Thursday, September 30, 2010

Maoists’ hydro madness in Nepal

My latest piece is about UCPN(M)’s decree to stop all hydropower projects funded by foreigners and that are export-oriented. I think it is wrong. Period. Why does not this party do something that will boost morale and incentives of investors so that we have badly-needed infrastructure and industrial investment in the economy. It is one of the quickest ways to create jobs and stimulate the stagnant economy. If they think all electricity will be exported, then let the terms and conditions be revised in such a way that electricity produced in our country will first have to fulfill domestic demand and then be allowed to export the surplus. I just do not see the logic in restricting foreign investment, for whatever investment and consumption purposes it may be, in Nepal. I don’t think they will invade our resources and snatch our sovereignty. It is maniac thinking in this century! Additional discussion in my previous blog post.

Maoists’ hydro madness

The demand of Unified Communist Party of Nepal (Maoist)’s water resources and energy department to cease all projects with foreign investment in hydropower sector and let them be reviewed by the parliament’s committee on natural resources was a bombshell. It shook the confidence of domestic as well as foreign investors. They have explicitly argued that the party will oppose any investment in hydropower that is export-oriented and funded by foreign investors.

This wrongheaded and senseless decision, if implemented, will cost the nation dearly in terms of investment, employment, economic growth and, above all, macroeconomic health of our fragile economy. Furthermore, it will exacerbate the existing power crunch.

This decree from the UCPN (M) shows that the party does not have a viable and coherent agenda to steer the economy toward a long-term sustainable growth path. Their failed Marxist ideology reeks of opportunism and hypocrisy. Recall that it was the Maoist government that announced a plan to generate 10,000 MW of electricity in 10 years time beginning 2008. Since the investors were not convinced that their investment deals will be honored by UCPN (M) party cadres and youth wings, they had lack of confidence in the Maoist government and hesitated investing. The then Finance Minister Baburam Bhattarai had to implore with investors, both domestic and foreign, to invest in the country as their dream of leapfrogging to double-digit growth rate in three years’ time had no chance of being realized. Out of power and unable to win confidence of other parties to officially run the state machinery again, they are doing exactly opposite of what they promised to the public and investors.

The average economic growth rate in the past five years has been below 4 percent. Unemployment in the formal sector is stagnating. The industrial sector growth rate declined for three consecutive years since the Maoists joined mainstream politics. It is recuperating after hitting a negative growth rate last year. Similarly, foreign direct investment has tanked. The incessant interference in the industrial sector by militant youth wings and politically-indoctrinated, belligerent trade unions has compelled both domestic and multinational firms to shut down operations, reduce production, and severely affected competitiveness of Nepal’s industrial sector. The result has been devastating: Job market has stagnated, exports have decreased while imports skyrocketed, shortage and carteling have led to unusually high prices of goods and services, and economic growth rate suppressed below 4 percent.

Amidst this unfortunate situation deliberately inflicted by misguided and naive approaches of UCPN (M), the only hopes of reviving the economy rests on two sectors Nepal is naturally endowed with: Tourism and hydropower. There is pretty much a consensus among political parties, including the Maoists, that they will let Nepal Tourism Year 2011 run smoothly. Excellent. Unfortunately, we do not have similar agreement for hydropower sector. It might be because this sector offers a fertile ground for hefty commission for an extended period of time. The UCPN (M) might also be planning to use this issue as a bargaining chip with India as most of the hydropower projects are to be constructed by Indian companies or joint ventures involving Indian companies. Whatever the political motive behind this move, one this is certain: With the Maoists basically against all foreign-invested hydro projects, the prospect of fulfilling domestic power demand and exports of surplus electricity look dim. It will severely affect our ability to create jobs, spur infrastructure investment-led growth, and narrow down negative balance of trade.

Writing a column in one of the leading dailies, a Maoist-affiliated member of parliament and analyst accused those opposing this new stance of his party saying that they are ignoring domestic power crunch and industrial development, and are hell-bent on exporting hydropower to narrow down trade deficit with India. He alleges that critics are not thinking of using electricity domestically to produce goods, which then can be exported at a high value instead of cheaply and directly exporting electricity. He argues that electricity is a ‘raw material’.

This stance reflects his party’s wrongheaded, naive and contradictory analysis about the use of our natural resources. First, no investor will export electricity if domestic demand is very high, which means the price domestic consumers are willing to pay is also very high.

Second, since this is an oligopolistic market – where there are few sellers and many buyers – low supply, high demand, and high price means that there is abnormal profit. No sensible investor would want to ignore profits in the domestic market. Even if they ignore, terms and conditions for purchase of electricity can be revised so that power is not exported until domestic demand is satisfied. With so many big hydropower projects on the anvil, exporting surplus electricity makes a perfect business sense, whose positive externalities, among others, would be a potential reduction of trade deficit and high economic growth rate. Bhutan is doing exactly this.

Third, running rivers are our raw materials. Harnessing latent energy out of this and transacting it within and outside of our border comes under services sector. Fourth, at present neither the government nor the domestic investors have financial resources and expertise to fund big hydropower projects. Hate it or love it, we will need foreigners to invest in the hydropower sector. There is no alternative to it. Small hydropower projects could be funded by domestic investors, but not big ones, which is the need of the hour for high and sustained growth. The country has already wasted way too many scarce resources in funding small hydropower projects that cannot fulfill increasing electricity demand in the domestic economy. We need to look for economies of scale to remain competitive.

The seemingly opportunistic, wrongheaded and senseless stance of the largest party in the parliament should be shelved for good. Else, investors will shy away from investing in Nepal, job market will not grow, and economic growth will continue to stagnate at a low level. If investments are made in line with the laws and regulations of the hydropower sector, then there is no logical justification to disallowing foreign investment in hydropower sector, be it for domestic use or exports.

[Published in Republica, September 30, 2010, pp.7]