BPC Fiasco Go For Partial Divestiture

By Narayan Manandhar
WITH Interkraft’s threat to pullout from Butwal Power Company (BPC) privatisation bid, the government is now, literally, in a catch 22 situation. Earlier, Independent Power Corporation (IPC), one of the two bidders for the privatisation of BPC, had pulled out blaming the government taking side of Interkraft. BPC privatisation, running over a billion rupees, is expected to be a mega deal privatisation programme in Nepal. The single transaction would have overshadowed previous privatisation deals in Nepal. But the controversy and tardiness in the bidding process have badly tarnished the image of the government and put a question mark on its capacity to undertake privatisation programme.

Test
The privatisation of BPC has also been forwarded as a tool to invite foreign direct investment in the country. The fiasco could also retard the process of realising Melamchi Drinking Water Project (MDWP), a much touted project in Nepal. It could possibly put a full stop on Nepal’s controversial privatisation drive. If privatisation is to take a new speed and vigor, it is high time that the privatisation consultants should now pull out and pave way for new actors to move in.

The government has decided to sell, out of its 97 per cent share holdings in BPC, 75 per cent in November 1998 through a global tender call. The tender call was also published in the British weekly magazine The Economist courtesy Adam Smith Institute, the British privatisation consultants to the government. Although several investors showed their interest, only two bidders, namely, American-British consortium, Independent Power Corporation and Norwegian-Nepali partnership, Interkraft actually made their bids to take over BPC. IPC made an unconditioned bid for $10 million while Interkraft made two bids. One unconditioned for $8.1 million and second conditional for $11.6 million.

The conditions put forwarded by Interkraft were the guarantee of power purchase agreement (PPA) with NEA, the right to construct check dam of MDWP and the right to distribute electricity in ten districts. NORAD, a Norwegian Agency for Development, has put BPC privatisation as a precondition for its $25 million assistance to MDWP. To complicate the matter further, BPC is literally, a child conceived by NORAD and handed over to the government.

Amid much diplomatic lobbying and the pressures from the civil society particularly on under valuation of BPC, the government has decided to go for fresh bids from the two contestants in September 1999. In their second bid, Interkraft increased its bid from $8.1 million to $10.5 million, however, Interkraft critics claim that the second bid is for lower than what is had promised earlier at $11.8. IPC, on the other hand, stick to its original bid claiming that their bid was made unconditional as per the original tender call. However, the government claims that their bid to make payments was conditional.

As per the condition only 30 per cent of the total amount could be deferred and rest to be paid in cash. IPC has agreed to pay 80 per cent of its offered amount through loan notes and to pay the remainder 20 per cent over the following two years. Interkraft has stated it would make 70 per cent cash down in the beginning and the remaining amount after two years. There is also a controversy over the currency involved whether the payments are to be made in US dollar terms or in Nepali rupees. There is also a controversy that by imposing a bar on experience and capital, the call is deliberately made to keep Nepali investors at bay.

On the first week of December, IPC pull out accusing the government taking a stand for Interkraft. It has been also "repeatedly lodged objections concerning the tender process with the Adam Smith Institute" ASI has earlier taken the stand that the BPC privatisation should be made as per the original tender call. ASI’s concern for the privatisation of BPC is clearly visible from the over emphasis given to the power sector privatisation in their highly publicised recently concluded South Asian Privatisation Summit held from December 2-3, here in Kathmandu. Interkraft has accused that IPC’s eleventh hour pull out was a ploy to topple BPC privatisation.

Apart from the controversies, accusations and counter accusations raised above there are some other questions remain unanswered. First is the intrinsic value of BPC. What is the value of BPC? Should its value be tied with PPA or be independently valued? Is the privatisation of BPC intricately linked with MDWP or it is for its own good? What is the role of ASI? Are they advising the government or executing the whole programme? Given the zeal of publicity campaign, the role of ASI need to be clarified.

There is a rumor going around particularly amongst the journalists that ASI is "sponsoring" pro-privatisation write-ups in the media. Will ASI clarify on this issue? Having participated in the second round, whey did IPC pulled out? Were the accusations leveled by IPC really serious enough? How and in what way the evaluation scores of two bidders, obviously expected to be confidential, were leaked out in the vernacular weekly? More important than these questions is why ASI is painting a glossy picture of past privatisation when in fact, the reality speaks a different story?

The privatisation fiasco brings us to the one and the only conclusion: beggars are not choosers. Not just privatisation programme, any development programme that is bereft of internal needs and conditions and is externally imposed, is bound to generate controversies of one type or other. This scribe has been an ardent fan of privatisation and still wanted to be but is very much moved by the phrase said to be spelled out by an Indian politician: "privatization is a medicine, it has to be taken in appropriate doses and in appropriate time with a careful eye on side effects." Some one posed a riddle: what happens to the sick person? Let us not have a situation where we have a successful operation with a dead patient.

Way Outs
If the civil society has the right to say "what is wrong" it has also a duty to say "what is right". Having said that we do not want, we must be able to speak what we want. At this moment, the only possible suggestion could be made for stopping BPC turning into a bad privatisation case. As said above, let the consultants pull out from the privatisation business, move out the Privatisation Cell from the ambit of the short sighted, revenue oriented Ministry of Finance and place it within Planning Commission or directly under PM, fill the positions with the professionals not the bureaucrats, scrap the tender call and make partial divestiture through the floatation of shares in the capital market, promise NORAD that eventually the BPC will be privatised. Partial divestiture of say 15 to 20 per cent share floatation could test the real market value of BPC. Remember it is far better to be a small fish in the big pond than a big fish in a small pond. According to World Bank study "it is far difficult to turn around a big ship". So go for partial divestiture and keep up to learning by doing.

(Dr. Manandhar is a member of Transparency International-Nepal Chapter)