NepaliEconomy.com: August 2008

Saturday, August 16, 2008

A fiasco named NOC

A fiasco named NOC
eKantipur, 15-Aug-08
BY SANJAY SHRESTHA

The state-run Nepal Oil Corporation has been in operation since January 10, 1970. We can say that the NOC has been able to maintain its vision and mission as mentioned in its profile by providing some degree of satisfaction to its unsatisfied customers with its services.

The facts show that there has been a dramatic change in the prices of gasoline in the last couple of years. It is not necessary to go back and compare the rates since its establishment. The data of the past 18 and a half years should suffice. Between 1990 and 2008, the prices of petrol, diesel and kerosene have swelled from Rs 19, Rs 7.50 and Rs 6 respectively to Rs 80, Rs 56.25 and Rs 51.20.

The NOC has always explained periodic price hikes by saying that they were unavoidable to save the corporation from the continuous losses it was suffering. Everybody knows the current price of gasoline. Even after the massive increase in the price, why has the NOC not been able to supply fuel in adequate quantities? Has it failed in its logistics that it cannot fulfill its responsibilities? The question remains unanswered. It would not be wrong now to say that the NOC has failed to carry out the vision and mission stated in its profile.

Although the NOC is said to be a semi-government enterprise, the government holds an enviable 98.36 percent of the shares with the rest owned by Rastriya Beema Sansthan (0.47 percent), National Trading Limited (0.78 percent), Nepal Bank Ltd (0.23 percent) and Rastriya Banijya Bank (0.16 percent). The NOC, therefore, can be said to be a fully government-owned company, and experiences unwanted and unhealthy intervention in its management. The government has direct control over its activities. The role of other shareholders is almost negligible.

Recently, the NOC stated publicly that it owes Rs 750 million to the Indian Oil Corporation. If that's true, we need to see evidence. The NOC has published no data about its financial activities as other companies do regularly. The secrecy has heightened public suspicion about the activities of its top management. The NOC is a monopoly. Why can't it bring out quarterly, half-yearly or yearly balance sheets if it has nothing to hide? Obviously, the government prevents it from publishing its financial statements. Why does the government keep such a strong grip on the NOC? Is it because some politicians pocket the profits?

There are many semi-government companies which the government has run into the ground by interfering with the management. Examples like Bansbari Shoe Factory, Nepal Airlines Corporation, Salt Trading Corporation, Nepal Food Corporation and Agriculture Corporation come to the fore. Among them, some have been dissolved and others pretend to be alive.

It has been a couple of days since the NOC introduced dual pricing for diesel. The corporation claims that it can cut its losses from Rs 750 million to Rs 650 million with this move. How feasible is the policy? And how effective will it be?

The NOC's storage policy provides another example of its lack of vision. Its present storage capacity is enough to fulfill the country's fuel requirement for only one and a half months. The NOC depot in Kathmandu has a capacity of 22,590 kiloliters, whereas the Amlekhgunj facility can store 23,640 kiloliters.

The NOC has been increasing the price of oil twice or thrice each fiscal year. For how much longer does it want to make the people suffer for fuel? Something is rotten in the NOC. It has racked up massive debts. Does it have any plans to make itself a debt-free company and start making money for a change? In plain language, the corporation is in need of a complete overhaul.

The Indian Oil Corporation, which is only six years older than the NOC, announced its quarterly unaudited profit of Rs 415 crore (Indian currency) in July 2008. Poor NOC announces losses every year.

The NOC should know that increasing the prices will not solve its problem. It should find long-term solutions to at least maintain a steady monetary policy without incurring losses. If the NOC is to become an efficient organization, it has to first come out from under government control. It could also issue shares to raise capital. If the NOC cannot break free of government interference, an alternative should be established.

WFP unveils plan to feed 2.5m in Nepal

WFP unveils plan to feed 2.5m in Nepal
eKantipur, 15-Aug-08

The World Food Program (WFP)-Nepal announced plans on Friday to expand operations to feed 2.5 million people who are of late struggling with the compounded effects of high food prices, decade-long conflict and drought.

The UN food agency in a statement said approximately half of those in need would be covered under the WFP’s existing program targeting 1.2 million people struggling to recover from conflict, an onslaught of natural disasters and the additional burden of high food prices.

Under the expanded operation, an additional 1.3 million will receive food assistance, and a minimum of 31 districts will be covered.

“In a country where more than 40 percent of the people are undernourished, millions of people are already living under constant threat of hunger. We have already seen how rising food and fuel prices have forced families to reduce the amount of food they consume - putting them at risk of malnutrition,” WFP country representative Richard Ragan said in the statement.

WFP-Nepal said it has recently received from Saudi Arabia a US$ 6 million contribution, announced earlier this week as part of the WFP’s package to assist 16 “hunger hotspots” across the world including Nepal.

“The contribution from the Kingdom of Saudi Arabia will help us to rapidly scale up to feed Nepal’s hungry, but we still need an additional US$ 70 million to reach the 2.5 million Nepalis who are becoming hungrier everyday as food prices continue to rise,” stated Ragan.

Nepal relies heavily on imports from its neighbors, primarily India, for essential commodities, including food and fuel. “Frequent strikes by transport syndicates disrupt the flow of commodities, causing localized food shortages and further increasing food prices,” the statement added.

Other major donors to the WFP’s operation to provide food assistance to vulnerable people affected by high food prices and conflict include the United States, the UN Central Emergency Revolving Fund, the Netherlands and Germany.

The world’s largest humanitarian agency has planned to feed around 90 million people in 80 countries.

NOC chief goes ‘underground’

NOC chief goes ‘underground’
eKantipur, 16-Aug-08
Kantipur Report

In an ironic twist, which comes as a mockery of the country's governance, the managing director of Nepal Oil Corporation (NOC) has gone 'underground' after the Supplies Minister, his own patron minister, threatened to kidnap him.

"Digambar Jha is presently out of contact and has hidden himself at a place unknown to us after Minister Shyam Sundar Gupta bursting into his office Wednesday threatened to kidnap him if he did not give new licenses to operate to dealers and gas companies," said an official requesting anonymity.

Interestingly, Jha has gone into hiding at the suggestion of Home Ministry officials, whose doors he had knocked for security. "With the wrongdoer being the Minister himself, Home minister officials say they are helpless," said the official.

The 'shameful' episode unfolded after the corporation management turned down the minister's order to grant five petroleum retailing dealership licenses to four applicants.

They were Modern Crystal Hardware (Chabahil), East-West Hardware Enterprise (in Thimi and Shaktikhor, Chitwan), Mandevi Petrol Center (in Thapathali) and Shiva Pujan Oil Store (in Rupandehi).

Likewise, the minister through personal order had directed the corporation chief to issue import licenses to two liquefied petroleum gas companies based in Sunsari and Dhading.

"The orders were issued two months ago. However, given the fuel crisis and financial problems, Jha held the view that the decision should come after normalcy was restored at the corporation," said the source.

However, as the minister continued the pressure, Jha called a Board meeting to deal with the case. The board headed by the Supplies Secretary himself supported Jha's stand though. It agreed in principle to the proposal to open new petrol pumps and gas companies, but allowed the corporation management to decide on issuing licenses after fulfilling all required procedures.

None of the names the Minister gave had prepared infrastructure or shown expression of interest at NOC. "The whole process was just opposite of what the corporation follows for issuing licenses," said the source.

Wednesday, August 13, 2008

Roundup of Economic & Business News (Jul 1 - Jul 31)

Nepal just lost Rs 80 billion

Nepal just lost Rs 80 billion
eKantipur, 11-Aug-08
BY SUJIT ACHARYA

The website of the Department of Electricity Development states that survey licenses for potential hydro projects totaling more than 40,000 MW in capacity are being processed, and that the average fee to be paid to the department is Rs 10,000 per MW. This translates into approximately Rs 400 million in license fees. Most of the companies that have applied for licenses are either Indian or Nepali with low or no financial and technical capacity to develop these projects.

The reason why many Indian companies have applied is because the license fee is extremely low in Nepal compared to India's price of Indian Rs 1-2 million per MW. Most of the Nepali applicants are “hydropower brokers” or entities that do not have the capacity to build the projects. Their real intention is to unload the licenses in the resale market with a hefty markup. So joining the queue is a profitable business.

This very reason will continue to delay the development of hydropower projects because the conditions and intentions of most of the applicants are to try and find “parties” who can buy their licenses at a higher price and a “free equity” portion in the projects.

This means that the Nepali people are losing big money in potential revenue because the government is ignorant of the current energy market. The estimated income from applications for 40,000 MW would be Rs 80 billion (8,000 crores). This amount is greater than all the revenue that the government received from other resources in 2007. According to the CIA World Fact Book, the government earned US$ 1.153 billion in 2007.

This load of cash will allow us to pay for our oil imports and free the people from having to stand in line for hours to buy gasoline. It is also enough to build roads and transmission lines so that more hydro developers (Nepali and foreign) can exploit more hydropower resources and generate more revenue.

Currently, as most Nepali companies do not have the capacity to build projects larger than 20 MW, project licenses above this capacity are going to be sold to foreign companies. This means that the cost of the license for a hydropower project in Nepal is directly influenced by the cost of the license in India (which is also the power evacuation market for most of our larger hydro projects).

Today, Indian state governments charge a minimum of Rs 2 million per MW (Nepali Rs 3.6 million) to interested developers to even just apply to bid for the license. Go to www.hpseb.com/tender/nip3.doc and check it out.

While this is just the minimum fee to apply to bid for the license, state governments make interested bidders compete to quote their highest price (paid to

the government) for winning the license. Companies like GMR of

India (which is building the Upper Karnali project) paid Indian Rs 9.2

million per MW for such licen-

ses. Look it up at www. tribuneindia.com/2008/20080216/himachal.htm#8. Brakel Corporation of the Netherlands and DS Constructions paid Rs 3.6 million and Rs 5.2 million per MW respectively to the state governments. Go to economictimes.indiatimes.com/articleshow/2162265.cms for the details.

Hydropower development companies in India are more than willing to pay this high price - and India is ensuring that it maximizes its revenue collection. Simultaneously, such competitive bidding for licenses ensures the entry of actual hydro developers instead of license brokers.

On the other hand, Nepal's licensing policy is handing out these precious licenses for almost free to companies who have seen this huge “discount” or to applicants who know they can sell these “discounted” licenses for a very high rate in the secondary market. This defunct hydropower policy is making Nepal and the people the real losers when our policies should be aimed at making them the real beneficiaries. This needs to stop right away!

If India can charge a minimum of Indian Rs 2 million per MW for a hydropower license and continuously receive much higher bids than this minimum, Nepal can safely charge Nepali Rs 2 million per MW which is still 37.5 percent lower than in India. The Electricity Department and the Ministry of Water Resources need to wake up immediately and plan to introduce this current market fee because of the following reasons:

-- Nepal's rate is much lower than the going price in a country where its hydro power licenses should be directed.

-- The real developers will be identified. The high cost of the license will eliminate brokers. Real developers would rather pay Rs 2 million per MW to the government than various brokers.

-- Unless genuine developers come forward, hydro projects will not be built. This means electricity will not be generated and the country won't be earning money from royalties and taxes.

-- Some will balk at paying Rs 2 million per MW complaining that the price is higher in India because there are more benefits to be had there. This is untrue.

Finally, there will be many critics who will question how Nepali developers can afford to pay Rs 2 million per MW and complain that the higher fees will discourage the development of Nepali entrepreneurs. Nepal's policymakers first need to think about the net benefits that can be received from this policy change in terms of the contribution to the country's economic progress. An increase in the rate will bring in more revenue for the government than it receives from all other sources.

There is nothing that should stand in the way of this policy change. However, it is also the moral responsibility of the government to ensure that Nepali hydro developers are encouraged. A reasonable compromise should thus be made. The price of hydropower licenses for up to 10 or 20 MW (the average capacity of Nepali developers) should be kept at its current rate of Rs 10,000 per MW. But for anything above that (in which most foreign parties will apply), the minimum rate should be set at Rs 2 million per MW.

(The writer is the only Nepali national who has developed a hydropower project in India.)

Saturday, August 02, 2008

India's economy: Turning sour

India's economy: Turning sour
Economist, Jul 31st 2008
Having won a vote of confidence at home, India’s government now faces another—abroad

INDIA’S coalition government went to outlandish lengths to win a vote of confidence in Parliament on July 22nd, a victory it hopes will prolong its life until early next year. To appease one politician, it even renamed the airport in Lucknow, a state capital, after his father. (The ingrate still voted the other way.) Asked to justify this ploy, India’s finance minister dryly remarked, “It will facilitate better take-offs and landings.” Now he and his fellow reformers must facilitate a safe landing for India’s economy. It too may go the other way.

Until the start of this fiscal year (which began on April 1st), India’s economy had its head in the clouds. Having grown by at least 9% a year for three years, it was attracting more overseas capital than it knew what to do with. Foreigners ventured a net $20 billion on its booming stock market last fiscal year; overseas banks lent even more to its mighty companies.

But India’s share prices were collapsing and its economy slowing even before July 29th, when the central bank stepped up its campaign against inflation by hiking its benchmark “repo” rate for the third time in less than two months (see chart). Industrial production expanded by only 3.8% in the year to May. The figures for capital goods and infrastructure industries, such as steel, cement and electricity, were particularly dismal for a country that prides itself on having an investment boom.

A big gap has now opened up between the increasingly gloomy views of India’s prospects from abroad, and the defiant optimism of its own forecasters. The Centre for Monitoring [the] Indian Economy, in Mumbai, thinks India will still grow by 9.5% this fiscal year. JPMorgan, a foreign bank, foresees growth of just 7%.

The imponderable is the oil price. Though prices have eased on world markets, India still faces an import bill for crude that may reach $120 billion this fiscal year, compared with $69 billion the year before. The extra burden is about 4% of GDP—a huge amount. The Congress-led government, which must go to the polls before May, is reluctant to pass on the full cost to voters. When it raised pump prices in June, the opposition described this as an “act of economic terrorism”.

But by sparing households, it is jeopardising the public finances. Between them, the fuel subsidy, cheap fertiliser, forgiven farm loans and fatter pay-packets for bureaucrats, could increase the budget deficit to 10% of GDP this fiscal year, if the red ink spilled by state governments is included.

When you combine government largesse with the oil bill, you get an external deficit which could reach 4% of GDP this fiscal year. Narrowing that gap is a matter of urgency. The foreign capital needed to bridge it is now less forthcoming. The threat to India’s exchange rate is plain.

It would be too sensational to talk of a run on the rupee. India is not a debtor nation: its foreign assets—including more than $300 billion of foreign-exchange reserves—outweigh its foreign debts. Moreover, the foreign investors with direct stakes in India’s growth will not liquidate their back offices or assembly lines just because of a bit of cyclical gloom.

More fickle, however, are the foreigners who bet large sums on Indian shares when the stockmarket was in full bloom. They are deserting the country, withdrawing $6.7 billion so far in 2008. The only consolation is that as share prices fall, so does the amount they can repatriate, relieving some of the pressure on the currency.

Two modest reforms, pending in Parliament, might restore some of India’s charms to foreigners even before the next election. Both are designed to encourage outside investment in the financial sector. One would raise the cap which limits foreign direct investment in insurance. The other would give foreigners who invest in Indian banks voting rights commensurate with their stakes. But India must learn to cope without an inrush of foreign money. That may entail slower investment and a narrower fiscal gap. In particular, the government, having won its confidence vote and prolonged its life, cannot now afford to wait until after the next election before again raising fuel prices.
Neither epic nor tragedy

Even as they dump shares, India’s foreign investors should also take stock. They were wrong to count on a 9-10% rate of growth. Such a rate could be sustained only with a furious pace of economic reform, which India’s mutinous democracy cannot provide. Any projection that relies on the wholesale unshackling of the market for labour, land or electricity would therefore be about as useful as the astrological projections that convinced India’s opposition leader he would triumph in the no-confidence vote.

But India also benefits from what financial types might call the “democracy put”: its politics forestall the worst outcomes, even if they squander the best. India’s policymakers only seem able to reform under duress. They accomplish little during good times but have plenty of rabbits left in the hat when darker times loom. For example, India is still a lightly taxed country, and the proposed introduction of a nationwide tax on goods and services could add three percentage points to the taxman’s share of GDP. Likewise, the government still owns hundreds of enterprises. It may not have time to flog much of this patrimony before it goes to the polls. But it could prepare the ground for a sale soon after.

In the past few years, foreigners have enjoyed reciting the “India story”, the epic tale of a youthful nation throwing off its shackles to fulfil its destiny as an economic superpower. Indians enjoyed telling the story back to them, with justifiable pride and perhaps a little masala (ie, embellishment). That story is not all myth: in the past few years, India’s sustainable rate of growth has increased from less than 6% to somewhere close to 8%. But as recent events show, the India story often resembles a comedy as much as an epic. Its policymakers run around in circles, swapping partners and scandalising onlookers, but with luck pull it together at the end.