Broaden markets for higher investment

Broaden markets for higher investment


After 16 years of effort, the West Seti Hydropower Company has failed to win the Indian market for export and rope in enough investment to implement the West Seti Project. Interested investors shied away citing the lack of good governance and investor-friendly environment. Meanwhile, Nepal remains under 13-hour-a-day load shedding because the supply has not kept up with the demand. To attract investment in hydropower, Nepal must reduce internal political risks to investment and change the monopsonic market for electricity.

While small hydropower projects are not cost effective, big projects are difficult to do, as they are financially expensive, technically complex, and legally intricate. Often, small countries do not have sufficient resources and expertise to design and implement them and market their output. Therefore, to harness their abundant water resources, Paraguay, Bhutan and Nepal have turned to external sources for funding and to neighboring countries for markets.

External funding – official development assistance (ODA) and foreign direct investment (FDI) — comes with conditions attached. Although ODA is given as grants or low-interest loans, donors have often their own political and economic objectives to promote. Because of this, they also tend to favor the big country when it teams up with a small nation to do a project. Besides, irresponsible political parties and their offshoot NGOs can kill big projects in small countries, the fate suffered by the Arun Project at the hands of UML and its sister NGOs.

FDI seeks to maximize profit and call for concessions, political stability, security for investment and guaranteed access to existing and new markets. If negotiated carefully, it brings more value to small nations by saving them from huge debt burden, efficiently tapping the existing markets, paying taxes, and co-opting reckless political parties and anti-progress NGOs.

Nepal’s experience has been mixed. Most externally funded water projects have posed no political problems, other than sharing on the delay all projects face in Nepal. While the privately financed Bhote Koshi Project has created some difficulty, the Indian assisted Gandak and Koshi projects, both multipurpose and located at or near the border, have proved a sore in Nepal’s heart. The Gandak Project gives Nepal either water for irrigation or electricity, while India gets both of them more than Nepal. The Koshi Project, which has no power component, inundates Nepal and protects India from flood in monsoon, and irrigates large swaths of India while Nepali farms parch in the dry season.

Such blatant imbalance reflexively prompts us to avoid doing water projects with India. But impulse is not the best guide for development. We need to look at the reasons behind such imbalance — including the lack of information and expertise and betrayal by decision-makers and the asymmetric power relations between the two countries – and try to remove or minimize them next time around. We can certainly do that better now.

We have more information and higher expertise now than before, and whatever is lacking can be obtained from outside. Also, we have freer and more vibrant media and more transparency in government to dig out betrayal and hold the betrayer to account. Regional and global forums can help mitigate the impact of asymmetry. Therefore, Nepal must not shy away from doing water-based projects.

When possible, Nepal should do such projects at locations and with partners that are least likely to create avoidable troubles. When necessary, it must do them with neighboring countries as well. Power projects done deep inside the country often do not generate benefit-sharing and water rights issues. If the irrigation component in multipurpose projects looks too risky, it can wait. The perfect should not be the enemy of the good. So we must harness hydropower before it loses its significance further in global energy mix and in India’s energy configuration.

Hydropower had its days after the Three Mile Island and Chernobyl nuclear disasters. Now that the horrors of those catastrophes have faded from public memory, nuclear energy is regaining popularity once again. In India, the share of hydropower, which is 21 percent of energy supply now, is set to decline in the future as that country begins to develop nuclear energy massively under the agreements with the United States and France.

This should give us a sense of urgency to reduce internal political risks and expand markets so investment could be increased in hydropower. Political uncertainty and corruption have been endemic to Nepal; the Maoist quest to impose the communist mode of ownership and production has scared investors further. To lure investors, the safety and guarantees to investment, as offered in our laws, must be strengthened further.

More importantly, the monopsonic market is the biggest obstacle to Nepal’s hydropower development. Economics 101 says monopsony is a market situation where a single buyer dictates the price of the product offered by several sellers. Depending on a single market is politically risky and economically imprudent, even if the annual increase in energy demand is hovering over 10 percent in India. We must actively seek to change it.

Hydropower had its days after the Three Mile Island and Chernobyl nuclear disasters. Now that the horrors of those catastrophes have faded from public memory, nuclear energy is regaining popularity once again. This should give us a sense of urgency to reduce internal political risks and expand markets so investment could be increased in hydropower.

Theoretically, Kathmandu can do three things to broaden the market. First, it should tap the market in Tibet and other nearby provinces of China. Secondly, it should convince India to recognize power lines as transit facility to open the door to export surplus electricity to Bangladesh. Thirdly, it should invest in new technologies, or wait until they become available, to make storing and exporting electricity commercially viable.

While such technologies may take many years to come if at all, other two measures can and should be initiated right away. Time for exploring China market has arrived, as Tibet and other western provinces have begun to develop. When I was foreign secretary, we did not focus much on exporting electricity to China, because the transmission cost and loss from Nepal to Chinese coastal areas, where most of energy demand was concentrated, was too prohibitive.

The effort to include transmission lines as transit facility needs to be picked up from where it was left at the end of the Almaty Conference on Landlocked Countries 2003. During my ambassadorship in New York, we had made a proposal to that effect and thrown in oil pipelines to make the proposal palatable to transit countries, as we were preparing for the conference. Transit countries resisted our proposal until the conference started.

Finally, they agreed to include pipeline but not power lines. After intensive lobbying accompanied by threats to drop pipelines also from the final agreement, most transit countries relented on power lines. Accordingly, the final draft agreement mentioned power lines. However, India held out insisting that there should be bilateral agreement before bringing the issue to a multilateral forum. So it became sort of a bilateral issue between Nepal and India.

On the last night of the Almaty meet — soon after I had left for my room dead tired from marathon negotiations — Purusottam Ojha, now commerce secretary, knocked on the door of my hotel room around 2 in the morning. Visibly frightened, he told me that an Indian delegate from the capital, who was a woman, had pulled him aside and threatened with unpleasant consequences if Nepal kept insisting on the power lines.

I told Ojha to hold the fort until we received instructions from Kathmandu and asked the foreign secretary to get directions from Prime Minister Surya Bahadur Thapa. The instructions were predictable. I went down to the negotiating room, obtained a pledge from the Indian delegate to take up the issue of power lines bilaterally and dropped them from the final draft of the Almaty outcome. It is time to reopen that issue with India.

New Delhi might not be too eager to accept power lines as transit facility, fearing that it might lose its grip on Nepal’s water resources. But we should convince India that the status quo, a recipe for inaction, will not benefit either country. If bilateral dialogue fails to bear fruit, we can take up the issue in SAARC and BIMSTEC. Even Dhaka’s proposal for trilateral talks among Nepal, India and Bangladesh over the use of the shared rivers could be a way forward, if the agreement among Argentina, Brazil and Paraguay on the use of Parana River water is any guide.

Although Nepal might not have enough surplus electricity to export to Bangladesh for some years to come, the mere existence of such access, together with the opening of China market, will attract investment and give a fillip to our hydropower sector. The benefits will be regional. Nepal’s economy will improve; homes and factories in India, China and Bangladesh will get power. Besides, India will have the opportunity to mitigate the blatant unfairness left by the Gandak and Koshi projects.

While Nepal must keep its political house in order and explore the Chinese market for hydropower, India, the largest state in South Asia, must facilitate efforts to broaden the markets and facilitate regional economic integration. The now forgotten “Gujral Doctrine” could be a good starting point to do so. There is no wisdom in living in dark homes and watching idle factories while our water continues to drain in the Bay of Bengal, unused.

Sharma is former ambassador to the United Nations and the United Kingdom

Published on 2011-01-30 01:10:53

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