FORUM (Spotlight Weekly)

The Private Sector Experience and the PDF Mantra

Khimti : The Good and the Bad: Khimti has brilliantly demonstrated to our top government officials and planners that it is not necessary to have posh air conditioned quarters and luxurious swimming pools to execute medium sized projects. The same results have been achieved from the staffs working from more humble and modest quarters. They have belatedly realized that such gadgets simply pad up the project costs to be conveniently passed on to the helpless consumers. In an era of capitalism and consumerism, can we hark back to socialist India's Trishuli with tin roofed thin partitioned quarters and communist China's Sunkoshi's "mandroed" quarters? Khimti has also taught us that the private sector is ready to bear certain risks to cut down its costs. It is but logical that when the multilateral agencies finance our projects they will expect that we hire reputed but expensive consultants. Normally the donors want us to have another back up consultants called the Panel of Experts. These experts are not only extremely expensive but in the "due diligence process" that they apply to the project's problems they take no risks, none whatsoever. This is motivated not only by their interest to keep the project risk free but more so not to jeopardize their international standing as well. The results hence are projects that are risk free but extremely costly. This is the dilemma bedevilling all donor funded projects in Nepal. Unlike our public sector projects, Statkraft in Khimti took the risk of NOT concrete lining the 8 Km tunnel or unnecessarily beautifying the powerhouse cavern, thus lowering the costs. Also this 8 km concrete lining would have meant a year's delay, the loss of 350 Gwh or to be precise 24 MUS$ loss. Kali Gandaki A's push back by a year similarly means loss of 840 Gwh which even at 5 cents per Kwh means 42 MUS$. This is an element that the public sector do not wish to understand but the private sector very much do.

The flurry of construction activity in the hydropower sector during the last three years was very laudable. Though the main contractors (Italian, Chinese, Indian, Norwegian etc.) were all foreigners, the crumbs that fell to the local Nepalese can not be belittled. This triggered the employment opportunities of all shades and hues in the Nepalese market. The experiences gained from these projects had sharpened up the technical expertise of our own Nepalese. But alas with the next sequence of projects badly delayed this is going to take its toll. The well-muscled foreign companies have the capability to move over to other foraging areas. But sadly it will be our tiny Nepalese companies like the Nepal Hydro, Himal Hydro, Shrestha Construction, Jayee Construction, BT Nirman, etc. that may become the first victims of this delay.

Khimti has also illustrated the fact that a "legally signed, sealed and done" PPA document by an internationally known developer like Statkraft does not necessarily lead to financial closure as the lenders, IFC and the private sector window of ADB, threw this first PPA out of the window. Later on the same lenders played the "mediator role" to RESURRECT this PPA so that Nepal does not send the "wrong message" to other would-be developers. Our tragedy has been that Khimti's Stratkraft fell into the charms of the "baniya" IFC which does not hesitate to charge exorbitant interest rates, more than twice the LIBOR rates for the perceived country risks. Statkraft naturally passes this on to NEA. With NEA coming on board in the Chilime project and the subsequent 80 crore debt from the Karmachari Sanchay Kosh, the conflict of interest issue of NEA's dual role as the buyer cum seller has come very much to the fore. It is being argued that this is unethical on NEA's part and this should not be permitted again. But no one has raised a similar conflict of interest role of Statkraft in Khimti where it is both the developer and the contractor. In an underdeveloped country like Nepal such public/private joint ventures must be permitted. It is the job of the regulatory body to ascertain whether the "collusion" element has occurred.

ii) Khimti : The Ugly: The ugly part of Khimti has, of course, been the "take or pay, dollar denominated and US consumer price indexed escalated tariff". This is what we get when a bunch of totally inexperienced NEA engineers backed by a Nepalese Rupee crunching indigenous lawyer wrestle with the globe trotting dollar crunching expatriate lawyer with his "silent" client, the Himal Power Limited. Like the ADB, IFC and NORAD representatives, our own government beautifully imitated them, playing the role of the good neutral observers deliberately staying far away from the PPA. If NEA had also hired a dollar crunching expatriate then this "level playing field" would have resulted either in a more balanced PPA or the walk out by the developer from Nepal as it had threatened when NEA put the "heat on". When our Nepalese Rupee devaluates nearly 40% against the US dollar in the five-year construction period, it is but natural that the dollar denominated tariff will shoot up accordingly. This pass through element is the "ugly" part of all projects constructed with foreign loans or equity. The fates of Gorakhkali Rubber and Jyoti Spinning are the classic examples. That is why the likes of Chilime and small hydros with the tariff denominated in Rupees need to be vigorously promoted but sadly the government is more enamoured with dollar crunching medium hydro projects.

iii) The PDF Mantra -- in Uncharted Waters : When the World Bank walked out of the Arun III saga in August 1995, it was with the solemn promise to HMGN that the allotted 175 MUS$ will be utilized in its new "alternate energy strategy" for Nepal. This strategy turned out later to be the Power Development Fund (PDF) wherein the Bank changed its mantra from the LENDER to the Public Institutions to the FACILITATOR to the Private Institutions. It is believed that the Bank had to use this "PDF medium" because the IDA charter does not allow direct lending to the private sectors, the role as envisioned by the Bank in its new alternate energy strategy. The Bank has the high interest private sector-lending window, the IFC, but apparently the soft window IDA, with its diminishing role, wanted to play the private sector game as well.

Initially, the Bank wanted to establish the PDF mechanism through the Nepal Company Act. HMGN was keener to have PDF under the Development Board Act. Though both agreed that a new PDF Act was the desirable answer because of the time constraint factor, a compromise was arrived at to manage this Fund through the PDF Administrator for an interim period. Whereas the government was keen to establish a small PDF Secretariat manned by a capable Administrator assisted by professionals of different cadres, the Bank's view prevailed in utilizing an existing institution (for cost reduction purposes) to manage the PDF. NIDC because of its ill health was ruled out and the selection of Nepalese financial institutions fulfilling certain criteria through competitive bidding was agreed on. The key elements to note are that the annual operating expenses will be well over 400,000 US$ and the Administrator with the requisite qualifications will be an expatriate. This way we have unwittingly handed over our own loan fund to be managed "with due diligence" by a foreigner. Perhaps, the need to revisit much more quickly the PDF Act with a small secretariat manned by a Nepalese Administrator and competent professionals is more in tune with the clarion call for "local shram and shrot". Due to this new PDF venture in uncharted waters and the usual red tapism from both sides even five years down the road not a cent has trickled into Nepal. Losing the 201 Mw project, the 175 MUS$ soft loan still deprived from a very poor country and be thrown into the unproven, uncharted alternative strategy of PDF, has been our fate. The money promised to Arun III by ADB and Japan will start laying the eggs once Kali Gandaki A comes on stream next year. Even the German KfW's 70 Mw middle Marsyangdi in lieu of Arun-III has taken off the ground. This is indeed a severe punishment by the World Bank to its poorest of the poor member.