even looking for foreign strategic partner and a process of divesting 30% of government ownership has already begun. These activities, he believes, will serve the Nepalese consumers even better in the days to come.
  • Investment Board of Nepal (IBN) is working with foreign investors in the hydropower sector of Nepal.
  • Nepal Telecom, Nepal Army Welfare Fund, Pension Fund and others have huge pools of unused funds. Nepal still needs to work on creating an investment-friendly climate for these domestic institutions. These funds can then be mobilized as investments.
  • Overall, government should realize that there might be times when certain sectors need to be protected from foreign investors, but Nepal should never protect inefficiency.

Akash Shrestha

About Akash Shrestha

Akash Shrestha is Coordinator of the Research Department at Samriddhi, The Prosperity Foundation where his focus areas are petroleum trade and public enterprises. He also writes newspaper articles, blogs and radio capsules, based on the findings of the studies conducted by The Foundation.

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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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