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February 2016 Economy and Policy

Published on: 2016-02-22 12:22:52     1094 times read    0  Comments
Internal Resource Mobilization for HEP

--By Prof Dr Kamal Raj Dhungel

Nepal is enriched by four river basins- Kosi in the east, Gandaki in the west, Karnali in the mid-west and a border river Mahakali in the far west. A sloppy mountain topography facilitates these rivers to make numerous falls, as seen in the pictures, providing an ample opportunity to generate electricity to the tune of 42 GW (see table). A tiny portion, nearly 2 percent of the total, is being exploited. The rest is yet to be developed. 

This represents a huge resource provided by nature at free of cost to develop, use, sell and export. Full development of this endowment will not only help Nepal turn into a dignified  country but also lay the foundation stone towards a drive into prosperity. But there are a number of constraints in the way when it comes to converting this endowment into a profitable commodity. 

Among them capital constraint is vital. The revenue of the government of Nepal does not exceed 10-15 percent of GDP. It is barely enough to cover the recurrent expenditure of the government. Saving is a source of investment. But the propensity to consume (ratio of additional consumption to additional income) is high, meaning that the propensity to save (ratio of additional saving to additional income) is low making a huge gap between saving and investment. It indicates a poor investment situation for capital. Thus, for a poor economy like Nepal, capital constraints is a critical and crucial issue to address for the development of hydropower projects. 

Unemployment and outmigration
Unemployment in Nepal is rampant and is pegged at over 46 percent. This is mainly because of the lack of employment opportunities in the domestic sector. It has long been realised that Nepal’s development hinges on proper management of its immense water resources. It can be the basis for the country’s future prosperity. A rational utilisation of water resources will open up numerous opportunities for both skilled and unskilled labour forces, and domestic and foreign capital. 

Hydropower development is the best option for utilising water, human and financial resources. This would provide opportunities to the nation’s unemployed and disenchanted population. But, if the policy of sending our productive labour to the richest countries continues, development of any kind in our country in the future is hard to imagine. Qatar had a GNI per capita ($92,200), 126 times more than Nepal’s GNI per capita ($730) in 2014. 

Since the beginning of the 21st century Qatar has been a major hub for Nepali labour. The per capita income of Qatar implies that a migrant worker from Nepal can earn as much as he/she would earn in the US, Japan, Australia and Europe. The growth of Qatar’s economy has been a major contributor to Nepal’s GDP, as 2013 showed with remittance covering 29 percent of Nepal’s GDP. 

A study conducted by the World Bank reveals that along with the pull factors stemming from the growth of Qatar’s economy, notable push factors driving migration from Nepal include: continued poverty, high levels of unemployment, political instability, and sluggish economic growth. The combination of push and pull factors has resulted in Nepalis becoming the second largest migrant group in Qatar. 

Many of these workers are employed in the construction and manufacturing industries as unskilled labourers. Their salaries vary according to their skills and the industry where they work, but on average they seem to receive lower salaries than those of other migrants for the same work. This reveals that Nepali migrant workers in Qatar have earned less than what other migrant workers coming from other countries have earned from the same or similar job. 

The reason for the lower income of Nepali migrant workers in Qatar, among other things, is the lower opportunity cost at home. People will be able to get numerous employment opportunities if Nepal is able to mobilise the funds particularly for the development of hydropower projects in the days to come. There are three sources of funding, all of which require the fulfillment of basic prerequisites.

The political factor
Mobilisation of resources for the development of hydropower requires a number of things. An unstable government among other things, is a curse when mobilising internal and external resources. Political stability is an essential part of mobilising scarce resources and in turn investing it in hydropower projects. Instability prevents good things from happening and encourages bad things such as fraud, corruption, cheating and distortion. Both private and public sectors, in their efforts to mobilise domestic resources to develop hydropower projects, would be unsuccessful. 

Assuming that the political factor in Nepal is getting stable and assuming that the government is committed to keep up good governance and to carry out development to make the country prosperous and competitive, and that it is engaged in formulating suitable policies which will help to mobilise the necessary resources and in turn channelise them to develop the untapped resources, assuming that everything mentioned above is set to work, then internal resource mobilisation would be effective in order to invest in the hydropower projects. 

Hydropower projects with Local fund mobilization
Investors or independent power producers consider hydropower to be a promising sector for investment. In spite of the discouraging situation, efforts are being made to develop hydropower projects from both the public and private sector. They have mobilised local funds to develop a number of hydropower projects. Consequently, a small number of hydropower projects with varying capacities ranging from a kW to 22 MW were constructed with the help of local funds. In addition, the under construction Upper Tamakosi hydropower project with an electricity generation capacity of 456 MW is the big project initiated through the mobilisation of domestic resources. Independent power producers also have constructed a number of small size hydropower projects through mobilising domestic funds. They are still working on this line. They are mobilising funds through banks and different kinds of shares through IPO (initial primary offering)

Way forward
Most of Nepal’s resources coming from the migrant workers still continue to be diverted into unproductive sectors; 79 percent of the total remittance received is used for daily consumption. Consumerism, if not discouraging, would stop generating savings both in private and public sectors needed for further investment in the economy. 

Consumerism, in Nepal’s particular case, is not the stimulating factor for producing goods and services domestically. Instead, it encourages imports to go up. All successful economies devote part of their current income to investment rather than consumption, so as to expand their future ability to consume. The real estate sector, which is less productive, absorbs a large portion of the investments. An ideal government and favorable investment policies help to transform unproductive investment into productive ones. 

Infrastructure projects such as hydropower need a comfortable amount of money to be commissioned. Saving is necessary to create such funds. Saving in a poor economy would be possible only by curtailing consumption and encouraging people to save a part of their income to help their motherland develop and become prosperous. Despite this, hydropower in Nepal is commendable and sustainable. But mobilisation of domestic funds alone would be insufficient to develop large hydropower projects. It is because of the resource/capital constraint. If Nepal internalises the ground reality, it should have to seek alternative sources of funding to develop large hydropower projects to export surplus energy to needy neighbours.

The author is retired Professor of Economics, Tribhuvan University.


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