The halo effect

  • Instead of discrediting rivals, our politicians should be on the same page about attracting foreign investment

Mar 14, 2017-

On March 2, leaders of top three political parties shared the platform of the Nepal Investment Summit 2017 to declare they were on the same page about increasing inflows of foreign investment into the country. That was a strong message considering their divergent political ideologies, and it rekindled hopes of creating a favourable investment climate that would not only attract funds but much-needed technology and expertise from abroad.

This, however, is not the first time political leaders have made such a commitment. In April 2013, leaders of leading political parties gathered on the stage of the Federation of Nepalese Chambers of Commerce and Industry, Nepal’s largest private sector umbrella body, and pledged to remove all barriers to developing hydroelectric projects in the country. But their modus operandi has barely changed since then.

Unfriendly business climate

Korean investors, for instance, ran into numerous hurdles for almost three years before they could sign an agreement to develop the 216 MW Upper Trishuli-1 hydroelectric project. The project developers are yet to sign a power purchase agreement with Nepal Electricity Authority, the country’s sole buyer of energy, based on which the electricity generated by the project could be sold here. It is not known how long this process will take.

The commitment expressed by political leaders also did not prevent the 900MW Upper Karnali and another 900MW Arun-3 hydroelectric projects from turning into political hot potatoes, delaying the signing of project development agreements. This happened even though the project developers—a state-owned and a privately-owned Indian companies—were selected through open bidding. 

Worse, Statkraft, a Norwegian company, pulled out of the 650MW Tamakoshi-3 hydropower project last year citing Nepal’s small power market, shortage of transmission lines and insufficient returns. Our politicians did not even ask what could have been done to incentivise the company to stay. All these indicate one thing: politicians here barely walk the talk, signalling no guarantee of policy stability. This makes Nepal’s investment climate unfavourable for foreign investors eyeing our hydroelectricity sector.

Foreign investors everywhere, including hydroelectric project developers, demand the red carpet wherever they go. But, here, they have to make rounds of seven government ministries and 23 departments to obtain various permits, conduct environmental impact assessment and acquire public and private land to build the projects. These processes take three to 10 years to complete.

If these processes are not shortened, Nepal will continue to lose the market for over 40,000 MW of hydroelectricity it can produce, because the cost of solar energy is dropping steadily due to technological advancement. The cost of generating a unit of electricity through solar plants is as low as IRs4.3 in India. This implies that the market for Nepali electricity in India, the largest market for power produced by Nepal, may soon be limited to the night-time when solar plants remain inactive.  Things may become even worse for Nepal if efficient and affordable devices are developed to store solar power generated during the day. Such a possibility cannot be ruled out considering the pace at which solar technology is evolving. This may sound the death knell for the dream of making Nepal prosperous by harnessing its hydro potential.

Case of Bippa

Our politicians and government officials are aware of these facts. But they are so self-centred and short-sighted that they continue playing petty games that serve their own interests, while the world continues to view Nepal as an impoverished country with little but unskilled and semi-skilled labourers to export.

This should change. Politicians and government officials should either get to grips with reality, or retire. Otherwise, the future of the next generation will be similar to ours. A worrying sign is our politicians’ tendency to mask their incompetence through sheer bias against plans and policies introduced by their opponents. 

They sometimes do this to discredit their opponents and at times because they simply dislike their rivals. This “halo effect” is taking a toll on the country because many politicians are shaping the views of their supporters and followers through misinformation. Take the case of the Bilateral Investment Promotion and Protection Agreement (Bippa) signed between Nepal and India in October 2011. The agreement was aimed at protecting Indian investment against discriminatory practices here and encouraging Indians, one of the biggest foreign investors in Nepal, to plough in more capital. A majority of the provisions in Nepal-India Bippa were similar to those signed elsewhere in the world. Further, Nepal had signed the same agreement with France, Germany, the UK, Mauritius, and Finland before reaching out to India. Yet many refrained from supporting the Nepal-India deal because it was sealed at a time when Baburam Bhattarai—someone said to be too close to India—was the prime minister. This inflamed “nationalistic” tempers and the move was protested. This prevented the agreement’s implementation, as Parliament is yet to ratify it.

I’m not a fan of Bhattarai, but his initiative was commendable. If Nepal wants to see greater inflows of foreign investment, such deals should be signed not only with India but also with China, and with other countries. Nepal needs foreign investment more than ever because around $3 billion that the government allocates every year for capital spending is not enough to build hydroelectric plants, transmission lines, irrigation projects, roads and expressways, airports, railway lines and other infrastructure required for higher economic growth. Foreign investment is also very helpful in enhancing people’s skills, attracting latest technology that enhance productivity, and promoting innovation.

Two places from where Nepal can get this investment are China and India. Although these fast-growing economies are our neighbours, Nepal still has not developed a deep diplomatic and people-to-people relationship with China. So Nepalis tend to give China the benefit of doubt. 

The case is quite opposite with India. Nationalistic sentiments are fanned when agreements are signed with India. Such reaction basically stems from the fear of surrendering the nation’s sovereignty to India. This is perhaps the result of the incompetence of our politicians and bureaucrats, who cannot press their demands while dealing with India. This incompetence breeds feelings of insecurity, prompting us to turn inwards, which is not a good way to attract foreign investment.

Memories of blockade

This does not mean Nepal should not remain watchful and prioritise its needs. Nepal has already shown how it can defy ulterior Indian motives by promulgating the new constitution in 2015. This prompted India to impose a trade embargo for almost five months, choking supplies of essential goods. But this gave us an opportunity to introspect and deepen relations with China, which led to the signing of the first Nepal-China Transit Transport Agreement. This pact was hailed as a “landmark”, as it was supposed to pave the way for landlocked Nepal to use the nearest sea port in China for third-country trade, providing an alternative to the Indian port in Haldia.

Since then India has lifted the blockade and memories of the hardship it inflicted have faded. So nobody is seriously following up on these issues, putting plans to build modern Nepal-China road networks and other infrastructure to facilitate cross-border trade in limbo. Is the halo effect working to prevent us from deepening our relations with China as well? 

This needs to be probed, because foreign investors who took part in the Investment Summit have expressed interest to plough in over $13 billion into Nepal. If we cannot get our act together, the commitments may not translate into real investment because foreign capital is mobile and it will flow to countries with a better investment climate than ours.


- Sharma is business bureau chief of The Kathmandu Post

Published: 14-03-2017 08:48

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