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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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Reforming NAC through strategic partnership

Lufthansa Group has been the cynosure for a few days now, for it has offered to partner with the currently state-run Nepal Airlines Corporation (NAC). On one hand, we have one of the largest carriers in Europe and on the other, there is a sick State Owned Enterprise that has been running on over a billion rupees worth of cumulative loss and if not for the Ground Handling Services (GHS) at Tribhuwan International Airport (TIA), would go on another millions of rupees worth of net loss every year. One of the first questions in a Nepalese’s head would be, “Why NAC?” Maybe the German group wants to create a new hub in South Asia. If so, why prefer Kathmandu over Delhi or Mumbai? Maybe it is all in the best interests of NAC, but should NAC be entertaining such unsolicited proposal (boycotting competitive bidding?) As per the information from the Ministry of Civil Aviation in Nepal, the matter is still pre-mature and we still do not have answers to lots of similar questions.

However, whether or not Nepal entertains this proposal from Lufthansa, this is very much the right time to talk about reforming NAC. Therefore, we will keep this discussion very specific and just focus on why NAC needs a strategic partner and what benefits can we derive from such a partnership.

Why a strategic partner?

Nepal Airlines Corporation is no more the same “national-pride” enterprise. As it stood only a couple of months ago, it came down from a fleet of 19 planes, serving 38 domestic and 10 international destinations in the mid 80s to a fleet of two Boeing 757s, serving 5 destinations and no operational twin otters for domestic service. Thanks to GHS, it brings in Rs. 2 billion annually for NAC. If it weren’t there, NAC very well faces a risk of bankruptcy. It bears heavy cumulative loss and unfunded liabilities. Complete government ownership means that all losses are borne by the government which is ultimately transferred to the taxpayers.

To add to this financial plight, there have been frequent cases of corruption, political intervention, nepotism, impunity, labor issue and operational inefficiency. As it stands today, Nepalese planes are banned in the European skies, which has greatly tarnished their reputation in the international arena.

Despite costly air-fares, insufficient Nepalese carriers and poor services, a great number of tourists fly in to Nepal every year. NAC has been unable to tap in on the prospects that these numbers offer. Now if you thought expanding the fleet again would do the trick in terms of tapping in, wait on just a second. Public Procurement Act (PPA), 2007 plays another nuisance in procurement of new planes and fleet expansion.

So what benefits will strategic partnership offer?

Interestingly, if done right, strategic partnership bears solutions to all problems we’ve just talked about; and even more benefits.

– Procurement decisions will be guided by the terms of agreement between NAC and its partner and not PPA, 2007. This will ease up procurement.

– Nepal can be transformed into an aviation hub from the current status of being a mere end-destination. This can increase traffic in the Nepalese skies. This will open up more employment opportunities as well.

– With business-driven partner, NAC will have a commercial orientation and will be directed towards a profit-driven modality.

– Code-sharing, which is a major practice in international aviation, will allow NAC to expand its service. It will one, market the services of NAC and two, generate additional revenue for NAC.

– Consumer benefits will also increase, due to greater network access and other benefits of strategic partnership like seamless travel via code-sharing, transferable priority status and more.

– NAC can acquire modern scientific technological and manual skill sets.

– With business-driven management, strategic partnership will also foster competition in the rural domestic destinations.

Of course, strategic partnership is not as easy in practice. There are important decisions to be made, in the process. What will the partnership look like? Maybe NAC board can play the role of a monitor while this partner takes care of the business side. Do we want a practicing airliner as a partner or just a management firm? How do we share risks and rewards? How much equity ownership do we hand-over? How do we deal with the employees that might have to be laid-off? These are some of the areas where Ministry of Culture, Tourism and Civil Aviation (MoCTCA) should take the lead and get the discussions going already.

To learn more about the costs and benefits of reforming NAC through strategic partnership, click here
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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Analysis of Budget 2071/72 Presented by GoN

The Ministry of Finance has presented a budget of Rs. 618 billion for the fiscal year 2071/72. While the Finance Minister has promised to kick-start second generation of economic reforms by reforming economic policies, bringing down anti-competitive practices like syndicate and cartels, encouraging the private sector and offering various fiscal incentives like tax exemptions and rebates, the budget has, in the mean time, also been a subject of debate in terms of issues like Constituency Development Fund, being pro-rich and many more.

Samriddhi, The Prosperity Foundation hosted its latest round of Econ-ity on “Analysis of Budget 2071/72 Presented by GoN” on the 17th of July, 2014 at Hotel Everest, New Baneshwor, Kathmandu.

The speakers at Econ-ity interacting with the audience

The speakers at Econ-ity interacting with the audience

This edition of econ-ity featured Dr. Chiranjibi Nepal (Chief Economic Advisor to the Prime Minister) and Prof. Dr. Bishwanbher Pyakuryal (Senior Economist) as speakers. The event was moderated by Mr. Rameshore Khanal (Former Secretary, Ministry of Finance) who started by acknowledging that this budget has been presented in the right time for Nepal. He shared that the current government is capable of staying in power throughout its tenure and has potential to deliver results in terms of constitution drafting, delivering economic growth, enhancing production, generating employment, etc. In the meantime, he also acknowledged the fact that this budget has been critically analysed in the parliament itself and opposition parties have raised concerns over its not being regionally balanced.

Here is a snippet of what the speakers said during the forum and what their analysis was regarding the new fiscal budget.

Prof. Dr. Bishwanbher Pyakuryal

Prof. Dr. Pyakurayal commenced his deliberation by acknowledging the good aspects of this budget. He mentioned that the allocations justify the government mission of employment generation, economic growth, social physical infrastructure, long term growth and poverty reduction.

He then went on to warn that this budget will not it yield any result unless the plans and policies and reform measures are implemented. The underlying assumptions that are made during the preparation of the budget do not seem to hold up in reality in Nepalese context. He talked about how theoretical economic policies and ground realities of Nepal do not match.

Nepal has seen wages go up or down, without really affecting labor productivity; despite the much talked about effect of India’s economy, Nepal’s inflation was still double digit when only last year it was contained at zero in India; the monetary policies have failed to deliver desired results in inflation. There does not seem to exist a robust relationship between Nepal’s monetary policy and inflation. He further expressed that we need to understand which among the factors like policies, capital adequacy/inadequacy, governance structure, and institutional set-ups are responsible for these issues.

He highlighted that one of the major problems in Nepal is the inability to make capital expenditures. Despite Local Self Governance Act and guidelines set by the fiscal commission, we have failed to spend on time. This raises concerns over our resource allocations. He said that we have already missed the train if we are to make it to Developing Nation status by 2022. We need to make 13-18 billion dollars worth of capital expenditure to graduate to Developing Nation status, but our current growth rates will not lead us there.

He raised serious concerns over how we never study India’s budget allocations’ impact in Nepalese economy despite its being released few months in prior. With their levels of planning, their currency is going to strengthen against USD. This will lead to lower production costs in India. On the contrary, our production costs are higher than market prices in India. Only 13% of the agricultural produces reach the markets in Nepal. In this case, the priority of the budget should have been making markets available to these entrepreneurs, farmers, businessmen. This has not been addressed by this budget.

While on one hand, the budget talks about reforming policies and Acts, in reality we have been relying on very old policies. We are still guided by Foreign Exchange Regulation Act, 1962, while India has made 3 amendments to the same Act of theirs till date. There are as many as three dozens of proposed policies and Acts lying around in the cabinet; some are stuck in the parliament. These processes need to be expedited.

He also expressed that we need to make structural changes in our tourism sector. 55-65% contribution to tourism sector comes from domestic tourism, but we have failed to recognize the domestic tourists. We need to explore further on possibilities of pilgrimage tourism, adventure tourism, trekking, sights-seeing, and formulate relevant programs for the domestic tourists. He also mentioned that we should look into popular international tourism practices like keeping Tourism Competitive Indices.

He concluded his deliberation by commenting over lack of capital/financial management in Neal and economic viability of possible federal states. There is domestic saving worth Rs. 2 trillion in Nepal itself but we have failed to channel these funds into productive sectors. He further drew attention to the issue of economic viability of federal states. While have been talking about federalism in Nepal, we have been overlooking facts like 60 % of Nepalese districts only somehow manage to collect revenues worth 10% of their total expenditure. Under such a situation, it is obvious that it makes no economic sense to go into federalism.

Dr. Chiranjibi Nepal

Dr. Nepal commenced his deliberation by expressing that we cannot have very high expectations from the budget. His focused majorly on our inability to make time-bound reforms to our existing policies and regulations. He acknowledged that for the first time in history, this budget has addressed Second Generation of Economic Reforms. However, lot needs to be done for the promises sowed by the budget to materialize.

He stressed on the need for industrial policies to adapt and respond to the changing trends and rapidly developing technological innovations coming in the market. Comparing it with India and China, he lamented that Nepal has been very slow in economic reforms and mentioned capital and financial market as an example of how the economy has been hit by lack of timely policies. China has continued to grow since its economic reforms of 1978, achieving as much as double digit annual economic growth and falling to single digit only recently. Industrial policy of China changes every 3 years to allow the industries to adapt to the technological advancements in the world. Similarly, India, that opened up its economy in 1994 has been continually reforming its economic policies and is all set to be one of the biggest economies in the world by 2020. In the meantime, Nepal has failed to internalize the positive changes occurring in the neighboring countries.

Dr. Nepal also shared that the Constituency Development Fund (CDF) will do away with the long bureaucratic procedures delaying the funds from reaching the local level, and expressed his consensus with the policy.
The pre-budget discussion, addressing Public Procurement Act, Financial Accountability, Land Acquisition and quality control are some major highlights of this budget, as expressed by Dr. Nepal.

Interaction with the audience

The participative and interactive audience then further talked about education, ability of the government to spend, youth self employment, foreign employment, sectors of comparative advantage, and other issues pertinent to the topic. Some highlights of the interaction session are as follows:

• Currently in Nepal, inflations has been rising and output is falling. There is therefore a situation of stagflation. Similarly, there does not seem to be a sound link between growth and employment. We have seen unemployment levels remain the same despite economic growth. In order to address situations like these, we need to form coordinated policies.

• Agricultural Development Bank has gone on loss due to its subsidy program. Now, instead of going for technological up-gradation and commercial agriculture, we are giving continuity to the same subsidy program. It appears that necessary homework has not been done in this regard.

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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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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