government must proiritse economic stability to ensure long-term growth

KATHMANDU

Keep up the pace

In recent years, the hydro sector in Nepal has made remarkable progress in terms of involvement of private sector and consistent management of generated electricity under the firm leadership of Nepal Electricity Authority (NEA). Adhering to the same growth pattern, 2017 saw large number of IPP involved in various new power projects as more than 150 hydro projects from private sector with the combined capacity of more than 3,500MW have already signed PPA and some are already under construction phase after financial closure. Besides the overwhelming involvement of IPP, Nepal has also made a breakthrough in 456MW Upper Tamakoshi Hydro power project with the completion of the tunnel. The project is likely to start operation by October 2018.

The progress made by NEA in terms of its operational capacity, management skills, loss reduction and management of financial expenses truly reflects the unleashed potential in hydro power sector that can be achieved through proper planning and effectual application. NEA managed to generate operational profit after many years amounting to Rs 2,407.38 million. The annual report published by NEA also shows that total revenue generated from energy sales and other income also reached Rs 50,229.48 million in comparison to Rs 53,073.48 million in the previous year. NEA also managed to reduce its net loss in the last fiscal year to Rs 978.92 million in comparison to the loss of Rs 8,890.19 million in the fiscal year 2015/16. Nepal surely has a big mountain to climb in regards to generating potential electric energy, but the rapid improvement at NEA proves that persisting problems can be tackled with proper planning. In order to attract investment in the hydro sector, the state must create competitive environment and bring forth different schemes that will ease the investment process. However, the bureaucratic hurdles often delay the projects by elongating the pre-construction phase which also adds

financial burden to the project. Shailendra Guragain, President of Independent Power Producer Association, Nepal says, “Nepal has made immense progress in the hydro sector in the past year but we still lag behind in regards to meeting the growing need for energy within the country. Because the state has failed to ensure ample investment platform, the hydro sector has not been able to leapfrog over trivial procedural complications and attain larger goals. “

Another pressing issue that hijacked everyone’s attention in 2017 is the heavily politicised Budhigandaki hydropower project. The Pushpa Kamal Dahal-led government had handed over the 1,200MW reservoir based Budhigandaki project to the Chinese Gezhouba Water and Power (Group) Co Ltd but the new government had annulled the awarded contract. A Cabinet meeting held on November 24 decided to use domestic investment under the completion of the project under Engineering, Procurement and Construction model. Projected as Nepal’s answer to insufficient energy, the Budhigandaki project has been victimised by political upheaval and the uncertainty still looms over the project despite the government’s decision and NPC’s assessment of investment sources.

The handling of Budhigandaki project exhibits the short-sightedness in political leadership as they clearly prioritise political agendas rather than focussing on the project. The state needs to place hydro power in top priority and devise long-term policies and framework which are secure against any invalid political interference.

Investment ideals

2017 proved to be pivotal for Nepali economy as the country bounced back from the impact of the earthquake and economic blockade of 2015. The economy managed to move ahead at the growth rate of 7.5 per cent in the last fiscal year. That said, Nepal needs to deal with many economic challenges and work on various economic fronts to create the foundation for mobilisation of financial resources to nurture macroeconomic stability. Lacking in such stability, the sudden growth spurt does not have long lasting impact on the national economy. It is likely to be replaced by low growth rate in upcoming years if the economic agendas are not met.

One of the major economic highlights of the past year was the liquidity crunch in banks and financial institutions that affected the domestic market and restricted investment

activities. The high interest rates on loans and unhealthy competition among banks to lure deposits forced Nepal Rastra Bank to intervene by altering the CCD (Credit to core capital cum deposit) ratio in productive sector by revising its monetary policy. At the end of the year, it appeared that the problem of credit crunch might resurface. Gyanendra Lal Pradhan, Treasurer at Federation of Nepalese Chamber of Commerce and Industries says, “The high interest rates on loans forced the business community in Nepal to constrict their business activities. If the problem of liquidity crunch keeps resurfacing forcing banks to increase their interest rates, it will be impossible to conduct business through financing and investment market won’t be expanded.”

In terms of foreign direct investment, Nepal saw large foreign direct investment from Chinese company Hongshi Holding Group which signed a Project Investment Agreement (PIA) worth $359.18 million with Investment Board Nepal on September 3. The company formed as a joint venture with Nepali company Shivam Cement will bring investment worth $251 million in a cement factory. This Nepal-China joint venture project is the largest joint venture project in Nepal so far. The factory under construction in Nawalparasi will have installed capacity to produce 6,000 tons of cement per day. The arrival of Chinese firm in the Nepali market with such a mega project surely sends a good message to

other foreign investors as well.

That said, despite being strategically located between two emerging economies, Nepal has failed to subscribe to the rapid growth of its neighbours. Even though Nepal has been pursuing a liberal foreign investment policy striving to create an investment-friendly environment to lure FDI, it has failed to consider the growing changes in the investment market. Lengthy bureaucratic procedure, inefficacy of IBN in creating one window policy, political uncertainty, lack of security and poor physical and economic infrastructure reflects the shortcomings in the implementation of Nepal’s foreign investment policy. The fact that ministries have failed to submit detailed proposals on projects that could be built under China’s Belt and Road Initiative shows the unpreparedness on the part of Nepali stakeholders.

If only Nepal addresses its structural weakness with coherent, strategic reforms, continuation of policy, institutional capacity building, it can attract foreign investors and also boost the involvement of domestic investor. Nepal must learn its lesson from the economic growth of last year and confirm that robust and sustained economic growth is achieved to graduate the country at the middle income status by 2030.

Expansion project takes off

Tribhuwan International Airport (TIA) is the only international airport in Nepal. With the number of international and domestic airlines operating in Nepal increasing every year, it has led to the disturbance in the operation of the airline expansion project. The airport currently occupies 36,000 sq mt, with the international terminal taking up 32,000 sq mt and the domestic terminal 4,000 sq mt.  According to TIA data, there are 28 international airlines and 22 domestic airlines that connect Kathmandu with many international and national destinations; through which 2.74 million travellers pass through the country’s only international airport. Due to the increase in number of airlines, the airport is not being able to sustain and manage the chaos in the airport management system. In order to address the congestion that in the operation of flights, Civil Aviation Authority of Nepal (CAAN), is all set to work for terminal expansion at TIA.

The $92 million TIA air transport enhancement project, has been on hold after Spanish contractor Constructora Sanjose was dismissed in 2016 for not meeting the deadline. The contract has now been passed to Shanxi Construction Engineering Group Corporation, a Chinese enterprise.

Asian Development Bank (ADB) has provided $80 million on loan and the government has given $12 million for air transport capacity enhancement project. Trilochan Poudyal, Deputy Director and Information officer at CAAN says, “Looks like the project will now see completion. Work has been in progress after the dismissal of the previous contractor. We are hopeful that the new contractor will meet the deadline.” According to Poudyal, CAAN has divided the project into three packages — NCB-01 runway extension, NCB-02 international terminal building expansion and NCB-03 utility works.

According to the contract documents, there has to be extension of runway at the southern end by 300-mt and construction of drainage along with perimetre and entry access road in the NCB-01 package — the work for which commenced in November itself. It is to be completed within 21 months. The second package, NCB-02, includes the expansion of international terminal building. This package is expected to be completed in the next 18 months.  The third package, NCB-03, includes improvement in utility facilitiesand installation of a power supply system. This package has to be completed within 12 months.

According to TIA, four parking bays will also be added with the resources provided by CAAN and nine will be constructed under the TIA Air Transport Capacity Enhancement Project funded by Asian Development Bank.

The enhancement project could be the answer to long standing problems such as increasing air traffic, lack of proper management and facilities and unmanaged infrastructures at TIA.