This month, a couple of news regarding Nepal Airlines Corporation and its demand for Rs. 4 billion to purchase new aircraft popped up, and the enterprise expected the funds would be arranged through the upcoming budget.Continue reading
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.
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.
Nepal Oil Corporation (NOC) is the sole distributer of petroleum products in Nepal. It has an inefficient management and institutional framework, there is immense leakage, corruption and private dealers’ cartels and it suffers huge losses by the day; but one of the major reasons behind its loss i.e. subsidy “meant for the poor”has not reached the targeted consumers and even if it did, the targeted consumer would be much better-off paying full price for electricity (for cooking and lighting), than using kerosene. This whole idea of selling LPGs at below-market price is a complete negative-sum game for the entire Nepalese economy.
Here is how!
Before 1970, there were multinational players like Shell, Esso and more, both in Nepal and India. Then during the 70s, India adopted oil nationalization policy. These multinationals sold off their equities and left India. It was no more feasible to operate in Nepal and thus they closed down their subsidiaries in Nepal as well. Then in 1974, the Government of Nepal (GoN) and Government of India (GoI) signed a Memorandum of Understanding (MoU) whereby, NOC would import petroleum products via Indian Oil Corporation Ltd. (IOC).
Established in 1970, NOC did good business until the year 2000 when it had Rs. 4.9 billion worth of cumulative profits. In recent years however, NOC has been a sorry State-Owned Enterprise (SOE) suffering net losses year after year and has a cumulative loss of over Rs. 24 billion as of 2012/13. Why the loss? One of the many reasons is subsidy mechanism.
NOC receives no direct subsidy from GoN. The government charges VAT on all petroleum products except kerosene and customs on all products. If we take the case of LPG alone, the government collects taxes worth Rs. 245.31 per cylinder and NOC sells a single cylinder for Rs. 1470 at a loss of Rs. 559.73 per cylinder. This loss amount is not reimbursed by GoN to NOC. There is however a mechanism of cross subsidizing LPG from profits made from other petroleum products. This still does not offset the losses made on the sale of LPG. Hence, the loss figures of NOC. (click here for more)
Now we all know why NOC has been selling LPG at subsidized rates. NOC, as a public enterprise has a duty of availing necessary goods to Nepalese citizens at affordable prices. But the people that fall below or just around the poverty line cannot afford to buy LPG at market prices. Therefore, GoN asks NOC to sell LPG at such low rates, ruining its own financial health. But the ineffectiveness of this policy begs that we delve a little deeper into the issue.
For every 10 cylinders that come into Nepal, 6 are consumed in Kathmandu valley alone. We consume 1.4 million tons of LPG every month. A substantial percentage of this ends up in hotels and restaurants that consume multiple cylinders a day. Majority of households also maintain a stock of upto 2-3 cylinders. While these hotels and restaurants and households that can afford to pay the market prices have been stocking and consuming a huge chunk of LPG supply, the poor within the valley and across all nooks and crannies of the country are relying on either kerosene or fuel wood. While this would have made perfect sense some 20 years ago, there is however, no economic logic behind this anymore.
And now is when Nepal’s own indigenous resource – hydroelectricity – comes into play. A research by Prof. Amrit Man Nakarmi (Center for Energy Studies) reflects the following:
Monthly life-cycle costs of cooking in urban households
|2012||1640||1030 (with subsidy)||
The table shows how kerosene, one of the major sources of fuel used by the poor, is the most expensive one in the market. Then comes LPG (do take a note that this is a two year old data and LPG costs much more than Rs.1030 as of June, 2014). The cheapest one seems to be, surprisingly, hydroelectricity – something that lies idle in our own backyard.
So the bottom-line is, yes, NOC has an inefficient management and institutional framework, there is immense leakage, corruption and private dealers’ cartels and it suffers huge losses by the day; but one of the major reasons behind its loss i.e. subsidy “meant for the poor”has not reached the targeted consumers and even if it did, the targeted consumer would be much better-off paying full price for electricity (for cooking and lighting), than using kerosene. This whole idea of selling LPGs at below-market price is a complete negative-sum game for the entire Nepalese economy.
For more on petroleum supply debate, watch https://www.youtube.com/watch?v=gsSsoXo-e3A
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.
Recently, the Nagrik Dainik published a news article which stated that Nepal Airlines Corporation (NAC), our only national airlines would have to halt all its flight during the festive occasion of Dashain. Apparently, the NAC had only got one functioning aircraft which it had hoped would help in providing services to the people of the remote area. However, the aircraft in question had been recently used by the Minister of Culture, Tourism and Civil Aviation. The Minister had apparently used the aircraft for more than the stated time thereby rendering it impossible to use the aircraft as its engine would not be able to fly the required distance. The ailing carrier and its delays are not a new thing. It has been named the top among the 15 worst airlines in the world for economy travel by the Business Insider.
Delays due to engine failure, lack of proper maintenance are not new things for the NAC that was operating with its two old Boeing. It has only recently been approved for a loan by the Employment Provident Fund to purchase new Boeing. According to news reports, the collateral of the corporation property had been placed against the loan. The ailing industry loss is an estimated 180 million rupees. The purchase of these aircraft is very crucial for NAC as it wants to tap potential profits from its international route. The main problem of this ailing carrier is the political interference and mismanagement at the administrative level.
According to the Annual Report of Public Corporation/Enterprises 2069 (2012) published by the Ministry of Finance stated that the NAC in the year 2069 B.S had 1411 officials working under it. To be noted is the fact that the NAC currently has 2 aging Boeing and a few aircraft for domestic flights which are currently not in use due to maintenance work. Hence, NAC has more than 1400 people looking after two aircraft.
To make matters worse, NAC might even lose its ground handling tenure at the Tribhuvan International Airport (TIA). The Civil Aviation Authority of Nepal (CAAN) has recently announced that if the NAC did not improve its ground handling facility which at the present consists of 2-3 buses and baggage handling which have led to luggage damages; it would be announcing a global tender in 2014. The NAC despite stating that it would be improving its services has not been able to provide efficient service so far. Even in terms of domestic travel, it is seen that privatized companies have been faring better than NAC. According to Nepal Transport Plan: Current Situation and Diagnostic (2012) published by Civil Aviation Authority of Nepal, the flight movement and the total number of passengers of private domestic flights are comparatively higher than NAC, especially Buddha Air and Yeti Air that are presently leading the domestic airline market.
By only purchasing new aircraft will not help in reducing the losses of the NAC. Instead ensuring proper service and maintenance of its aircraft for timely flight should be the most crucial objective for the NAC at the present. This will only happen, if decisions of the NAC are not mired for political reasons. Furthermore, NAC has to have a competitive approach towards growth like the private airlines which are operating domestic flights in the country. They have so far been successful in catering to the transportation needs of the people compared to the NAC. These private airlines are always at a stiff competition with each other, trying to upgrade their services to attract more customers. NAC seems to have been left far behind in the race towards achieving a successful flight towards progress. It can only achieve a comeback by not just buying new aircraft but ensuring in the long run that the services it provides is timely and meets a minimum standard. Organizational restructuring into a public-private partnership model could be one option for this.