e-Seminar Title: Nepal PSD
Subject: Hydropower, Prospects for PSD, and Federal Structure – Summary of February 27, 2007 Deliberations
Contributors: Mallika Shakya, Keshav Acharya, and Alok Bohara (Editorial Summary by Vijaya R. Sharma, Co-Moderator)
Date: February 27, 2007
Mallika Shakya:
(During February 26 deliberations) AmbikaJi suggested that local/regional investors better adapt to demands at lower prices but cannot influence the Indian giant, while larger FDI are worse in former and better in latter. But need this impose a policy trade off for Nepal? Can we not have the good of both the worlds? Let's develop a hypothetical model where a hydropower project is divided into three clear components: A. infrastructure and connectivity; B. core power generation; C. international/regional mediation for market. Components A and C are clearly public goods while B is private.
An efficient and competitive PPP (this could be a restructured NEA or a different institution) can manage component A (with some donor funding). Component B should be private -- the choice between local, regional and international investment -- will be decided by pure competition (bidding prices + environmental/social CBA). Component C can be headed by the PPP but subcontracted to a top-notch private business strategy MNC that can bring business leaders from India on board.
Whether or not local capital is better than FDI should be left to the market on purely commercial products. The State should have a role on public goods. This will not only
increase the number of private bidders but also will bring down the total costs substantially.
Whether India is interested or not on Nepali hydropower should be concluded only
after we have tried the Indian private sector. Nepal is probably not capable enough (yet) to tackle the Indian businessmen, but there are many brokers in the international market that can do this job for fees. All this only emphasizes the need for a better business enabling environment and investment climate, which is the State's responsibility.
I very much agree with AmbikaJi about increasing local demand for power. This may even make Component C redundant. To encourage local absorption of hydropower, it is imperative that the hydro strategy doesn't stand in isolation but is closely linked with SME development strategy. The ongoing safa tempo strike in Kathmandu to protest the power cut reminds us of the direct connection here.
There are other connections that have gone unnoticed. When the Garment Association of Nepal was lobbying in the US Senate for a duty-free access to US for readymade garments after the concessional multi-fibre-agreement (MFA) ended in 2004, one of the biggest hurdles it faced was from Panda Energy Group and its political contacts in DC.
Keshav Acharya, Chief Economic Advisor, Nepal Rastra Bank (currently working at the IMF)
1. Nepal's economy holds tremendous potential in the long run, among others, in bio-diversity, hydro-electricity and tourism.
2. For any meaningful, comprehensive and sustainable transformation of the Nepali economy, one should begin from agriculture where nearly 21 of the 28 million Nepali people depend for their livelihood. In the last 10 years, Nepal's traditional farm production such as rice, wheat, pulses and oilseeds have been almost displaced by Indian production for the following reasons:
a. India is in the process of completing its second generation of green revolution, whereas Nepali farming practices remain traditional even today. This has created a huge productivity differential between the Nepali and Indian food production. As such, given the open border, it is quite natural for the Indian food grains to substitute Nepali produce.
b. In the process of liberalization, Nepal has withdrawn all forms of subsidies from agriculture, whereas India continues to heavily subsidize the use of chemical fertilizer, seeds, electricity, diesel, farm credit, extension services and railway and sea freight for farm produce. Furthermore, India is accelerating public investments on infrastructure such as irrigation, rural roads, rural electrification, and extension of railway connection to rural India. In Nepal public capital allocation for agriculture is subsequently declining. Naturally, competitiveness of Nepal's agriculture is successively eroding.
c. Yet, there are lots of prospect for Nepali agriculture. The prospect lies in the rich bio-diversity of Nepal. The inflow of Indian FDI in the form of Dabur, Hindustan Lever and a few others is a clear indication of this competitive advantage of Nepal vis-a- vis India. What the state needs to do is to inject sufficient investment on infrastructure such as irrigation, electricity and road or cable-car connectivity, by mobilizing donor support; and enforce the property rights.
d. In the last several years, there has been a massive build-up of infrastructure in Tibet and a tremendous increase in Tibetan purchasing power. If Nepal endeavours to supply the food demand of Tibetan consumers, it can transform the livelihood of Nepal's northern hills and mountains; it requires the provision of infrastructure and technical know-how.
3. The talk has been going on in the last couple of years to develop Nepal as a transit corridor between India and China. The geographers and engineers have advocated that there are several prospective road projects which can considerably narrow the distance between these two fast growing countries. Given the rapidly growing trade flows between the two giant economies, the Nepali authorities can approach these neighbouring countries to invest on mutually beneficial road projects through Nepal. Such road connectivity would also help to explore the possibility of developing pasture in Nepal's northern highlands, which in turn would support sheep farming which would substitute the import of raw wool, for making carpets and pashmina.
4. Nepal Government's Department of Mines and Geology needs to undertake massive survey to find out which gems are available in commercial quantity. After this, the Government will have formulate laws, rules, and regulations governing extraction, processing and export of gems and jewellery by the private sector with international joint ventures.
5. Provision of infrastructure and public utilities is too costly in hills and mountains, as compared to terai and the valleys. There should be inducement and incentive given to people to resettle or conglomerate in areas that are wide enough and free from geological and other natural hazards such as land slide, from the perspective of cheaper cost of providing modern basic amenities of life. Furthermore, such resettlement would create space for private sector in terms of construction and repair.
6. Regarding development of private sector in Nepal, the Nepali authorities have mostly played on tariff differential (arbitrage) with India. Goods imported to Nepal were illegally smuggled into India against the payment in Indian Currency. Such a trade policy generated customs revenue and brought Indian currency into Nepal and offset the trade gap with India. Things have changed now. India is fast lowering its tariff structure to allow no space for arbitrage in Nepal. Now is the time for Nepal's private sector to look into the country's long term comparative advantage. In this context, the following things need to be done to facilitate the development of private sector in Nepal.
a. Provide macroeconomic stability, particularly in its fiscal and monetary policy. Have political consensus on not making frequent changes in the rate of tax. It is right time for the economic policy agenda to get space in the debate on constitution. As there is a general drift towards federal structure of government, the constitution should clearly spell out the basis of resource sharing between the federal and the provincial governments.
b. The constitution should layout the blueprint categorically for the space of state and the area for public private partnerships, so that the private sector can plan its activities accordingly.
c. Private enterprises of certain size and above should be made to follow nationally defined accounting standards and disclosure norms for increased transparency of financial statements, and there should be some mechanism to constantly monitor to increase public investment in stocks.
d. The private financial sector is urban centric. In the rural area there is a very thin and sparse presence of financial services, especially in the hills and mountains. Some intervention seems imperative in expanding financial services to rural areas in general and in the hills and the mountains in particular. The preferred nature of intervention would be budgetary and tax incentives, rather than the government itself operating financial services.
e. Since the last few years, annual remittance inflows have exceeded the combined total receipt from exports, tourism and foreign aid. But, the contribution of remittances is confined to sustaining consumption, imports and somewhat real estate investment. There should be a plan to pool some resources from remittances for undertaking productive investment in areas such as hydro or microfinance with full legal guarantee of returns to the remitters.
f. There has been a tremendous proliferation of bank and non-bank financial institutions in the urban areas, which puts a limit on the supervisory capacity of the central bank. There is an urgent need to set up a second tier supervisory institution and also a need for some kind of self regulation of these institutions.
g. Nepal should reorient its focus on the development of self regulated cooperative societies and microfinance institutions in the rural areas, with some kind of initial budgetary support.
h. To reduce the cost of operation of financial services in rural and deprived areas, rather than opening a new branch or a full-fledged institution in such areas, one can look for a local agent, train him and assign him with the task of lending and recovering for a certain fee.
i. Finally, the. One can also look into the prospect of formalizing, organizing and consolidating the informal financial services that have been in existence in Nepal since time immemorial into modern type of microfinance institutions, without much financial and bureaucratic cost.
Alok K. Bohara:
The federalism issue is quite complicated in the current context and any link to the PSD will be overshadowed by numerous other contentious issues. It is the institution that makes a long-lasting difference in the making of a nation and the people. That is, federalism is not the only real issue; the problem should also address the degree of centralization/decentralization including both the political and economic. One of the issues that I have raised constantly is the issues of revenue sharing 50/50 from the hydro resources. Giving some economic clout to the regional governments is a good start. But, such revenue must not be spent anything other than education, health, and the infrastructure.
e-Seminar Title: Nepal PSD
Subject: Federal Structure, Hydropower, State Regulation and FDI – Summary of February 25 and 26 Deliberations
Contributors: Vijaya R. Sharma, Ambika P. Adhikari, Mallika Shakya, Dileep Adhikay and Hari B. Jha (Editorial Summary by Vijaya R. Sharma, Co-Moderator)
Date: February 25 and 26, 2007
Issues related to two areas – the prospective federal structure of the country and the hydropower – have been discussed in the last two days.
Deliberations on Federal Structure
Vijaya R. Sharma:
I like to draw your attention to also the prospective federal system that Nepal would have in near future. Will the federal system be or can it be made more conducive to PSD? Having many provincial governments, would it facilitate the implementation of community-managed schools (as suggested by MeenaJee), setting up education trust funds at the level of provinces (suggested by AlokJee), expanding +2 schooling system for supply of middle level technicians, and/or launching of niche ethnic branding of specialty products (suggested by MallikaJee)? Should the promotion of all non-FDI business ventures be left to the provincial governments? Just as increased competition raises the efficiency of the market, increased competition among provinces may improve efficiency of governmental services (subject to the hard budget constraint that provinces must balance their budget). What should be the approach to empower provincial governments in the interest of PSD?
Deliberations on Hydropower, State Regulation and FDI
Ambika Adhikari
Prior to 1992, it was the conventional wisdom that big hydropower projects would be developed by government, through foreign assistance and by government owned public authorities. The concept of privatizing hydropower basically began in 1992 after the hydro-power act. At the initial phase, the Electricity Development Center (EDC) prepared a menu of potential and viable projects and offered them for development to international companies. A few foreign private companies did develop some initial ones e.g. Bhote Koshi I and II, Upper Marsyangdi and Upper Karnali. So big was the euphoria at that time that many Nepali investors and promoters even invited the now bankrupt Enron to develop the biggest prize of all, the gigantic lower Karnali project.
The private sector power development did face hurdles. The Bhote Koshi power purchase agreement generated much controversy inviting intervention from the US government and law suits from the private developer. On the other hand, some local Nepali invested smaller projects have become successful and profitable. They catered to the available demand, utilized local man-power and professional expertise, and were much better grounded in the local reality.
In my opinion, a major problem faced by the middle and large sized foreign developed projects is the difficulties in accessing the Indian market. Although some experts have talked about it, no one has seriously explored the national consumption potential, and increasing the domestic demands for power in the interim. The many black-outs, load-shedding and lack of power for industries are proving that there is enough domestic demand for power in Nepal. Further, with the rise of income that is anticipated in the post-conflict Nepal, the emerging Nepali economy should be able to absorb power from several small and medium size projects.
Mallika Shakya:
First, we agree that hydro-investment has to come from the private sector and the public sector should facilitate it. Here do we have a good model for public-private-partnership that would satisfy the demands of investment, financial efficiency and knowledge transfer? The need to rid NEA of political appointments and outdated knowledge is well established. Can this be achieved in practice? And is the problem all political? What technical capacity is NEA lacking which makes its performance so dismal? Maybe it is NEA that has to be privatized, especially in facilitating smaller projects more efficiently, as DileepJi has pointed out.
Second is the role of ADB and other multilaterals in promoting Nepali hydropower in the Indian market. Has ADB done this for any other countries? Some of the examples from East Asia, if this is the basis for our hope on ADB, might actually be less relevant for South Asia simply on the grounds that East Asia enjoys far better regionalism than South Asia and hence persuading powerful neighbours might be an easier task there. How about multinational business strategy companies who might specialise precisely on hydro issues?
Third, I agree that the Indian State is not interested in Nepali hydro, but I am still not convinced (and I might sound a bit stubborn here). Why do we fully exclude the possibility that the Indian private sector might be interested after all? If there is a market demand, what stops them from exploring new economic opportunities in Nepal especially when they have a competitive advantage over others on knowledge and information? For example, Bangladesh has been totally unsuccessful in selling its gas to India, but Tata is very much making its entrance there. Are we exploring that possibility at all?
These same issues might be very much relevant for various other industrial sectors, e.g., roads, telecom, IT, tourism, etc.
Dileep K Adhikary:
Firstly, hydro-electricity (HE) is basically a commercial project, which should not be a government project, but a private sector project. Therefore, neither Nepal government nor India government nor any other government could be a promoter. But the private sector from anywhere who dares to venture could promote it.
Secondly, interest of India on Nepal is not on getting electric power but on securing water supplies.
Thirdly, with the above clarity engage multi-lateral agencies like ADB as the go-between, even for the promotion of Private HE with India as a market.
Fourthly, the Nepal Government has serious limitations to provide funds for NEA to make investments, and NEA has serious limitations of its own income to generate surplus for investments.
Fifthly, the current banking regulations in NEPAL are of no help to promote even medium size (60-100MW) projects.
Sixthly, the current practices for micro/small projects are based on milking NEA not on the basis of competitiveness.
Seventhly, in developing HE to the desired/competitive level unbundling of NEA is also a critical requirement.
Hari B. Jha:
Nepal's hydropower sector has failed to grow. The main factor is the mind-set. We neither do on our own nor allow the others to contribute in this sector. In regard to external investors, we have a mind-set that we will be cheated if we make a deal. Mahakali Project is a glaring example. Despite the fact that the Project was framed on the basis of equal participation both in investment and returns, we did not allow it to materialize so far. Even in project such as Arun III, we did not go forward though it is most feasible project. If at all we have shown interest in certain projects such as in Marsyangdi and a few others, it is just because it served the vested interests of certain groups. Therefore, the main problem is educating us. We have to come out of the well and make meaningful dialogue maybe with our neighbours or agencies outside the region for making best utilization of this scarce resource. But for all this the mind-set has to be changed and vision created that Nepal needs to be made an affluent country rather than a country moving with begging bowl.
e-Seminar Title: Nepal PSD
Subject: PSD in Education, Hydropower, Business Environment and Finance – Summary of February 23, 2007 Deliberations
Contributors: Meena Acharya, Keshav Upadyay, Mallika Shakya, Mukti Upadhyay and Dileep Adhikary (Editorial Summary by Vijaya R. Sharma, Co-Moderator)
Date: February 23, 2007
Meena Acharya:
(Comments on PSD in Education, Education Trust Fund)
I agree with Prof. Bohara’s proposal of a Fund and tapping the remittances. However, a big problem in education in Nepal is the archaic mentality of control rather than problem-solving mindset among our politicians, including the student unions. If you listen carefully to some of the advisors, Maoists and UML, they would allow private sector neither in education nor in health. The idea of a Fund is good, given the private sector is allowed to exist. Fund will be useful only if other aspects of education are also addressed simultaneously.
There is a big quality gap in the private education system in Nepal. The curricula and the textbooks of private sector schools cover histories and issues more relevant to India or developed countries rather than Nepal. The curricula glorify the countries to where these schooled are linked, rather than to Nepal's history and present day realities. All of the private school education is geared to sending students overseas, teaching their lifestyles and social patterns. Further, only a few schools go beyond rote learning. So even if students pass SLC and + 12 with good grades, if they decide to stay in Nepal, often adjustment becomes a problem for them. A large chasm is created between them and the ordinary people. Such students often become misfit in general social environment. Only advantage they have is their good verbal English. I think this is where the problem lies.
The state should have a good regulatory framework and capacity to supervise what is being taught and in what way, but in no way try to impose political partisan view points like in the Communist countries or under the Panchyat Raj. Politicians should cease to use schools as recruitment grounds for their cadres, fill it with their followers as teachers and use them for party politics. There should be a law to ban recruitment of school children not only in army but also their use for party demonstrations.
One more issue pertinent for school education is the role of community managed schools. They could replace the private schools in competition itself given proper environment. The snag is that while parents and students are willing to pay 10 times more for private education, levy of even minimum charges by the community/public schools faces strong opposition, inflamed by politicians. The VDCs could pay for really those unable to pay even the minimum in community/public schools from this Fund. Community schools can probably do a better job on this front.
Keshav Upadhyay:
(Comments on Hydropower, State Regulation, and FDI)
Let me summarize what I wanted to say about the development of hydro power in Nepal.
1. First thing that has to be done by the Government is to establish a regulator who can balance the interests of both sides: investor and consumer. It is very good for the government too, because it takes on the responsibility of often unpopular pricing decisions which have to be taken for the sake of the sector as a whole.
2. Forget India. If they want Nepali hydropower they will come on their own. And the subject has now become so sensitive that no politician wants to be seen selling hydropower to India because then he would be charged of selling the sovereignty.
3. Educate the public that hydropower does not come cheap; massive investments are required upfront to construct the power stations, transmission lines, etc. The only attraction it has for us is that we do not have to be dependent on import of other materials for our energy needs. Stress the security angle that it provides, and say repeatedly that if we tighten the belt now we will be free of the worries of Nakabandi, like the one we had to face in 2046.
4. Do a massive restructuring of NEA. Take away distribution from it, initially. Give it to private companies or local bodies. We started privatization in electricity from the wrong end. The reason obviously is that MNCs are not interested in distribution, it is a messy business. Generation is rather clean.
Mallika Shakya:
(Comments on Business Environment and Financial Development)
1. DileepJi has used the terms 'business environment' and 'legal and institutional frameworks', but some of the State's roles require 'hands-on' actions rather than passive environment-creating. Physical infrastructure and backbone services alone require active engagement from all sides.
2. I agree that the State must not try to lead but facilitate 'activation, innovation and competition' from the private sector. Facilitation of this innovation and competition will require establishment and nurturing of a whole tier of institutions that actively promote and enable good practices from the private sector. For example, 'brand'-building or niche marketing is an area where small countries like Switzerland and Nepal have competitive advantage in products/services like carpets, tourism and handicraft. Such sectors will require massive efforts on physical infrastructure, backbone services and image-building.
The Indian government spent four million dollars to develop 'India Everywhere' brand to entice the foreign investors and convince them of its financial credibility, which was then extended to 'Incredible India' brand for its tourism market, and now a whole range of Indian products like IT, medical services, etc. capitalize on it. One might say national brand is a big brand; private sector firms can go ahead and develop smaller product brands for their individual products. But, the private sector will need to have the right training/technological institutions to achieve the quality, then certification agencies and harmonization procedures to gain credibility, then promotion agencies to reach out to consumers, a sound legal framework for incentive to innovate.
Bhola ChaliseJi pointed out in his comments, that of a bureaucratic duty drawback for exporters which is too time-consuming to be useful. The only sector which could convert this to a more user-friendly 'bank-guarantee-system' was the garment industry. This shows that name of the game is public-private-partnership or meaningful dialogue between the two. Both of these require very specific knowledge, skills and experience, and of course the right mindset. But this is very much the precursor to PSD.
I very much agree with MuktiJi that the flow of remittance and flow of people might give us a unique window of opportunity in this regard. Does the State have a vision?
Mukti Upadhyay:
(Comments on Business Environment and Financial Development)
Dileep Adhikaryji rightly emphasizes the improvement of legal and institutional framework for PSD. Although there has been a large successful sectoral growth of private sector institutions in education, health, and finance in Nepal, it is important to remember that free markets only cater to people who can vote with money. The result is a gross disparity in access to quality services between Kathmandu and outside, and between the well-off and worse-off even within Kathmandu. While the growth of private activity in these sectors poses no direct problem, the increasing inequality that results from it does.
Alokji has floated a sound proposal, namely the creation of a national fund, to address education inequity. Let me raise a few questions about finance here. How many opportunities do private banks have in Nepal to expand banking services in rural areas? The question is whether institutional credit is getting ready to move into the rural hinterland if and when peace returns in the country more permanently. Do we have enough large and small developmental type banks, including micro-finance organizations (MFIs), to meet a high fraction of credit needs at the going interest rate? And, have the directives and guidelines from the Rastra Bank to commercial banks made a significant contribution to increasing the supply of rural credit? Potential borrowers in rural areas may want to make use of loans but they cannot present their case in a way acceptable to banks. They may know how to produce and where to sell but perhaps cannot fill out forms or prove their creditworthiness by putting up marketable collateral. To what extent have MFIs helped overcome the problem of asymmetric information (high-risk vs. low-risk borrowers that a conventional bank cannot distinguish) in a situation like this?
Another interesting development in Nepal has been the inflow of remittances. It is widely believed that, because of limited opportunities for investment in real capital, this has ended up either raising the price of real estate or giving some desired consumption boost among poor households. What institutional development will help to induce much of the remittance money toward growth of the rural economy? Is it feasible, for instance, to translate remittances into MFI loans?
Dileep K Adhikary, Consultant & Facilitator, PRAM Associates
(Comments on Business Environment)
First of all, one must appreciate the silent revolution on grass roots economic front that is going on in Nepal since the days of small farmer development programme. Then there came Community Forestry. These innovations must be accredited to the government initiative. Right from the 1990s people have sprang up themselves which saw the mushrooming of self-serving community-based organisations (CBOs) which are still growing on with their saving and credit schemes.
In recent months, I am having several sessions with NIRDHAN Chairman Dr Harihar Dev Pant in promoting One Product One Village (OPOV) in Bara-Parsa terai sections. As Nirdhan is contributing to micro-credit to poor lot in ten districts including these two, the need for graduating the micro-credit takers to micro-enterprise is the idea behind the concept of OPOV. Nirdhan will promote three micro enterprise centres with a plan I should be facilitating in terms of centre identification, market linked product identification and entrepreneurs identification.
Basically, what a state is supposed to do is to improve the business environment, it will not be able to do it if it is politically weak on the one hand and administratively confused on the other. My contention has been that it should be policy making/implementation role for the ministry, regulatory role for the government department, non-commercial services for the public institution/enterprise and commercial activities for the private. Presently, you will find ministry involved at the project level as well.
Activation, innovation and competition should be left to the private sector, and the State should to provide suitable legal and institutional frameworks to create environment for the private sector activation, innovation and competition. The state should cooperate from behind, not try to lead from the front. The thrust required is on the front of infrastructure, and on the arena of marketing and financial dynamics beyond the traditional buy and sell and the traditional production credits. Missing are the services linked to outreaching the market which would demand a specific highway specific to product or services, and missing is the financing (that embodies banking and financing beyond what is practiced or served currently in Nepal).
Integration is the key in the upcoming of the private sector which links it to from source to production (product or service) to market. Assuming that macro policy (of openness and competition) is here to stay, and that objectively we have to attain the economic growth of sustainable magnitude through the expansion of the private sector activities, then what needs to be pitched obviously is the appropriate legal and institutional frameworks. Unless the government understands how a business happens and that too at competitive terms the private sector will be too weak to raise Nepal. That should be the starting point.
e-Seminar Title: Nepal PSD
Subject: Business Environment and Financial Development
Contributor: Mukti Upadhyay, Eastern Illinois Univeristy
Date: February 23, 2007
Dileep Adhikaryji rightly emphasizes the improvement of legal and institutional framework for PSD. Private sector institutions in education, health, and finance are frequently cited as examples of little government intervention leading to large sectoral growth in Nepal. Despite this success, however, it is important to remember that free markets only cater to people who can vote with money. And that is true of schools, health clinics, and banks and finance companies around Kathmandu. The result is a gross disparity in access to quality services between Kathmandu and outside, and between the well-off and worse-off even within Kathmandu.
While I think the growth of private activity in these sectors poses no direct problem, the increasing inequality that results from it does. Alokji has floated a sound proposal, namely the creation of a national fund, to address education inequity. Let me raise a few questions about finance here.
First, how many opportunities do private banks have in Nepal to expand banking services in rural areas? Have they done enough to grab them? It might sound even crazy to ask such questions when the country is just trying to come out of a situation where people did not feel secure for their life, not to mention their property. The question, however, remains whether institutional credit is getting ready to move into the rural hinterland if and when peace returns more permanently. Do we have enough large and small developmental type banks, including micro-finance organizations (MFIs), to meet a high fraction of credit needs at the going interest rate? And, have the directives and guidelines from the Rastra Bank to commercial banks made a significant contribution to increasing the supply of rural credit? Do we have any data on the share of formal finance in total credit in the country?
Assume for a moment that the supply of micro and small loans is of less immediate concern than their revealed demand. Potential borrowers may want to make use of loans but they cannot present their case in a way acceptable to banks. They may know how to produce and where to sell but perhaps cannot fill out forms or prove their creditworthiness by putting up marketable collateral. To what extent have MFIs helped overcome the problem of asymmetric information (high-risk vs. low-risk borrowers that a conventional bank cannot distinguish) in a situation like this?
Another interesting development in Nepal has been the inflow of remittances. For the entire South Asia, Nepal has emerged as probably the largest recipient of remittance dollars per capita? It is widely believed that, because of limited opportunities for investment in real capital, this has ended up either raising the price of real estate or giving some desired consumption boost among poor households. What institutional development will help to induce much of the remittance money toward growth of the rural economy? Is it feasible, for instance, to translate remittances into MFI loans?
e-Seminar Title: Nepal PSD
Subject: PSD in Education, Education Trust Fund, Mindset of Politicians, and Community-Managed Schools
Contributor: Dr. Meena Acharya
Date: February 23, 2007
Part of the problem in Nepal on education has been captured by Prof. Bohora. I agree with his proposal of a Fund and tapping the remittances. However, a big problem in education in Nepal is the archaic mentality of control rather than problem-solving mindset among our politicians, including the student unions. Role of the private sector in education has become a big political issue. If you listen carefully to some of the advisors, Maoists and UML, they would allow private sector neither in education nor in health. Moreover, if you listen to some of the leftist NGOs brandishing the UN charter of rights, I do not know what role the private sector can have in the social sector.
The idea of a Fund is good, given the private sector is allowed to exist. I was thinking along the same line. But Fund will be useful only if other aspects of education are also addressed simultaneously. There is a big quality gap in the private education system as well in Nepal. Going through the private sector school text books and the education methodology in Nepal, one is very disappointed. The curricula and books cover histories and issues more relevant to India or developed countries rather than Nepal. Not knowing proper Nepali becomes pride of the student. The curricula glorify the countries to where these schooled are linked, rather than to Nepal's history and present day realities. All of the private school education is geared to sending students overseas, teaching their lifestyles and social patterns. Further, only a few schools go beyond rote learning. A six year old is burdened with 10 books, she can not carry. So even if they pass SLC and + 12 with good grades, if they decide to stay in Nepal, often adjustment becomes a problem for them. A large chasm is created between them and the ordinary people. Such students often become misfit in general social environment. From my association with women in various walks of life, I see them working mostly in travel agencies, hotels or INGOs. Only advantage they have is their good verbal English. I think this is where the problem lies. The state should have a good regulatory framework and capacity to supervise what is being taught and in what way. However such supervision should in no way try to impose political partisan view points like in the Communist countries or under the Panchyat Raj. Politicians should cease to intervene in the education system, not use schools as recruitment grounds for their cadres, fill it with their followers as teachers and use them for party politics. There should be a law to ban recruitment of school children not only in army but also their use for party demonstrations.
One more issue pertinent for school education is the role of community managed schools. They could replace the private schools in competition itself given proper environment. The snag is that while parents and students are willing to pay 10 times more for private education, levy of even minimum charges by the community/public schools faces strong opposition, inflamed by politicians. The politicians should make up their minds whether they are promoting education or politics. The VDCs could pay for really those unable to pay even the minimum in community/public schools from this Fund. The basic problem in public schools is management and politics. Community schools can probably do a better job on this front.
e-Seminar Title: Nepal PSD
Subject: Government’s Role on Business Environment, Activation, Innovation, and Competition
Contributor: Dileep K Adhikary, Consultant & Facilitator, PRAM Associates
Date: February 23, 2007
First of all, one must appreciate the silent revolution on grass roots economic front that is going on in Nepal since the days of small farmer development programme (even Noble Prize winner M Younis was here in Trishuli, Tupche to see it before he started the revolutionary Grameen Bank). Then there came Community Forestry. These were the innovations that must be accredited to the government initiative. Right from the 1990s people have sprang up themselves which saw the mushrooming of self-serving community-based organisations (CBOs) which are still growing on with their saving and credit schemes.
In recent months, I am having several sessions with NIRDHAN Chairman Dr Harihar Dev Pant in promoting One Product One Village (OPOV) in Bara-Parsa terai sections. As Nirdhan is contributing to micro-credit to poor lot in ten districts including these two, the need for graduating the micro-credit takers to micro-enterprise is the idea behind the concept of OPOV as micro-credit has its limitation in the growth of the poor. As per the consideration Nirdhan will promote three micro enterprise centres with a plan I should be facilitating in terms of centre identification, market linked product identification and entrepreneurs identification.
Basically, what a state is supposed to do is to improve the business environment, it will not be able to do it if it is politically weak on the one hand and administratively confused on the other (to explain the latter: government needs defining of the roles of the ministry, department, public institutions/enterprises, and the private enterprises, which is just not there). My contention which I did try to explain through PRAM Associates consultancies in 2005 (Options for 7 public enterprises in bringing about competitiveness in trade and industry) to NPEDC/MOICS has been that it should be policy making/implementation role for the ministry, regulatory role for the government department, non-commercial services for the public institution/enterprise and commercial activities for the private). Presently, you will find ministry involved at the project level as well.
The problem at the state level in Nepal is inability to pitch suitable legal and institutional frameworks that contribute the private sector with environment for activation, innovation and competition. Activation, innovation and competition should be left to the private sector and the state should be cooperating from behind, not trying to lead from the front. For a buoyant private sector to emerge, the thrust that is required is on the front of infrastructure, and on the arena of marketing and financial dynamics beyond the traditional buy and sell (marketing) and the traditional production credits (finance) which alone do not generate and sustain the business. This means what is missing is the services (that embodies costs and competitiveness) linked to outreaching the market (and thereby to the customers) which would demand a specific highway specific to product or services. And this means what is missing is the financing (that embodies banking and financing beyond what is practiced or served currently in Nepal).
Integration is the key in the upcoming of the private sector which links it to from source to production (product or service) to market. Assuming that macro policy (of openness and competition) is here to stay, and that objectively we have to attain the economic growth of sustainable magnitude through the expansion of the private sector activities, then what needs to be pitched obviously is the appropriate legal and institutional frameworks. Unless the government understands how a business happens and that too at competitive terms the private sector will be too weak to raise Nepal. That should be the starting point.
e-Seminar Title: Nepal PSD
Subject: Hydropower and Education – Summary of February 22, 2007 Deliberations
Contributors: Mallika Shakya, Sujeev Shakya, Meena Acharya, Bhuban Bajracharya, and Keshav Upadhyay (Editorial summary by Vijaya R. Sharma, Co-Moderator)
Date: February 22, 2007
Mallika Shakya:
(Comments on hydropower)
I have no disagreement on private profit-making as the key incentive for risk-taking. My concern is more about monopoly or cartel-based profit-making which may distort the market. I think the State has an important role in removing barriers to entry/operate
through 'smarter' licensing and faster turnaround on decision-making. We all know the evils of monopoly/cartel economics. Yes, hydroelectricity can be as tangible as fish - it's a bigger fish but customers should still be able to bargain terms and conditions. Competition within the private sector should facilitate this, and not constrain.
I found the differentiation between the Indian State and Indian private-sector FDI very revealing indeed. Same differentiation can be made between the Nepali State and Nepali private investors/NRNs. I believe paying attention to such subtleties might open new doors in future.
I do not agree that donor aid and FDI are a trade-off. The European infrastructure model of the 1950s and the East Asian infrastructure model of the 1970s have one thing in common. They both mobilized donor credit (i) to set up market-efficient models which dissected public goods from private, and awarded commercially-managed contracts to competitive private bidders; (ii) to invest heavily on technology/knowledge-transfer as the projects proceeded; and (iii) to subsequently graduate from the donor credit by replicating the models internally for future ventures. Besides, more of Nepal's donor debt seems to come not from mega-infrastructure projects but from something less ambitious.
And the rest comes from paying for IPP-power that was never consumed.
I also do not agree that academics are a waste of time. Negotiation in big projects will come from number-crunching, than from lobbying/linde-dhipi or abstract philosophizing. I am always impressed to see the academics in UK and US, for example, coming to aid of the governments in bargaining with the private sector. Nepal might be only beginning to wake up to it, but it is better late than never.
Meena Acharya:
(Comments on hydropower)
I am not very versatile in issues involved in technicalities of Hydro-power development in Nepal. As a political economist I see the need to develop Nepal's water resources speedily. There is no point sitting over it and let India develop all the water resources and have the claim of the first use. But that should not mean pawning all our water resources for perpetuity. We will learn by doing. We had a very bad experience with Koshi, Gandak and now Mahakali. Why is Mahakali Nepali side of the bund so high that water flows to Nepal only during rainy season? Why did we renew the Sharada agreement without amendment when it expired? Why do we always get hoodwinked? Are we able now to negotiate with more technical knowledge?
Should not the political parties cease to make it an issue of party politics? What do we do with the demands like that India should pay for the Nepal's share of water it uses, until Nepal can use its entire share? The water is flowing any way. To me it seems Nepal needs to ensure only that it can use its share when it wants.
Will bringing in the Indian private sector make the Indian investment to Nepal's
need more responsive? Our experience with the Indian State has not been happy.
How far the Indian State is willing to change? Once these issues are sorted out, technical questions, environmental issue etc. can be solved easily. But given Nepal's terrain, investment capacity, and difficulty in network expansion due to terrain, perhaps smaller projects should be supported actively for rural consumption in the Hills, while a few larger projects taken up both for export and Nepal's industrialization and transport
development.
Bhuban B Bajracharya:
(Comments on Alok Bohara’s posting on education, made on February 21, 2007)
I agree with Prof Bohora on the need for Education Trust Fund. There are certain disciplines such as medicine which have become simply expensive beyond the reach of even middle income families. We need to introduce various funding mechanisms to facilitate access of students from disadvantaged and low income brackets to the education opportunities particularly higher education.
Private sector is coming up in many spheres of education including those in teachers' training and vocational and skill development. There again comes the role of government in PSD in education - that of ensuring standards and quality, once again a question of having well regulated system. With foreign employment expanding and its importance not waning in foreseeable future, vocational and technical education can be promoted for the skills required for such foreign employment.
With increasing number of educational institutions providing foreign degrees in the country (such as Cambridge A syllabus)and definitely they being in the private sector, there is a group strongly pledging to stop this practice to protect the national education system (SLC, national university degrees etc.). I think we can deliberate in some of these interesting issues.
Sujeev Shakya:
(Comments on Mallika Shakya’s posting of February 21, 2007 on hydropower)
We have to perhaps agree to disagree. Markets and market economies have distortion, as there is 'profit' involved unlike 'tax payers subsidies' in case of state owned projects and enterprises. Definitely people working in Surya Nepal are better off than their compatriots in Janakpur Cigarette Factory, and pilots of private airlines are paid more than the state carrier. This is a reality that perhaps we have to live with.
If we have no problem in allowing fish which is a byproduct of water to be traded freely, why do we have problems in ensuring private trading of electricity which is a by-product of water?
Perhaps, Nepali hydropower have not been able to take off as the people who think they have solutions for this 'business of hydropower' are not investors, but people who continuously make it an issue to study and compile reports and do workshops. They can point out what is wrong but not come with a concrete solution. As I mentioned in my earlier deliberations also that such people for the past couple of decades belching different formulae have landed Nepal into darkness.
The issue is of action and taking risk! Perhaps apart from the private sector there are none to take this 'risk' as they look for the reward for the institutions unlike the 'rewards' that public sector projects bring to individuals who are bestowed strategic positions. If Nepali hydropower is to be harnessed, the options are either to take grants and deliver expensive projects to the economy and create more debt on the average Nepali, or to allow private entrepreneurs to take risk and get it going with at least one project. Else even in 2017 we will still be having the same deliberations now that are not different than what we were having in 1997!
Re: Chilime prices and newspaper reports, we an ask NEA a public utility to make the prices public. Of course if we go by the newspaper reports on various hydropower projects, one can end as confused as one started with.
Keshav Upadhyay:
(Comments on postings of Ambika Adhikari and Sujeev Shakya on hydropower on February 21, 2007)
I agree that we have to have some sort of understanding with Indians for the development of hydropower in a big scale. But are they interested? I am asking this question because despite Parliament's ratification of Mahakali treaty nothing has happened. There is a school of thought in Nepal which says that Indians are interested in river treaties, more for water than power. They can have power from other sources, but their problem in the foreseeable future is the availability of drinking water.
Sujeevji is right that there are not many possible investors and we should give every opportunity to those who really want to invest in hydro power in Nepal, but there are about fifty applications pending in NEA for Power Purchase Agreement (PPA). Developers are running from pillar to post for PPA. Nothing happens. Recently I had an opportunity to go to NEA to discuss with NEA people about the energy rates for a hydropower project to be developed by one of my friends. It was a heated discussion that ensued. Ultimately managing director of NEA closed the discussion telling the developer that they should wait for about a month since NEA right then was engaged in an exercise of review of energy price. He hinted that the energy price they had offered for the plants of capacity of 5 MW or less could come down. Apparently there is a glut of investors. Could Merchant Power Stations without a legally binding power purchase agreement be built in Nepal? Would anybody invest in it? There was a small mention (in the meeting) about energy price of Chime. It is at par with Khimti and Bhotekoshi, even a little higher, though I am not quite sure about it. But Chilime people would hotly deny it. They would say that since NEA owns 51% of the equity in Chilime, NEA does get a very good dividend, and so if you take that into account the effective rate, it would be much lower than Khimti or Bhotekoshi's.
e-Seminar Title: Nepal PSD
Subject: Education, Maoists’ Vision, Hydropower, State Regulation and FDI – Summary of February 21, 2007 Deliberations
Contributors: Alok Bohara, Jagadish Upadhyay, Mallika Shakya, Ambika Adhikari, Vijaya R. Sharma (Editorial summary by Vijaya R. Sharma, Co-Moderator)
Date: Feb 21, 2007
Ambika Adhikari:
(Comments on Hydropower and FDI)
Sujeev Shakya's de-licensing proposal is innovative. India has experienced the dramatic improvement in economic output as a result of scrapping the license-Raj for industries since the 90's. However, in Nepal 's case hydropower sector is not a normal industry. It has deep security implications. In fact, this sector has been the bone of contention between India and Nepal for a long time. Many in Nepal feel it is the only tangible and realistic potential we have for our economic development. Nepal does not want to give that up so easily, but use it towards leverage whenever we wish to bargain with India. This psychology has cost us money and time, as the water continues to flow without being tapped for power.
I remember what Chandra Sekhar told a group of prominent Nepalis in the 90's when he was the Indian Prime Minister. His statement was something like "I heard about your hydro potential and India's power need when I was a teenager, I heard the same thing when I was a MP, and I am hearing the same story now I am the PM. You will not develop it yourself, and you will not allow us to develop it for you. You will remain poor, and you will also cause us to remain poor". This was frustration from a very powerful man, who could not break the barrier of mistrust Nepalis have for any Indian initiated development of our most coveted resource.
We need to let go of the mistrust with India and play with them on pragmatic level. While we must maintain control of the national priorities, we must work with Indian and other foreign investors on mutually beneficial grounds. We can not sit on the hydro-potential for ever. Nepal should also be very clear on what it wants. There will be cost of development. There will be loss of some control when you do a big trade. There will also be social perversions and environmental degradations that will accompany hydro development. We must assess them carefully and accept some costs.
Also to respond to Sujeev jee's assertion about shortening environmental assessment procedure, I beg to disagree. Nepal's geology is very fragile, its bio-diversity highly vulnerable, and the rural population powerless to block large developments. In fact, in the equation of power development, the local communities lose the most as the power is transmitted to urban areas and possibly to India, leaving the local communities to bear the brunt of the environmental damages, while most of the time not even getting any power. Even when power may be available, they can not afford the price.
During the late nineties, I was involved in the socio-environmental impact management of the Bhotekoshi power project during its developmental phase. I remember how the locals lost precious amenities, how their houses were creaked due to blasts during construction, and how they were displaced from the places of their adobe. The only gains were that some villagers got the menial jobs temporarily. I strongly believe that socioeconomic and bio-physical impacts of the large hydropower projects should be rigorously prepared, actively mitigated, and regularly monitored. State's regulatory roles are critical in this phase.
Mallika Shakya:
(Responses to Sujeev Shakya’s comments on hydropower and FDI, which may be read under February 20 deliberations)
The policymakers and private sector leaders must disseminate the right information on hydropower projects so public thirst for information is quenched. Let me explain. I grew up reading in my textbooks that Nepal is the second largest source of hydropower in the entire world. As a grown-up, I now find my father taking early retirement from Nepal Electricity Authority (NEA) because of its budget crunch while my sister earns a 100% bonus from Statkraft. I do wonder what went wrong -- isn't this precisely the kind of 'inefficiencies' the 'market' was supposed to have taken care of?
I understand very well that alternative investment opportunities are high in advanced economies which skyrocket their net present values (NPVs) and make least developed countries’ state guarantees less attractive. One solution might be to accept this at the face value and go with high NPVs factored in. But another solution might well be to seek local and regional funds which are the victims of the same evil. You rightly pointed out that Nepalese sit in a plot of land for years without building on it. Does this not, at least in principle, give a local visionary entrepreneur an opportunity to develop a local/regional hydro fund?
There also need to be a good enabling environment for a project to function, competitive bargaining platform to reach price equilibrium, and guarantee of property/profit rights to be able to commercially sustain. Other countries are surely mobilizing donor-granted cheaper money to lend to domestic power investors at commercially competitive rates while setting aside public funds for intangibles. Nepal's decision to go straight to IFC might be commercially sound, but IFC also has a 'frontier market division' who are interested in doing business with frontier economies like Nepal and they offer better terms and conditions. They are just not as close with the political power-holders as they should be.
FDI is directly connected with technology transfer. If we missed the technology lessons on how to build it locally next time -- they call it 'the Chinese lesson' -- we wasted our opportunity in real terms. This is where the State has a role. This is where the State should have a role, regardless of whether it is Red or Blue, at a point of time.
Mallika Shakya:
(Comments on the Maoists’vision)
I agree that there is policy uncertainty regarding the Maoists’ vision, but I disagree that this should remain an overwhelming issue. Should this ambiguity not allow the policymakers a good pretext to assert their vision before they are pre-empted by either ultra-leftists or ultra-rightists? It is absolutely right that a debate on Maoism-vs-Capitalism is a non-starter. However, if we go a step below, it is not so black-and-white. It is largely about technical coherence of institutions, regulations and incentives. For
example, if we want to develop niche products, which have been our competitive advantage throughout both Panchayat and Bahudal; the recipe does not necessitate a philosophical debate on left-vs-right. It is about ensuring that we develop effective certifying and market promotion agencies; avail appropriate financial instruments for transactions to happen; allow collaboration/innovation economics; develop a smooth supply chain.
Jagadish Upadhyay:
(JagadishJee has contributed the following responses to MallikaJee’s comments on the Maoists’ vision, which may be read in “February 19 deliberations.”)
Unfortunately, the Maoists have said different things to different audiences and in different forums. Therefore, while we should hope for the best for PSD and for overall economic growth development following the experience of other countries, "policy uncertainty" should remain as an overwhelming issue until we see convincing evidence of their policy.
Alok K. Bohara:
Historically, education has been the best equalizer in many societies. Even the world capital of free market, America, provides free education up to the high school level for all of its citizens: rich, poor, whites, and non-whites. In Nepali case, despite much progress in the private education sector in the post-1990 democratic era, a dangerous segregation is taking place between the rich and the poor in the education sector. Wealthy families have access to high quality education offered by expensive private schools and colleges, whereas a vast majority of poor and disadvantaged students are stuck in the ailing public education sector.
The new government’s attempt to chart a new educational strategy is a welcome sign. But, in the name of reform, imposing quotas, price control or nationalization will all be counter productive, and these overly restrictive regulations (especially banning or nationalization the private educational enterprise as proposed by the Maoists) are not the answer. The recent governmental ordinance, for example, requiring students to seek governmental permission from the Ministry of Education to go abroad for studies is an example of populist desperation rather than a sound policy prescription.
In addition to having a capital flight to India, such policies will also deteriorate in-school services. It will discourage innovations and Nepali ingenuity in the production of education, which has been a hallmark of the post-1990 democratic era. The point is that a healthy private sector can be constructive in helping the public sector, and in my recommendation, I am drawing upon my proposal which argues for a trust fund to strike that balance.
The proposed system of trust fund uses five percent tax from the total revenue generated by the private schools and colleges (i.e., all higher institutions). There are 1.5 million students in eighty-five hundreds private schools, and 70,000 students go to about 250 private colleges. Using a conservative amount of Rs 1,500 as a monthly charge, the five percent tax revenue will yield about Rs 1.413 billion for the trust fund. The second portion of the trust fund relies on a ten percent levy –about Rs 1 billion-- from the sin taxes on alcohol, tobacco, and casinos. [These are good faith guesstimates.]
Jointly, the five-plus-ten tax system can raise Rs 2.413 billion worth for the trust fund. Both sectors, being on the target list of the Maoists, should not mind contributing five and ten percent of their revenues respectively to this noble cause. In return, the government and the agitating student organizations should not be imposing too much unfair regulatory controls on them. The proposal then argues for allocating these monies to the graduates of the public schools for their higher level education (including vocational trainings.) and vocational trainings.
Vijaya Sharma:
On February 19, 2007 Mr. Bhuvan Bajracharya contributed his views on PSD in social service sector. It is a common knowledge that political parties have used schools and colleges as a training ground to groom young party activists. In addition, the Maoists have heavily interfered in the past years with the operations of even secondary schools and have argued for nationalization of primary and secondary schools.
Perhaps the most important criterion of measuring success of PSD in Nepal (at least in the near and mid-term) would be its impact on employment generation. For this, our educational system should be able to produce human resources that serve the need of the private sector. To better match supply with demand, I have argued for active involvement of private sector in developing and running a system of post-secondary vocational and training schools for producing mid-level technicians (read my views on this in the website of this seminar posted under “designated discussants’ comments”).
Participants with insights into the educational sector of Nepal could enlighten us with their valuable perspectives on the role of the government in promoting private sector participation in expanding schooling and educational system in Nepal.
e-Seminar Title: Nepal PSD
Subject: Hydropower, State Regulation, and FDI : February 20, 2007 Deliberations
Contributors: Sujeev Shakya, Mallika Shakya, Ambika Adhikari, Keshav Upadhyay, and Vijaya Sharma (Editorial Summary by Vijaya R. Sharma, Co-Moderator)
Date: February 20, 2007
Sujeev Shakya:
Talking about hydropower and bashing Independent Power Producer’s Bhotekoshi and Khimti has become nation’s favorite pastime. All the people who earned donor dollars to crib against the private developers in the past ten years could not suggest alternatives; therefore, Nepal is back reeling under power shortages. While we talk of private investment in hydropower, we talk as if we have zillions of people lining up to invest in Nepal. Contrary to that, it is difficult to find investors in the hydropower sector. Only 15 hydropower projects have financially closed in the past decade and a half out of which two are in Nepal. Price is determinant on cost of production. Nepal is not credit rated and therefore getting financing for Nepal is utterly difficult. When the financial closing for Bhotekoshi was underway, 63 banks rejected the proposal despite being led by a multilateral like IFC and had a dollar based PPA. The guarantee of countries like Nepal which people presume to be part of selling national sovereignty is a piece of paper and many guarantees globally have been meaningless. Private power producers need to pay for insurance, legal costs and interest during construction. We always compare these costs with NEA developed projects like Kali Gandaki and now Middle Marsyangdi where there are neither elements of interest factored nor any financial considerations on account of delay factored in. If we take both into consideration many studies have shown that Kali Gandaki is perhaps more expensive to the economy than the IPPs. The fact that Chilime, the NEA promoted company has a rate that is close to the IPP rates perhaps reflects on the fact that if we have to assume that there is cost to money and money is not free and there is a concept called time value of money and delays do not amount to cost, then the rates paid to IPP are close to the real prices. If we continue to harp expensive power by comparing oranges with apples then we will land up writing many seminar papers, but Nepal will continue to reel in the dark. It is like complaining about foreign airlines that charge dollar fares that ferry Nepalis outside Nepal taking business away from our national flag carrier!
If NEA has bled on account of exchange losses by paying dollars rates to Bhotekoshi and Khimti, it would be interesting to see the balance sheet improve this year when the dollar rates have actually come down making the prices of Chilime and Bhotekoshi the same.
In the power sector we need more radical reforms to look at the scrapping the system of PPAs and survey licenses and shortening Environmental Impact Assessment timeline. There is a demand in Nepal and India, there are projects that can be developed, leave the rest to the market. People are sitting on survey licenses (bestowed upon by political masters) for years and like sitting on plots of land and not building houses they are trying to encash on the premium. Scrap the licenses, let merchant power plants who can manage risks come up with power, they will find the market themselves. The transmission lines have to get to a special purpose vehicle owned by the state and let everybody use it like they can use the road by paying tolls. Let distribution be managed by municipalities who know the customer better and cut debtors. Let private sector be just allowed to build generation plants. If we take the potential of 40,000 MW to sell at 5 cents a unit based on current estimates, it can fetch $ 150 billion plus revenues. We need to re-engineer our thinking.
Mallika Shakya:
Is power not a single unit but multiple and eclectic? It's commercial components might include core components of power generation, but its infrastructure components surely include the public goods of roads and transmission lines. But in today's financial sophistication, it should well be possible to differentiate the treatment of these two components so that we avoid the dilemma of subsidization versus capitalization.
To take one example, from Bangladesh, the power finance facility, first, set up a public fund (through govt., multilateral and bilateral donors). They then dissected this into two sub-components, each managed by different entities. The first subcomponent was managed by the government: First, it developed an eclectic (as opposed to 'thick') infrastructure plan based on social-cost-benefit-analysis (as opposed to financial CBA). Second, the plan mobilized the donor support to award contracts to private bidders on a competitive basis. Since the fund was based on the local currency, bidders were either local companies or were sufficiently locally grounded. The second subcomponent was a purely commercial credit which was managed by a commercial financial institution for commercial remunerations on commercial principles.
I am not too sure that Nepal's current hydro loss is coming from the subsidization-vs.-capitalization dilemma. I think a larger factor might be the problem that the one component was never sufficiently dissected and differentiated from the other. We cannot ignore the importance of mini-calculations and comparative bargains from within the country and within the region. Penny-crunching seems to be the name of the game in such projects although this might be idealistically a bit sad.
Ambika Adhikari:
Hydropower development in Nepal has long been held as a panacea for Nepal's economic development. The government and foreign-aided hydropower development have not been that successful, both due to large per unit cost (construction inefficiencies, graft), and problems of maintenance. Since 1992, the private sector development of the hydropower was seen as the best approach to utilize Nepal's most important economic potential while utilizing the private sector efficiency. There lingers a vast controversy on the modalities of these investments. Although the previous few private power development were carried out by the US, Australian, Chinese and a few other companies, the most successful ventures have been the ones organized by the Nepali investors.
The most recent private hydropower development projects are almost all proposed by Indian or Indian-Nepali joint investors. This is an interesting change and merits a careful review. The Indian companies are perhaps, best suited to operate in Nepal due to their proximity, cultural and economic understanding of the Nepali situation, and relatively low cost of their professional and other costs. More importantly they are in the best position to negotiate Indian market for Nepal generated power. However, Many Nepalis are long concerned about the possible compromise of national security, and monopsony by the Indian state in the development of Nepal 's hydropower. Also, Nepal wishes to diversify its investor's list, and wishes to attract non-Indian investors in the power sector to obtain foreign technology and also to counter the enormous Indian influence in Nepal.
Keshav Upadhyay:
The problem with hydropower is how you treat power in the economic schema. Do you take it as an essential part of infrastructure, or is it a commodity like say a pair of shoes? There are two sides, both equally important. First one is of course the need for investment, where does the money come from? If you give a handsome return to the investors, investment will surely come. But then the price of energy will go soaring high. Can you allow that? What would be the impact in the macroeconomic sphere if you let that happen? It is here that I think there is a need of serious intervention by the government. If you are clear about it color of the cat is not important.
Vijaya Sharma:
The discussions on February 18 and 19 mainly focused on power sector in Nepal,
especially Nepal's bitter experiences with FDI in Khimti and Bhotekoshi projects, the limited investment capacity of the national private sector, the problem of red tape and corruption discouraging private investment, the severe crunch of power shortage in the country, and the potential loss of comparative advantage in the South Asian energy market if investments on power sector are further delayed. At this time it is being hotly debated in Nepal, as to what would be the most appropriate investment modality for Tamakoshi: FDI, national private sector, or state investment through the Nepal Electricity Authority.
Should Nepal target Indian investors? Should the government extend loan guarantees and/or subsidized credit for large power projects to promote national private investment? Should the government directly engage in investing in power? What kind of policies and strategies should the country undertake for producing and selling power to the domestic market and also for exporting to India and the South Asian region?
E-Seminar Title: Nepal PSD
Subject: Hydropower, Cultural Capital, and Political-Economy – February 19, 2007 Deliberations
Contributors: Alok Bohara, Mallika Shakya, Bhuban Bajracharya, and Vijaya Sharma (Editorial Summary by Vijaya R. Sharma, Co-Moderator)
Date: February 19, 2007
Today’s deliberations covered three subthemes – hydropower, cultural capital, and political economy, which are separately summarized below.
I. Deliberations on Hydropower
Alok K. Bohara:
We already saw in previous comments of Mallika Shakya and Keshav Upadhyay some hints of problems in Nepal’s hydro sector: regulatory delays, adverse price effect on local consumers, political instability, corruption, etc. I do not know what the answer is for our own internal housekeeping, for example, for or against FDI and/or expediting the regulatory process. But, the rising economic super power –India—is not certainly waiting around for Nepal to be the source of its energy needs. Any unnecessary regulatory mechanism to slowdown FDI in the hydro sector will hurt us from becoming a player in the emerging regional energy market. I am sure that the Indian economy’s double digit growth and its rising energy consumption need have not gone unnoticed among the policy makers in Nepal. Pakistan is another potential market, and between the two of them, the South Asian region could be a vibrant market for energy exports and imports.
India has already begun to look into its insatiable energy need from a larger regional perspective, and Nepal may or may not factor into this equation. The choice is ours to
make. From this perspective, the state’s role is vital in developing the necessary groundwork to make us competitive in this vast energy market. To that end, making
government actively involved in the FDI regulation may prove to be counter productive. India has increased its involvement in Bhutan’s hydro sector, and is looking to import gas and electricity from Bangladesh and Myanmar. India is also looking to invest in a coal plant in Sri Lanka.
On the western front, Pakistan, Afghanistan, Tajikistan, and Kyrgyz Republic are assessing the prospect of exporting about 1000 MW of hydropower from Central Asia to
South Asia with the possibility of importing gas from Iran and Turkmenistan. With a population of 1.5 billion people, this region (including SAARC) could be one of the largest markets for energy consumption. Thus, the regional trade in energy is not a distant hypothetical fantasy anymore. Within a decade or so, we may be seeing regional grid
sharing and power trading all across the sub-continent.
Can Nepal afford not to join this regional energy market? What export policy does Nepal need to facilitate such an option? What can we learn from Bhutan? Should we be focusing on Indian private ventures for our hydro developments? What could be an efficient energy trading model?
II. Deliberations on Cultural Capital
Mallika Shakya:
While I totally agree with being cautious and preventing gender/ethnic inclusion from distorting the market, yet cultural capital can be a real potential for Nepal where branding the cultural/geographic products (handicraft, tourism and speciality goods like tea, coffee and carpets) for global niche markets is one of the most promising avenues for international competitiveness. At the moment, Nepal does this task haphazardly and is not very successful at it. One example comes to mind is that of a Bahun and a State bureaucrat trying to sell the ancient Sherpa heritage to elite culture connoisseurs without knowing one Sherpa word. The same Bahun can do it much better only if he is prepared to invest a couple of years learning about the Sherpa culture/history and another couple of years understanding the international clientele he is trying to serve.
Let me state another small example. One of the most important of Nepal's export is traditional handicraft. Here, by being ethnically insensitive, the State is losing out a lot. Over 85 per cent of the members of the Handicraft Association of Nepal (HAN) are Newar traditional artisans. But, their programs for developing international certification, copyrights and marketing are extremely haphazard, because the State does not appropriately recognize ethnic skills. The State definition of 'expertise' ends at formal mainstream school education. As a result, a superb master of statue-making fails to get government accreditation as a trainer/certifier if he/she does not have a diploma, although that is irrelevant for the area of expertise. What this has meant then is that a secretive, uncoded, monopolized, and hence rudimentary system of accreditation tightly controls the statue-making enterprise, which is a total loss for both the artisans and the State. The government can solve such a problem by offering more ethnically nuanced accreditation/training system, which on the one hand, will lead to formalization and hence wider access to ethnic skills, and on the other hand, will lead to better recognition to ethnic identities in society.
India has developed very sophisticated classical art academies which give credit to the masters of those arts, while giving a wide range of people access to those arts. Classical arts have helped tremendously in building an international brand of India and in marketing of not only specialty goods such as tea and herbs but also 'heavy' products such as Indian airlines and IT services. Cultural capital is very much part of the India brand.
I also believe that exploiting the potentials of cultural capital is healthier than a myopic focus on distribution at the expense of economic growth. While societies will continue to negotiate the shares of the pie, I think it is also important that each share also contributes creatively towards making the pie bigger.
III. Deliberations on Political Economy
Bhuban B Bajracharya, Lead Researcher, Technical Review of School Education, ESAT/DANIDA:
The new political development has increasingly put the PSD under uncertainty. Though there is a realization that private sector is necessary, the likely inequality is taken as a political ploy for its rejection to backstage. Thus, there is also a need for strong analytical article showing enough evidence that the overall inequality does not negate the equality well at the higher level even for lower quintile groups ensuring better livelihood status. Further, the social protection measures compensate for and ensure the social service delivery reasonably at the higher level. The service delivery could even be better than that in socialistic economies. PSD also needs to highlight the public private partnerships in social service delivery so as to impress upon the general public that the profit motivated private sector will not leave the social service delivery behind. They are very much essential to be highlighted to stop the temptation to go for direct service delivery by the government machinery rather than through more market friendly measures.
Successful PSD assumes the existence of well developed regulatory system, and the role of the government’s role in evolving such a rule based system needs to be highlighted to impress upon the populace that the government is not sitting silent and doing nothing before the market forces. It will give an impression that the government is fully aware of the concerns of disadvantaged communities and poorer section of the society and only thing is that such policies are to be market friendly. Let the government be smart enough in giving the message strongly that unleashing the private sector does not and will not lead to overlook the concerns of poorer section of the society.
The dislike for private schools and colleges in the name of more equal education (or equal opportunity to the education facilities) and in the face of limited public resource availability speaks these confusion and contradictions. Despite private schools sharing the obligation of the government in the drive for universal school education, in the absence of strong and effective regulatory mechanisms, private schools are also despised for brewing inequality in the society. How do we address this issue in the role of government in PSD?
Alok K. Bohara:
The Maoists have outlined their economic agenda and the corruption control has become one of their priority fields, to be followed by the radical land reform, and the regulation of the FDIs. Like everyone else, they also see hydro and tourism as our comparative advantage. They also profess a mixed economy, but with a protectionist flavor. However, I would like to focus on the corruption issue and provide some comments.
While speaking of the private sector development and the state’s role, the issue of transparency becomes a natural topic of focus. The newly passed Competitive Bill (February 2007) seems very comprehensive in its scope covering numerous angles such as, tied selling, bid rigging, cartel, collective price fixing, market restrictions, dial-system, market segregation, undue business influences, syndicate and exclusive dealing. The government must be congratulated for the announcement. But, it looks like a daunting task, and it will not be cheap. It will involve a sizable workforce to detect violations. The legal cost of prosecution will also have to be figured into the total enforcement cost. The stipulated fines of Rs 10K, Rs. 25K, Rs. 100K and even Rs. 300K don’t seem severe enough, and are most likely to be internalized as a part of cost of doing business and will be passed on to the consumers in the form of higher price. Furthermore, these regulations are also likely to increase the rent seeking behavior of the government employees and increase the opportunity for corruption. The Competitive Bill needs to be equally matched by the other corruption control measures and transparency measures. A city like Bangalore, for example, reduced its low level rampant corruption by 30-40 % within a year or two by simply creating barriers between the “public” and “the clerks”. For example, Instead of making the public stand in line to get government services (e.g., paying bills, registration renewal), the government instituted the envelop drop-in system. This type of e-governance system diminishes the contacts between the public and “the clerk-babus” and thus reduces the opportunity for bribery.
Advanced market economy like the US is also not immune to malpractices in government contract deals. Consider the following data: Of the $380 billion government contract dollars in 2005, 20-30%, were rewarded without any genuine competition. But, unlike in a country like Nepal, there are civilian oversights of these activities, which include hearings at the congressional level. In 2005 alone, the Public Corruption Program convicted 759 cases out of 890 indictments. It is quite routine event to see the congressmen convicted and put in jail. Even the all-mighty Enron was brought down to its knee. Over 1000 government employees were convicted by the FBI just in the last one or two years. Thus, it would be useful to find out how the procurement practices are carried out at the government level in Nepal. How transparent are these bidding practices? Do we have any civilian oversight? Do we have any whistleblower law in Nepal? It would also be interesting to find out about the internal bidding mechanism of the government tender.
Mallika Shakya:
This article in Nepal Weekly by Rishikesh Dahal might be of interest to the participants on Maoist vision on PSD for New Nepal: http://www.kantipuronline.com/Nepal/artha.php
This article reports that the Maoists commit to: (i) a mixed economy with individual rights to profit; (ii) transparency and corruption control; and (iii) revolutionary land reform (including scaling/upgrading of co-operatives). Sectorally, they seem to have picked up hydropower and tourism as potential growth-bearers and connectivity (e.g. an ambitious east-west highway in the Mahabharata region) as a primary developmental goal on PSD. This shows signs of welcome pragmatic improvisations on Baburam Bhatterai's 'red' vision 12 years ago. 'Old wine, new bottle' might be too much of an expression, but save some logistical differences in modalities, a Maoist PSD agenda might not really be 'the new broom' either, which should actually leave policymakers a small space for policy maneuvering in the coming days.
Vijaya Sharma:
Nepal has indisputably experienced a shift towards left in the political balance of power, with the emergence of the Maoists as a big political force. In the changed political context, the designated discussants have raised concerns that the mainstream political parties, especially the Maoists, have not clarified their vision and economic agendas for the New Nepal. Will the economic liberalization that began in 1992 continue? What would be the parties’ approach to private sector development?
What direction should the private sector development (PSD) take in Nepal, especially on the general pitfalls that Nepal should avoid in the areas of protection of private property rights, treatment of FDI vis-à-vis domestic sources of investment, the issue of social and gender inclusion in private enterprises, level of protection of domestic industries, and promotion of competitive business environment?
e-Seminar Title: Nepal PSD
Subject: Hydropower, State Regulation and FDI – February 18, 2007 Deliberations
Contributors: Mallika Shakya and Keshav Upadhyay (Editorial Summary by Vijaya R. Sharma, Co-Moderator)
Date: February 18, 2007
Mallika Shakya:
I totally agree with Keshav Upadhyay in almost everything he says. Nepal has a generation of young people who have been brought up with the belief that Nepal is one of the richest sources of hydropower, only to discover later that FDI in our hydropower has left us poorer than before, while the same hydropower has comfortably doubled the GNP per capita for Bhutan.
Private sector investment is sorely needed for hydropower, but some of the initial experimentations seem to have gone so bad that unless the State corrects this serious market distortion, it thwarts hydro-FDI potentials considerably. The solution to this, in my opinion, is not to abandon FDI but to change its modality. FDI does not automatically instigate competition among investors nor does it entail automatic technology transfer. As I mentioned in my paper, the contrast between the FDI in China and Africa shows that FDI is not a natural panacea, it must be forced and tailored into delivery of technology transfer and cost-efficiency. Have we made efforts to learn from experimentations in South and East Asia on this? For example, Bangladesh has recently set up a Power Facility where the State (or donors) will provide guarantee and extend subsidized credit for the public infrastructure goods with longer gestation period while the commercial/competitive private investment would be sought for the power generation and distribution at sustainable rates. This might actually encourage domestic private sector investment vs. FDI at least in some areas. This might actually also revitalize the banking system if done well.
The success or failure, again, will lie not in 'thick' modaliy, but in subtle calculations and modeling. This is where I put the question back to the commentator as well as others in this forum who have dense experience in this area. What are the precise lessons learnt from Nepal's few experimentations in this area? Which are the specific areas where expertise is lacking within the country? How can they be fulfilled? Who can help Nepal strengthen its skills? Some donors? Strong business consultants? Non-resident Nepalis with technical skills? Technicians within the country?
Mallika Shakya has written a lucid essay on the issues relevant for drafting a workable strategy of Private Sector Development (PSD) in a transitional Nepal. She has pointed her finger at the interventions required to address the "ethnic and gender concerns without self destructive compromises on market rigor". Since the redress of ethnic and gender concerns would definitely distort the market in some ways it is here that I am not comfortable with her prognosis though I would very much like to agree entirely with her because the concerns are genuine. It is not that there is any argument with the politico-economic agenda of inclusive democracy; it is the question of strategy which is a matter of debate. Though the country's politics has visibly veered towards far left, there is no point in developing a strategy of PSD for an extreme left regime that would give no role to the private sector. A realistic PSD strategy has to dovetail into the socio-economic agenda of the liberal left; otherwise the whole exercise could turn into idle play of words. Small pillars of the economy like micro credit and cooperative initiatives, I am sure, would fit seamlessly into the new scheme of things, so the stress would naturally go in that direction. But, as the author has rightly stated, there are some sectors where inducing
bigger investments would require a totally different approach.
To take an example, Nepal has seen the inflow of foreign direct investment (FDI) in the sector of electricity generation (the 60mw Khimti from Norwegian Statkraft and the 36mw Bhotekoshi from Panda Energy of USA), and this has vitiated the market in such a way that FDI in power sector has now become an anathema. They have been instrumental in raising retail electricity rates to the extent that a further rate increase would never be
politically acceptable. If, however, the retail rates are not raised, the Nepal Electricity Authority (NEA) would go into financial bankruptcy.
In fact, so far as FDI in the power sector is concerned, everything which Ms. Shakya warns against has happened here. It has distorted the price, and is neither cost effective nor market friendly. NEA is very apprehensive of entering into new power purchase agreements because of its bitter experience in the past. Therefore, not enough investment from the private sector is coming into this sector. NEA has been continuously in the red for half a decade now and is, without a surplus, not in a position to invest. The government, on the other hand, does not treat electricity as infrastructure but rather as a commercial commodity, and recent utterances of the finance minister confirm this. The only option that remains is the national private sector which is also hampered by archaic rules and regulations unfriendly to investment.
To give an example, it takes almost two years for a power project to get a clearance from the environment ministry after submission of the Environment Impact Assessment (EIA). Two years is an average period. There have been cases where some procedural reasons force the whole assessment exercise to be repeated. Secondly, the size of investible funds may be difficult to mobilize. My estimates indicate a figure of nine billion rupees that
must be invested annually to meet the rising demand of 60mw per year. Is our banking system capable of lending this amount of money where the return on investment starts trickling in only after five years at the least? Meanwhile the country is reeling under a severe power crisis leading to a blackout of six hours per day for we don't know how
long.
I wanted to show with examples from the power industry that when the economy is too immature, the entry of private sector does not automatically bring in the benefits that are classically attributed to it. Resources may not get allocated to the sector where there is a
possibility of maximum gain, at least in terms of the social rates of return, or prices may not stay high enough to sustain investment at a desired rate. The author's instincts, though, are in the right place and I entirely agree with Ms. Shakya that the political
economy of new Nepal would lie somewhere between capitalistic anarchy and a rigid central planning of a socialist state. In such a framework for development, the role of state cannot be minimal.
e-Seminar Title: Nepal PSD
Subject: Hydropower, State Regulation and FDI
Contributor: Ambika Adhikari
Date: Feb 21, 2007
Sujeev Shakya's de-licensing proposal is innovative. India has experienced the dramatic improvement in economic output as a result of scrapping the license-Raj for industries since the 90's. However, in Nepal 's case hydropower sector is not a normal industry. It has deep security implications. In fact, this sector has been the bone of contention between India and Nepal for a long time. Many in Nepal feel it is the only tangible and realistic potential we have for our economic development. Nepal does not want to give that up so easily, but use it towards leverage whenever we wish to bargain with India. This psychology has cost us money and time, as the water continues to flow without being tapped for power.
I remember what Chandra Sekhar told a group of prominent Nepalis in the 90's when he was the Indian Prime Minister. His statement was something like "I heard about your hydro potential and India's power need when I was a teenager, I heard the same thing when I was a MP, and I am hearing the same story now I am the PM. You will not develop it yourself, and you will not allow us to develop it for you. You will remain poor, and you will also cause us to remain poor". This was frustration from a very powerful man, who could not break the barrier of mistrust Nepalis have for any Indian initiated development of our most coveted resource.
We need to let go of the mistrust with India and play with them on pragmatic level. While we must maintain control of the national priorities, we must work with Indian and other foreign investors on mutually beneficial grounds. We can not sit on the hydro-potential for ever. Nepal should also be very clear on what it wants. There will be cost of development. There will be loss of some control when you do a big trade. There will also be social perversions and environmental degradations that will accompany hydro development. We must assess them carefully and accept some costs.
Also to respond to Sujeev jee's assertion about shortening environmental assessment procedure, I beg to disagree. Nepal's geology is very fragile, its bio-diversity highly vulnerable, and the rural population powerless to block large developments. In fact, in the equation of power development, the local communities lose the most as the power is transmitted to urban areas and possibly to India, leaving the local communities to bear the brunt of the environmental damages, while most of the time not even getting any power. Even when power may be available, they can not afford the price.
During the late nineties, I was involved in the socio-environmental impact management of the Bhotekoshi power project during its developmental phase. I remember how the locals lost precious amenities, how their houses were creaked due to blasts during construction, and how they were displaced from the places of their adobe. The only gains were that some villagers got the menial jobs temporarily. I strongly believe that socioeconomic and bio-physical impacts of the large hydropower projects should be rigorously prepared, actively mitigated, and regularly monitored. State's regulatory roles are critical in this phase.
e-Seminar Title: Nepal PSD
Subject: Hydropower, State Regulation, and FDI
Contributor: Sujeev Shakya, President of Tara Management Private Limited, Nepal
Date: February 20, 2007
Talking about hydropower and bashing Independent Power Producer’s Bhotekoshi and Khimti has become nation’s favorite pastime. All the people who earned donor dollars to crib against the private developers in the past ten years could not suggest alternatives; therefore, Nepal is back reeling under power shortages. While we talk of private investment in hydropower, we talk as if we have zillions of people lining up to invest in Nepal. Contrary to that, it is difficult to find investors in the hydropower sector. Only 15 hydropower projects have financially closed in the past decade and a half out of which two are in Nepal. Price is determinant on cost of production. Nepal is not credit rated and therefore getting financing for Nepal is utterly difficult. When the financial closing for Bhotekoshi was underway, 63 banks rejected the proposal despite being led by a multilateral like IFC and had a dollar based PPA. The guarantee of countries like Nepal which people presume to be part of selling national sovereignty is a piece of paper and many guarantees globally have been meaningless. Private power producers need to pay for insurance, legal costs and interest during construction. We always compare these costs with NEA developed projects like Kali Gandaki and now Middle Marsyangdi where there are neither elements of interest factored nor any financial considerations on account of delay factored in. If we take both into consideration many studies have shown that Kali Gandaki is perhaps more expensive to the economy than the IPPs. The fact that Chilime, the NEA promoted company has a rate that is close to the IPP rates perhaps reflects on the fact that if we have to assume that there is cost to money and money is not free and there is a concept called time value of money and delays do not amount to cost, then the rates paid to IPP are close to the real prices. If we continue to harp expensive power by comparing oranges with apples then we will land up writing many seminar papers, but Nepal will continue to reel in the dark. It is like complaining about foreign airlines that charge dollar fares that ferry Nepalis outside Nepal taking business away from our national flag carrier!
If NEA has bled on account of exchange losses by paying dollars rates to Bhotekoshi and Khimti, it would be interesting to see the balance sheet improve this year when the dollar rates have actually come down making the prices of Chilime and Bhotekoshi the same.
In the power sector we need more radical reforms to look at the scrapping the system of PPAs and survey licenses and shortening Environmental Impact Assessment timeline. There is a demand in Nepal and India, there are projects that can be developed, leave the rest to the market. People are sitting on survey licenses (bestowed upon by political masters) for years and like sitting on plots of land and not building houses they are trying to encash on the premium. Scrap the licenses, let merchant power plants who can manage risks come up with power, they will find the market themselves. The transmission lines have to get to a special purpose vehicle owned by the state and let everybody use it like they can use the road by paying tolls. Let distribution be managed by municipalities who know the customer better and cut debtors. Let private sector be just allowed to build generation plants. If we take the potential of 40,000 MW to sell at 5 cents a unit based on current estimates, it can fetch $ 150 billion plus revenues. We need to re-engineer our thinking.
E-Seminar Title: The Nepal PSD
Subject: The Private Education Sector: Creating a Trust Fund to Close Education Gap
Contributor: Alok K. Bohara, PhD, Professor, University of New Mexico
Date: February 21, 2007
Historically, education has been the best equalizer in many societies. Even the world capital of free market, America, provides free education up to the high school level for all of its citizens: rich, poor, whites, and non-whites. In Nepali case, despite much progress in the private education sector in the post-1990 democratic era, a dangerous segregation is taking place between the rich and the poor in the education sector. Wealthy families have access to high quality education offered by expensive private schools and colleges, whereas a vast majority of poor and disadvantaged students are stuck in the ailing public education sector.
The new government’s attempt to chart a new educational strategy is a welcome sign. But, in the name of reform, imposing quotas, price control or nationalization will all be counter productive, and these overly restrictive regulations (especially banning or nationalization the private educational enterprise as proposed by the Maoists) are not the answer. The recent governmental ordinance, for example, requiring students to seek governmental permission from the Ministry of Education to go abroad for studies is an example of populist desperation rather than a sound policy prescription.
In addition to having a capital flight to India, such policies will also deteriorate in-school services. It will discourage innovations and Nepali ingenuity in the production of education, which has been a hallmark of the post-1990 democratic era. The point is that a healthy private sector can be constructive in helping the public sector, and in my recommendation, I am drawing upon my proposal which argues for a trust fund to strike that balance. (A complete version of the proposal is attached).
The Trust Fund
The proposed system uses five percent tax from the total revenue generated by the private schools and colleges (i.e., all higher institutions). There are 1.5 million students in eighty-five hundreds private schools, and 70,000 students go to about 250 private colleges. Using a conservative amount of Rs 1,500 as a monthly charge, the five percent tax revenue will yield about Rs 1.413 billion for the trust fund. The second portion of the trust fund relies on a ten percent levy –about Rs 1 billion-- from the sin taxes on alcohol, tobacco, and casinos. [These are good faith guesstimates.]
Jointly, the five-plus-ten tax system can raise Rs 2.413 billion worth for the trust fund. Both sectors, being on the target list of the Maoists, should not mind contributing five and ten percent of their revenues respectively to this noble cause. In return, the government and the agitating student organizations should not be imposing too much unfair regulatory controls on them. The proposal then argues for allocating these monies to the graduates of the public schools for their higher level education (including vocational trainings.) and vocational trainings.
E-Seminar Title: Nepal PSD
Subject: PSD in Social Service and Education Sector
Contributor: Vijaya Sharma, Co-Moderator
Date: February 21, 2007
In the last few days we have seen a number of valuable contributions made on few specific themes related to private sector development (PSD), namely hydropower and FDI, political economy and competition policy, and cultural capital. As a moderator of the e-seminar, I urge participants to expand deliberations on these and other themes as well.
It is a common knowledge that political parties have used schools and colleges as a training ground to groom young party activists. In addition, the Maoists have heavily interfered in the past years with the operations of even secondary schools and have argued for nationalization of primary and secondary schools.
Perhaps the most important criterion of measuring success of PSD in Nepal (at least in the near and mid-term) would be its impact on employment generation. For this, our educational system should be able to produce human resources that serve the need of the private sector. To better match supply with demand, I have argued for active involvement of private sector in developing and running a system of post-secondary vocational and training schools for producing mid-level technicians; read my views at: http://nepalstudycenter.unm.edu/SeminarsWorkshopsConferences/e-Seminars/e-SeminarN012007/e-SeminarNo12007Papers/VijayaSharmaComments%20on%20ShakyaVer2pdf.pdf
Participants with insights into the educational sector of Nepal could enlighten us with their valuable perspectives on the role of the government in promoting private sector participation in expanding schooling and educational system in Nepal.
E-Seminar Title: Nepal PSD
Subject: PSD in Social Service Sector
Contributor: Bhuban B Bajracharya, Lead Researcher, Technical Review of School Education, ESAT/DANIDA
Date: February 19, 2007
The new political development has increasingly put the PSD under uncertainty. Though there is a realization that private sector is necessary, the likely inequality is taken as a political ploy for its rejection to backstage. Thus, there is also a need for strong analytical article showing enough evidence that the overall inequality does not negate the equality well at the higher level even for lower quintile groups ensuring better livelihood status. Further, the social protection measures compensate for and ensure the social service delivery reasonab
Discussants' Contributions & Deliberations(25)
e-Seminar Title: Nepal PSD
Subject: Hydropower, Prospects for PSD, and Federal Structure – Summary of February 27, 2007 Deliberations
Contributors: Mallika Shakya, Keshav Acharya, and Alok Bohara (Editorial Summary by Vijaya R. Sharma, Co-Moderator)
Date: February 27, 2007
Mallika Shakya:
(During February 26 deliberations) AmbikaJi suggested that local/regional investors better adapt to demands at lower prices but cannot influence the Indian giant, while larger FDI are worse in former and better in latter. But need this impose a policy trade off for Nepal? Can we not have the good of both the worlds? Let's develop a hypothetical model where a hydropower project is divided into three clear components: A. infrastructure and connectivity; B. core power generation; C. international/regional mediation for market. Components A and C are clearly public goods while B is private.
An efficient and competitive PPP (this could be a restructured NEA or a different institution) can manage component A (with some donor funding). Component B should be private -- the choice between local, regional and international investment -- will be decided by pure competition (bidding prices + environmental/social CBA). Component C can be headed by the PPP but subcontracted to a top-notch private business strategy MNC that can bring business leaders from India on board.
Whether or not local capital is better than FDI should be left to the market on purely commercial products. The State should have a role on public goods. This will not only
increase the number of private bidders but also will bring down the total costs substantially.
Whether India is interested or not on Nepali hydropower should be concluded only
after we have tried the Indian private sector. Nepal is probably not capable enough (yet) to tackle the Indian businessmen, but there are many brokers in the international market that can do this job for fees. All this only emphasizes the need for a better business enabling environment and investment climate, which is the State's responsibility.
I very much agree with AmbikaJi about increasing local demand for power. This may even make Component C redundant. To encourage local absorption of hydropower, it is imperative that the hydro strategy doesn't stand in isolation but is closely linked with SME development strategy. The ongoing safa tempo strike in Kathmandu to protest the power cut reminds us of the direct connection here.
There are other connections that have gone unnoticed. When the Garment Association of Nepal was lobbying in the US Senate for a duty-free access to US for readymade garments after the concessional multi-fibre-agreement (MFA) ended in 2004, one of the biggest hurdles it faced was from Panda Energy Group and its political contacts in DC.
Keshav Acharya, Chief Economic Advisor, Nepal Rastra Bank (currently working at the IMF)
1. Nepal's economy holds tremendous potential in the long run, among others, in bio-diversity, hydro-electricity and tourism.
2. For any meaningful, comprehensive and sustainable transformation of the Nepali economy, one should begin from agriculture where nearly 21 of the 28 million Nepali people depend for their livelihood. In the last 10 years, Nepal's traditional farm production such as rice, wheat, pulses and oilseeds have been almost displaced by Indian production for the following reasons:
a. India is in the process of completing its second generation of green revolution, whereas Nepali farming practices remain traditional even today. This has created a huge productivity differential between the Nepali and Indian food production. As such, given the open border, it is quite natural for the Indian food grains to substitute Nepali produce.
b. In the process of liberalization, Nepal has withdrawn all forms of subsidies from agriculture, whereas India continues to heavily subsidize the use of chemical fertilizer, seeds, electricity, diesel, farm credit, extension services and railway and sea freight for farm produce. Furthermore, India is accelerating public investments on infrastructure such as irrigation, rural roads, rural electrification, and extension of railway connection to rural India. In Nepal public capital allocation for agriculture is subsequently declining. Naturally, competitiveness of Nepal's agriculture is successively eroding.
c. Yet, there are lots of prospect for Nepali agriculture. The prospect lies in the rich bio-diversity of Nepal. The inflow of Indian FDI in the form of Dabur, Hindustan Lever and a few others is a clear indication of this competitive advantage of Nepal vis-a- vis India. What the state needs to do is to inject sufficient investment on infrastructure such as irrigation, electricity and road or cable-car connectivity, by mobilizing donor support; and enforce the property rights.
d. In the last several years, there has been a massive build-up of infrastructure in Tibet and a tremendous increase in Tibetan purchasing power. If Nepal endeavours to supply the food demand of Tibetan consumers, it can transform the livelihood of Nepal's northern hills and mountains; it requires the provision of infrastructure and technical know-how.
3. The talk has been going on in the last couple of years to develop Nepal as a transit corridor between India and China. The geographers and engineers have advocated that there are several prospective road projects which can considerably narrow the distance between these two fast growing countries. Given the rapidly growing trade flows between the two giant economies, the Nepali authorities can approach these neighbouring countries to invest on mutually beneficial road projects through Nepal. Such road connectivity would also help to explore the possibility of developing pasture in Nepal's northern highlands, which in turn would support sheep farming which would substitute the import of raw wool, for making carpets and pashmina.
4. Nepal Government's Department of Mines and Geology needs to undertake massive survey to find out which gems are available in commercial quantity. After this, the Government will have formulate laws, rules, and regulations governing extraction, processing and export of gems and jewellery by the private sector with international joint ventures.
5. Provision of infrastructure and public utilities is too costly in hills and mountains, as compared to terai and the valleys. There should be inducement and incentive given to people to resettle or conglomerate in areas that are wide enough and free from geological and other natural hazards such as land slide, from the perspective of cheaper cost of providing modern basic amenities of life. Furthermore, such resettlement would create space for private sector in terms of construction and repair.
6. Regarding development of private sector in Nepal, the Nepali authorities have mostly played on tariff differential (arbitrage) with India. Goods imported to Nepal were illegally smuggled into India against the payment in Indian Currency. Such a trade policy generated customs revenue and brought Indian currency into Nepal and offset the trade gap with India. Things have changed now. India is fast lowering its tariff structure to allow no space for arbitrage in Nepal. Now is the time for Nepal's private sector to look into the country's long term comparative advantage. In this context, the following things need to be done to facilitate the development of private sector in Nepal.
a. Provide macroeconomic stability, particularly in its fiscal and monetary policy. Have political consensus on not making frequent changes in the rate of tax. It is right time for the economic policy agenda to get space in the debate on constitution. As there is a general drift towards federal structure of government, the constitution should clearly spell out the basis of resource sharing between the federal and the provincial governments.
b. The constitution should layout the blueprint categorically for the space of state and the area for public private partnerships, so that the private sector can plan its activities accordingly.
c. Private enterprises of certain size and above should be made to follow nationally defined accounting standards and disclosure norms for increased transparency of financial statements, and there should be some mechanism to constantly monitor to increase public investment in stocks.
d. The private financial sector is urban centric. In the rural area there is a very thin and sparse presence of financial services, especially in the hills and mountains. Some intervention seems imperative in expanding financial services to rural areas in general and in the hills and the mountains in particular. The preferred nature of intervention would be budgetary and tax incentives, rather than the government itself operating financial services.
e. Since the last few years, annual remittance inflows have exceeded the combined total receipt from exports, tourism and foreign aid. But, the contribution of remittances is confined to sustaining consumption, imports and somewhat real estate investment. There should be a plan to pool some resources from remittances for undertaking productive investment in areas such as hydro or microfinance with full legal guarantee of returns to the remitters.
f. There has been a tremendous proliferation of bank and non-bank financial institutions in the urban areas, which puts a limit on the supervisory capacity of the central bank. There is an urgent need to set up a second tier supervisory institution and also a need for some kind of self regulation of these institutions.
g. Nepal should reorient its focus on the development of self regulated cooperative societies and microfinance institutions in the rural areas, with some kind of initial budgetary support.
h. To reduce the cost of operation of financial services in rural and deprived areas, rather than opening a new branch or a full-fledged institution in such areas, one can look for a local agent, train him and assign him with the task of lending and recovering for a certain fee.
i. Finally, the. One can also look into the prospect of formalizing, organizing and consolidating the informal financial services that have been in existence in Nepal since time immemorial into modern type of microfinance institutions, without much financial and bureaucratic cost.
Alok K. Bohara:
The federalism issue is quite complicated in the current context and any link to the PSD will be overshadowed by numerous other contentious issues. It is the institution that makes a long-lasting difference in the making of a nation and the people. That is, federalism is not the only real issue; the problem should also address the degree of centralization/decentralization including both the political and economic. One of the issues that I have raised constantly is the issues of revenue sharing 50/50 from the hydro resources. Giving some economic clout to the regional governments is a good start. But, such revenue must not be spent anything other than education, health, and the infrastructure.
A complete version of my article on federalism is linked to the following website as a February 26, 2007 attachment:
http://nepalstudycenter.unm.edu/SeminarsWorkshopsConferences/e-Seminars/e-SeminarN012007/e-SeminarNo12007_PaperAccess.html
Also, it may be worth reading the following interview with Mr. Yash Pal Ghai:
http://kantipuronline.com/kolnews.php?&nid=101887
Posted by Vijaya R. Sharma | February 28, 2007 2:22 AM
Posted on February 28, 2007 02:22
e-Seminar Title: Nepal PSD
Subject: Federal Structure, Hydropower, State Regulation and FDI – Summary of February 25 and 26 Deliberations
Contributors: Vijaya R. Sharma, Ambika P. Adhikari, Mallika Shakya, Dileep Adhikay and Hari B. Jha (Editorial Summary by Vijaya R. Sharma, Co-Moderator)
Date: February 25 and 26, 2007
Issues related to two areas – the prospective federal structure of the country and the hydropower – have been discussed in the last two days.
Deliberations on Federal Structure
Vijaya R. Sharma:
I like to draw your attention to also the prospective federal system that Nepal would have in near future. Will the federal system be or can it be made more conducive to PSD? Having many provincial governments, would it facilitate the implementation of community-managed schools (as suggested by MeenaJee), setting up education trust funds at the level of provinces (suggested by AlokJee), expanding +2 schooling system for supply of middle level technicians, and/or launching of niche ethnic branding of specialty products (suggested by MallikaJee)? Should the promotion of all non-FDI business ventures be left to the provincial governments? Just as increased competition raises the efficiency of the market, increased competition among provinces may improve efficiency of governmental services (subject to the hard budget constraint that provinces must balance their budget). What should be the approach to empower provincial governments in the interest of PSD?
Deliberations on Hydropower, State Regulation and FDI
Ambika Adhikari
Prior to 1992, it was the conventional wisdom that big hydropower projects would be developed by government, through foreign assistance and by government owned public authorities. The concept of privatizing hydropower basically began in 1992 after the hydro-power act. At the initial phase, the Electricity Development Center (EDC) prepared a menu of potential and viable projects and offered them for development to international companies. A few foreign private companies did develop some initial ones e.g. Bhote Koshi I and II, Upper Marsyangdi and Upper Karnali. So big was the euphoria at that time that many Nepali investors and promoters even invited the now bankrupt Enron to develop the biggest prize of all, the gigantic lower Karnali project.
The private sector power development did face hurdles. The Bhote Koshi power purchase agreement generated much controversy inviting intervention from the US government and law suits from the private developer. On the other hand, some local Nepali invested smaller projects have become successful and profitable. They catered to the available demand, utilized local man-power and professional expertise, and were much better grounded in the local reality.
In my opinion, a major problem faced by the middle and large sized foreign developed projects is the difficulties in accessing the Indian market. Although some experts have talked about it, no one has seriously explored the national consumption potential, and increasing the domestic demands for power in the interim. The many black-outs, load-shedding and lack of power for industries are proving that there is enough domestic demand for power in Nepal. Further, with the rise of income that is anticipated in the post-conflict Nepal, the emerging Nepali economy should be able to absorb power from several small and medium size projects.
Mallika Shakya:
First, we agree that hydro-investment has to come from the private sector and the public sector should facilitate it. Here do we have a good model for public-private-partnership that would satisfy the demands of investment, financial efficiency and knowledge transfer? The need to rid NEA of political appointments and outdated knowledge is well established. Can this be achieved in practice? And is the problem all political? What technical capacity is NEA lacking which makes its performance so dismal? Maybe it is NEA that has to be privatized, especially in facilitating smaller projects more efficiently, as DileepJi has pointed out.
Second is the role of ADB and other multilaterals in promoting Nepali hydropower in the Indian market. Has ADB done this for any other countries? Some of the examples from East Asia, if this is the basis for our hope on ADB, might actually be less relevant for South Asia simply on the grounds that East Asia enjoys far better regionalism than South Asia and hence persuading powerful neighbours might be an easier task there. How about multinational business strategy companies who might specialise precisely on hydro issues?
Third, I agree that the Indian State is not interested in Nepali hydro, but I am still not convinced (and I might sound a bit stubborn here). Why do we fully exclude the possibility that the Indian private sector might be interested after all? If there is a market demand, what stops them from exploring new economic opportunities in Nepal especially when they have a competitive advantage over others on knowledge and information? For example, Bangladesh has been totally unsuccessful in selling its gas to India, but Tata is very much making its entrance there. Are we exploring that possibility at all?
These same issues might be very much relevant for various other industrial sectors, e.g., roads, telecom, IT, tourism, etc.
Dileep K Adhikary:
Firstly, hydro-electricity (HE) is basically a commercial project, which should not be a government project, but a private sector project. Therefore, neither Nepal government nor India government nor any other government could be a promoter. But the private sector from anywhere who dares to venture could promote it.
Secondly, interest of India on Nepal is not on getting electric power but on securing water supplies.
Thirdly, with the above clarity engage multi-lateral agencies like ADB as the go-between, even for the promotion of Private HE with India as a market.
Fourthly, the Nepal Government has serious limitations to provide funds for NEA to make investments, and NEA has serious limitations of its own income to generate surplus for investments.
Fifthly, the current banking regulations in NEPAL are of no help to promote even medium size (60-100MW) projects.
Sixthly, the current practices for micro/small projects are based on milking NEA not on the basis of competitiveness.
Seventhly, in developing HE to the desired/competitive level unbundling of NEA is also a critical requirement.
Hari B. Jha:
Nepal's hydropower sector has failed to grow. The main factor is the mind-set. We neither do on our own nor allow the others to contribute in this sector. In regard to external investors, we have a mind-set that we will be cheated if we make a deal. Mahakali Project is a glaring example. Despite the fact that the Project was framed on the basis of equal participation both in investment and returns, we did not allow it to materialize so far. Even in project such as Arun III, we did not go forward though it is most feasible project. If at all we have shown interest in certain projects such as in Marsyangdi and a few others, it is just because it served the vested interests of certain groups. Therefore, the main problem is educating us. We have to come out of the well and make meaningful dialogue maybe with our neighbours or agencies outside the region for making best utilization of this scarce resource. But for all this the mind-set has to be changed and vision created that Nepal needs to be made an affluent country rather than a country moving with begging bowl.
Posted by Vijaya R. Sharma | February 26, 2007 11:35 PM
Posted on February 26, 2007 23:35
e-Seminar Title: Nepal PSD
Subject: PSD in Education, Hydropower, Business Environment and Finance – Summary of February 23, 2007 Deliberations
Contributors: Meena Acharya, Keshav Upadyay, Mallika Shakya, Mukti Upadhyay and Dileep Adhikary (Editorial Summary by Vijaya R. Sharma, Co-Moderator)
Date: February 23, 2007
Meena Acharya:
(Comments on PSD in Education, Education Trust Fund)
I agree with Prof. Bohara’s proposal of a Fund and tapping the remittances. However, a big problem in education in Nepal is the archaic mentality of control rather than problem-solving mindset among our politicians, including the student unions. If you listen carefully to some of the advisors, Maoists and UML, they would allow private sector neither in education nor in health. The idea of a Fund is good, given the private sector is allowed to exist. Fund will be useful only if other aspects of education are also addressed simultaneously.
There is a big quality gap in the private education system in Nepal. The curricula and the textbooks of private sector schools cover histories and issues more relevant to India or developed countries rather than Nepal. The curricula glorify the countries to where these schooled are linked, rather than to Nepal's history and present day realities. All of the private school education is geared to sending students overseas, teaching their lifestyles and social patterns. Further, only a few schools go beyond rote learning. So even if students pass SLC and + 12 with good grades, if they decide to stay in Nepal, often adjustment becomes a problem for them. A large chasm is created between them and the ordinary people. Such students often become misfit in general social environment. Only advantage they have is their good verbal English. I think this is where the problem lies.
The state should have a good regulatory framework and capacity to supervise what is being taught and in what way, but in no way try to impose political partisan view points like in the Communist countries or under the Panchyat Raj. Politicians should cease to use schools as recruitment grounds for their cadres, fill it with their followers as teachers and use them for party politics. There should be a law to ban recruitment of school children not only in army but also their use for party demonstrations.
One more issue pertinent for school education is the role of community managed schools. They could replace the private schools in competition itself given proper environment. The snag is that while parents and students are willing to pay 10 times more for private education, levy of even minimum charges by the community/public schools faces strong opposition, inflamed by politicians. The VDCs could pay for really those unable to pay even the minimum in community/public schools from this Fund. Community schools can probably do a better job on this front.
Keshav Upadhyay:
(Comments on Hydropower, State Regulation, and FDI)
Let me summarize what I wanted to say about the development of hydro power in Nepal.
1. First thing that has to be done by the Government is to establish a regulator who can balance the interests of both sides: investor and consumer. It is very good for the government too, because it takes on the responsibility of often unpopular pricing decisions which have to be taken for the sake of the sector as a whole.
2. Forget India. If they want Nepali hydropower they will come on their own. And the subject has now become so sensitive that no politician wants to be seen selling hydropower to India because then he would be charged of selling the sovereignty.
3. Educate the public that hydropower does not come cheap; massive investments are required upfront to construct the power stations, transmission lines, etc. The only attraction it has for us is that we do not have to be dependent on import of other materials for our energy needs. Stress the security angle that it provides, and say repeatedly that if we tighten the belt now we will be free of the worries of Nakabandi, like the one we had to face in 2046.
4. Do a massive restructuring of NEA. Take away distribution from it, initially. Give it to private companies or local bodies. We started privatization in electricity from the wrong end. The reason obviously is that MNCs are not interested in distribution, it is a messy business. Generation is rather clean.
Mallika Shakya:
(Comments on Business Environment and Financial Development)
1. DileepJi has used the terms 'business environment' and 'legal and institutional frameworks', but some of the State's roles require 'hands-on' actions rather than passive environment-creating. Physical infrastructure and backbone services alone require active engagement from all sides.
2. I agree that the State must not try to lead but facilitate 'activation, innovation and competition' from the private sector. Facilitation of this innovation and competition will require establishment and nurturing of a whole tier of institutions that actively promote and enable good practices from the private sector. For example, 'brand'-building or niche marketing is an area where small countries like Switzerland and Nepal have competitive advantage in products/services like carpets, tourism and handicraft. Such sectors will require massive efforts on physical infrastructure, backbone services and image-building.
The Indian government spent four million dollars to develop 'India Everywhere' brand to entice the foreign investors and convince them of its financial credibility, which was then extended to 'Incredible India' brand for its tourism market, and now a whole range of Indian products like IT, medical services, etc. capitalize on it. One might say national brand is a big brand; private sector firms can go ahead and develop smaller product brands for their individual products. But, the private sector will need to have the right training/technological institutions to achieve the quality, then certification agencies and harmonization procedures to gain credibility, then promotion agencies to reach out to consumers, a sound legal framework for incentive to innovate.
Bhola ChaliseJi pointed out in his comments, that of a bureaucratic duty drawback for exporters which is too time-consuming to be useful. The only sector which could convert this to a more user-friendly 'bank-guarantee-system' was the garment industry. This shows that name of the game is public-private-partnership or meaningful dialogue between the two. Both of these require very specific knowledge, skills and experience, and of course the right mindset. But this is very much the precursor to PSD.
I very much agree with MuktiJi that the flow of remittance and flow of people might give us a unique window of opportunity in this regard. Does the State have a vision?
Mukti Upadhyay:
(Comments on Business Environment and Financial Development)
Dileep Adhikaryji rightly emphasizes the improvement of legal and institutional framework for PSD. Although there has been a large successful sectoral growth of private sector institutions in education, health, and finance in Nepal, it is important to remember that free markets only cater to people who can vote with money. The result is a gross disparity in access to quality services between Kathmandu and outside, and between the well-off and worse-off even within Kathmandu. While the growth of private activity in these sectors poses no direct problem, the increasing inequality that results from it does.
Alokji has floated a sound proposal, namely the creation of a national fund, to address education inequity. Let me raise a few questions about finance here. How many opportunities do private banks have in Nepal to expand banking services in rural areas? The question is whether institutional credit is getting ready to move into the rural hinterland if and when peace returns in the country more permanently. Do we have enough large and small developmental type banks, including micro-finance organizations (MFIs), to meet a high fraction of credit needs at the going interest rate? And, have the directives and guidelines from the Rastra Bank to commercial banks made a significant contribution to increasing the supply of rural credit? Potential borrowers in rural areas may want to make use of loans but they cannot present their case in a way acceptable to banks. They may know how to produce and where to sell but perhaps cannot fill out forms or prove their creditworthiness by putting up marketable collateral. To what extent have MFIs helped overcome the problem of asymmetric information (high-risk vs. low-risk borrowers that a conventional bank cannot distinguish) in a situation like this?
Another interesting development in Nepal has been the inflow of remittances. It is widely believed that, because of limited opportunities for investment in real capital, this has ended up either raising the price of real estate or giving some desired consumption boost among poor households. What institutional development will help to induce much of the remittance money toward growth of the rural economy? Is it feasible, for instance, to translate remittances into MFI loans?
Dileep K Adhikary, Consultant & Facilitator, PRAM Associates
(Comments on Business Environment)
First of all, one must appreciate the silent revolution on grass roots economic front that is going on in Nepal since the days of small farmer development programme. Then there came Community Forestry. These innovations must be accredited to the government initiative. Right from the 1990s people have sprang up themselves which saw the mushrooming of self-serving community-based organisations (CBOs) which are still growing on with their saving and credit schemes.
In recent months, I am having several sessions with NIRDHAN Chairman Dr Harihar Dev Pant in promoting One Product One Village (OPOV) in Bara-Parsa terai sections. As Nirdhan is contributing to micro-credit to poor lot in ten districts including these two, the need for graduating the micro-credit takers to micro-enterprise is the idea behind the concept of OPOV. Nirdhan will promote three micro enterprise centres with a plan I should be facilitating in terms of centre identification, market linked product identification and entrepreneurs identification.
Basically, what a state is supposed to do is to improve the business environment, it will not be able to do it if it is politically weak on the one hand and administratively confused on the other. My contention has been that it should be policy making/implementation role for the ministry, regulatory role for the government department, non-commercial services for the public institution/enterprise and commercial activities for the private. Presently, you will find ministry involved at the project level as well.
Activation, innovation and competition should be left to the private sector, and the State should to provide suitable legal and institutional frameworks to create environment for the private sector activation, innovation and competition. The state should cooperate from behind, not try to lead from the front. The thrust required is on the front of infrastructure, and on the arena of marketing and financial dynamics beyond the traditional buy and sell and the traditional production credits. Missing are the services linked to outreaching the market which would demand a specific highway specific to product or services, and missing is the financing (that embodies banking and financing beyond what is practiced or served currently in Nepal).
Integration is the key in the upcoming of the private sector which links it to from source to production (product or service) to market. Assuming that macro policy (of openness and competition) is here to stay, and that objectively we have to attain the economic growth of sustainable magnitude through the expansion of the private sector activities, then what needs to be pitched obviously is the appropriate legal and institutional frameworks. Unless the government understands how a business happens and that too at competitive terms the private sector will be too weak to raise Nepal. That should be the starting point.
Posted by Vijaya R. Sharma | February 24, 2007 1:36 AM
Posted on February 24, 2007 01:36
e-Seminar Title: Nepal PSD
Subject: Business Environment and Financial Development
Contributor: Mukti Upadhyay, Eastern Illinois Univeristy
Date: February 23, 2007
Dileep Adhikaryji rightly emphasizes the improvement of legal and institutional framework for PSD. Private sector institutions in education, health, and finance are frequently cited as examples of little government intervention leading to large sectoral growth in Nepal. Despite this success, however, it is important to remember that free markets only cater to people who can vote with money. And that is true of schools, health clinics, and banks and finance companies around Kathmandu. The result is a gross disparity in access to quality services between Kathmandu and outside, and between the well-off and worse-off even within Kathmandu.
While I think the growth of private activity in these sectors poses no direct problem, the increasing inequality that results from it does. Alokji has floated a sound proposal, namely the creation of a national fund, to address education inequity. Let me raise a few questions about finance here.
First, how many opportunities do private banks have in Nepal to expand banking services in rural areas? Have they done enough to grab them? It might sound even crazy to ask such questions when the country is just trying to come out of a situation where people did not feel secure for their life, not to mention their property. The question, however, remains whether institutional credit is getting ready to move into the rural hinterland if and when peace returns more permanently. Do we have enough large and small developmental type banks, including micro-finance organizations (MFIs), to meet a high fraction of credit needs at the going interest rate? And, have the directives and guidelines from the Rastra Bank to commercial banks made a significant contribution to increasing the supply of rural credit? Do we have any data on the share of formal finance in total credit in the country?
Assume for a moment that the supply of micro and small loans is of less immediate concern than their revealed demand. Potential borrowers may want to make use of loans but they cannot present their case in a way acceptable to banks. They may know how to produce and where to sell but perhaps cannot fill out forms or prove their creditworthiness by putting up marketable collateral. To what extent have MFIs helped overcome the problem of asymmetric information (high-risk vs. low-risk borrowers that a conventional bank cannot distinguish) in a situation like this?
Another interesting development in Nepal has been the inflow of remittances. For the entire South Asia, Nepal has emerged as probably the largest recipient of remittance dollars per capita? It is widely believed that, because of limited opportunities for investment in real capital, this has ended up either raising the price of real estate or giving some desired consumption boost among poor households. What institutional development will help to induce much of the remittance money toward growth of the rural economy? Is it feasible, for instance, to translate remittances into MFI loans?
Posted by Vijaya R. Sharma | February 24, 2007 1:21 AM
Posted on February 24, 2007 01:21
e-Seminar Title: Nepal PSD
Subject: PSD in Education, Education Trust Fund, Mindset of Politicians, and Community-Managed Schools
Contributor: Dr. Meena Acharya
Date: February 23, 2007
Part of the problem in Nepal on education has been captured by Prof. Bohora. I agree with his proposal of a Fund and tapping the remittances. However, a big problem in education in Nepal is the archaic mentality of control rather than problem-solving mindset among our politicians, including the student unions. Role of the private sector in education has become a big political issue. If you listen carefully to some of the advisors, Maoists and UML, they would allow private sector neither in education nor in health. Moreover, if you listen to some of the leftist NGOs brandishing the UN charter of rights, I do not know what role the private sector can have in the social sector.
The idea of a Fund is good, given the private sector is allowed to exist. I was thinking along the same line. But Fund will be useful only if other aspects of education are also addressed simultaneously. There is a big quality gap in the private education system as well in Nepal. Going through the private sector school text books and the education methodology in Nepal, one is very disappointed. The curricula and books cover histories and issues more relevant to India or developed countries rather than Nepal. Not knowing proper Nepali becomes pride of the student. The curricula glorify the countries to where these schooled are linked, rather than to Nepal's history and present day realities. All of the private school education is geared to sending students overseas, teaching their lifestyles and social patterns. Further, only a few schools go beyond rote learning. A six year old is burdened with 10 books, she can not carry. So even if they pass SLC and + 12 with good grades, if they decide to stay in Nepal, often adjustment becomes a problem for them. A large chasm is created between them and the ordinary people. Such students often become misfit in general social environment. From my association with women in various walks of life, I see them working mostly in travel agencies, hotels or INGOs. Only advantage they have is their good verbal English. I think this is where the problem lies. The state should have a good regulatory framework and capacity to supervise what is being taught and in what way. However such supervision should in no way try to impose political partisan view points like in the Communist countries or under the Panchyat Raj. Politicians should cease to intervene in the education system, not use schools as recruitment grounds for their cadres, fill it with their followers as teachers and use them for party politics. There should be a law to ban recruitment of school children not only in army but also their use for party demonstrations.
One more issue pertinent for school education is the role of community managed schools. They could replace the private schools in competition itself given proper environment. The snag is that while parents and students are willing to pay 10 times more for private education, levy of even minimum charges by the community/public schools faces strong opposition, inflamed by politicians. The politicians should make up their minds whether they are promoting education or politics. The VDCs could pay for really those unable to pay even the minimum in community/public schools from this Fund. The basic problem in public schools is management and politics. Community schools can probably do a better job on this front.
Posted by Vijaya R. Sharma | February 24, 2007 12:57 AM
Posted on February 24, 2007 00:57
e-Seminar Title: Nepal PSD
Subject: Government’s Role on Business Environment, Activation, Innovation, and Competition
Contributor: Dileep K Adhikary, Consultant & Facilitator, PRAM Associates
Date: February 23, 2007
First of all, one must appreciate the silent revolution on grass roots economic front that is going on in Nepal since the days of small farmer development programme (even Noble Prize winner M Younis was here in Trishuli, Tupche to see it before he started the revolutionary Grameen Bank). Then there came Community Forestry. These were the innovations that must be accredited to the government initiative. Right from the 1990s people have sprang up themselves which saw the mushrooming of self-serving community-based organisations (CBOs) which are still growing on with their saving and credit schemes.
In recent months, I am having several sessions with NIRDHAN Chairman Dr Harihar Dev Pant in promoting One Product One Village (OPOV) in Bara-Parsa terai sections. As Nirdhan is contributing to micro-credit to poor lot in ten districts including these two, the need for graduating the micro-credit takers to micro-enterprise is the idea behind the concept of OPOV as micro-credit has its limitation in the growth of the poor. As per the consideration Nirdhan will promote three micro enterprise centres with a plan I should be facilitating in terms of centre identification, market linked product identification and entrepreneurs identification.
Basically, what a state is supposed to do is to improve the business environment, it will not be able to do it if it is politically weak on the one hand and administratively confused on the other (to explain the latter: government needs defining of the roles of the ministry, department, public institutions/enterprises, and the private enterprises, which is just not there). My contention which I did try to explain through PRAM Associates consultancies in 2005 (Options for 7 public enterprises in bringing about competitiveness in trade and industry) to NPEDC/MOICS has been that it should be policy making/implementation role for the ministry, regulatory role for the government department, non-commercial services for the public institution/enterprise and commercial activities for the private). Presently, you will find ministry involved at the project level as well.
The problem at the state level in Nepal is inability to pitch suitable legal and institutional frameworks that contribute the private sector with environment for activation, innovation and competition. Activation, innovation and competition should be left to the private sector and the state should be cooperating from behind, not trying to lead from the front. For a buoyant private sector to emerge, the thrust that is required is on the front of infrastructure, and on the arena of marketing and financial dynamics beyond the traditional buy and sell (marketing) and the traditional production credits (finance) which alone do not generate and sustain the business. This means what is missing is the services (that embodies costs and competitiveness) linked to outreaching the market (and thereby to the customers) which would demand a specific highway specific to product or services. And this means what is missing is the financing (that embodies banking and financing beyond what is practiced or served currently in Nepal).
Integration is the key in the upcoming of the private sector which links it to from source to production (product or service) to market. Assuming that macro policy (of openness and competition) is here to stay, and that objectively we have to attain the economic growth of sustainable magnitude through the expansion of the private sector activities, then what needs to be pitched obviously is the appropriate legal and institutional frameworks. Unless the government understands how a business happens and that too at competitive terms the private sector will be too weak to raise Nepal. That should be the starting point.
Posted by Vijaya R. Sharma | February 24, 2007 12:54 AM
Posted on February 24, 2007 00:54
e-Seminar Title: Nepal PSD
Subject: Hydropower and Education – Summary of February 22, 2007 Deliberations
Contributors: Mallika Shakya, Sujeev Shakya, Meena Acharya, Bhuban Bajracharya, and Keshav Upadhyay (Editorial summary by Vijaya R. Sharma, Co-Moderator)
Date: February 22, 2007
Mallika Shakya:
(Comments on hydropower)
I have no disagreement on private profit-making as the key incentive for risk-taking. My concern is more about monopoly or cartel-based profit-making which may distort the market. I think the State has an important role in removing barriers to entry/operate
through 'smarter' licensing and faster turnaround on decision-making. We all know the evils of monopoly/cartel economics. Yes, hydroelectricity can be as tangible as fish - it's a bigger fish but customers should still be able to bargain terms and conditions. Competition within the private sector should facilitate this, and not constrain.
I found the differentiation between the Indian State and Indian private-sector FDI very revealing indeed. Same differentiation can be made between the Nepali State and Nepali private investors/NRNs. I believe paying attention to such subtleties might open new doors in future.
I do not agree that donor aid and FDI are a trade-off. The European infrastructure model of the 1950s and the East Asian infrastructure model of the 1970s have one thing in common. They both mobilized donor credit (i) to set up market-efficient models which dissected public goods from private, and awarded commercially-managed contracts to competitive private bidders; (ii) to invest heavily on technology/knowledge-transfer as the projects proceeded; and (iii) to subsequently graduate from the donor credit by replicating the models internally for future ventures. Besides, more of Nepal's donor debt seems to come not from mega-infrastructure projects but from something less ambitious.
And the rest comes from paying for IPP-power that was never consumed.
I also do not agree that academics are a waste of time. Negotiation in big projects will come from number-crunching, than from lobbying/linde-dhipi or abstract philosophizing. I am always impressed to see the academics in UK and US, for example, coming to aid of the governments in bargaining with the private sector. Nepal might be only beginning to wake up to it, but it is better late than never.
Meena Acharya:
(Comments on hydropower)
I am not very versatile in issues involved in technicalities of Hydro-power development in Nepal. As a political economist I see the need to develop Nepal's water resources speedily. There is no point sitting over it and let India develop all the water resources and have the claim of the first use. But that should not mean pawning all our water resources for perpetuity. We will learn by doing. We had a very bad experience with Koshi, Gandak and now Mahakali. Why is Mahakali Nepali side of the bund so high that water flows to Nepal only during rainy season? Why did we renew the Sharada agreement without amendment when it expired? Why do we always get hoodwinked? Are we able now to negotiate with more technical knowledge?
Should not the political parties cease to make it an issue of party politics? What do we do with the demands like that India should pay for the Nepal's share of water it uses, until Nepal can use its entire share? The water is flowing any way. To me it seems Nepal needs to ensure only that it can use its share when it wants.
Will bringing in the Indian private sector make the Indian investment to Nepal's
need more responsive? Our experience with the Indian State has not been happy.
How far the Indian State is willing to change? Once these issues are sorted out, technical questions, environmental issue etc. can be solved easily. But given Nepal's terrain, investment capacity, and difficulty in network expansion due to terrain, perhaps smaller projects should be supported actively for rural consumption in the Hills, while a few larger projects taken up both for export and Nepal's industrialization and transport
development.
Bhuban B Bajracharya:
(Comments on Alok Bohara’s posting on education, made on February 21, 2007)
I agree with Prof Bohora on the need for Education Trust Fund. There are certain disciplines such as medicine which have become simply expensive beyond the reach of even middle income families. We need to introduce various funding mechanisms to facilitate access of students from disadvantaged and low income brackets to the education opportunities particularly higher education.
Private sector is coming up in many spheres of education including those in teachers' training and vocational and skill development. There again comes the role of government in PSD in education - that of ensuring standards and quality, once again a question of having well regulated system. With foreign employment expanding and its importance not waning in foreseeable future, vocational and technical education can be promoted for the skills required for such foreign employment.
With increasing number of educational institutions providing foreign degrees in the country (such as Cambridge A syllabus)and definitely they being in the private sector, there is a group strongly pledging to stop this practice to protect the national education system (SLC, national university degrees etc.). I think we can deliberate in some of these interesting issues.
Sujeev Shakya:
(Comments on Mallika Shakya’s posting of February 21, 2007 on hydropower)
We have to perhaps agree to disagree. Markets and market economies have distortion, as there is 'profit' involved unlike 'tax payers subsidies' in case of state owned projects and enterprises. Definitely people working in Surya Nepal are better off than their compatriots in Janakpur Cigarette Factory, and pilots of private airlines are paid more than the state carrier. This is a reality that perhaps we have to live with.
If we have no problem in allowing fish which is a byproduct of water to be traded freely, why do we have problems in ensuring private trading of electricity which is a by-product of water?
Perhaps, Nepali hydropower have not been able to take off as the people who think they have solutions for this 'business of hydropower' are not investors, but people who continuously make it an issue to study and compile reports and do workshops. They can point out what is wrong but not come with a concrete solution. As I mentioned in my earlier deliberations also that such people for the past couple of decades belching different formulae have landed Nepal into darkness.
The issue is of action and taking risk! Perhaps apart from the private sector there are none to take this 'risk' as they look for the reward for the institutions unlike the 'rewards' that public sector projects bring to individuals who are bestowed strategic positions. If Nepali hydropower is to be harnessed, the options are either to take grants and deliver expensive projects to the economy and create more debt on the average Nepali, or to allow private entrepreneurs to take risk and get it going with at least one project. Else even in 2017 we will still be having the same deliberations now that are not different than what we were having in 1997!
Re: Chilime prices and newspaper reports, we an ask NEA a public utility to make the prices public. Of course if we go by the newspaper reports on various hydropower projects, one can end as confused as one started with.
Keshav Upadhyay:
(Comments on postings of Ambika Adhikari and Sujeev Shakya on hydropower on February 21, 2007)
I agree that we have to have some sort of understanding with Indians for the development of hydropower in a big scale. But are they interested? I am asking this question because despite Parliament's ratification of Mahakali treaty nothing has happened. There is a school of thought in Nepal which says that Indians are interested in river treaties, more for water than power. They can have power from other sources, but their problem in the foreseeable future is the availability of drinking water.
Sujeevji is right that there are not many possible investors and we should give every opportunity to those who really want to invest in hydro power in Nepal, but there are about fifty applications pending in NEA for Power Purchase Agreement (PPA). Developers are running from pillar to post for PPA. Nothing happens. Recently I had an opportunity to go to NEA to discuss with NEA people about the energy rates for a hydropower project to be developed by one of my friends. It was a heated discussion that ensued. Ultimately managing director of NEA closed the discussion telling the developer that they should wait for about a month since NEA right then was engaged in an exercise of review of energy price. He hinted that the energy price they had offered for the plants of capacity of 5 MW or less could come down. Apparently there is a glut of investors. Could Merchant Power Stations without a legally binding power purchase agreement be built in Nepal? Would anybody invest in it? There was a small mention (in the meeting) about energy price of Chime. It is at par with Khimti and Bhotekoshi, even a little higher, though I am not quite sure about it. But Chilime people would hotly deny it. They would say that since NEA owns 51% of the equity in Chilime, NEA does get a very good dividend, and so if you take that into account the effective rate, it would be much lower than Khimti or Bhotekoshi's.
Posted by Vijaya R. Sharma | February 23, 2007 1:16 AM
Posted on February 23, 2007 01:16
e-Seminar Title: Nepal PSD
Subject: Education, Maoists’ Vision, Hydropower, State Regulation and FDI – Summary of February 21, 2007 Deliberations
Contributors: Alok Bohara, Jagadish Upadhyay, Mallika Shakya, Ambika Adhikari, Vijaya R. Sharma (Editorial summary by Vijaya R. Sharma, Co-Moderator)
Date: Feb 21, 2007
Ambika Adhikari:
(Comments on Hydropower and FDI)
Sujeev Shakya's de-licensing proposal is innovative. India has experienced the dramatic improvement in economic output as a result of scrapping the license-Raj for industries since the 90's. However, in Nepal 's case hydropower sector is not a normal industry. It has deep security implications. In fact, this sector has been the bone of contention between India and Nepal for a long time. Many in Nepal feel it is the only tangible and realistic potential we have for our economic development. Nepal does not want to give that up so easily, but use it towards leverage whenever we wish to bargain with India. This psychology has cost us money and time, as the water continues to flow without being tapped for power.
I remember what Chandra Sekhar told a group of prominent Nepalis in the 90's when he was the Indian Prime Minister. His statement was something like "I heard about your hydro potential and India's power need when I was a teenager, I heard the same thing when I was a MP, and I am hearing the same story now I am the PM. You will not develop it yourself, and you will not allow us to develop it for you. You will remain poor, and you will also cause us to remain poor". This was frustration from a very powerful man, who could not break the barrier of mistrust Nepalis have for any Indian initiated development of our most coveted resource.
We need to let go of the mistrust with India and play with them on pragmatic level. While we must maintain control of the national priorities, we must work with Indian and other foreign investors on mutually beneficial grounds. We can not sit on the hydro-potential for ever. Nepal should also be very clear on what it wants. There will be cost of development. There will be loss of some control when you do a big trade. There will also be social perversions and environmental degradations that will accompany hydro development. We must assess them carefully and accept some costs.
Also to respond to Sujeev jee's assertion about shortening environmental assessment procedure, I beg to disagree. Nepal's geology is very fragile, its bio-diversity highly vulnerable, and the rural population powerless to block large developments. In fact, in the equation of power development, the local communities lose the most as the power is transmitted to urban areas and possibly to India, leaving the local communities to bear the brunt of the environmental damages, while most of the time not even getting any power. Even when power may be available, they can not afford the price.
During the late nineties, I was involved in the socio-environmental impact management of the Bhotekoshi power project during its developmental phase. I remember how the locals lost precious amenities, how their houses were creaked due to blasts during construction, and how they were displaced from the places of their adobe. The only gains were that some villagers got the menial jobs temporarily. I strongly believe that socioeconomic and bio-physical impacts of the large hydropower projects should be rigorously prepared, actively mitigated, and regularly monitored. State's regulatory roles are critical in this phase.
Mallika Shakya:
(Responses to Sujeev Shakya’s comments on hydropower and FDI, which may be read under February 20 deliberations)
The policymakers and private sector leaders must disseminate the right information on hydropower projects so public thirst for information is quenched. Let me explain. I grew up reading in my textbooks that Nepal is the second largest source of hydropower in the entire world. As a grown-up, I now find my father taking early retirement from Nepal Electricity Authority (NEA) because of its budget crunch while my sister earns a 100% bonus from Statkraft. I do wonder what went wrong -- isn't this precisely the kind of 'inefficiencies' the 'market' was supposed to have taken care of?
I understand very well that alternative investment opportunities are high in advanced economies which skyrocket their net present values (NPVs) and make least developed countries’ state guarantees less attractive. One solution might be to accept this at the face value and go with high NPVs factored in. But another solution might well be to seek local and regional funds which are the victims of the same evil. You rightly pointed out that Nepalese sit in a plot of land for years without building on it. Does this not, at least in principle, give a local visionary entrepreneur an opportunity to develop a local/regional hydro fund?
There also need to be a good enabling environment for a project to function, competitive bargaining platform to reach price equilibrium, and guarantee of property/profit rights to be able to commercially sustain. Other countries are surely mobilizing donor-granted cheaper money to lend to domestic power investors at commercially competitive rates while setting aside public funds for intangibles. Nepal's decision to go straight to IFC might be commercially sound, but IFC also has a 'frontier market division' who are interested in doing business with frontier economies like Nepal and they offer better terms and conditions. They are just not as close with the political power-holders as they should be.
FDI is directly connected with technology transfer. If we missed the technology lessons on how to build it locally next time -- they call it 'the Chinese lesson' -- we wasted our opportunity in real terms. This is where the State has a role. This is where the State should have a role, regardless of whether it is Red or Blue, at a point of time.
Mallika Shakya:
(Comments on the Maoists’vision)
I agree that there is policy uncertainty regarding the Maoists’ vision, but I disagree that this should remain an overwhelming issue. Should this ambiguity not allow the policymakers a good pretext to assert their vision before they are pre-empted by either ultra-leftists or ultra-rightists? It is absolutely right that a debate on Maoism-vs-Capitalism is a non-starter. However, if we go a step below, it is not so black-and-white. It is largely about technical coherence of institutions, regulations and incentives. For
example, if we want to develop niche products, which have been our competitive advantage throughout both Panchayat and Bahudal; the recipe does not necessitate a philosophical debate on left-vs-right. It is about ensuring that we develop effective certifying and market promotion agencies; avail appropriate financial instruments for transactions to happen; allow collaboration/innovation economics; develop a smooth supply chain.
Jagadish Upadhyay:
(JagadishJee has contributed the following responses to MallikaJee’s comments on the Maoists’ vision, which may be read in “February 19 deliberations.”)
Unfortunately, the Maoists have said different things to different audiences and in different forums. Therefore, while we should hope for the best for PSD and for overall economic growth development following the experience of other countries, "policy uncertainty" should remain as an overwhelming issue until we see convincing evidence of their policy.
Alok K. Bohara:
Historically, education has been the best equalizer in many societies. Even the world capital of free market, America, provides free education up to the high school level for all of its citizens: rich, poor, whites, and non-whites. In Nepali case, despite much progress in the private education sector in the post-1990 democratic era, a dangerous segregation is taking place between the rich and the poor in the education sector. Wealthy families have access to high quality education offered by expensive private schools and colleges, whereas a vast majority of poor and disadvantaged students are stuck in the ailing public education sector.
The new government’s attempt to chart a new educational strategy is a welcome sign. But, in the name of reform, imposing quotas, price control or nationalization will all be counter productive, and these overly restrictive regulations (especially banning or nationalization the private educational enterprise as proposed by the Maoists) are not the answer. The recent governmental ordinance, for example, requiring students to seek governmental permission from the Ministry of Education to go abroad for studies is an example of populist desperation rather than a sound policy prescription.
In addition to having a capital flight to India, such policies will also deteriorate in-school services. It will discourage innovations and Nepali ingenuity in the production of education, which has been a hallmark of the post-1990 democratic era. The point is that a healthy private sector can be constructive in helping the public sector, and in my recommendation, I am drawing upon my proposal which argues for a trust fund to strike that balance.
The proposed system of trust fund uses five percent tax from the total revenue generated by the private schools and colleges (i.e., all higher institutions). There are 1.5 million students in eighty-five hundreds private schools, and 70,000 students go to about 250 private colleges. Using a conservative amount of Rs 1,500 as a monthly charge, the five percent tax revenue will yield about Rs 1.413 billion for the trust fund. The second portion of the trust fund relies on a ten percent levy –about Rs 1 billion-- from the sin taxes on alcohol, tobacco, and casinos. [These are good faith guesstimates.]
Jointly, the five-plus-ten tax system can raise Rs 2.413 billion worth for the trust fund. Both sectors, being on the target list of the Maoists, should not mind contributing five and ten percent of their revenues respectively to this noble cause. In return, the government and the agitating student organizations should not be imposing too much unfair regulatory controls on them. The proposal then argues for allocating these monies to the graduates of the public schools for their higher level education (including vocational trainings.) and vocational trainings.
Vijaya Sharma:
On February 19, 2007 Mr. Bhuvan Bajracharya contributed his views on PSD in social service sector. It is a common knowledge that political parties have used schools and colleges as a training ground to groom young party activists. In addition, the Maoists have heavily interfered in the past years with the operations of even secondary schools and have argued for nationalization of primary and secondary schools.
Perhaps the most important criterion of measuring success of PSD in Nepal (at least in the near and mid-term) would be its impact on employment generation. For this, our educational system should be able to produce human resources that serve the need of the private sector. To better match supply with demand, I have argued for active involvement of private sector in developing and running a system of post-secondary vocational and training schools for producing mid-level technicians (read my views on this in the website of this seminar posted under “designated discussants’ comments”).
Participants with insights into the educational sector of Nepal could enlighten us with their valuable perspectives on the role of the government in promoting private sector participation in expanding schooling and educational system in Nepal.
Posted by Vijaya R. Sharma | February 23, 2007 1:15 AM
Posted on February 23, 2007 01:15
e-Seminar Title: Nepal PSD
Subject: Hydropower, State Regulation, and FDI : February 20, 2007 Deliberations
Contributors: Sujeev Shakya, Mallika Shakya, Ambika Adhikari, Keshav Upadhyay, and Vijaya Sharma (Editorial Summary by Vijaya R. Sharma, Co-Moderator)
Date: February 20, 2007
Sujeev Shakya:
Talking about hydropower and bashing Independent Power Producer’s Bhotekoshi and Khimti has become nation’s favorite pastime. All the people who earned donor dollars to crib against the private developers in the past ten years could not suggest alternatives; therefore, Nepal is back reeling under power shortages. While we talk of private investment in hydropower, we talk as if we have zillions of people lining up to invest in Nepal. Contrary to that, it is difficult to find investors in the hydropower sector. Only 15 hydropower projects have financially closed in the past decade and a half out of which two are in Nepal. Price is determinant on cost of production. Nepal is not credit rated and therefore getting financing for Nepal is utterly difficult. When the financial closing for Bhotekoshi was underway, 63 banks rejected the proposal despite being led by a multilateral like IFC and had a dollar based PPA. The guarantee of countries like Nepal which people presume to be part of selling national sovereignty is a piece of paper and many guarantees globally have been meaningless. Private power producers need to pay for insurance, legal costs and interest during construction. We always compare these costs with NEA developed projects like Kali Gandaki and now Middle Marsyangdi where there are neither elements of interest factored nor any financial considerations on account of delay factored in. If we take both into consideration many studies have shown that Kali Gandaki is perhaps more expensive to the economy than the IPPs. The fact that Chilime, the NEA promoted company has a rate that is close to the IPP rates perhaps reflects on the fact that if we have to assume that there is cost to money and money is not free and there is a concept called time value of money and delays do not amount to cost, then the rates paid to IPP are close to the real prices. If we continue to harp expensive power by comparing oranges with apples then we will land up writing many seminar papers, but Nepal will continue to reel in the dark. It is like complaining about foreign airlines that charge dollar fares that ferry Nepalis outside Nepal taking business away from our national flag carrier!
If NEA has bled on account of exchange losses by paying dollars rates to Bhotekoshi and Khimti, it would be interesting to see the balance sheet improve this year when the dollar rates have actually come down making the prices of Chilime and Bhotekoshi the same.
In the power sector we need more radical reforms to look at the scrapping the system of PPAs and survey licenses and shortening Environmental Impact Assessment timeline. There is a demand in Nepal and India, there are projects that can be developed, leave the rest to the market. People are sitting on survey licenses (bestowed upon by political masters) for years and like sitting on plots of land and not building houses they are trying to encash on the premium. Scrap the licenses, let merchant power plants who can manage risks come up with power, they will find the market themselves. The transmission lines have to get to a special purpose vehicle owned by the state and let everybody use it like they can use the road by paying tolls. Let distribution be managed by municipalities who know the customer better and cut debtors. Let private sector be just allowed to build generation plants. If we take the potential of 40,000 MW to sell at 5 cents a unit based on current estimates, it can fetch $ 150 billion plus revenues. We need to re-engineer our thinking.
Mallika Shakya:
Is power not a single unit but multiple and eclectic? It's commercial components might include core components of power generation, but its infrastructure components surely include the public goods of roads and transmission lines. But in today's financial sophistication, it should well be possible to differentiate the treatment of these two components so that we avoid the dilemma of subsidization versus capitalization.
To take one example, from Bangladesh, the power finance facility, first, set up a public fund (through govt., multilateral and bilateral donors). They then dissected this into two sub-components, each managed by different entities. The first subcomponent was managed by the government: First, it developed an eclectic (as opposed to 'thick') infrastructure plan based on social-cost-benefit-analysis (as opposed to financial CBA). Second, the plan mobilized the donor support to award contracts to private bidders on a competitive basis. Since the fund was based on the local currency, bidders were either local companies or were sufficiently locally grounded. The second subcomponent was a purely commercial credit which was managed by a commercial financial institution for commercial remunerations on commercial principles.
I am not too sure that Nepal's current hydro loss is coming from the subsidization-vs.-capitalization dilemma. I think a larger factor might be the problem that the one component was never sufficiently dissected and differentiated from the other. We cannot ignore the importance of mini-calculations and comparative bargains from within the country and within the region. Penny-crunching seems to be the name of the game in such projects although this might be idealistically a bit sad.
Ambika Adhikari:
Hydropower development in Nepal has long been held as a panacea for Nepal's economic development. The government and foreign-aided hydropower development have not been that successful, both due to large per unit cost (construction inefficiencies, graft), and problems of maintenance. Since 1992, the private sector development of the hydropower was seen as the best approach to utilize Nepal's most important economic potential while utilizing the private sector efficiency. There lingers a vast controversy on the modalities of these investments. Although the previous few private power development were carried out by the US, Australian, Chinese and a few other companies, the most successful ventures have been the ones organized by the Nepali investors.
The most recent private hydropower development projects are almost all proposed by Indian or Indian-Nepali joint investors. This is an interesting change and merits a careful review. The Indian companies are perhaps, best suited to operate in Nepal due to their proximity, cultural and economic understanding of the Nepali situation, and relatively low cost of their professional and other costs. More importantly they are in the best position to negotiate Indian market for Nepal generated power. However, Many Nepalis are long concerned about the possible compromise of national security, and monopsony by the Indian state in the development of Nepal 's hydropower. Also, Nepal wishes to diversify its investor's list, and wishes to attract non-Indian investors in the power sector to obtain foreign technology and also to counter the enormous Indian influence in Nepal.
Keshav Upadhyay:
The problem with hydropower is how you treat power in the economic schema. Do you take it as an essential part of infrastructure, or is it a commodity like say a pair of shoes? There are two sides, both equally important. First one is of course the need for investment, where does the money come from? If you give a handsome return to the investors, investment will surely come. But then the price of energy will go soaring high. Can you allow that? What would be the impact in the macroeconomic sphere if you let that happen? It is here that I think there is a need of serious intervention by the government. If you are clear about it color of the cat is not important.
Vijaya Sharma:
The discussions on February 18 and 19 mainly focused on power sector in Nepal,
especially Nepal's bitter experiences with FDI in Khimti and Bhotekoshi projects, the limited investment capacity of the national private sector, the problem of red tape and corruption discouraging private investment, the severe crunch of power shortage in the country, and the potential loss of comparative advantage in the South Asian energy market if investments on power sector are further delayed. At this time it is being hotly debated in Nepal, as to what would be the most appropriate investment modality for Tamakoshi: FDI, national private sector, or state investment through the Nepal Electricity Authority.
Should Nepal target Indian investors? Should the government extend loan guarantees and/or subsidized credit for large power projects to promote national private investment? Should the government directly engage in investing in power? What kind of policies and strategies should the country undertake for producing and selling power to the domestic market and also for exporting to India and the South Asian region?
Posted by Vijaya R. Sharma | February 23, 2007 1:13 AM
Posted on February 23, 2007 01:13
E-Seminar Title: Nepal PSD
Subject: Hydropower, Cultural Capital, and Political-Economy – February 19, 2007 Deliberations
Contributors: Alok Bohara, Mallika Shakya, Bhuban Bajracharya, and Vijaya Sharma (Editorial Summary by Vijaya R. Sharma, Co-Moderator)
Date: February 19, 2007
Today’s deliberations covered three subthemes – hydropower, cultural capital, and political economy, which are separately summarized below.
I. Deliberations on Hydropower
Alok K. Bohara:
We already saw in previous comments of Mallika Shakya and Keshav Upadhyay some hints of problems in Nepal’s hydro sector: regulatory delays, adverse price effect on local consumers, political instability, corruption, etc. I do not know what the answer is for our own internal housekeeping, for example, for or against FDI and/or expediting the regulatory process. But, the rising economic super power –India—is not certainly waiting around for Nepal to be the source of its energy needs. Any unnecessary regulatory mechanism to slowdown FDI in the hydro sector will hurt us from becoming a player in the emerging regional energy market. I am sure that the Indian economy’s double digit growth and its rising energy consumption need have not gone unnoticed among the policy makers in Nepal. Pakistan is another potential market, and between the two of them, the South Asian region could be a vibrant market for energy exports and imports.
India has already begun to look into its insatiable energy need from a larger regional perspective, and Nepal may or may not factor into this equation. The choice is ours to
make. From this perspective, the state’s role is vital in developing the necessary groundwork to make us competitive in this vast energy market. To that end, making
government actively involved in the FDI regulation may prove to be counter productive. India has increased its involvement in Bhutan’s hydro sector, and is looking to import gas and electricity from Bangladesh and Myanmar. India is also looking to invest in a coal plant in Sri Lanka.
On the western front, Pakistan, Afghanistan, Tajikistan, and Kyrgyz Republic are assessing the prospect of exporting about 1000 MW of hydropower from Central Asia to
South Asia with the possibility of importing gas from Iran and Turkmenistan. With a population of 1.5 billion people, this region (including SAARC) could be one of the largest markets for energy consumption. Thus, the regional trade in energy is not a distant hypothetical fantasy anymore. Within a decade or so, we may be seeing regional grid
sharing and power trading all across the sub-continent.
Can Nepal afford not to join this regional energy market? What export policy does Nepal need to facilitate such an option? What can we learn from Bhutan? Should we be focusing on Indian private ventures for our hydro developments? What could be an efficient energy trading model?
II. Deliberations on Cultural Capital
Mallika Shakya:
While I totally agree with being cautious and preventing gender/ethnic inclusion from distorting the market, yet cultural capital can be a real potential for Nepal where branding the cultural/geographic products (handicraft, tourism and speciality goods like tea, coffee and carpets) for global niche markets is one of the most promising avenues for international competitiveness. At the moment, Nepal does this task haphazardly and is not very successful at it. One example comes to mind is that of a Bahun and a State bureaucrat trying to sell the ancient Sherpa heritage to elite culture connoisseurs without knowing one Sherpa word. The same Bahun can do it much better only if he is prepared to invest a couple of years learning about the Sherpa culture/history and another couple of years understanding the international clientele he is trying to serve.
Let me state another small example. One of the most important of Nepal's export is traditional handicraft. Here, by being ethnically insensitive, the State is losing out a lot. Over 85 per cent of the members of the Handicraft Association of Nepal (HAN) are Newar traditional artisans. But, their programs for developing international certification, copyrights and marketing are extremely haphazard, because the State does not appropriately recognize ethnic skills. The State definition of 'expertise' ends at formal mainstream school education. As a result, a superb master of statue-making fails to get government accreditation as a trainer/certifier if he/she does not have a diploma, although that is irrelevant for the area of expertise. What this has meant then is that a secretive, uncoded, monopolized, and hence rudimentary system of accreditation tightly controls the statue-making enterprise, which is a total loss for both the artisans and the State. The government can solve such a problem by offering more ethnically nuanced accreditation/training system, which on the one hand, will lead to formalization and hence wider access to ethnic skills, and on the other hand, will lead to better recognition to ethnic identities in society.
India has developed very sophisticated classical art academies which give credit to the masters of those arts, while giving a wide range of people access to those arts. Classical arts have helped tremendously in building an international brand of India and in marketing of not only specialty goods such as tea and herbs but also 'heavy' products such as Indian airlines and IT services. Cultural capital is very much part of the India brand.
I also believe that exploiting the potentials of cultural capital is healthier than a myopic focus on distribution at the expense of economic growth. While societies will continue to negotiate the shares of the pie, I think it is also important that each share also contributes creatively towards making the pie bigger.
III. Deliberations on Political Economy
Bhuban B Bajracharya, Lead Researcher, Technical Review of School Education, ESAT/DANIDA:
The new political development has increasingly put the PSD under uncertainty. Though there is a realization that private sector is necessary, the likely inequality is taken as a political ploy for its rejection to backstage. Thus, there is also a need for strong analytical article showing enough evidence that the overall inequality does not negate the equality well at the higher level even for lower quintile groups ensuring better livelihood status. Further, the social protection measures compensate for and ensure the social service delivery reasonably at the higher level. The service delivery could even be better than that in socialistic economies. PSD also needs to highlight the public private partnerships in social service delivery so as to impress upon the general public that the profit motivated private sector will not leave the social service delivery behind. They are very much essential to be highlighted to stop the temptation to go for direct service delivery by the government machinery rather than through more market friendly measures.
Successful PSD assumes the existence of well developed regulatory system, and the role of the government’s role in evolving such a rule based system needs to be highlighted to impress upon the populace that the government is not sitting silent and doing nothing before the market forces. It will give an impression that the government is fully aware of the concerns of disadvantaged communities and poorer section of the society and only thing is that such policies are to be market friendly. Let the government be smart enough in giving the message strongly that unleashing the private sector does not and will not lead to overlook the concerns of poorer section of the society.
The dislike for private schools and colleges in the name of more equal education (or equal opportunity to the education facilities) and in the face of limited public resource availability speaks these confusion and contradictions. Despite private schools sharing the obligation of the government in the drive for universal school education, in the absence of strong and effective regulatory mechanisms, private schools are also despised for brewing inequality in the society. How do we address this issue in the role of government in PSD?
Alok K. Bohara:
The Maoists have outlined their economic agenda and the corruption control has become one of their priority fields, to be followed by the radical land reform, and the regulation of the FDIs. Like everyone else, they also see hydro and tourism as our comparative advantage. They also profess a mixed economy, but with a protectionist flavor. However, I would like to focus on the corruption issue and provide some comments.
While speaking of the private sector development and the state’s role, the issue of transparency becomes a natural topic of focus. The newly passed Competitive Bill (February 2007) seems very comprehensive in its scope covering numerous angles such as, tied selling, bid rigging, cartel, collective price fixing, market restrictions, dial-system, market segregation, undue business influences, syndicate and exclusive dealing. The government must be congratulated for the announcement. But, it looks like a daunting task, and it will not be cheap. It will involve a sizable workforce to detect violations. The legal cost of prosecution will also have to be figured into the total enforcement cost. The stipulated fines of Rs 10K, Rs. 25K, Rs. 100K and even Rs. 300K don’t seem severe enough, and are most likely to be internalized as a part of cost of doing business and will be passed on to the consumers in the form of higher price. Furthermore, these regulations are also likely to increase the rent seeking behavior of the government employees and increase the opportunity for corruption. The Competitive Bill needs to be equally matched by the other corruption control measures and transparency measures. A city like Bangalore, for example, reduced its low level rampant corruption by 30-40 % within a year or two by simply creating barriers between the “public” and “the clerks”. For example, Instead of making the public stand in line to get government services (e.g., paying bills, registration renewal), the government instituted the envelop drop-in system. This type of e-governance system diminishes the contacts between the public and “the clerk-babus” and thus reduces the opportunity for bribery.
Advanced market economy like the US is also not immune to malpractices in government contract deals. Consider the following data: Of the $380 billion government contract dollars in 2005, 20-30%, were rewarded without any genuine competition. But, unlike in a country like Nepal, there are civilian oversights of these activities, which include hearings at the congressional level. In 2005 alone, the Public Corruption Program convicted 759 cases out of 890 indictments. It is quite routine event to see the congressmen convicted and put in jail. Even the all-mighty Enron was brought down to its knee. Over 1000 government employees were convicted by the FBI just in the last one or two years. Thus, it would be useful to find out how the procurement practices are carried out at the government level in Nepal. How transparent are these bidding practices? Do we have any civilian oversight? Do we have any whistleblower law in Nepal? It would also be interesting to find out about the internal bidding mechanism of the government tender.
Mallika Shakya:
This article in Nepal Weekly by Rishikesh Dahal might be of interest to the participants on Maoist vision on PSD for New Nepal: http://www.kantipuronline.com/Nepal/artha.php
This article reports that the Maoists commit to: (i) a mixed economy with individual rights to profit; (ii) transparency and corruption control; and (iii) revolutionary land reform (including scaling/upgrading of co-operatives). Sectorally, they seem to have picked up hydropower and tourism as potential growth-bearers and connectivity (e.g. an ambitious east-west highway in the Mahabharata region) as a primary developmental goal on PSD. This shows signs of welcome pragmatic improvisations on Baburam Bhatterai's 'red' vision 12 years ago. 'Old wine, new bottle' might be too much of an expression, but save some logistical differences in modalities, a Maoist PSD agenda might not really be 'the new broom' either, which should actually leave policymakers a small space for policy maneuvering in the coming days.
Vijaya Sharma:
Nepal has indisputably experienced a shift towards left in the political balance of power, with the emergence of the Maoists as a big political force. In the changed political context, the designated discussants have raised concerns that the mainstream political parties, especially the Maoists, have not clarified their vision and economic agendas for the New Nepal. Will the economic liberalization that began in 1992 continue? What would be the parties’ approach to private sector development?
What direction should the private sector development (PSD) take in Nepal, especially on the general pitfalls that Nepal should avoid in the areas of protection of private property rights, treatment of FDI vis-à-vis domestic sources of investment, the issue of social and gender inclusion in private enterprises, level of protection of domestic industries, and promotion of competitive business environment?
Posted by Vijaya R. Sharma | February 23, 2007 1:11 AM
Posted on February 23, 2007 01:11
e-Seminar Title: Nepal PSD
Subject: Hydropower, State Regulation and FDI – February 18, 2007 Deliberations
Contributors: Mallika Shakya and Keshav Upadhyay (Editorial Summary by Vijaya R. Sharma, Co-Moderator)
Date: February 18, 2007
Mallika Shakya:
I totally agree with Keshav Upadhyay in almost everything he says. Nepal has a generation of young people who have been brought up with the belief that Nepal is one of the richest sources of hydropower, only to discover later that FDI in our hydropower has left us poorer than before, while the same hydropower has comfortably doubled the GNP per capita for Bhutan.
Private sector investment is sorely needed for hydropower, but some of the initial experimentations seem to have gone so bad that unless the State corrects this serious market distortion, it thwarts hydro-FDI potentials considerably. The solution to this, in my opinion, is not to abandon FDI but to change its modality. FDI does not automatically instigate competition among investors nor does it entail automatic technology transfer. As I mentioned in my paper, the contrast between the FDI in China and Africa shows that FDI is not a natural panacea, it must be forced and tailored into delivery of technology transfer and cost-efficiency. Have we made efforts to learn from experimentations in South and East Asia on this? For example, Bangladesh has recently set up a Power Facility where the State (or donors) will provide guarantee and extend subsidized credit for the public infrastructure goods with longer gestation period while the commercial/competitive private investment would be sought for the power generation and distribution at sustainable rates. This might actually encourage domestic private sector investment vs. FDI at least in some areas. This might actually also revitalize the banking system if done well.
The success or failure, again, will lie not in 'thick' modaliy, but in subtle calculations and modeling. This is where I put the question back to the commentator as well as others in this forum who have dense experience in this area. What are the precise lessons learnt from Nepal's few experimentations in this area? Which are the specific areas where expertise is lacking within the country? How can they be fulfilled? Who can help Nepal strengthen its skills? Some donors? Strong business consultants? Non-resident Nepalis with technical skills? Technicians within the country?
Keshav Upadhyay, Engineer, Nepal Electricity Authority (NEA):
Mallika Shakya has written a lucid essay on the issues relevant for drafting a workable strategy of Private Sector Development (PSD) in a transitional Nepal. She has pointed her finger at the interventions required to address the "ethnic and gender concerns without self destructive compromises on market rigor". Since the redress of ethnic and gender concerns would definitely distort the market in some ways it is here that I am not comfortable with her prognosis though I would very much like to agree entirely with her because the concerns are genuine. It is not that there is any argument with the politico-economic agenda of inclusive democracy; it is the question of strategy which is a matter of debate. Though the country's politics has visibly veered towards far left, there is no point in developing a strategy of PSD for an extreme left regime that would give no role to the private sector. A realistic PSD strategy has to dovetail into the socio-economic agenda of the liberal left; otherwise the whole exercise could turn into idle play of words. Small pillars of the economy like micro credit and cooperative initiatives, I am sure, would fit seamlessly into the new scheme of things, so the stress would naturally go in that direction. But, as the author has rightly stated, there are some sectors where inducing
bigger investments would require a totally different approach.
To take an example, Nepal has seen the inflow of foreign direct investment (FDI) in the sector of electricity generation (the 60mw Khimti from Norwegian Statkraft and the 36mw Bhotekoshi from Panda Energy of USA), and this has vitiated the market in such a way that FDI in power sector has now become an anathema. They have been instrumental in raising retail electricity rates to the extent that a further rate increase would never be
politically acceptable. If, however, the retail rates are not raised, the Nepal Electricity Authority (NEA) would go into financial bankruptcy.
In fact, so far as FDI in the power sector is concerned, everything which Ms. Shakya warns against has happened here. It has distorted the price, and is neither cost effective nor market friendly. NEA is very apprehensive of entering into new power purchase agreements because of its bitter experience in the past. Therefore, not enough investment from the private sector is coming into this sector. NEA has been continuously in the red for half a decade now and is, without a surplus, not in a position to invest. The government, on the other hand, does not treat electricity as infrastructure but rather as a commercial commodity, and recent utterances of the finance minister confirm this. The only option that remains is the national private sector which is also hampered by archaic rules and regulations unfriendly to investment.
To give an example, it takes almost two years for a power project to get a clearance from the environment ministry after submission of the Environment Impact Assessment (EIA). Two years is an average period. There have been cases where some procedural reasons force the whole assessment exercise to be repeated. Secondly, the size of investible funds may be difficult to mobilize. My estimates indicate a figure of nine billion rupees that
must be invested annually to meet the rising demand of 60mw per year. Is our banking system capable of lending this amount of money where the return on investment starts trickling in only after five years at the least? Meanwhile the country is reeling under a severe power crisis leading to a blackout of six hours per day for we don't know how
long.
I wanted to show with examples from the power industry that when the economy is too immature, the entry of private sector does not automatically bring in the benefits that are classically attributed to it. Resources may not get allocated to the sector where there is a
possibility of maximum gain, at least in terms of the social rates of return, or prices may not stay high enough to sustain investment at a desired rate. The author's instincts, though, are in the right place and I entirely agree with Ms. Shakya that the political
economy of new Nepal would lie somewhere between capitalistic anarchy and a rigid central planning of a socialist state. In such a framework for development, the role of state cannot be minimal.
Posted by Vijaya R. Sharma | February 23, 2007 1:08 AM
Posted on February 23, 2007 01:08
e-Seminar Title: Nepal PSD
Subject: Hydropower, State Regulation and FDI
Contributor: Ambika Adhikari
Date: Feb 21, 2007
Sujeev Shakya's de-licensing proposal is innovative. India has experienced the dramatic improvement in economic output as a result of scrapping the license-Raj for industries since the 90's. However, in Nepal 's case hydropower sector is not a normal industry. It has deep security implications. In fact, this sector has been the bone of contention between India and Nepal for a long time. Many in Nepal feel it is the only tangible and realistic potential we have for our economic development. Nepal does not want to give that up so easily, but use it towards leverage whenever we wish to bargain with India. This psychology has cost us money and time, as the water continues to flow without being tapped for power.
I remember what Chandra Sekhar told a group of prominent Nepalis in the 90's when he was the Indian Prime Minister. His statement was something like "I heard about your hydro potential and India's power need when I was a teenager, I heard the same thing when I was a MP, and I am hearing the same story now I am the PM. You will not develop it yourself, and you will not allow us to develop it for you. You will remain poor, and you will also cause us to remain poor". This was frustration from a very powerful man, who could not break the barrier of mistrust Nepalis have for any Indian initiated development of our most coveted resource.
We need to let go of the mistrust with India and play with them on pragmatic level. While we must maintain control of the national priorities, we must work with Indian and other foreign investors on mutually beneficial grounds. We can not sit on the hydro-potential for ever. Nepal should also be very clear on what it wants. There will be cost of development. There will be loss of some control when you do a big trade. There will also be social perversions and environmental degradations that will accompany hydro development. We must assess them carefully and accept some costs.
Also to respond to Sujeev jee's assertion about shortening environmental assessment procedure, I beg to disagree. Nepal's geology is very fragile, its bio-diversity highly vulnerable, and the rural population powerless to block large developments. In fact, in the equation of power development, the local communities lose the most as the power is transmitted to urban areas and possibly to India, leaving the local communities to bear the brunt of the environmental damages, while most of the time not even getting any power. Even when power may be available, they can not afford the price.
During the late nineties, I was involved in the socio-environmental impact management of the Bhotekoshi power project during its developmental phase. I remember how the locals lost precious amenities, how their houses were creaked due to blasts during construction, and how they were displaced from the places of their adobe. The only gains were that some villagers got the menial jobs temporarily. I strongly believe that socioeconomic and bio-physical impacts of the large hydropower projects should be rigorously prepared, actively mitigated, and regularly monitored. State's regulatory roles are critical in this phase.
Posted by Vijaya R. Sharma | February 22, 2007 2:18 AM
Posted on February 22, 2007 02:18
e-Seminar Title: Nepal PSD
Subject: Hydropower, State Regulation, and FDI
Contributor: Sujeev Shakya, President of Tara Management Private Limited, Nepal
Date: February 20, 2007
Talking about hydropower and bashing Independent Power Producer’s Bhotekoshi and Khimti has become nation’s favorite pastime. All the people who earned donor dollars to crib against the private developers in the past ten years could not suggest alternatives; therefore, Nepal is back reeling under power shortages. While we talk of private investment in hydropower, we talk as if we have zillions of people lining up to invest in Nepal. Contrary to that, it is difficult to find investors in the hydropower sector. Only 15 hydropower projects have financially closed in the past decade and a half out of which two are in Nepal. Price is determinant on cost of production. Nepal is not credit rated and therefore getting financing for Nepal is utterly difficult. When the financial closing for Bhotekoshi was underway, 63 banks rejected the proposal despite being led by a multilateral like IFC and had a dollar based PPA. The guarantee of countries like Nepal which people presume to be part of selling national sovereignty is a piece of paper and many guarantees globally have been meaningless. Private power producers need to pay for insurance, legal costs and interest during construction. We always compare these costs with NEA developed projects like Kali Gandaki and now Middle Marsyangdi where there are neither elements of interest factored nor any financial considerations on account of delay factored in. If we take both into consideration many studies have shown that Kali Gandaki is perhaps more expensive to the economy than the IPPs. The fact that Chilime, the NEA promoted company has a rate that is close to the IPP rates perhaps reflects on the fact that if we have to assume that there is cost to money and money is not free and there is a concept called time value of money and delays do not amount to cost, then the rates paid to IPP are close to the real prices. If we continue to harp expensive power by comparing oranges with apples then we will land up writing many seminar papers, but Nepal will continue to reel in the dark. It is like complaining about foreign airlines that charge dollar fares that ferry Nepalis outside Nepal taking business away from our national flag carrier!
If NEA has bled on account of exchange losses by paying dollars rates to Bhotekoshi and Khimti, it would be interesting to see the balance sheet improve this year when the dollar rates have actually come down making the prices of Chilime and Bhotekoshi the same.
In the power sector we need more radical reforms to look at the scrapping the system of PPAs and survey licenses and shortening Environmental Impact Assessment timeline. There is a demand in Nepal and India, there are projects that can be developed, leave the rest to the market. People are sitting on survey licenses (bestowed upon by political masters) for years and like sitting on plots of land and not building houses they are trying to encash on the premium. Scrap the licenses, let merchant power plants who can manage risks come up with power, they will find the market themselves. The transmission lines have to get to a special purpose vehicle owned by the state and let everybody use it like they can use the road by paying tolls. Let distribution be managed by municipalities who know the customer better and cut debtors. Let private sector be just allowed to build generation plants. If we take the potential of 40,000 MW to sell at 5 cents a unit based on current estimates, it can fetch $ 150 billion plus revenues. We need to re-engineer our thinking.
Posted by Vijaya R. Sharma | February 22, 2007 2:13 AM
Posted on February 22, 2007 02:13
E-Seminar Title: The Nepal PSD
Subject: The Private Education Sector: Creating a Trust Fund to Close Education Gap
Contributor: Alok K. Bohara, PhD, Professor, University of New Mexico
Date: February 21, 2007
Historically, education has been the best equalizer in many societies. Even the world capital of free market, America, provides free education up to the high school level for all of its citizens: rich, poor, whites, and non-whites. In Nepali case, despite much progress in the private education sector in the post-1990 democratic era, a dangerous segregation is taking place between the rich and the poor in the education sector. Wealthy families have access to high quality education offered by expensive private schools and colleges, whereas a vast majority of poor and disadvantaged students are stuck in the ailing public education sector.
The new government’s attempt to chart a new educational strategy is a welcome sign. But, in the name of reform, imposing quotas, price control or nationalization will all be counter productive, and these overly restrictive regulations (especially banning or nationalization the private educational enterprise as proposed by the Maoists) are not the answer. The recent governmental ordinance, for example, requiring students to seek governmental permission from the Ministry of Education to go abroad for studies is an example of populist desperation rather than a sound policy prescription.
In addition to having a capital flight to India, such policies will also deteriorate in-school services. It will discourage innovations and Nepali ingenuity in the production of education, which has been a hallmark of the post-1990 democratic era. The point is that a healthy private sector can be constructive in helping the public sector, and in my recommendation, I am drawing upon my proposal which argues for a trust fund to strike that balance. (A complete version of the proposal is attached).
The Trust Fund
The proposed system uses five percent tax from the total revenue generated by the private schools and colleges (i.e., all higher institutions). There are 1.5 million students in eighty-five hundreds private schools, and 70,000 students go to about 250 private colleges. Using a conservative amount of Rs 1,500 as a monthly charge, the five percent tax revenue will yield about Rs 1.413 billion for the trust fund. The second portion of the trust fund relies on a ten percent levy –about Rs 1 billion-- from the sin taxes on alcohol, tobacco, and casinos. [These are good faith guesstimates.]
Jointly, the five-plus-ten tax system can raise Rs 2.413 billion worth for the trust fund. Both sectors, being on the target list of the Maoists, should not mind contributing five and ten percent of their revenues respectively to this noble cause. In return, the government and the agitating student organizations should not be imposing too much unfair regulatory controls on them. The proposal then argues for allocating these monies to the graduates of the public schools for their higher level education (including vocational trainings.) and vocational trainings.
Posted by Vijaya R. Sharma | February 22, 2007 1:32 AM
Posted on February 22, 2007 01:32
E-Seminar Title: Nepal PSD
Subject: PSD in Social Service and Education Sector
Contributor: Vijaya Sharma, Co-Moderator
Date: February 21, 2007
In the last few days we have seen a number of valuable contributions made on few specific themes related to private sector development (PSD), namely hydropower and FDI, political economy and competition policy, and cultural capital. As a moderator of the e-seminar, I urge participants to expand deliberations on these and other themes as well.
On February 19, 2007 Mr. Bhuvan Bajracharya contributed his views on PSD in social service sector. You can read his views in: http://www.nepalstudycenter.org/eseminar/2007/01/eseminar_no_1_2007/index.html
It is a common knowledge that political parties have used schools and colleges as a training ground to groom young party activists. In addition, the Maoists have heavily interfered in the past years with the operations of even secondary schools and have argued for nationalization of primary and secondary schools.
Perhaps the most important criterion of measuring success of PSD in Nepal (at least in the near and mid-term) would be its impact on employment generation. For this, our educational system should be able to produce human resources that serve the need of the private sector. To better match supply with demand, I have argued for active involvement of private sector in developing and running a system of post-secondary vocational and training schools for producing mid-level technicians; read my views at:
http://nepalstudycenter.unm.edu/SeminarsWorkshopsConferences/e-Seminars/e-SeminarN012007/e-SeminarNo12007Papers/VijayaSharmaComments%20on%20ShakyaVer2pdf.pdf
Participants with insights into the educational sector of Nepal could enlighten us with their valuable perspectives on the role of the government in promoting private sector participation in expanding schooling and educational system in Nepal.
Posted by Vijaya Sharma | February 21, 2007 3:12 AM
Posted on February 21, 2007 03:12
E-Seminar Title: Nepal PSD
Subject: PSD in Social Service Sector
Contributor: Bhuban B Bajracharya, Lead Researcher, Technical Review of School Education, ESAT/DANIDA
Date: February 19, 2007
The new political development has increasingly put the PSD under uncertainty. Though there is a realization that private sector is necessary, the likely inequality is taken as a political ploy for its rejection to backstage. Thus, there is also a need for strong analytical article showing enough evidence that the overall inequality does not negate the equality well at the higher level even for lower quintile groups ensuring better livelihood status. Further, the social protection measures compensate for and ensure the social service delivery reasonab