Wednesday, February 17, 2016

The root of energy crisis (deficit) in Nepal

Ambition without vision
Painful and drastic reforms are needed in the NEA and NOC to realise energy goals

The economic devastation caused by the April 2015 earthquake and trade blockade for about four months have reignited discussion over production and import diversification, and economic self-sufficiency. It has become a hot topic amongst politicians, talking heads, opinion makers and the public in general. Ministers are making bold statements about self-sufficiency. Prime Minister KP Oil even promised that his government will end load-shedding within one year and connect every household to gas pipelines. 

As events unfold and experts debate on its possibility, it appears this will likely be an ambition without a vision and a good homework, mainly due to the lack of willingness to overhaul management, jurisdiction and operations of Nepal Electricity Authority (NEA) and Nepal Oil Corporation (NOC).

Binding constraint

The most binding constraint to economic growth is the inadequate supply of infrastructure, especially electricity. This is not only stymieing industrial activities, but also leading to an increase imported fuel, which is widely used by small and medium enterprises to sustain their operations even if they have to incur higher costs. Fuel import accounts for about 20% of total imports (about $1 billion annually) and is larger than the total value of merchandise exports. The cost of production using imported fuel— procured and distributed through Nepal Oil Corporation (NOC) — is expensive relative to hydroelectricity and hence the prices of goods and services in the market are also relatively higher compared to other comparable cities around the world. 

Against this backdrop, the biggest policy bang for a buck lies in accelerating electricity generation— both hydropower and alternative sources such as solar and wind— to meet demand. It will not only reduces demand for imported fuel, but also increases fiscal revenues, economic growth and new jobs. However, over the past 100 plus years very little has been achieved due to the politicization of the entire sector (Pharping hydro power started generating electricity on 22 May 1911). 

Without a complete overhaul of management, financial and operational efficiency of NEA and NOC, energy self-sufficiency would continue to remain a distant dream. Despite all the promises, politicians have shown little credible interest in overhauling these two public enterprises as it cuts across party lobbyists, unions, syndicates, employment for cronies, and periodic financial bonanza.

Inefficient institutions

The NEA and the NOC more or less solely procure and sell electricity and fuel, respectively. They are operating without competitors and dictating quantity purchased from suppliers on their own. It leaves a huge space for financial and distribution malgovernance— often with the tacit support of politicians and lobbyists.

Both the public enterprises are financially bankrupt. The NEA’s operating loss amounted to about 0.4% of GDP in FY2015. About Rs27 billion outstanding debt was written-off in FY2012 to make it financially viable and to make it worthy for investor’s consideration. However, it continues to accumulate losses as electricity prices are not adjusted to reflect cost of production or purchase. Meantime, little has been done to reduce technical losses, one of the highest in the world. Total peak time supply is barely 55% of total demand, leading to load-shedding of between 12 and 16 hours a day (contingent upon the level import from India). 

The NOC is in a more perilous state as it has no long term investment assets to bank on for revenues. The management and distribution inefficiency, and mismatch between buying and selling prices of fuel and gas have turned NOC into an infamously inefficient public enterprise. In FY2014, its losses amounted to about 0.4% of GDP as domestic fuel and gas prices were kept low despite high international prices. With low fuel prices internationally for over a year and reluctant downward adjustment of domestic fuel prices, it is in a much better shape now. Although its accumulated debt amounts to about 1.12% of GDP, it nevertheless is planning to distribute bonus earned from the revenues generated by charging high prices to consumers (with the commitment to cover past losses). 

Hollow commitment

Any political commitment or speech on reforming these two public enterprises is an additional political capital for parties, and they have not shied away from capitalizing on that. For instance, during the second Constituent Assembly election, Nepali Congress promised to generate 5,000 MW of electricity within five years and achieve economic growth of 8-10%. UML promised to complete all major hydropower projects (both storage and run-of-the-river types) within 10 years by involving the private sector and also end load-shedding in five years. Meanwhile, the UCPN-M promised to end load-shedding in three years and develop 10,000 MW, 20,000 MW and 25,000 MW in the 10, 20, and 40 years respectively. 

Lately, the government has been promising to end load-shedding within a year (mostly by importing from India) and generate 10,000 MW within ten years by declaring an energy emergency (similar one came in 2008 as well followed by a Ten Year Hydropower Development Plan in 2009). Also, the government has allowed the private sector to procure and distribute fuel, technically breaking the monopoly of NOC. 

Painful reforms

A lot of painful drastic reforms are needed to realize even a fraction of these promises. Unfortunately, the political parties are not up to the speed and have been unwilling to forgo representing the special interest groups. This has been the main reason behind the delay in cost evaluation of projects, prolonged and contentious procurement (the earlier energy minister even snatched regular management jurisdiction of NEA to her ministry’s chamber), and trading of generation licenses. The politically-affiliated unions at the NEA and affiliates in districts are further complicating the situation by demanding unjustified compensation and shares. Similarly, the NOC has been a plump earning source for unscrupulous traders and political affiliates. 

The bureaucracy is more hesitant than before to complete procurement and necessary project clearances on time. There is delay in constructing transmission lines and signing power purchase agreements, which has been put on hold on the misguided belief that the country will have surplus power during wet season from FY2018. The demand for electricity is never linear in an energy-hungry country like Nepal. Electricity acts as an alternative source of energy to fuel and is convenient as well as relatively cheap. Hence, immediately after the fuel blockade, the demand for electricity was so high that the NEA’s transformers exploded. The actual latent demand for electricity is much higher than the one estimated by the NEA.

Painful reforms are needed to reform these two public enterprise and the sectors they represent. To avoid irregularities, discretionary power of ministry and management should be minimized and a rule-based system (breaking up production, transmission and distribution aspects), inscribed in an Act, should be enacted. This means overhauling procurement processes, requirements for preliminary project assessment, inter-ministry and inter-department coordination, efficient and responsible human resources, and politics free decision-making and operations. Unfortunately, it is easier said than done.

It was published in The Kathmandu Post on 15 February 2016