The biggest problem in our hydro sector is that we failed to learn from our mistakes
Pessimism is slowly gaining ground in Nepal’s hydropower sector. Even the leaders of the sector have started losing hope that Nepal can attract any significant amount of Foreign Direct Investment (FDI) in the near future. “Nepal is not going to receive FDI. Make it the headline of your article,” said a hydropower expert and entrepreneur Gyanendra Lal Pradhan during a recent meeting. Our politicians and bureaucrats aren’t serious about FDI and as long as they aren’t serious, we are not going to get it, Pradhan explained.
Pradhan is not just a hydropower expert and entrepreneur. He is also the chairperson of the Energy Committee of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), the leading umbrella organization of Nepal’s private sector. Pradhan doesn’t seem to be wrong, though he may sound pessimistic.
For a country with a low GDP like ours, FDI could be the best bet to accelerate economic growth. But the FDI situation is not encouraging. Foreign investors are making investment pledges worth billions, according to the data provided by the Department of Industry (DoI).
But statistics maintained by Nepal Rastra Bank (NRB) show that only a fraction of these commitments are being translated into actual investment.
Take the last fiscal year (2015/16), for example. In this year, foreign investors pledged Rs 15.13 billion in Nepal, according to DoI. But NRB statistics show that—DoI officials say they do not have a mechanism to monitor the actual investment—the actual FDI amounted to less than Rs 5 billion in 2015/16. The previous year (2014/15) was no exception. Nepal received an all-time high FDI commitment of Rs 67.42 billion but the actual FDI inflow stood at Rs 4.38 billion.
The facts about FDI in hydropower, one of the sectors with highest FDI potential, are even gloomier. The last Nepali hydel project to receive FDI is the 216 MW Upper Trishuli. But that was more than a decade ago. What is perhaps even more worrisome is not many foreign investors have even been making investment commitments in Nepal’s hydropower.
The same old problems have been keeping us behind, to cut the story short. Though the insurgency ended through a peace agreement between the Maoist rebels and the state 10 years ago, Nepal is yet to achieve political stability. The country has seen 24 governments over the past 26 years—with eight governments formed in the last nine years alone. That gives a loud and clear message to domestic as well as foreign investors.
Multiple problems as a result of political instability, lack of policy predictability, lack of industry-friendly labor laws and difficult environment for doing business discourage foreign investors. Even domestic investors are finding it hard to make investments. In such a situation, it is not practical to expect foreign investment.
Frequent changes in the leadership of key ministries dealing with industry, trade and commerce have made the situation worse. In the past five years, these three ministries never had stable leadership, with ministers changing with each government change. This has dealt a serious blow to policy stability in the country. Key ministries such as industry, trade and commerce should have stable leadership, including ministers and secretaries. Sadly, this is not the case in Nepal. This has led to policy inconsistency, deterring investors, domestic as well as foreign.
Also, hydropower issues are unnecessarily politicized in Nepal, with foreign funded projects being subject to attacks from political groups. For example, a petrol bomb was hurled at Indian major GMR’s office in Kathmandu on January 5, 2016. This was not the first attack against the Indian infrastructure and energy major. On May 22, 2011 a Maoist-led mob had attacked the GMR office and site camp in Dailekh, burning them down and injuring a guard as well as two engineers. GMR is developing the 900 MW Upper Karnali hydroelectric project.
The World Bank Doing Business Report 2016 rightly highlights the difficulties that Nepali private sector as well as foreign investors face. The report says starting a business in Nepal requires seven procedures, takes 17 days and costs 28.40 percent of per capita income. Nepal currently ranks 105th in the world in terms of the ease of starting a business, down from 94th in 2015. Similarly, in terms of enforcing contracts, the report has placed Nepal 152nd position among 189 countries. Contract enforcement in Nepal takes 910 days and costs 26.8 percent of the value of the claim in the country, according to the World Bank.
Politicians and business leaders during their abroad trips talk about good business environment and how they value FDI in Nepal. Foreign investors believe them and make investment pledges. But by the time they have to make the actual investment, they are well aware of the ground realities.
What to do?
Something we have never done so far. Mentioned above are some of the greatest barriers to inviting FDI. Unfortunately, they have existed ever since we seriously thought about exploiting our hydropower potential. It’s high time we broke these barriers.
To start with, there has to be an all-party understanding for the development of hydropower sector. Our policies and approach to hydropower development should not change with government change. The political parties should see to it that our hydropower policies remain the same no matter which party or parties are in the government. That would ensure policy stability for foreign investors, which in turn could attract FDI.
One major complaint is that our bureaucracy is not supportive of FDI. Hydropower experts claim that instead of facilitating foreign investors, our bureaucrats get jealous of them, thinking that the latter will make great profit, and so they create hurdles for foreign investors. What the investors face from our bureaucracy—mainly the DoI, the Department of Electricity Development, MoI, forest ministry, etc—works as a repellant. Our bureaucrats need to understand that the main motive of foreign investors, anywhere in the world, is to make profits.
Similarly, we need several key pieces of legislation to be updated. For example, the Electricity Act of 1992 has not been able to address issues related to mega projects such as concerns about resettlement, transmission line construction, and multiple use benefits. Also, this legislation does not provide a vision to manage a competitive bidding system that is transparent and open to the public for comment. Similarly, the Foreign Investment and Technology Transfer Act (FITTA) 1992, too, should be amended to be compatible with the changing FDI scenario.
Keep the hope
We shouldn’t lose the hope of attracting FDI in hydropower. In fact, it’s quite encouraging that some foreign investors have committed to invest in our hydropower despite the odds.
Mainly Indian and Chinese companies have committed to invest in some of our mega projects. For example, India’s GMR and Satluj Jal Vidyut Nigam have committed to the 900MW Upper Karnali and 900 MW Arun III, respectively. Similarly, a Chinese company has committed to the 750 MW West Seti hydro project.
Nepal needs to roll out a red carpet for foreign investors, something like Ethiopia is doing.
The once-poorest country in the world is building 6,500 MW of hydroelectricity, thanks to FDI. According to Pradhan, Ethiopia issues hydropower licenses to foreign investors within three days of application, signs the Power Purchase Agreement (PPA) with the investor within a month, acquires land for the project within 45 days, issues FDI approval within two months and cancels the license if the developer doesn’t begin construction within six months.
Why don’t we learn from Ethiopia?
The author is coordinator of Republica’s online edition