BRIGHT ECONOMIC FUTURE OF NEPAL

By Janardan Dev Pant

Nepal's political parties and policymakers are making financial mistakes that have left the people in poverty, serious financial stress and feeling of helplessness. Nepal is experiencing immense challenges in transforming its social and business environment. Such transformation requires departure from outdated modes of providing dogmatic directions.  Everybody is suggesting that the need of the hour is good governance, awareness about and understanding of global and national economic business environment, strategic thinking and choices, formulation and implementation of proper policies, effective communication, digitization, and management of available human talent.  These all require an overall understanding of the fast paced changes of both the external and internal environment.

We have achieved lots of good things.  We have produced world class engineers, doctors, lawyers and bankers by liberalizing education, telecommunications and banking. Majority of them are working in the USA, Canada, UK and Australia due to the absence of right environment in Nepal. Due to this migration of talent, all the achievement made in the education sector has been useless in raising the living standards of 85 per cent Nepalis.  Common people are undergoing extreme socio-economic hardships without hope of any immediate relief.  This situation must not be allowed to continue. 

Nepal's market-oriented reform started in 1991 implied that those who lack the purchasing power will be marginalised.  People without money are as good as non-existent in the sort of market economy prevailing today.  It is the state's responsibility to take care of such citizens.  Failure to take care of such Nepalis, who are about 85 per cent of the country's population, is the key failure of Nepal's economic liberalization.The main reason behind this failure is our inability to use our existing resources properly. That is what is forcing us to live in poverty, serious financial stress and feeling of helplessness. 

This article is about a proposal to get out of this mess and achieve growth through the use of hydropower.

Setting the Goal

The first step in embarking on a journey is to set a goal. Let's set the goal as:  Nepal's per capita income US$ 2,500 by 2017 and US$ 50,000 by 2040.  This goal is specific, measurable, achievable, realistic and time bound.  With this goal in mind, I would like to draw a number of policy prescriptions to achieve this goal. These policies can promote investment, create jobs and wealth, and consumer spending which will give us double digit growth and eradicates poverty so that Nepal will be transformed from least developed county to developed country by 2040.

Bench Mark

We must benchmark with our comparator countries to achieve best practices and gain efficiencies.  Our core competencies are hydropower and tourism.  The comparator countries in this respect are Bhutan and Laos. They too are landlocked, have mountainous terrain and plentiful water resources.  But they have succeeded to produce and export large volume of hydroelectricity to their neighbors.  We can learn many things from 1070 MW Nam Theun Hydropower Project of Laos and 1020 MW Tala Hydroelectric Project of Bhutan. We have to learn from them and achieve the above stated goal. But we have to revise and refine those models to suit our specific environment.  For example, they are exporting power whereas we have market for power within the country itself.

Supply creates its own demand, said the famous economist JB Say.  He is perfectly right in his statement, at least in Nepal where the pent up demand for electricity is huge. If we start construction of various hydroelectricity projects immediately as per our model, our per capita income will reach around US $50,000 by 2040 with double digit economic growth every year.  By that time our rate of per person electricity use will reach around 150 times from today's 70 units per head.  As we are going to consume here in Nepal all the electric power that we are going to produce, the policy of exporting power must be stopped immediately.  Power exporting policy will hold back our fast track economic growth.   

Liberalizing Hydropower

This is the time that the government needs to think about liberalizing hydropower sector, just like it liberalized banking, telecommunications and education which unleashed the banking, communication and education revolution.  We have to rehabilitate to Nepal Electricity Authority (NEA) to match our development strategy because NEA is already a sick unit.  We are experiencing a severe energy crisis. We are already without electricity 14 hours a day and this duration is getting longer. But with the hydropower potential we have, it does not have to be that way. Presently, peak power demand of integrated Nepal power system is around 967 MW and power supply is around 400 MW.  The deficit can be met easily with a few projects.

 But the existing power purchase rates make the power projects commercially unfeasible due to high rates of interest that the banks are charging.  Therefore, it is suggested that the power purchase rates be revised upward, immediately.  When the market interest rates rises further, the power purchase rates should be raised accordingly. Similarly, when the interest rate cools down, the power purchase rates should be lowered accordingly.

Cost of Hydropower

The cost of hydropower is highly site specific, and depends on different factors, including hydrologic characteristics, site accessibility, and distance from transmission line.   However, hydropower is the cheapest way to generate electricity in Nepal. The 456 MW Upper Tamakoshi hydropower project is estimated to cost Rs 35.29 billion, if the project is completed by FY 2014-15 as scheduled.  That means it costs about Rs 77.39 million per MW.  On that basis, we can say, at today's rate, a typical hydropower project in Nepal can cost somewhere between Rs 80 million and Rs 150 million per installed MW.   

Means of Financing

One major obstacle often cited in Nepal's hydropower development is the lack of finance. But in reality, it is no big deal for us to raise the money.  The project can be financed through a mix of debt and equity arranged through a public-private partnership.  The people of Nepal can arrange the resources on their own to produce at least 2,360 MW of electricity if the leaders extend some help. 

First of all, Nepal Government has to create Nepal Development Company Limited (NDCL) as a sovereign wealth fund holding company.  Then the government should sell 40 per cent shares it holds in the Nepal Telecommunication Company Ltd (NTC). This will yield around Rs 24 billion and that amount should be invested as the seed money of NDCL.  With this money, NDCL can promote many subsidiary public limited companies in the same manner as Nepal Electricity Authority has promoted Chilime Hydropower Company Limited.  The equity participation in these subsidiaries is proposed at 51% from NDCL, 25% from national or international strategic partner, 24% from the general public.  Subsidiaries should be managed by the strategic partners so as to ensure efficiency and customer satisfaction.  NDCL can also promote East-West Electric Railway Ltd and many North-South cable car companies in similar modality of raising the fund.

 Nepal Telecom has been seeking strategic partner as it is losing 10 per cent of its profit growth every four months to the private telecom service providers.  Nepal Telecom on its second annual general meeting held on March 29, 2010 has passed a resolution to sell minority shares to international telecommunications operator.  But nothing has been done on this line till now. People believe that this delay is due to financial influence of other telecom service providers on our political leaders and government authorities.  Further, it is also widely believed that if Nepal Telecom cannot bring foreign telecommunications operator through bidding as a strategic partner, Nepal Telecom too will face the same fate as that of Janakpur Cigarette Factory and Nepal Airlines Corporation. 

The paid-up capital of Nepal Telecom is Rs 15 billion, of which Nepal Government holds 91.50%.   If the Government can sale 40% share in Nepal Telecom through international bidding, at the rate of minimum Rs 400 per share, the proceeds will be a minimum of Rs 24 billion.  Assuming that this Rs 24 billion will be the 25% equity from NDCL's side, and that Rs 72 billion will be available as loan from various lenders, the total funds available will be Rs 96 billion.  This will be sufficient to set up projects to generate hydroelectricity of 960 MW, assuming, on the basis of calculations above, that Rs 100 million will be required to install one MW capacity for hydroelectricity.   

Similarly, Nepal Army Welfare Fund has billions in its account.  If it invests Rs 5 billion as equity in hydropower projects, it can get 75% of the project as loan and the total available amount will be Rs 20 billion.  This amount is sufficient to install 200 MW capacity of hydroelectricity on the same assumptions as above.Then is the Employees Provident Fund. It is no big deal for this institution to invest Rs 10 billion as equity for hydropower generation. That will attract loans to make the total fund of Rs 40 billion.  This is sufficient for installing a generation capacity of 400 MW.  

Then, we can easily assume that 100,000 Nepali citizens will come forward to invest Rs 200,000 per person. That will generate a total equity amount of Rs 20 billion which will attract a loan so that the total amount will be Rs 80 billion.  From this amount, we can install a capacity of R 800 MW. The equity can be raised by issuing preferred redeemable increased dividend equity shares (PRIDES) to the general people.  PRIDES, according to Investopedia, are securities consisting of a forward contract to purchase the issue's underlying security and an interest bearing deposit.  Interest payments are made at regular intervals, and conversion into the underlying security is mandatory at maturity.  PRIDES allow investors to earn stable cash flows while still participating in the capital gains of an underline stock.  This is possible because these products are valued along the same lines as the underlying security.

Micro-finance institutions, Banks and Co-operatives can give loans to purchase these PRIDES issued by NDCL or its subsidiaries to the Nepalis who have low or no income. Such loan can be issued against the collateral of PRIDES.  This will bring positive impact on distribution of benefits from national resources to the low income people.  This will ensure that the economic development does not marginalize the poor.

We can get loan from various financial institutions located in Nepal, China, India or global institutions such as Agence Francaise de Development, European Investment Bank, Nordic Investment Bank etc. China's foreign exchange reserves have reached US$ 2.4 trillion making it by far the largest holder of foreign exchange reserve in the world. China was holding US$ 906 billion in US treasury bonds as of October, 2010.  We should request China to invest some of that amount in Nepal's infrastructure development, such as hydropower. They should agree because the return will be higher in our projects.

Infrastructure-Transmission Line

Hydropower development depends on the power transmission to carry the power from the power project site to the consumer. On January 5, 2007 NEA signed an MOU to construct Butwal-Gorakhpur, Duhabi-Purnia, Dhalkebar-Mujaffarpur and Anarmani-Siligudi 220 KV transmission lines for power trade between Nepal and India. But if we have to develop Nepal's hydropower and consume this within Nepal, NEA has to start constructing East-West 400 KV, North-South 132 KV, and North-South 220 KV transmission lines along the corridors of North-South major rivers, where it is feasible.  NEA will make profit from wheeling charges received from power producers.

These transmission lines are essential to solve the present problem of power deficit.  No investor will be interested to invest in power project without transmission line. Therefore, for Nepal, transmission line construction is not an option but compulsion. If NEA is not able to construct these transmission lines, the private sector can be invited to do it under Build-Own-Operate-Transfer (BOOT) contracts.  The private sector can be allowed to operate such transmission lines for 30 years after which it has to transfer ownership to the government-owned NDCL.

The responsibility to distribute electricity should be given to the local government units, such as the District Development Committees or Municipalities or to the proposed federal states.  With this arrangement, the present problem of leakage of electricity will be stopped. At present, the electricity leakage is 26 per cent according to NEA. 

Market

The concept of supply creates its own demand is applicable in our case.  There is scope of exponential increase in the supply of electric power in Nepal because there is also a very high scope for exponential increase in the demand for electric power.  The data provided in the Table-1 is a conservative estimate.  This does not include major hydropower projects initiated by NEA and foreign investors. NDCL can immediately start Construction of electric railway system such as Mechi-Mahakali, Raxaul-Hetauda-Kulekhani-Kathmandu and Kathmandu valley metro system.  The estimated construction cost is Rs 500,000 per meter for double track railway. It goes up to Rs 1,000,000 if tunnel construction is also required.

NDCL can also immediately start construction of cable car system from various points of east-west electric railway up to the hilly and Himalayan region to the market centres and tourist attractions including various reservoirs to be created by hydro dams. 

Meanwhile, we can benefit from the fast growth in the economies of our two neighbours. We share our northern border (1415 kms) with China which is not only the most populous country in the world with 1.34 billion people, but also the worlds second largest economy after the United States.  It is the world's fastest growing major economy, with average annual growth rates of 10% for the past 30 years.   China's middle class population, that has an annual income of at least US$ 17,000, has now reached more than 100 million. China's per capita income (nominal) is US$ 4,283.  Similarly, our southern neighbor India with which we share a common border of 1,850 Kms, is the second most populous country in the world with 1.2 billion people.  India too is one of the fastest growing economies in the world and its per capita income (nominal) is US$ 1,124. 

If we can attract even one per cent of the population of our two neighboring countries as tourists in Nepal, that will give tremendous economic growth to our economy as well. That requires construction of various electric train lines, international airports, cable car systems and recreational centres. Development of hydropower will help in all these. For example, water can be used for creating recreational facilities. Most importantly, if Nepal has good infrastructure, its geographical location makes it very suitable to be international financial center.

Determined Government

One frequently cited problem in Nepal's development and investment is the political uncertainty. However, there are examples, such as Singapore, China and South Korea, that a determined government can build an advanced country from scratch in a short period of time. That means our politicians have to start learning.

Presently, our leaders or political parties are focused on the 301-game trying to make sure that they have 301 members of the Constituent Assembly on their side at any cost. That has to change. Over the past 35 years, we have seen rapid pace of technological change in our physical environment.  Innovations such as cellular telephones, laser surgery, computers, electronic banking and new electronic trading techniques have materially affected the way people live.  These technologies are easily transferable.  Our politicians should keep themselves aware about these technological changes.  That is required because the politicians should be able to optimize the use of the country's resources, promote excellence in the delivery of services and enhance competitiveness in line with our strategic visions, by keeping economic policy, institutions and bureaucracy above politics.

 Politicians should be given growth challenges in numerical terms.  They must be given a target such as 12.3 percent growth rate per annum in our gross domestic product (GDP).  Why 12.3 per cent? Our population growth rate is 2.3 per cent per annum.  So, we need 2.3 per cent annual rate of GDP growth to take care of population increase. Another 5 percent growth rate is required to provide increased standard of living to the people, and another 5 percent is needed to provide increased momentum in the subsequent years.  It is an achievable target and this must be the duty of the Prime Minister to achieve this. It makes no sense to continue hiring the Chief Executive Officer of the country without giving him or her a target to achieve.

 The type of economic growth that we will achieve with this model will not only eradicate poverty from Nepal in a short period of time, but will lift the country to the group of developed countries by 2040. 

 (Pant is Director of Nepal Investment Bank Ltd and Chairman of Quantum Capital Ltd.  He can be contacted at janardanpant@gmail.com)