Scrap the deal

The controversial deal between the Royal Nepal Airlines Corporation (RNAC) and Lauda Air for the lease of a Boeing 767 aircraft must be scrapped. The issue has raised a lot of uproar and resulted in a probe by the Parliamentary Accounts Committee (PAC). Although PAC has instructed the Ministry of Civil Aviation and RNAC to freeze the deal. RNAC still wants to proceed with it and has cited citing its own reasons.

RNAC management has openly flouted CIAA regulations which expressly require all aircraft purchase and leasing to be undertaken through international tender by circumventing regulations and engaging in direct negotiation with Lauda Air. Not only this, RNAC even sent a bank guarantee amounting to one million US dollars to the Lauda Air account without considering the security of the amount, in case the deal failed to go ahead. It is also interesting that Lauda Air was not involved in the sealed tender invited by RNAC some time ago. RNAC chief Hari Bhakta Shrestha’s defence was that RNAC was forced to undertake direct negotiation for the jet lease due to exigency. Whatever the reason, the RNAC chief had no right to ignore existing rules and guidelines concerning aircraft leasing. It leaves plenty of room to suspect that there is more to the Lauda Air deal than the RNAC chief overstepping his bounds. The hasty transfer of bank guarantee is itself a suspicious act. Therefore, PAC must get to the heart of the air deal.

This is not the first time that RNAC has come under fire for its shady and intransparent deals involving aircraft purchase and leasing. In its previous bid to acquire a Boeing 767 aircraft on lease, RNAC had called for international tender. This led to nothing as the company which won the sealed bid failed to produce the aircraft. This shows the flawed bidding procedure that had been adopted. The Chase Air scandal tarnished RNAC’s reputation. Its ability to handle smooth purchase /lease deals has come under ridicule. Now again, despite changes in the management, RNAC’s incompetence in making decisions has been exposed. It is regrettable that RNAC has become a haven for officials who have not been able to disassociate themselves from shady deals who lack transparency, and flaunt
rules and regulations. The present miserable situation arose after RNAC sold its two Boeing 727 jets and leasing became the name of the game. There seems to be vested interest in continuing the tradition of aircraft leasing which has emptied at least US$ 90 million from the national coffers. The money could itself have purchased a brand new aircraft.

The national flag carrier has been involved in a series of scandals and flawed deals. Political pressure is also one of the main causes for this state of affairs. Clearly the only way such pressure can stop will be to privatise RNAC. Perhaps, this is the only way RNAC can become an organization that is less corrupt and more efficient.

Explore the North

By Nagendra Chhetri

Peace, development, stability and security are major themes in the world today. The present world trend is towards, multi polarity, economic globalization and the international security situation, in general ie major power rivalry continues to lean towards relaxation. Although relations among major world powers are so complicated with many interwoven contradictions and fractions, their overall national interest forces them to cooperate with each other by checking and constraining their political, economic and military muscles. If the vast number of developing countries, with a great potential for developing into economic powers are balancing factors for stability and peace, science and technology are breaking unexpected new grounds for human welfare. Economic ties and integration among states have become deciding factors to strengthen confidence building measures. A new international order safeguarding peace and stability is the priority of any country in order to achieve its economic development. Nepal, although a small country, cannot remain isolated from this trend.

After the restoration of multi party democratic system, the Nepalese expected, perhaps, much from friends. Our political leaders though that Nepal, though landlocked, would be given unfettered freedom to have access to the sea. Everybody expected multi-party democracy to free Nepal from it’s perpetual geographical bondage. But this did not materialize. Nepal’s hopes of generosity have been dashed, and instead the country has now been gifted with more than one hundred thousand Bhutanese refugees and Laxmanpur barrage in addition to countless other back breaking punches to make the suffocation more intensely painful and severe. Nepal was also subjected to a series of well crafted media campaigns, including the BBC package to instigate and tease the democratically disillusioned public opinion. The campaign is selectively directed against the whole national apparatus including the monarchy, various political leaders security arrangement and the public in general. A legacy of white man’s burden has continued and will continue till the foreseeable future. But Nepal has to survive whatsoever. It must explore the possibilities of greener pastures in the new century in order to release itself from perpetual suffocation. Although Nepal has very little room to manoeuvre, the leadership has to understand that the rivers flowing from the Himalayas will always flow to the Ganges; they must also think of the alternatives. Nepal, of course, has to be carefully wise and sensitive not to jeopardize the national security interest of either or its neighbours by not allowing Nepalese soil to be used against the interest of either of the neighbours. She has followed this traditional policy and no leadership can afford to deviate from this. Maintaining this balancing act as far as practicable, Nepal must now explore all possibilities to find some breathing space in order to bring some solace to its downtrodden population. Although SAARC is supposed to be the principal vehicle for integrated economic development, its fate hinges on the will of one country to activate it. Nepal needs, therefore, to pursue bilateral economic integration with both of its neighbours. Therefore one practical course for it is to explore the north.

Nepal’s Northern neighbour, People’s Republic of China has been engaged wholeheartedly in its modernization drive since the past 20 years. China is seeking a peaceful international environment and a favourable surrounding to serve its fundamental interests. China is firmly committed to internal as well as external peace, stability, prosperity and economic development. It has rightly realised that butter and bread are the bedrock. To make its gun effective and stronger it first needs to develop a sustainable and stable economy. For a competitive and modernized economic structure, scientific and technological advancement, it has carved a centralized political system and decentralized economic system. With this national policy, China is fast developing. In 1999, even while facing complicated international and domestic political, and economic environment, China conscientiously implemented policies, aiming to expand domestic demand and to overcome various difficulties. While efforts were intensified to promote cultural and ethical progress, focus was placed on economic construction. As a result, new achievements were made in economic and social development with various projected objectives for development and reform being accomplished.

In its fast drive to develop its economy, China has now started focusing on the west and south west regions which it plans to fast develop. An express highway and train link to Lhasa from Beijing is underway. Once the rail and express highway reach Lhasa, a vast development process is sure to start in the autonomous region of Tibet. For China, Tibet has been a sensitive soft belly and economic development is the only panacea to protect Tibet from scathing western criticism on human rights violation and political suppression. Construction of skycrapers, vast six-lane highway, motorways and huge industrial complex hotels, railways, parks and fast increasing information technology is affecting the lives of ordinary people. These are ample proofs of developing China. Once this process of development comes to Tibet autonomous region and Xinjiang provinces bordering central Asian republics like Tajikistan, Kyrgyzstan and Kazakhstan, it will change the life style and living standard of the people in the region directly impacting on neighbouring countries like Nepal.

China lays emphasis on fast developing these regions because the major powers are interested in the central Asian Republic for its vast oil and gas deposits. Unless fast and substantial economic development takes place in this region, China’s utmost desire to maintain a peaceful and stable environment will be threatened on account of ethnic, religion and regional reasons, unleashing destabilizing forces which find a pretext. The large Tibetan splinter groups outside China, the vast majority of Muslim population in Xinjiang province sharing similar language, religion, tradition and costume with central Asian Republics are serious causes of concern to China. China has full well visualized the major threat that could be imported and exploited in order to destabilize and cause a setback for China’s economic development. As the middle east’s dominating oil-wealth is slowly declining, the central Asian Republic will be the focal point for major power rivalry in the coming decades and China is fully aware of this. This has even encouraged China to form a regional grouping of Shanghai Five including Russia, Kazakhstan, Kyrgyzstan and Tajikistan.

Now developing major infrastructure in Tibet, China needs huge quantities of construction materials which are not available in Tibet. Transporting them either from Beijing or Shanghai is too expensive and time consuming. The Express highway and railwayling in most part will be passing through mountainous terrain, tunnels and hill passes offering, may be, limited manoeuvring capacity for the heavy goods carrying vehicles and railways. Nepal can provide an alternative to this. Rasuwa Dhunche-Trishuli and Banepa-Bardibas highway could be the ideal and shortest route to ferry construction materials to and from Tibet in the near future. These is a bigger possibility if pragmatic approaches are given priorities in the overall development process of economic integration. China surely has an interest in developing surface communication network in the Nepal-Tibet border for various reasons. Not only government, and business agencies but also Nepal’s young, vibrant and boisterous press can and should lead the public into unity and support every move that helps develop our northern border regions. A strong, sustainable economic integration with both of our neighbours is a sure guarantee of Nepal’s long term security, integrity and stability.

China has already constructed a road from Lhasa along the Brahmaputra River crisscrossing the river and running along the bank right up to Mansarovar, the source, going beyond the lake. From the lake, it runs west along the bank of river Indus and then turns towards the north, joining Karakorum highway, touching central Asian Republics, finally reaching the Asian Highway. In addition to this, China has constructed an unmentalled road along the Nepal-Tibet border connecting a number of Nepalese border passes and joining the Brahmaputra road north of Nepal-India-China tri-junction. Nepal can, thus benefit from the road network that is being developed. Not only Nepal can draw multiple economic and communication benefits and can also have access to central Asian region-opening up a new lifeline for the country in future. Today, European and Asian countries are not much bothered about security threat from each other because of the massive economic benefit provided by strong economic integration among neighbours, which is too lucrative to sacrifice, citing security threat. Therefore, the best guarantee for security is to nurture and foster a strong, sustainable relationship of give-and take provided by intensified economic ties with neighbours. For the economic development of northern Nepal, and to encourage and intensify bilateral trade, Nepal must explore the north to be a politically stable, economically strong and democratically mature country.

Who is to be blamed

By Sunit Giri

To serve and to protect is the motto of the police in most major Hollywood, Bollywood or you can say, even in Kollywood movies. Initially, these were the major source of inspiration to join "Nepal Prahari."

But now things have changed. Maobadi and Khaobadi encounters have demotivated everyone from joining the police force except for a few, who have the source force to be posted in the right place at the right time. I am talking about those few for whom Dashain and Tihar is everyday. To my knowledge, the first of such places is obviously the airport, the one and only international air connection in the country. Then you have Durbar Marg which is flooded with dance restaurants and discotheques. Thamel, Jansewa, Sorah Khuttay, Birgunj, Biratnagar, Bhairahawa, you name it and the list goes on and on.

By the way, the ministers of today are no better. Stable government is something that the general public of this country can only dream of. Ironically, dreams are usually untrue that’s why they remain dreams and not reality. I do not blame the ministers. What I blame is the chair they sit on. Even they are human beings, even they have wants, needs and desires and where else can they get it done. The exchange of ministers from one party to another and commission for everything are the major sources of income according to their near and dear ones. How can we forget our own government officials who are enjoying the seats at the customs malpot, yatayat and so on so forth. Most government officials, if not everyone has some source to meet daily requirements and luxuries. There is no other way of surviving this mahanghai ko jamana. Some way or the other you have to find a way to keep up with everyone else. You cannot blame them.

Then comes today’s so called dadas who are generally supported by the so called maathi ko haath. They are not afraid of themselves or for their prestige, so we can hardly do any thing about it. After all even they are like us and they too need to survive.

The so called business community is no better. They, together with their government brothers know every trick in the book. No matter what laws and regulations are made in the country, these people do find some loopholes. VAT or SAT some of these people are real rats.

Now who is to be blamed but we ourselves for we are the lazy, hardly educated, unwilling to do anything no matter what happens around us.
Are we moving towards the 21st century or are we moving backwards is the question I ask myself time and again. And I have no answer because I am a part of this system and I am also to be blamed.

Was dual pricing necessary

By Amrit Nakarmi

Nepal Oil Corporation (NOC) recently increased the domestic prices of petroleum products. The price- hike was 17.50% for petrol, 19.50% for diesel, and 18.30% for LPG respectively. In the case of kerosene, dual pricing was imposed (19.20% at coupon prices and 100% at free market prices). Since petroleum prices have been going up in the international market for the last one and half year, it has become essential to increase domestic prices accordingly. But delayed price adjustment, lack of proper analysis and planning in dual pricing, and unplanned distribution of coupons are creating problems for consumers.

A computer-based pricing model for major petroleum products was used to analyse the recent price hike. As per the pricing model, the most sensitive input variables in the aggregate prices of major petroleum products are import prices and the foreign currency exchange rate. The model links the prices with NOC’s bottomline and shows how domestic aggregate prices have to be set so as to have a positive return on investment.

NOC’s import prices: It will be appropriate to analyse NOC's data of import prices for kerosene and diesel for the past 20 years. NOC imports finished products such as kerosene and diesel from the international market and sells them to Indian Oil Corporation (IOC). The analysis shows that in 20 years, 90% of the time, the import price of kerosene was below US $ 277.00/MT. Similarly, import prices of High Speed Diesel (HSD) or gasoil was below US $ 265.00/MT.

It seems that NOC and HMG/N must have based import prices at around US $ 300.00/MT, while increasing petroleum prices. But, if we consider the weighted average price for the whole year, the scenario may be different. In fiscal year 1999/2000, the average C & F (Cost & Freight) import price of Kerosene and diesel were US $240.00/MT and US $ 228.00/MT respectively. Increase of one US dollar in import prices result in approximately NC Rs 2.5 crores loss to NOC.

Another sensitive input variable is the foreign currency exchange rate. Due to continuous trade deficit, the Nepalese currency is always devaluating against the US Dollar. In pricing petroleum products, we have to consider this. Sensitivity analysis shows that for devaluation of one NC Rs against the US Dollar in a year, NOC has to bear a loss of NC Rs 18 crores in the current market scenario.

The pricing model contains a spreadsheet model for prices of major petroleum products with import prices of diesel and kerosene and exchange rate as the input variables. Then, this model is dynamically linked with a financial model for operating or net profit of NOC.

With the price of petrol at NC Rs 47.00/litre, diesel at NC RS 27.50/litre, and single price of Kerosene at NC RS 19.00/litre, NOC will still be making approximately NC Rs 52 crores on average in the current fiscal year . The pricing model shows that NOC can sustain itself even if it supplies kerosene at a single price of Rs 19.00 per litre. Consumers will not have to go through the hassles of coupons, which we are introducing, but which India is abolishing.

Some suggestions: International petroleum market is efficient but extremely volatile. Due to inflexibility, inefficiency, and poor managerial capability, state-owned oil companies are finding difficulty coping with volatility in the market. Many empirical studies show the private sector as quite flexible, efficient, quick to adapt to market needs. Because of this, even countries with socialist structure of government are turning to the private sector.

Short-term suggestions: 1) Pricing authority has to be handed over to NOC. In the first phase, NOC should be allowed to price the products in order to have a good return on its net assets (for example, around 12% on its net assets). If the profit is higher than the allowed return on NOC’s net assets, the extra profit is to be deposited in the special "Price Stabilization Fund (PSF)" at the Ministry of Commerce, Industry and Supplies. This fund should be utilized to provide short-term relief to consumers if there is drastic increase in oil prices in the international market. Sometimes, state monopolies can charge higher prices, and make windfall profits. The extra profit must go to PSF, until the downstream sector is deregulated.

2. Price adjustment has to be done regularly i.e. monthly or quarterly to reflect changes in input prices in the international market.

3. Cost reduction measures must be taken at NOC. Payment terms with Indian Oil Corporation Ltd (IOC) have to be revised. Because of inequitable terms, around NC Rs 80 crores may be currently lying with IOC without interest.

4. Most oil companies are taking hedging instruments to protect themselves against volatility in the international market. NOC must learn hedging instruments such as ‘futures’ and ‘options’. At present, future prices are lower than spot prices. NOC can protect itself from upward market prices, using these hedging instruments.

Medium and long-term suggestions:

5. HMG/N has to immediately initiate policy making in deregulation of petroleum marketing so as to keep parity with India. India is deregulating its downstream sector from April 2002. An independent Petroleum Regulatory Authority or a separate Commission must be established. This Authority has to look into developing Acts and Regulations relating to safe handling and storage of products, quality of products sold, and other relevant matters in marketing of petroleum products.

6. HMG should start divestment of NOC assets as a separate oil company so that a healthy competitive market can develop. Oil companies must develop storage facilities to meet at least 90 day’s demand within the stipulated time.

Conclusion: In many developing countries, structural reform of petroleum markets has become a critical component of macro-economic liberalization policies. The role of government in the petroleum sector is being redefined, and markets are being deregulated (i.e. state interventions such as special treatment of state-owned oil companies, price controls, and restrictions to trade are being removed, and monopolies are being broken up). Increasingly, the private sector is participating in more competitive petroleum markets.

In such a global scenario and India’s already announced deregulation since April 2002, HMG/N has to make necessary reforms and deregulate petroleum distribution in Nepal. This is also an opportune time for reform, as the current price revision reflects the economic costs of the petroleum products. If HMG does not take action in time, it will have to face a chaotic situation in supply and management of petroleum distribution when our neighbour goes for complete deregulation.