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Four Reasons Why the NEA Should Not Procure LED Bulbs

The Government of Nepal’s decision to purchase 200 million units of energy efficient LED bulbs has created a big controversy. While the decision in itself has been projected as being in the national interest, the NEA has been facing suspicions of corruption for having bypassed the public procurement law, and having resorted to the special power of the cabinet for buying light bulbs.

Granted that the NEA is acting in the national interest and there is no corruption involved, there are still other reasons to why the procurement of LED bulbs by the NEA is wrong.

1. Going beyond the NEA’s mandate
Nepal Electricity Act, 2041 states that the primary objective of NEA is to supply the power by generating, transmitting and distributing electricity efficiently and reliably, making it accessible to everyone. That is to say that NEA is tasked with only generation, and management of supply of electricity to make it affordable and accessible to all Nepalese. Therefore, procurement of LED bulbs falls beyond the mandate of the NEA as it is clearly not indispensable for either the generation, or the transmission and distribution of electricity.

2. The flaw in the proposed financing model
To finance the procurement, the Government of Nepal is granting a loan of Rs. 2.08 billion which the NEA seeks to repay by selling the bulbs through its distribution centers. In a country where 25.2% of the population lives below the poverty line, it is not pragmatic to expect people to spend money in purchasing energy efficient bulbs in the name of contributing to national interest. In this scenario, the government is likely to provide subsidies to make it affordable to the poor, reducing the retail price (which may even be below the cost price). As soon as that happens, the NEA will face similar fate as the NOC where the dysfunctional subsidy policy rendered it unable to even attain break-even, making it impossible to pay the loans.

3. Crowding out private investment
The NEA, as it is a public enterprise, enjoys few privileges that private enterprises do not. It neither has to depend on investors for capital, not on consumers for profit. With the unlimited government backing, it can afford to procure goods at economic cost and sell them in the market at social costs, even if it makes loss after loss. This disrupts the playing field for private enterprises for they cannot compete with state-backed competitors. This will eventually crowd out private investments.

4. Policy insecurity; lack of predictability
The most important factor affecting investment decisions of private investors is predictability, which is a function of policy stability. The fact that the state-owned enterprises can, at any moment, use the special powers of the government to curb the law of the land makes it further challenging for private investors. In this case, Honorable Minister of Energy, Mr. Janardan Sharma has cited the provision in the public procurement law that allows direct procurement with an international inter-government organization but he has conveniently left out the condition of the provision being applied only in the case of pre- existing supplier of the said goods or services. These kind of malpractices also set negative precedents that can be borrowed by other sectors of the economy as well, which has the potential of making it impossible for private investors to operate in any sector in Nepal.

The Alternative Solution
The rationale given for the purchase of the bulbs by Honorable Minister of Energy, Mr. Janardan Sharma and the MD of NEA, Mr. Kulman Ghising, is its potential to reduce the national electricity consumption by up to 200 MW. Nepal has adopted a liberal economic policy and there are private enterprises that are offering the same service as the NEA is attempting to. If the goal is to lessen the peak demand, then the government could very well relax some of the taxes that apply to these products, making these energy-efficient bulbs affordable to most, if not all, consumers of the grid electricity.

About Ranju Bista

Ranju is a researcher at Samriddhi Foundation.

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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.

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Re-thinking Public Enterprises in Nepal

When public enterprises were first introduced in Nepal during late fifties and early sixties the scenario was quiet different from what it is now.  The presence of private sector in the market was negligible and thus it made sense for the government to take control of the economy and establish several public enterprises. The government, in order to fulfill its duty of serving the people along with providing them essential goods and services, established one enterprise after other. The rate of establishment was such that at a point in time there existed 61 public enterprises–from water and food to cement and air services and everything in between–most of them monopolized the sector. Their number has been reduced to 37 today but their return in terms of goods and services to the people and profit-making for the government is questionable.

Almost six decades have passed us by and  instead of improving the services these enterprises have imposed an enormous burden on the taxpayers as well as the government. While the debate on public enterprises continues–some favor putting in more efforts and improving the management while others opt for a complete privatization. While this happens in the backdrop,  we bring to you facts on public enterprises that simply cannot be overlooked or neglected anymore. Since resources (esp. monetary) is already scarce in the country it would not be wrong for us to ask the government to use the resources in productive areas rather than pouring in taxpayers’ hard earned money into ineffective enterprises.

Public Entreprise Infograph

 

Koshish Acharya

About Koshish Acharya

Acharya is a student of social sciences and has been associated with Samriddhi, The Prosperity Foundation for the last three years.

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Stuck in the Wires

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Like in most of the countries around the world, Nepal Electricity Authority (NEA) which is a public utility entity enjoys natural monopoly over construction of transmission lines. The Electricity Act 1992 opened up the sector for private players in generation which led to the production of more than 230 MW of electricity and more than 1586 MW have been in different stages of development. Most of the construction, however, has been halted due to transmission related problems, project infeasibility, and social or environmental issues.
Lack of timely construction of transmission infrastructure by Nepal Electricity Authority has created hindrances in hydropower development. For instance, construction of Khimti-Dhalkebar Corridor was supposed to be completed by 2010 but it has not been completed till date. The people of Sindhulimadi agreed to give land to the project if they were to be given a 100 percent compensation for their land and this sadly did not happen. Thankot-Capagaun Corridor has been under construction for more than a decade now. Similarly, Mai Khola Hydropower and Sipring Khola Hydropower, two power projects backed by independent power developers are about to start generation but the construction of transmission infrastructure has fallen behind schedule putting these projects’ future operation in quandary.
The congestion in the existing grid adds further woe to the situation as available power cannot be transmitted due to the problem of tripping. In Bhairahawa, expensive machines used for industrial production were damaged due to sudden cut of power due to tripping. The same problem has been experienced in certain areas of the Kathmandu valley time and again due to excessive load hardly supported by distribution network.
NEA, however, has not been able to construct transmission lines due to problem in land acquisition. It takes a long time to get clearance from Ministry of Forest for the construction of transmission lines in forest, national parks and conservation areas. Likewise, the process of land acquisition is very cumbersome because affected people demand 100% compensation with ownership right of land. However, the Land Acquisition Act ensures only 10% as compensation. Additionally, Rule 88 of Electricity Regulation, 1993 made a provision for the formation of a Compensation Fixation Committee to provide compensation in lump sum to people whose land was used for construction of transmission lines, but the provision doesn’t mention the percentage of compensation. Such ambiguity obstructs the construction of transmission lines.

In addition to this, Public Procurement Act, 2007 was promulgated with the intention of making procedures, processes and decisions relating to public procurement open and transparent to promote competition, fairness, and accountability in public procurement process. However, the tendency to follow the law to the letter rather than the spirit has handicapped decision-making in public institutions. The Act allows discretionary decision-making to chiefs of public enterprises only up to decisions that cost less or equal to NRs. 100,000. Any decision involving higher amounts has to go through a lengthy process as described in the Act. In addition to this, according to the Public Procurement Act, construction of transmission lines should be awarded to the party with the lowest bid. However, there have been many instances where parties have bid an amount too low to get the project contract. After winning the contract, they have been found to raise their claims later resulting in higher costs and thus delays in construction of transmission lines. Therefore, contracts should be given to those parties whose cost is 10 percent above or below the estimated cost under Engineering, Procurement and Construction (EPC) system. Only then, will a new ray of hope be ushered in the development of transmission lines.

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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Multiple Buyers in Nepalese Electricity Market

Multiple-Choices-Nepal-Electricity-Authority

The perennial problem of load shedding in Nepal will never be resolved unless we get over temporary fix mindset and start considering longer term solution. The answer lies in constructing storage type projects and expansion of cross border electricity trade with India.

The large reservoir based projects provide a suitable alternative by generating sufficient amount of electricity even during the dry season.

What makes this proposition even more viable is, that there is a complementary demand-supply relationship between the two countries regarding the use of electricity. An average Indian household in the neighboring states of West Bengal, UP and Bihar demands more electricity during the summer season when the use of electrical appliances like refrigerator, cooler and air conditioners is at its maximum. Ideally, this is the time when the generation capacity of the project would be peaking due to increased volume of water in the snow fed rivers of Nepal.
But besides power generation, Nepal also faces serious challenge in terms of efficient transmission and distribution of power. Nepal Electricity Authority (NEA), which is a monopoly buyer in Nepali electricity market also has sole control over its transmission and distribution system. Often NEA is blamed for prioritizing construction of transmission lines in projects where it is involved while ignoring projects built by private sector without its involvement. It is also blamed of spiking up Power Purchasing Agreement (PPA) for such projects. Thus, an unfair playing field is created in the market which discourages national and international private developers.

Sadly, despite all the unfair advantages NEA has an operating loss of over eight billion rupees annually due to inefficient management, overstaffing, institutional corruption, over politicization and misuse of resources. For all the reasons mentioned here, it has not been able to strike a PPA deal with majority of private developers who are now running out of patience.

To cut the argument short, Nepal’s electricity market needs multiple buyers because the state owned NEA run by employees instead of entrepreneurs simply lacks strong motive to earn profit. Additionally, a salaried bureaucrat sitting at the top of a public institution does not have incentive to take unpopular decisions because these organizations are regulated by departments and ministries which have the final authority over the use and abuse of its resource.
Nevertheless, the private developers are still willing to invest in large storage type projects if they are provided higher rate in Power Purchasing Agreement (PPA) and if the government is willing to bring effective resettlement and land acquisition policy. This is possible when there are multiple buyers in electricity market who are compelled to provide higher price to sustain their market in the long run. Multiple buyers in Nepali electricity market will attract more private investments, increase efficiency of human resource, enhance technical growth and improve customer satisfaction as different parties compete to win their market share. It also promotes innovation and lowers the costs of production by taking risks on new ideas which have greater public value.

Nepal has seen positive changes in telecommunications after restructuring of Nepal Telecommunication Authority and opening market in this sector for other players. Today, price of various telecommunication products and customer services has become more competitive in every respect. Similar changes are seen in education, health, media, banking and entertainment sector after the end of government monopoly and arrival of domestic and foreign private players.

However, privatization is not without challenges in a developing market like ours. And in hydropower sector which has limited number of players given the size and level of investment required, the risk of price cartelling and syndication instead of competitive market pricing is unusually high. When that happens, the strategy of deregulation could easily backfire, taking monopoly out of state’s hand only to give it back to a bunch of crony capitalists hungry for unlimited profit.

Therefore, the government must play it smart and open up Nepali electricity market to multiple buyers, but with proper policies that helps us harness and access this resource at an affordable price. The mantra should be to make profit but the intent must be to provide public service as well because quality electricity is not just a product anymore, it is also a right.

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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