Federalism here we come

This article was first published in The Kathmandu Post, Jan 12, 2018.

Following the completion of local, provincial and federal elections, there are now 761 governments in the country with full authority to govern as per the constitution. In a way, we now have 761 labs that will be testing different policies and governance practices. Each rural municipality, municipality and provincial government has the authority to ensure rule of law, develop quality public infrastructure, design the syllabus up to the secondary level, maintain sanitary facilities, improve service delivery and upgrade the quality of life of local citizens. Each government is free to develop systems that facilitate the process of paying local taxes and guarantee optimal utilisation of local resources. 

The Local Government Operation Act, 2017 allows local governments to develop and implement short-, medium- and long-term plans. This means we will be experimenting with different kinds of governance mechanisms, organic ways of ensuring rule of law and different modalities of tax collection. The bright side is that we might see new and innovative ways of ensuring good governance. The traditional modality of adopting one homogenous way of governance will come to an end. Local governments are in close contact with the people which will force them to be more accountable. There will be no space for big talk and zero delivery. Take, for example, the way locals started breathing down the mayor’s neck when he took steps that would damage the archaeological integrity of Rani Pokhari, an ancient pond in central Kathmandu. This applies to other local governments too. Local leaders who fail to perform will be voted out in the next election.

Unequal distribution

The federal states were clearly not demarcated on the basis of financial and natural resources. There are some local governments which are richer in terms of finance, natural resources, public infrastructure and human resources than other local governments. Likewise, it is easier to develop connectivity infrastructure in the plains than in the hills and mountains. This means that there are some unavoidable constraints for local governments in the highlands. They will have to be more creative and come up with better ways of development, something their plains counterparts will not have to confront. This will give us a clear picture of local governments evolving through this transition uniquely in the mountains, hills and plains. 

It will be challenging for both local and provincial governments to secure funds for infrastructure projects that are critical for their growth. The central government itself will be hard-pressed to disburse money to local and provincial governments for more than fulfilling basic needs. But the good part of this system is that it creates an environment of competition among local governments to attract more resources. Like every Nepali, elected local government representatives and officials are new to the system. The way is unfamiliar to everybody. They need resources to build their capabilities and spend on public infrastructure. Local governments are responsible for developing and implementing short-, medium- and long-term plans. The challenge is that not all local governments are capable of developing such plans, nor do they have the funds to outsource these tasks. 

Localised plans are key

There isn’t one single sample that can be replicated in all the local units. There should be contextualised and customised plans and projects for each local unit. No local government will be able to make optimal utilisation of resources and develop its area without a clear vision and sound plans. The question is who will come forward to help them at this stage when the central government is struggling with its own problems. There is also the danger of local governments trying to get funds and implement some remotely developed projects that have no connection with the ground realities, and waste limited resources on them. This is not what we aspired for when we dismantled the unitary system to create local governments. The purpose is to design and implement plans and projects that make complete sense to locals. Local governments should focus on priority areas and the unique features of local lifestyles and 

livelihoods. 

This is where development partners, especially the World Bank, Asian Development Bank and Asian Infrastructure Investment Bank can support local governments through the Urban Planning Development Centre (UPDC), a planning wing of the Department of Urban Development and Building Construction under the Ministry of Urban Development. Meanwhile, the UPDC will also be institutionalised as a wing to help local and provincial governments develop plans and strategies for urban development. That can be beneficial for both development partners and the government since no donor can directly extend financial resources to local governments. 

It is important to highlight the fact that local governments need technical assistance to develop a bank of periodic plans and projects before they start pouring money into any infrastructure project. We have to ensure that all these 761 ‘laboratories’ have the required instruments and knowledge to help them become successful examples. The efforts and best practices that we will be developing in all these local units over the years will shape the future of Nepal as a whole. There is, of course, the challenge of managing financial resources to institutionalise the federal system that we have just embarked upon. But that shouldn’t discourage us from supporting local governments to adopt and implement best practices. We are trying to establish a federal system under the principles of cooperation and collaboration. This requires all stakeholders to be equally responsible for both failures and successes. 

Full speed ahead

This article was first published in The Kathmandu Post, Dec 11, 2017. 

The 10th South Asia Economic Summit held in Kathmandu last month aroused hopes and aspirations as it discussed regional cooperation on many fronts, from promoting trade and investment to mitigating the risks of climate change. The National Planning Commission (NPC) was directly involved, along with Kathmandu-based regional think tank South Asia Watch on Trade, Economics and Environment (Sawtee). The main message from the summit was that, while the pillars of prosperity are shifting towards Asia Pacific from the West, South Asia has an important role to play as a dynamic and open society with a huge population dividend. 

An enabling environment

The government scrapped a $2.5 billion deal with China Gezhouba Group Corporation to build the 1,200 MW Budhi Gandaki Hydroelectric Project, which would be the largest in the country. The decision taken just before the scheduled parliamentary and provincial elections has spread the wrong message to the public. It has also generated conspiracy theories about the ‘relations’ of political parties with China and India. The country’s credibility has eroded as a result. Nepal needs foreign investment, and it can come from any country. We don’t have to worry whether it’s Chinese or Indian money as long as it helps to develop large-scale infrastructure. 

Nepal will require an estimated $15 billion for infrastructure development within the next few years, and another $20 billion for urban development. Multilateral development banks such as the World Bank, Asian Development Bank (ADB) and newly established Asian Infrastructure Investment Bank (AIIB) are funnelling new investments into Nepal, but they are not enough. The country now needs something more—a consistent inflow of private investment in the services and manufacturing sectors. Services and manufacturing can attract investment from domestic and foreign private parties only if the government ensures an enabling environment. This means quality connectivity infrastructure, policy clarity and consistency regardless of changes of government. 

While the second condition could be fulfilled by a stable government looking towards state prosperity, it is quite difficult to see how the first condition of quality connectivity infrastructure will be fulfilled. The question is about the massive funding needed to build connectivity infrastructure. At the same time, issues of governance and the expenditure capacity of our institutions and the technical capacity of the human resources remain.

The state mechanism is going to be bulkier and more expensive with the change from the existing unitary system to federalisation. The Finance Ministry has estimated that it will cost around Rs820 billion to establish office buildings and facilities for the local and provincial governments. Considering the huge amount of money needed, managing funding for municipal and scaled-up provincial level infrastructure is another question. 

It is not practical to expect local and provincial governments to secure funding for infrastructure development at this early stage of federalism. The central government has to support local and provincial governments so they are institutionally capable to function as soon as possible. The central government has to adopt policies that create an enabling environment for foreign investors to jump in to develop infrastructure projects. This will allow the government to focus on the core issues of institutionalising the achievements made so far in terms of federalising the country. The process has been more about political engineering so far, but now it will also require finance and technical capacity.

House in order

The country’s needs are beyond measure, and we have limited resources at our disposal. Nepal has to look towards both the south and north for support, not just financial support but also political support through which both China and India can help Nepal emerge from transition successfully. 

So, we have to be clear about what we want, and design our foreign policies accordingly. The first and foremost priority of our foreign policy at present should be attracting more foreign investment. Let’s revisit Deng Xiaoping’s time to get some nuggets of wisdom. In the early 1970s, the Nixon administration got closer to China to find potential ways to contain the influence of the former Soviet Union. This was phrased as America using the ‘China Card’ as a weapon against the Soviet Union. The then leader of China, Deng Xiaoping, was asked if the US was using the ‘China Card’; and his response was quite an answer to the world. He said that China wouldn’t be on the table but at the table. He continued saying that China didn’t want to be a card but a player. 

Nepal has to abandon this ‘card’ mentality. Nepal can neither be a card nor a player at the moment. It has to come out of the ground of regional geopolitics and get its house in order first. The challenges ahead are enormous, and we have to be serious. 

Next on the agenda

This article was first published in The Kathmandu Post, Oct 30, 2017. 

The foundation for sustainable and inclusive economic development has been laid following the election of representatives to all 753 local units. With parliamentary and provincial elections slated for November and December, political parties are working on their election manifestos, highlighting the goal of making the country economically prosperous and inclusive. New political forces are emerging, and old ones are forming alliances. Civil society is playing a constructive role in pushing political forces towards a new dynamism that can help to overcome the prevailing rent-seeking mindset. 

Both our neighbours, China and India, are extending financial support for mega infrastructure projects. The international community and development partners are helping to implement small, medium and large-scale infrastructure projects and other programmes on governance and institutional capacity building. This is where we have to design Vision 2.0 for the country, which is developing an inclusive and prosperous society. Vision 1.0 was about political rights at all levels for all communities. This has been achieved with the promulgation of a federal constitution. The job of institutionalising and strengthening the capacity of new provincial and local institutions will be challenging, but this is what we have agreed to do believing that it will lead to an inclusive and prosperous society.

Targeting growth acceleration

We now have to look forward to the possibility of accelerating the pace of economic development and becoming a middle-income country (MIC) by 2030. Economic growth should be investment driven and sustainable in the coming years. Investment should be made in large-scale infrastructure and sustainable urban infrastructure. Recent growth rates do not provide an encouraging scenario to look forward to, but there are some underlying developments which can be considered to be major foundations for a prosperous future. 

There should be a push towards structural transformation of the economy through investment in priority sectors. Economic growth has so far been agriculture-driven, but there are signs of other sectors moving to the forefront of development. The service sector has been performing much better lately. Industry and manufacturing are rebounding with an improved power supply and labour market. Urban development is coming up as one of the strong drivers of the economy with a remittance-driven rise in the urban population. However, more than 70 percent of the urban population lacks access to basic facilities like medical services, education, sanitation, drinking water, energy and transportation. 

Sustainable, inclusive and resilient cities are prerequisites for better livelihood of the people and sustainable economic growth. Urbanisation has been growing at a rate of around 6 percent since the 1970s. But this has not fully contributed to economic development due to inadequate urban planning, weak institutions and neglected operations and maintenance. The Asian Development Bank (ADB) estimates that there should be investments totalling $24.5 billion up to 2030 to meet future demand. Development of rural roads, which supports the urbanisation process by connecting the hinterland with urban cores, is another major progress. These rural roads also create an enabling environment for the rural population to enjoy quasi-urban facilities. 

Highway to the future

Nepal is well ahead in terms of achieving the Sustainable Development Goals (SDGs) so far. Rural roads play an indispensable role in achieving more than half of the SDGs and fulfilling the promise of the 2030 Agenda for Sustainable Development to ‘leave no one behind’. A research paper issued by Research for Community Access Partnership states that although there is no SDG dedicated to rural transport, there are numerous linkages between rural access and SDGs. 

The authors of the paper claim that successful scaled up implementation of rural transport will contribute to realising SGD1 (to alleviate poverty), SDG2 (to achieve zero hunger and ensure food security), SDG3 (to ensure health and well-being), SDG4 (to provide access to education), SDG5 (to empower women in rural areas), SDG6 (to facilitate access to clean water and sanitation), SDG 8 (to promote inclusive growth and economic opportunities), SDG9 and SDG11 (to contribute to sustainable infrastructure and communities for all), and SDG13 (to increase climate resilience and adaptation in rural areas).

The above mentioned connections between rural transport and achievement of SDGs is based on the following five key messages: (i) Improved rural transport drives sustainable rural development and national growth; (ii) Better rural transport is key to food security and zero hunger; (iii) Subpar rural transport condemns the poor to stay disconnected and indigent; (iv) Additional money and commitment is needed to build and maintain rural road networks and develop sustainable rural transport services and, (v) Better rural transport calls for local solutions to local challenges. 

Around 50,944 km of blacktopped, gravel and dirt roads have been built across the country. Since very few of them are all-weather roads, the challenge is to upgrade them. One of the major achievements in Nepal since the early 2000s is the opening of rural road tracks. Many small and emerging towns in different parts of the country are served by roads that are usable only during the winter season.

The country needs to come out of the labyrinth of low investment, low job creation, weak and inadequate infrastructure and slow economic growth. As we now have local institutions in place, the central government should work on arranging a financing mechanism for local councils such as municipalities and village councils. If there is adequate investment at all local councils, the economy can steer a course towards structural transformation within a short period of time. The new constitution has granted greater rights and responsibilities to the local councils. Accordingly, the central government should arrange the required funding to carry out development activities during this transitional phase and focus on institutional capacity building of the local councils. 

Beyond borders

This article was first published in The Kathmandu Post, July 21, 2017. 

That Nepal can and should benefit from its two neighbours, China and India, is an opinion that is echoed across almost all platforms these days. China and India are both on their way to becoming leading economies with lucrative markets and a rising middle class. Nepal shares a 1,400km open border with India, allowing free flow of people and goods. Nepal and China, however, are separated by mountains, and the challenging terrain makes direct interaction between people and flow of goods troublesome. 

But China is a source of finance for thousands of mega projects across the globe. So, it would not be a big stretch to say that Nepal stands to benefit from its proximity with China. But for that to happen, Nepal should first build a foundation for foreign investment. The question is: what qualifies Nepal to become a good destination for foreign direct investment, particularly from China and India? 

Locational advantage

Strategic location alone is not sufficient for a country to prosper. Nepal has not been able to properly utilise its locational advantage due to a constantly evolving economic, political and social history. Of course, like Nepal, China and India also have their own history and internal problems. While China cannot fully embrace the world due to ideological differences, India suffers from a colonial mindset and extreme poverty in a huge swathe of the country. Yet, despite challenges, both the countries are striving for regional leadership.

China has launched the Belt and Road Initiative (BRI) with the objective of connecting the entire Eurasia landmass via land and sea. While Nepal is a signatory of this project, India has withheld its support. Hawkish Indian nationalists see this project as a strategy to encircle India and establish a singular Chinese leadership in the region and eventually in the world. But India’s competition with China is futile for at least the next couple of decades. India cannot afford to get into any conflicts if it is serious about improving the living standards of its citizens. 

India’s ambitions are clear. Indian Prime Minister Narendra Modi concluded his speech at the 18th SAARC Summit in Kathmandu in December 2014 saying that India’s vision of South Asia rests on five pillars: trade, investment, assistance, cooperation and people-to-people connections. India, being the biggest country in the regional bloc, explicitly highlights in all forums that it would lead the sub-continent to shared peace and prosperity. But the claim Modi made in 2014 has not materialised even to the slightest degree. Thus far, India has not taken any initiatives to push the region forward. Against this backdrop, India is now trying to block the BRI with its lack of cooperation and by discouraging neighbouring countries from being a part of it.

Mutually beneficial strategy

Even though India detests the idea of China taking the lead in connectivity in the region, Nepal is officially a part of the BRI. But Nepal has not yet assessed how to leverage optimal benefits from the Chinese initiative. First and foremost, Nepal is in need of infrastructure to advance the economy. 

Nepal government has identified major economic centres in its National Urban Development Strategy, 2017 (NUDS-2017): i) Kathmandu ii) Pokhara iii) Dhangadi iv) Nepalgunj v) Butwal vi) Siddharthanagar vii) Bharatpur viii) Hetauda ix) Janakpur x) Dharan and xi) Biratnagar. These economic centres were identified on the basis of their locational advantage, economic base and regional potential. To advance the economy and raise people’s living standards, Nepal has to build infrastructure for three purposes: i) connecting these economic centres with each other ii) connecting these centres with the hinterlands surrounding them and iii) connecting them with the border points with both neighbours. 

The process of building connectivity infrastructure within the country should be synced with the implementation of the BRI in the region. The NUDS-2017 has come at an opportune time; it can be synchronised with the broader goal of connectivity envisaged by the BRI. 

Nepal may be a signatory of the BRI, but the connectivity line proposed and endorsed by the Chinese government does not include Nepali territory. The belt and road, however, crosses through many countries in Eurasia. This leaves room to question the benefits Nepal will derive from the initiative. But instead of being cynical, Nepal should work with the Chinese government to make optimal use of the latter’s ambition. 

For China, the best way to take Nepal under its arm and gain access to South Asia is to establish the headquarters of the Asian Infrastructure Investment Bank (AIIB) in Lumbini. Lumbini will be a strategic place for AIIB, as it will allow China to be right next to India. Establishing AIIB’s headquarters in Lumbini will have two major benefits for China: the bank’s headquarters will be in a least developed country, and China can show that it is working towards complementing worldwide development efforts through the bank. This will also help China refute the claim that the AIIB is merely China’s challenge to the existing structure and operation of the World Bank and the Asian Development Bank. China will also have a strategic presence in South Asia, an important step to balance India’s power and help this region progress.

Nepal has to find ways to advance its pace of development by synchronising national priorities with regional initiatives. Nepal also has to make a convincing case to China and other members of the AIIB to establish its headquarters in Lumbini. By doing so, Nepal can make optimum use of new initiatives and can urge China and India to work together for the region’s development. 

Beyond the growth figures

This article was first published in The Kathmandu Post, May 3, 2017. 

The government has projected that the economy would grow by almost 6.5 percent in fiscal year 2016-17. There were similar higher growth projections from different development agencies. For example, the Asian Development Bank (ADB) has predicted that the growth rate would be somewhere between 5.2 to 6.2 percent in fiscal year 2016-17. The International Monetary Fund (IMF) has stated that the economy would grow by 5.5 percent in its 2017 report. These figures are encouraging for a country that has seen an average growth rate of only 4 percent in the last two decades. 

But the projected higher growth rate is not led by infrastructure development. So the higher growth rate won’t be reflected significantly in people’s lives through job creation and income generation. Since the growth rate is mostly due to timely monsoon and ballooning import of consumer goods, there is a looming fear that it may not be durable. 

The government has identified a total of 21 national priority projects that have direct links with urban, semi-urban and rural populations. Right now, the most important aspect of development is building infrastructure that complements urban life and facilitates rural-urban migration. But the Development Committee under the Legislature-Parliament has concluded that none of the national pride projects would be completed in time. Only four out of the 21 pride projects have completed more than 50 percent of the work. Underlining the importance of fast-paced development of national pride projects, the Development Committee has directed the government to expedite work on these 21 projects.

Urbanisation and migration

Nepal’s average urban population density is 1,381 per square kilometre, whereas the total population density is 180 per square kilometre, according to the 2011 census by the Central Bureau of Statistics (CBS). Increasing urbanisation demands quick construction of infrastructure so that migration and urbanisation are in sync. Kathmandu, Pokhara, other medium-sized cities and some small towns along different highways are expanding, but severely lack adequate urban facilities such as education, health, drinking water, sanitation, public transport, electricity supply and, most importantly, land zoning. 

Remittance has been the mainstay of Nepal’s economy for many years. The official estimation is that the ratio of remittance to GDP is 32.1 percent in fiscal year 2015-16. Income from remittance has registered a 4 percent growth in fiscal year 2015-16, which is reflected in the form of semi-urbanisation in different parts of the country. If the government works to accelerate the pace of infrastructure projects, emerging semi-urban clusters could add value to the overall economic development more efficiently.

Infrastructure development connects rural population to the nation’s economic development, facilitating better access to health, education and advanced means of doing agricultural activities. In such a scenario, youths would find job opportunities in Nepal rather than having to migrate abroad. Evidently, development of high-end infrastructure projects would create job opportunities for all kinds of labourers—skilled, semi-skilled and unskilled. In such a fast-paced development process, Nepal could utilise its own working population to build a prosperous nation.

Infrastructure-led capital spending 

Capital expenditure in Nepal has consistently been low, creating strong barriers to economic development. With less than three months remaining in the fiscal year, the government’s capital spending stands at less than 30 percent of the total capital budget allocation of Rs312 billion for the current fiscal year. The government has to expedite the development of infrastructure projects so that money travels through all the veins of state apparatus and also through the private sector. This would employ a large number of working-age population and boost capital spending. However, there is no magic wand to increase capital spending through infrastructure development. The government has to design, process and implement various infrastructure projects connecting different parts of the country through road, rail and air. 

In addition, health and education infrastructures in Nepal are way below 

standards. For example, a visit to the library of Tribhuvan University in Kirtipur shows how unmanaged and ugly it is. Students studying there do not even get basic amenities such as proper toilets and drinking-water taps. This applies to any public education institution in Nepal. Needless to say, availability of basic amenities can be instrumental in enhancing the quality of education. The government has to spend on improving the quality of health and education infrastructures.

The economic growth rate figures should be directly reflected in citizen’s lives. This happens only if the government actually develops what is required and not just counts the numbers to project an inflated sense of development for public consumption. The projected economic growth rate for the current fiscal year comes mainly from the availability of farm inputs such as seeds and chemical fertilisers, timely monsoon, imports and somewhat increased levels of post-earthquake reconstruction activities. But these are not a result of planned development and expenditure to generate jobs and wealth. There has been no substantial progress in addressing the pressing needs of the economy that could uplift people’s livelihood and lay the foundation to sustain the growth rate in the coming years.

Trickier future path

McKinsey & Company, a management consulting firm, concludes in its Infrastructure Financing Report that inadequate infrastructure—and the resulting congestion, power outages and lack of access to safe water and roads—is a global concern. Worryingly, the pace of urbanisation in Nepal is the lowest in South Asia. As Nepal is entering a new kind of administrative structuring, large-scale infrastructure development might be mired in provincial disputes in the future. The government has to ensure that the national priority projects do not fall victim to bureaucratic inefficiency, provincial disputes and political bickering. As McKinsey & Company highlights, Nepal will face haphazard urbanisation in the near future if the government does not address the issue right now. For instance, the more time the government takes, the more difficult it will be to acquire land for project development. 

Rabindra Adhikari, chairman of the Development Committee under the Legislature-Parliament, has been vocal about reminding the government time and again to complete at least the 21 priority projects on time so that the country’s growth figures will reflect improvements in people’s lives. The more the government delays developing these infrastructures, the harder it will be in the future.

Mitigating risks of a military approach

This article was first published in The Kathmandu Post, Jan 31, 2017. 

The interests of China in pursuing the announced joint military exercise with Nepal in the second week of February are clearly defined. That is not the case for Nepal, as it has not outlined what it wants to achieve from the initiative. The government should, however, work on a sustainable approach to such activities, in order to reap long-term benefits. 

The Nepal-China relationship has entered a new phase, with China showing interest in a wide range of sectors, from hydropower to the military. Yet the possibility of establishing strategic cooperation between the two countries is small. China’s failure to cement strategic cooperation with the Philippines can be taken as a reference here. This failure happened despite the goodwill visit by then Chinese Defence Minister General Liang Guanglie and State Councillor Dai Bingguo in May 2011. The reason behind the failure then was the US. With Nepal, the reason will be India. 

Costs and benefits

This proposed joint military exercise may not serve the welfare of the majority of Nepalis; rather may be limited to benefit the military elites. A joint military exercise in itself does not improve the socio-economic prosperity of any country, which is the most pressing need of Nepal at the moment. Rather it is a largely symbolic show put on for a geopolitical purpose. Although Nepal has been holding joint military exercises with other countries, including India and the United States, this is the first time the Nepali military would be holding such an exercise with China. Prof SD Muni from New Delhi, a long-time Nepal observer, has argued that the exercise is solely aimed to target Tibetan agitators and that would be against the global spirit of free movement of Tibetans in Nepal and across the world. 

However, both Chinese and Nepali officials have claimed that the exercise is meant to enhance the preparedness of the Nepali side to deal with hostage situations involving international terrorist groups. The Nepali side has claimed that the deal will not go against the spirit of the 1950 Peace and Friendship Treaty between Nepal and India. But it will make India nervous, causing it to counter the cosy relationship between China and Nepal. This exercise has multiple dimensions and will have long-term impact on the bilateral relationship between Nepal and China. It will impact Nepal’s political and economic development. 

There is a lot of euphoria in Nepal over its overtures towards China, and anything that happens is celebrated without properly weighing the costs and benefits. This joint military exercise has benefits to Nepal as well, but it is important to look at the costs that Nepal might have to bear. 

It would not be too far-fetched to say that the joint military exercise is a major breakthrough in the Nepal-China relationship. However, how this will serve Nepal’s interests in the long run is yet to be seen. The government of Nepal is trying to carry out this joint military exercise at a politically wrong time. Nepal is still struggling to implement the new constitution, which is the most crucial task of the government at the moment and a military show-off with China will have an influence in achieving that goal. 

There are cases of Nepal acting in a haphazard manner without outlining long-term plans to engage with its two big neighbours. Each new government has its own priorities in mind, rather than working towards the country’s long-term goals, such as political stability and economic prosperity. The China-Nepal joint military exercise can be called a turning point for two countries trying to establish a strategic relationship through the exchange of military experiences. But, before being blinded, let’s look at what China is expecting from this and where Nepal falls short in serving its own interests. 

China’s relations with neighbours

China has a strained relationship with most of its neighbours, except Pakistan and Nepal. This is where China wants to work through ‘peripheral diplomacy’, a term coined by Xi Jinping at the beginning of his term. China wants to use this military exercise as a ‘showpiece’ for the international community, proving how close its relationship with a neighbouring country can be. The Chinese side seems to be more enthusiastic about the exercise than the Nepali side. China anticipates it will help project its power in South Asia. But what is not clear yet is how China will work on developing this partnership in the future. 

Nepal’s political course has stagnated due to the failure to implement the constitution and prepare the ground for elections. Elections are a prerequisite for letting the country move forward. Political parties are polarised on the issue of constitution amendment and federal demarcation. The Madhes-based political parties have been protesting against the spirit of the new constitution, suggesting that it does not accommodate the aspirations of the Madhesi people. Nepal’s southern neighbour India has been expressing its reservations on the new constitution through various means and channels. 

Against this backdrop, it appears as if China has started being actively involved in Nepal’s internal issues. The joint military exercise was basically proposed by the Chinese side at great potential costs to Nepal’s political course, particularly the implementation of the new constitution. 

China has adopted a military approach to deepen its ties with Nepal although it could have taken a non-military ‘geo-economic’ approach to help Nepal’s development. China could invest in Nepal’s non-military sectors, such as the finance, industry and education. Joint military exercises might overshadow other more important issues for Nepal such as expanding trade routes with China, building railway connections and giving Nepal more liberal access to the Chinese market. Nepal has an insatiable hunger for infrastructure and China could have been a source of satisfying that. 

China should work on building Nepal’s economic foundation if it really wants to adopt a strategic military approach in the long term. But activities on the economic front take time, whereas military exercises can be quickly completed. This will only make India more anxious, giving it an excuse to further block the road for a timely implementation of the new constitution. Nepal could fall into the trap of losing out because of this military exercise, because it calls into question Nepal’s balanced engagement with its two neighbours.

Purchasing power

This article was first published in The Kathmandu Post, Dec 16, 2016

Potential power exporters in Nepal have received a jolt from the new Guidelines on Cross-Border Trade of Electricity released last week by the Indian government. The policy has limited open access to the Indian market for Nepali power producers and foreign investors other than those from India. India’s new policy framework affects Nepal’s aspiration to attain double-digit economic growth through hydropower. The government has planned to develop 10,000 MW including export-oriented and domestic-oriented projects in the next 10 years to fuel economic growth. The question now is whether Nepal can fulfil that aim by developing only domestic-oriented hydropower projects. Yes, it can do so with the right rebalancing policy response to Indian interests in water resources in the region. 

India has highlighted that cross-border energy trade involves issues of strategic, national and economic importance in the new guidelines. This is a manifestation of India’s strategic interests in water resources in the region. Blocking unlimited and open access to the Indian power market serves India’s goal of having a stronger say in the utilisation of water resources in the region. Nepali power producers and investors from third countries will be hesitant to invest in Nepal’s hydropower sector due to limited markets. This is what the Nepal government has to focus on. 

The new guidelines are against the spirit of the power trade agreement (PTA) signed between Nepal and India in 2015 following Indian Prime Minister Narendra Modi’s visit to Nepal in 2014. The PTA was signed establishing a formidable ground that Nepal would have access to the Indian power market regardless of the nature of the investment in power generation. But now, the guidelines have not only eroded the prospects of hydropower development in Nepal but also hit the spirit of regional power trade in South Asia. 

Core of Nepal-India relations

Nepal’s economy is heavily dependent on India from the energy security perspective, and this will become even more complex in the coming days. Hence, the guiding principles of hydropower development in Nepal should be, one, ensuring national energy security and, two, shifting from dependence to independence from the Indian economy. Investment in hydropower development has a direct relationship with Nepal’s resource utilisation and national security. The state should help Nepali investors invest in hydropower development regardless of access to the Indian market. The Nepali private sector has to work in tandem with the government to invest in the energy sector and expand the domestic power market. 

The core of Nepal-India relations is water resources. India is interested in Nepal’s water resources. This is not wrong, but what is crucial here is whether Nepal’s leaders will be able to protect the country’s strategic interests while serving Indian interests. India desperately needs water to irrigate vast farmlands in Uttar Pradesh state. The new guidelines complement India’s plan to use water from Nepal for irrigation purposes eventually. Nepal does not win by keeping Indian lands dry, but it will lose if it fails to identify what strategic direction it should take in river-basin management and utilisation of water resources. 

Domestic power market

Nepal’s annual peak power demand is estimated at 1,385.3 MW. The Nepal Electricity Authority (NEA) has predicted that the average annual electricity demand will grow by 9 percent and peak demand by 8.85 percent. Currently, the supply of electricity from the integrated national grid amounts to 855 MW, and the shortfall is met by imports from India. Nepal’s economy has faced a power crisis since 2006. It has crippled the country’s industrial growth and slowed the ongoing shift from traditional to commercial sources of energy. In an environment where even the existing industries are not running at full capacity because of power shortages, there is no incentive for new industries to enter the market. Industrial growth remained at an average of 2.1 percent in the last one decade thanks to the energy crisis. There are signs of structural changes in Nepal’s economy—the contribution of the industrial sector is declining while that of the service sector is increasing. The service sector grew at an average of 5 percent in the last decade, but it also suffers from a lack of adequate power.

A sizeable portion of the rural population has not been able to enjoy the benefits of electricity. Only 76.3 percent of the population has access to electricity. Rural households have been denied opportunities to replace traditional fuels for lighting, better schooling, TV, radio and internet, improved health care and access to information, knowledge and learning. They cannot start home businesses or micro enterprises like milling and drying due to the lack of electricity. 

Against this backdrop, there is a potential market for the electricity that is expected to be produced in Nepal. There is, therefore, a strong economic rationale as well as imperative for investing in the power sector to remove the most critical barrier to economic growth and job creation. Supplying adequate and reliable electricity is a national priority and a growth driver that supports the realisation of the national goals of Vision 2030 including Sustainable Development 

Goals (SDGs).

Pathway for power sector

The pathway would entail basin-wide development of hydropower generation and transmission in a planned way. The investment portfolio has to be an optimal mix of run-of-the-river and storage projects; domestic-oriented projects; hydropower and alternate energy projects; and generation, transmission and distribution projects. But accelerated power development would require a series of reforms and administrative streamlining particularly in the areas of (i) Land acquisition, resettlement and rehabilitation policy, (ii) Environmental (forest) clearance and disaster resilience, (iii) Benefit sharing and local participation, (iv) Project bidding, licensing, project development agreement (PDA) and PDA negotiation framework, (v) Project financing agreement, project financing regulations and sovereign guarantee policy, (vi) PPA, power tariff, wheeling charge and tariff regulation and (vii) Credit worthiness of the NEA, its unbundling, power trading and power market development. 

As massive investments will be required to implement the accelerated programme of power development, the investment climate and ease of doing business need to be made favourable and consistent with global business practices to attract sufficient foreign direct investment (FDI) inflows, public resources need to be leveraged to build public-private partnership and 

financial sector development and reform need to be expedited to mobilise internal resources. The immediate priority in the sector, however, is to remove transmission bottlenecks, reduce system losses and place power trading with India by 

rebalancing the policy framework, which may require cross-country harmonisation of relevant systems and practices keeping in mind its new approach to cross-border electricity trade.