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March 2016 Economy and Policy

Published on: 2016-03-22 15:14:52     922 times read    0  Comments
 External Resource Mobilisation for HEP

--By Prof Dr Kamal Raj Dhungel

A least developed and sixteenth poorest country of the world as classified by HDR 2013, Nepal, a subsistence farming based economy, is still suffering from the legacy of a decade long conflict (1996-2006).  Nepal, an India-locked rather than land-locked nation, has chronic poverty (55 percent) and development has been further hit by two deadly events- the 2015 earthquake and the recent India blockade.

The Madhesi Morcha inspired blockade created barriers to development and obviously decreased the country’s economic efficiency which in turn caused to push a huge number of Nepali families under the poverty line. The earthquake and blockade have caused a decrease in trade activities with China and India and consequently have weakened custom based revenue collection in the north and south borders respectively. 

A weak economy gets weaker, further reducing government ability to invest in development activities. The primary aim of the blockade, to stop the movement of petroleum products in Nepal, to some extent succeeded which paralysed social life and industrial activities. Nepal’s hydropower development is the solution. It can react against a blockade and ensure energy security to smooth economic growth. A weak and poor economic base makes it mandatory to seek foreign assistance to develop large hydropower projects. 

Mobilising Multilateral Loans
Countries are getting financial facilities from a number of regional and global financial institutions. The main objective of these institutions is to provide financial aid to help developing countries in the way of their development endeavours. Nepal is a member country of the majority of these institutions. They are providing loans to develop a particular project under consideration to the member countries of the world. Most of the developing countries are facilitated by soft loans. 

Nepal has been receiving such loans from different institutions to develop hydropower projects such as Kulekhani, Marsyangdi, middle Marsyangdi, Kali Gandaki ‘A’ etc. Nepal, a resource constraint country, can mobilise the necessary resources to develop large hydropower projects from these institutions. These institutions, to allow their funds into a particular country, require a number of attributes- stability, commitment, accountability, transparency, good governance and unity. In Nepal none of these qualifying attributes are in place.  Political parties should make an effort to improve these loan qualifying attributes in order to develop hydropower potential. 

Welcoming FDI
A modern means to drive development activities of developing and emerging economies is foreign direct investment (FDI). The history of FDI is as long as the history of economic development. It has become apparent that FDI is a critical and crucial source of capital and technology for the rational utilisation of global untapped resources. It helps to uplift the ailing economies by transferring the newest technology and capital from a home to host country. FDI became popular and more important after the outbreak of World War II. The relevance of the role of FDI is still growing with the onset of the twenty-first century. 

From the beginning of the mid-nineteenth century, Nepal has been an aid recipient country. Most of the existing infrastructure projects, such as roads and power supply, have been constructed with foreign assistance. This is only a tiny example. Development activities since the beginning of the first plan are being financed by foreign aid. This provides enough support to say that Nepal is an aid dependent country. In this context, foreign aid in the form of FDI is most critical for development activities to kick off. 

Furthermore, the relevancy of FDI is still high, more crucial and unavoidable in the context of hydropower development. Nepal with a poor economic background, seems incapable of financing itself. Hydropower projects are capital intensive. Billions of dollars are required to develop large hydropower projects. The only gateway to obtain such investment is to mobilise FDI. But the FDI experience in Nepal’s hydropower development is sour. 

In the 1990s, small sized two hydropower projects with combined electricity generation capacity of 86 MW, were constructed through FDI.  They help to reduce average load shedding hours to as low as 10 hours a day in the dry season and two hours a day in the rainy season. Despite this contribution, the provision of payment of principal and interest in dollars, have caused to turn Nepal Electricity Authority (NEA) into a house of big losses. This is not because of the projects developed through FDI but because of the defective agreement influenced by bribery between NEA and developers. 

Short sightedness
We know that in the recent past, the Arun III project was in the pipeline under World Bank investment. But this project was killed off because of the calls against its implementation. Nepal today is struggling with long load shedding hours even during the peak rainy season as a consequence. This has not only proven counterproductive, but also has eroded all the requirements of a forward looking economy. If this project had been constructed, it could have become a viable medium not only to mitigate load-shedding in the country, but also to boost economic growth. We, undoubtedly, are the losers, not the winners. 

Our neighbours not only show keen interest but also are committed to invest in hydropower projects. Disputes and conflicts of interest put up a number of bottlenecks against the development of a number of hydropower projects. The conflict of interest between Nepal and India as well as India and China with respect to hydropower development, make the favourable situation even worse for any future FDI. This has thrown a shade over the successful implementation of selected hydropower projects such as Upper Karnali, West Seti and Arun III. 

The successful implementation of these projects would be the gateway to FDI and the means to generate employment for youths who are turning into migrant workers abroad. But, on the path to implementation, they are facing difficulties mainly because of the lack of political stability and lack of consensus within and among the political parties. Construction of the mentioned projects would turn Nepal not only into a load shedding free country, but also a country exporting electricity.

Conclusion
Nepal’s road to prosperity hinges on the development of its immense ‘capital intensive’ hydropower potential.  Nepal faces a challenging task of mobilising resources for its development. In the global quest of developing pollution free clean energy, Nepal can be a part of the solution. It deserves the opportunity to mobilise local, regional and global resources for the development of hydropower. This opportunity to mobilise adequate funds is conditional upon keeping political stability, good governance, good diplomatic relations, accountability, commitment, transparency, honesty and effective law and order.  

If all these qualifying attributes are in proper place, no doubt, global and regional funds will flow in, in the form of FDI. However, for the past five decades, Nepal has been plagued by political instability followed by bribery, irrational use of scarce resources, unaccountability, lack of transparency, dishonesty, etc. This situation prevents regional and global funds to come in. The responsibility to improve this is in our own hands. 

The author is retired Professor of Economics, Tribhuvan University.


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