Tuesday, March 21, 2017

Rapid economic transformation in Nepal

It was published in The Kathmandu Post, 20 March 2017

Implementing the vision would require consistent and committed political leadership, and a competent bureaucracy

Kenichi Yokoyama & Chandan Sapkota

Nepal has set a long-term vision to graduate from the Least Developed Country (LDC) category by 2022 and attain a prosperous, middle-income country status by 2030. The National Planning Commission is leading efforts to chart a bold and time-bound economic development roadmap to attain these goals. In this regard, the remarkable economic transformation of several Asian economies in a matter of a few decades provides important lessons for Nepal in its quest to achieve rapid, sustainable and inclusive economic growth. 

Economic structure

So far, Nepal’s economic transformation is not supported by growth-enhancing structural change. Economic structure and labour have shifted from low productivity agricultural to low productivity services, bypassing the industrial sector. In 1984, agricultural, service-based and industrial  sectors accounted for 61 percent, 26 percent and 13 percent of gross domestic product (GDP) respectively. Currently, while the agricultural sector accounts for 33 percent and the service sector a whopping 52 percent of GDP, industries account for just 15 percent of GDP. In effect, there is a gradual deindustrialisation since the industrial sector peaked at 23 percent of GDP in 1997.

Consequently, GDP growth has been low and volatile, depending mostly on the monsoon rains and remittance-fueled consumption demand in the service sector. Per capita GDP growth averaged just 2.6 percent in the last three decades, reaching $746 in 2016. Similarly, real annual GDP growth averaged 4.2 percent in the last three decades. GDP growth was above 8 percent in two instances only: in 1981 and 1984. In 1994, it grew by 7.9 percent. The economy has to grow by an average 8 percent each year to achieve its goal of becoming a middle-income country. 

Asian experience

The Asian experience—for instance the cases of Japan, Hong Kong, Singapore, Thailand, and Malaysia—provides valuable insight to initiate rapid structural transformation

These economies invested heavily in fundamentals and guided the economy with a clear vision, resulting in rapid and sustained economic growth. Initially, the structure of the economy was transformed by increasing the size and dynamism of the industrial sector. Agriculture played an important role by increasing labour and land productivity, stimulating growth in backward and forward linkages such as agro-processing, and releasing labour to help industrialisation. These were supported by stable fiscal and monetary policies that were occasionally unorthodox, and an investment-friendly policy regime. These strategies led to a sustained high growth rate. 

Furthermore, they invested heavily in infrastructure as a foundation for production and trading, prioritised human capital formation, fostered technology transfer, and strengthened institutions. This enhanced and sustained economic competitiveness and high per capita income levels. These measures were crucial in boosting productivity and value addition in the industrial sector, and in diversification and sophistication of productive services such as financial and IT systems. Here, well-planned and developed urban infrastructure was a critical catalyst.

In essence, pragmatic industrial promotion strategies along with access to markets, capital and technologies of more advanced economies helped these economics to rapidly take-off and boost per capita income. A clear and pragmatic development vision, incremental reforms to boost critical physical and social infrastructure, and strong institutional fundamentals and ownership underpinned this transformative process. 

Lessons for Nepal

The global investment, trade and financial regimes are different now compared to the times when these economies were taking-off and growing at high rates. As a latecomer, Nepal doesn’t have the same privileges, untapped potential and preferential market access opportunities. However, it does have significant opportunities to spur high growth by catering to the needs of the growing internal and favourable external markets through hydroelectricity, light manufacturing goods, high value agriculture products, tourism, and information technology development. Overall, raising productivity across all sectors will be the key. 

Note that enhancing per capita income to a middle-income level will be conditional on the correct positioning of micro and macro fundamentals. Faster catch-up is easier at this stage if productivity of agricultural and industrial sectors increases rapidly. In particular, a competitive manufacturing sector, which produces tradable goods, absorbs more labour, provides sustained sources of income and boosts entrepreneurship, is essential to move up the ladder of industrialisation. 

Nepal could point the macro fundamentals in the right direction by increasing the quantum and quality of investment in agriculture, transport, energy, urban development, education and skills, and healthcare. Nepal could also make progress by controlling inflation, improving governance and rolling out private sector friendly reforms. Some of these measures are an integral part of the government’s “second generation reforms”. However, the lack of effective implementation of policies and timely budget execution are subduing growth potential. Similarly, the micro fundamentals that need to be addressed are labour relations, land reforms, and anti-competitive practices, which are fostering inefficiencies and stifling growth opportunities in all sectors.

As the backbone of the economy, agriculture supports growth and livelihoods and lowers price volatility. Thus, enhancing land and labour productivity is crucial for a meaningful transformation. Productivity could be increased by using new technology and shifting traditional cropping practices to more high value added activities such as livestock, fruits, vegetables and agro-processing. It should be supported by transport networks, development of value chains, credit flows, irrigation and marketing.These call for well-structured programming and implementation of the Agriculture Development Strategy.  

Following the enhancement of agriculture, strengthening the industrial sector is vital for generating meaningful jobs and accelerating growth. Provisioning of infrastructure and supportive policy and institutional reforms are critical. Also necessary are pragmatic industrial promotion strategies, which could range from import replacement and export promotion that hinge on increasing domestic value added and employment, to establishing functional industrial zones and economic corridors. A range of industrial and trade policies/strategies are periodically updated and approved, but their effective implementation is not getting much attention.  

Nepal has a latecomer advantage in the light manufacturing sector, which normally absorbs semi-skilled labour force—similar to the workers who migrate overseas. Hence, it could get spill over demands from countries where wages are rising fast, provided that factors that supress competitiveness such as inadequate power supply, high cost of transport, and labour relations are addressed. Nepal could then gradually produce sophisticated goods that require higher knowledge, management skills and technology transfer. This would also complement high productivity services, ie moving from trading businesses to IT services, travel and tourism, and educational and healthcare services. 

Government’s role

The government has an important role to play in providing critical infrastructure, addressing market failures, designing a growth-enhancing tax regime, and implementing business-friendly policies to usher in a meaningful structural transformation. It also needs to enhance both the quantum and quality of public capital spending to over 8 percent of GDP annually. Given the sound fiscal space, though Nepal doesn’t have a shortage of funds until medium-term, a dearth of capacity to fully execute the budget and finish projects on time may prove problematic. 

Implementing the vision of a rapid economic transformation would require consistent and committed political leadership, and a competent bureaucracy. This would form the institutional fabric that helps translate good economics into good politics with economic development as the core theme. It ensures shared prosperity, makes reversibility of policies costly, enhances individual’s and firm’s confidence in the economy, and encourages the bureaucracy to provide faster and better service delivery.

With an appropriate mix of macroeconomic strategies, financial arrangements, smart project execution, and supportive institutions and policies, it is reasonable for Nepal to be upbeat about the possibility of a meaningful economic transformation and attainment of the long-term vision.

Yokoyama is Country Director of Asian Development Bank, Nepal resident mission; Sapkota is an economist. Views expressed in this article are personal

Saturday, March 4, 2017

Nepal: Huge investment pledge and a new financial sector reform loan

Foreign and domestic investors pledged investment commitment (at this stage its "letter of intent" [LOI]) totaling NRs1,445.5 billion (around $13.5 billion) at the Nepal Investment Summit held on March 2-3 in Kathmandu.  The investors showed interest in hydropower, hotels, metro rail, airlines, tunnels, tourism, energy, agriculture, infrastructure, mines and financial sector.
  • China: $8.3 billion (airport, highway, tunnel, water supply, hydropower, railways, road, smart grid)
  • Bangladesh: $2.4 billion (food and construction)
  • Japan: $1 billion (hydropower)
  • UK: $1 billion (energy, agriculture, infrastructure)
  • Sri Lanka: $500 million (hydropower, solar, wind)
  • India: $317 million (investment bank, solar, steel plant, tourism, industrial and biomedical, )
  • Nepal: $11.5 million (pulp and paper, construction, manufacturing, agriculture)
The last such investment summit was organized back in 1992. The investment summit had a broad support from across the political parties. 

The big question is: What is the government going to do (or what different is it going to do) to translate these commitments into actual investment? The government doesn’t have a plan yet. But, they are going to start working on it immediately by setting up sectoral committees to follow up on the pledged investment.  

The World Bank is providing $100 million Development Policy Credit (the third in a series of program loans) to enhance financial sector development; restructure and consolidate the financial system; strengthen the legal and regulatory framework for crisis management, banking and insurance supervision and payment systems; and enhance the governance and transparency of the banking sector.

Here is a the latest Financial Sector Development Strategy (FY2017 - FY2021) approved by the government. 

Thursday, March 2, 2017

Investment summit & commitment in Nepal, strong Q3 growth in India

Industrial Promotion Board (IBP) has approaved investment worth NRs26 billion (NRs20.5 billion as FDI) in cement, hotel and hydropower sectors. Most are for increasing paid-up capital.
  • Arghakhachi Cement (NRs3 billion)
  • Langtang Bhotekoshi Hydropower Company (NRs17.5 billion)
  • Sarbottam Cement (NRs3.4 billion) 
  • Sinohydro Sagarmatha (NRs3.4 billion) 
  • Soaltee Crowne Plaza (NRs1.6 billion)
  • Swetganga Hydropower and Construction (NRs320 million)
The IPB allowed Dolma Impact Fund (Mauritius) to purchase 320,000 units of shares of Swet Ganga Hydropower and Construction Pvt Ltd at a price of Rs 100 per unit (total NRs320 million).

Investment Board Nepal (IBN) and Ministry of Industry (MOI) are organizing a two-day investment summit (March 2-3) to showcase and promote investment potential in Nepal, particularly in infrastructure, mining, tourism and agriculture. Nepal's Prime Minister Pushpa Kamal Dahal is set to inaugurate the summit, which will draw about 300 foreign delegates from around 25 countries. Indian Finance Minister Arun Jaitley and president of Asian Infrastructure Investment Bank (AIIB) Jin Liqun are also attending the summit. The last time such a summit was organized was in the early 1990s.

The government is promoting projects such as a chemical fertiliser plant, East-West railways, Kathmandu-Kulekhani-Hetauda tunnel highway, Second International Airport at Nijgadh, East-West electric Railway, Kathmandu Valley metro project, Kathmandu-Pokhara railway project, and Tamakoshi-3 hydropower project. Additionally, the government also intends to draw foreign investment in around 20 mines across the country that have deposits of limestone, copper, zinc and iron ore. Construction of SEZs at Simara, Panchkhal, Biratnagar, Kapilvastu, Jumla and Dhangadi will also be floated. 

Actual net FDI inflows in FY2016 was just $59.7 million. In recent years, it peaked to $113.9 million in FY2012. By the first half of FY2017, FDI commitment was NRs8.3 billion and actual inflows was NRs7.4 billion ($68.9 million). Investor confidence is gradually recovering, especially after the normalizatio of supplies, improved power supply, and approval of key legislation and policies (Industrial Enterprises Act, Special Economic Zones Act, Banks and Financial Institution Act, Intellectual Property Policy, Mining Policy). Amended versions of Foreign Investment and Technology Transfer Act and Labor Act are pending approval by the parliament.  

According to the latest data released by the government, India's GDP growth slowed only marginally to 7% y-o-y in Q3, October-December (the time when the government withdrew high-value currency notes from circulation), from 7.4% in Q2 (July-September). In Q1, it grew by 7.1% (y-o-y). Private consumption, fixed investment and industrial output growth all accelerated in Q4, with only the services sector witnessing a slowdown. The second advance estimate of growth in FY2016/17 is 7.1%.

There is some controversy over the accuracy of the data (private consumption rose by 10.1% over the quarter; credit by banks fell to the lowest level in a decade but investment grew), but FM Jaitley argued that it was due to high manufacturing (8.3%). The index of manufacturing production decreased by 2% in December. Also, inflation fell as demonetization dampened demand.

Saturday, February 25, 2017

Nepal (mid-year FY2017) and India (FY2016/17): Brief macroeconomic overview

Nepal: Mid-year review of FY2017 budget and monetary policy

The Ministry of Finance released its mid-year review of FY2017 budget. It increased revenue target but lowered expenditure target. There is not much change in expenditure pattern. Actual capital spending was just 11.3% of planned capital spending. However, the government is targeting to bump this to 84% by the end of the fiscal year. Around 49% of total revenue target was achieved by mid-year. 

The NRB also released its mid-year review of FY2017 monetary policy and macroeconomic situation. Inflation averaged 5.8% on the back low fuel and commodity prices, good monsoon-led boost in agricultural output, normalization of supplies and decreasing inflation in India. Current account slipped in the negative territory due to the widening of trade deficit and deceleration of remittance inflows. 

The NRB also tweaked accounting rules on computing CCD ratio. It has allowed BFIs to discount 50% of productive lending (plus lending to deprived sector and lending to agro sector at subsidized interest rate) while computing the CCD ratio. This essentially gives a breathing space to many BFIs that are close to the mandatory threshold of 80. It frees up about NRs130 billion for extra lending (by mid-year BFIs lent about NRs254 billion to productive sector).  

India: Macroeconomic overview (IMF)
  • Real growth (at market prices) projected to slow to 6.6% in FY2016/17 and then rebound to 7.2% in FY2017/18
  • Normal monsoon rainfall but suppressed private consumption demand (due to demonetization shock)
  • Low inflation of around 4.7% (temporary demand disruptions due to demonetization, good agricultural harvest due to good monsoon, collapse of global commodity prices, supply-side measures, tight monetary policy stance) 
  • Reduced external vulnerabilities (CA deficit to remain low and international reserves to cover around 8 months of import), and large terms of trade gain (increased by 2.22% in 
  • FY2013/14, 2.5% in FY2014/15, and 7% in FY2015/16)
  • Focus on fiscal consolidation and quality of public spending (FY2015/16 budget deficit of around 3.9% of GDP; FY2016/17 budget on track to reach 3.5% of GDP target)
  • Implementation of key structural reforms including GST (has the potential to raise medium-term growth to above 8%), using Aadhaar identification and bank accounts to make direct benefit transfers, formalization of inflation targeting framework, new Bankruptcy Act
Key challenges: persistently high household inflation expectations, large fiscal deficits, excess capacity in key industrial sectors, strains in financial and corporate balance sheets, the extent of cash shortages, external vulnerabilities (global financial market volatility including from US monetary policy normalization and weaker-than-expected global growth).

Wednesday, February 22, 2017

Liquidity/credit crunch and mid-year review of monetary policy

In its mid-term review of monetary policy for FY2017 the central bank appears overly accommodative by tweaking accounting rules to compute local currency credit to core capital plus local currency deposit ratio (CCD ratio in popular lingo). It has allowed BFIs to discount 50% of productive lending (plus lending to deprived sector and lending to agro sector at subsidized interest rate) while computing the CCD rato. This essentially gives a breathing space to many BFIs that are close to the mandatory threshold of 80. It frees up about NRs130 billion for extra lending (by mid-year BFIs lent about NRs254 billion to productive sector). At the core of it, the BFIs indirectly got what they wanted— more space to lend irrespective of deposit growth. This is a temporary measure with a sunset clause (ending mid-July 2017). 

But then will this kind of overly accommodative measure by the central bank foster moral hazard (i.e., the BFIs don't have an incentive to guard against reckless lending risk when they know that they will be somehow protected from its consequences = privatize profits, socialize losses)? The BFIs have been indirectly rescued by the central bank again and again. Initially, it was due to the accumulation of high non-performing assets before 2000, then it was due to aggressive lending to real estate, housing and hire purchase around 2012, and now due to reckless lending even when they clearly knew that deposit growth was and is going down. This pattern of making deliberate (or not!) mistake and then the central bank coming to their rescue in one way or the other is amazing!

Here is an article on the current liquidity/credit crunch and its causes. For more background, here is another long article on the causes of severe liquidity crunch around 2011/12. Briefly, the BFIs brought the troubles upon themselves by aggressively lending to few sectors to gain quick returns in such a way that the credit growth far outpaced deposit growth. Keep in mind the following points:
  1. Deceleration of remittance inflows was expected from last year because of the slowdown in growth of migrant workers. Remittance inflows are considered a stable source of deposits.  
  2. Credit growth expanded more than deposit growth even when BFIs knew the reality (i.e., #1)
  3. Ever-greening and at times imprecise classification of risky assets are tricks used by BFIs to navigate through the regulatory loopholes.
  4. Asset-liability mismatch is still an issue (think of the problems arising from using short-term deposits to lend to long-term projects)
Lets say the BFIs lend NRs130 billion extra loanable fund they have now because of the tweak in accounting rules till mid-July. Then what? Will they maintain CD ratio below the mandatory threshold with enough space to keep credit flowing even if deposit growth continues to dries down? How can we be assured that they will not continue to engage in reckless lending to meet unsustainably high profit targets? Will these practices lead to building up of non-performing assets? Any tweaking of monetary policy and established rules should be accompanied by clarity/direction on its expected consequences. 

The government might have feared that a sudden credit crunch will squeeze revenue growth from high contributing sectors and will also hurt economic activities. This would mean missing revenue and growth targets for FY2017 (you get a sense of this from the MOF's mid-year review of FY2017 budget). I think the central bank’s decision to tweak the accounting rules indirectly is aimed at addressing this issue rather than cleaning up the mess within the BFIs. Good for short term, but creates uncertainty in the medium term. Interest rates will likely stabilize. .

Lets not forget what the BFIs need to focus on: enhancing their capacity to roll out better operational and management practices. They should scrutinize loan proposals more intensely, invest more in research and personnel training, introduce innovative deposit and credit schemes, diversify their asset portfolio, lower unsustainable profit targets, improve corporate governance and continue consolidation efforts.

Anyway, there are good measures as well: revising down limit on personal overdraft loans to NRs7.5 million from NRs10 million (these are sometimes diverted to stock market, real estate and other speculative investments); limiting interest on call deposit to that of normal savings deposit; allowing issuance of foreign currency-denominated LOC for 90 days (lowers cost of borrowing for traders), limit on lending to personal vehicle purchase based on its value, etc. 

For now, lending rates will stabilize (lets hope deposit rates will rise by some percentage points). The liquidity/credit crunch will normalize as soon as capital spending accelerates (as usual in the last trimester). Addressing the liquidity/credit crunch brought upon themselves by the BFIs is a tricky issue for the central bank. There ain't no easy fix!

Tuesday, February 7, 2017

Nepal's self-inflicted liquidity/credit crunch

It was published in The Kathmandu Post, 07 February 2017.

The current liquidity crunch is the result of faulty operation and management of BFIs

The financial sector is in a temporary yet recurring state of disarray right now as a self-inflicted ‘liquidity crunch’ has handicapped most banks and financial institutions (BFIs). While the business community is unnerved by the rapid shrinkage of loanable funds and prospects of an interest rate hike, BFIs are struggling to stay within the mandated credit-to-deposit threshold. 

Nepal Rastra Bank (NRB) has rightly refused to increase the 80 percent threshold as it is one of the widely used tools to ensure the viability of the financial system and security of deposits. The liquidity/credit crunch is the consequence of flawed operation and management practices of BFIs.

BFIs are required to maintain at least 20 percent of their deposits in the form of very liquid assets, which means cash or assets that can be readily turned into cash. The credit to core capital plus deposit ratio should not exceed 80 percent. If they are close to the ceiling and are unable to attract more deposits, they need to hold back on aggressive lending. Any drop in deposits means that BFIs will have to lower credit growth too so that they do not overshoot the threshold.

To better secure deposits, reduce the number of BFIs and improve the financial sector, NRB instructed BFIs to increase their paid-up capital by mid-July 2017 (Rs8 billion for commercial banks). In response, several weak BFIs merged or were acquired by stronger ones. Others floated shares or are in the process of doing so. BFIs also had to increase credit growth to maintain a high profit target. Without many alternatives, they engaged in aggressive, unproductive and irresponsible lending to three particular sectors: real estate, hire purchase and share investment. Demand for loanable funds in these sectors is always high, and with little hassle and transaction cost, BFIs earn disproportionally large profits compared to lending to other sectors such as energy, agriculture, infrastructure and tourism. Underneath this lending practice lies ever-greening and at times imprecise classification of risky assets.

Socialise losses, privatise profits

Real estate prices began heating up after the earthquakes in 2015 following a few years of stability. Most BFIs had some room left for real estate lending, and due to lack of other bankable investment opportunities, they started issuing loans generously. Simultaneously, they increased margin lending, which contributed to a bullish stock market despite no noticeable change in economic fundamentals.

The other profitable market segment that could absorb credit quickly was vehicle purchase whose import demand spiked after a lull triggered by a crippling supplies disruption last year. Lending to these sectors swelled so fast, and without proper scrutiny of sustainability of the balance sheet, that the total credit growth outstripped deposit growth. At the same time, deposit growth slowed because of a deceleration in remittance inflows and the inability of BFIs to offer innovative savings instruments. The situation exacerbated to such a level that BFIs are now imploring the central bank to temporarily increase the credit-to-deposit threshold to 85 percent.

Pleading for an increase in the upper limit is akin to begging for a subsidy so that BFIs can continue enjoying the profits from imprudent and unsustainable lending practices and meet their high profit targets year after year. This is utterly reckless and reeks of an intention to socialise losses but privatise profits. The central bank should remain steadfast in its policy on the credit-to-deposit rate and defend the measures required to ensure a prudent financial system.

We went through this kind of situation in 2011 when there was a slowdown in deposit growth and unhealthy and cutthroat competition to increase lending and the real estate bubble burst disrupting financial flows. It resulted in a severe liquidity crisis and a loss of confidence in the banking system after the then Vibor Bikas Bank knocked the doors of the central bank in June 2011 to either inject money or take over its management. Subsequently, NRB imposed a 25 percent cap on real estate and housing loans and implemented reforms to improve the health of the financial sector.

Incongruous arguments

BFIs still have not learnt from their mistakes. First, the recommendation by BFIs to increase the credit-to-deposit threshold is nonsensical. It will not solve the structural operational and management flaws on which they try to flourish. They point to a liquidity crunch, but react unenthusiastically when the central bank offers temporary liquidity facilities. It looks like BFIs just want to cover up their reckless and imprudent operations. Second, they argue that slow capital expenditure and a slowdown in deposit growth led to the credit crunch. Yes, that is true. But then these two factors (which tend to drive deposit growth) were expected anyway. Given that there has not been any change in the expenditure absorption capacity, low capital spending was entirely predictable when the fiscal budget was introduced. Similarly, overseas migration started declining immediately after the earthquake and remittances started decelerating from May 2016. This was also anticipated well in advance.

BFIs knew that they were close to the threshold as early as the beginning of 2016, but they still engaged in aggressive lending to quick return and unproductive sectors to attain high profit targets. Whining for an increase in the threshold by floating incongruous arguments is irresponsible. They presented the same arguments in 2011 too. BFIs should have been conservative on credit growth (and its quality), which should be consistent with deposit growth to avoid a sustained asset-liability mismatch. The central bank should not increase the threshold now. The situation will likely normalise in the last trimester when most of the capital spending happens.

Unless BFIs change their operational and management model, the same thing is going to happen again. They should scrutinise loan proposals more intensely, invest more in research and personnel training, introduce innovative deposit and credit schemes, diversify their asset portfolio, lower unsustainable profit targets, improve corporate governance and continue consolidation efforts.

Thursday, January 19, 2017

Melamchi and the mismanaged KUKL

It was published in The Kathmandu Post, 18 January 2017

Mismanaged KUKL

The organisation needs an urgent overhaul to ensure efficient distribution of Melamchi water

Once known for its financial and administrative mismanagement, Nepal Electricity Authority (NEA) is now the most talked about public enterprise that is giving hope of a bright future. Apart from the scheduled electricity generation and additional import from India, drastically reducing load-shedding would not have been possible without the administrative acumen of NEA’s Managing Director Kul Man Ghising, unflinching support by a majority of the board of directors, and strong support by Energy Minister Janardan Sharma.

Meanwhile, gross negligence by management, especially the chairman of the board of directors, and excessive political interference is turning Kathmandu Upatyaka Khanepani Limited (KUKL) into a new basket case of administrative and financial mismanagement. It is an alarming development requiring urgent attention of and intervention by the government. Else, the dream of channelling Melamchi’s water through the dry taps in Kathmandu will continue to remain a daydream despite the fact that the main tunnel work is going to be completed by 2017.

NEA as a model

After the Nepal Oil Corporation, NEA is probably the second-most decried and politically interfered public enterprise in Nepal. The combined financial loss—a direct product of administrative mess, political interference and a mismatch between cost and retail prices—of these two enterprises was about 0.7 percent of gross domestic product (GDP) in FY2014. The intermittent petroleum shortages and prolonged load-shedding was throwing regular life out of gear. Fortunately, the low oil prices in the international market and its ability to still charge high prices in the domestic market was a blessing in disguise for the NOC, which despite being embroiled in an administrative mess and political interference through the labour unions, has turned its negative balance sheet positive in the matter of a year.

The case with NEA is different though. It continues to have a negative balance sheet, generating loss amounting to about 0.6 percent of GDP in FY2016. The administrative, political and union related troubles continue to beset its financial health and public service delivery. It cannot revise upward retail electricity prices like the NOC and continues to sell electricity below the cost of production. Hence, the government’s decision to write off 26.5 billion rupees of accumulated debt in 2011 was not enough to turn around its negative balance sheet.

But NOC is still a lost cause, given its core troubles despite the improved financials thanks to external factors. But NEA is a beacon of hope despite its bad financials thanks to a capable managing director and the backing of the board of directors. The tireless effort, management shrewdness, and commendable drive to achieve allocative efficiency have led to a drastic reduction in power cuts, making the public and the business community happy.

Ending Kathmandu’s water woes

The kind of overhaul seen in NEA and its recent improvement in service need to be replicated in KUKL. KUKL is a semi-public organisation tasked with managing water supply distribution and sewer systems (including treatment plants) in Kathmandu. To avoid the fate of a failing public enterprise, KUKL was established as a public company, which could loosely operate like a public-private-partnership (PPP) entity. Although the private sector collectively has just a 15 percent share, it is nevertheless allowed to head the board and have an important say on key issues. While this was done in good faith, given the mess with public enterprises, it is becoming a bane for the future of KUKL.

A political, inefficient and carefree chairman of the board of directors (from the private sector) is trying to prolong his tenure and blocking human resources and administrative reforms that are required to enable KUKL to distribute and manage water from Melamchi, which is expected to be completed by 2017. Finishing Melamchi’s tunnel work and channelling water to Kathmandu is only half the story. Efficient management and distribution of over 300 million litres of water per day is the other equally important half of the story.

Kathmandu’s water woes will not end unless the government intervenes in order to mend three core issues: address current staffing; remove the obstructionist chair of board of directors; and stop political interference in personnel hiring and in putting water supply lobbyists (water bottlers and tankers suppliers) above KUKL’s interests.

KUKL should hire competent staff for the vacant positions and replace personnel who do not have the required abilities. These include engineers of varying skills, machine operators, mid-to-senior level sectoral management staff, and overseers. The current general manager is not getting timely and appropriate cooperation from the board chair to fill these positions and enhance capacity of the existing ones. It will affect service delivery of KUKL.

Furthermore, the current board chair is staying beyond his term limit by coaxing politicians, delaying annual general meetings (which have not taken place since 2014), and making KULK a dumping ground for employing politically affiliated personnel. An uncooperative board chair—who has been on KUKL’s board since 2008 and chairman since 2014—with no respect for corporate governance, and who interferes in day-to-day administrative issues can virtually immobilise other management staff, including its competent general manager. The current board chair, who has even lost confidence in his fellow board members, needs to be booted out of KUKL.

Taking action

KULK’s annual general meeting is scheduled for the third week of January. The government should use its rightful authority and coerce the board chairman out of KUKL. Furthermore, the two large private sector umbrella organisations that are represented in the board of directors of KUKL need to behave as professional private sector players and not do the bidding of politicians and lobbyists. The private sector representation is failing to deliver the kind of management skills and visionary leadership expected of them at KUKL.

KUKL needs the recent NEA-type management, ie a competent and respected managing director or general manager fully backed by the board of directors, to ensure that Melamchi water is timely and efficiently distributed to the people of Kathmandu.