ADB wishes to see the passage of an Electricity Theft Control Act

-Dr. Richard Vokes, ADB, Nepal Office

Overview

With 21 December, 2000 approval of a $120m loan for the Melamchi Water Supply Project, ADB’s lending for Nepal in 2000 will total $173 million for four loans along with $5.5 million in technical assistance (TA) grants. All are designed to support development and reforms in key priority areas of the economy and include water supply, corporate and financial governance, governance reforms and agriculture. Largely due to the large size of the loan for Melamchi, the total lending this year is above the current ADB’s indicative planning figure for Nepal. However, ADB’s lending in 1999, at only $50 million, was well below this planning figure; as a result annual lending for the period 1997-2000 averaged $89million, in line with the ADB’s current medium lending scenario.

The loans and TAs have been carefully prepared, with extensive stakeholder participation and are consistent with the Government’s strategic priorities as set out in the Ninth Plan. The loans are also consistent with ADB’s medium term assistance priorities in Nepal which aim to support a sustainable reduction in poverty, through broad-based economic growth, improvements in basic social services, and environmental improvement. These priorities are specifically addressed in the 2000 program through support for major governance reforms, both for corporate and financial governance, governance reforms in the public sector and improvement of social infrastructure and agriculture.

Loans Approved in 2000

The four loans approved in 2000 are:

A loan of $35 million was approved in September 2000 in support of the Small Towns Water Supply and Sanitation Sector Project designed to assist the Government in implementing a part of its 15-year plan for small town water supply and sanitation development. The Project will improve water supply and sanitation conditions in 40-50 new small towns. About 0.6 million people, of whom more than 34 percent live below the official poverty line, will benefit from the Project. The objectives are to (i) improve the health and quality of life of the people living in the project towns by constructing water supply, drainage and sanitation facilities, and providing health and hygiene education; (ii) support community participation by developing the institutional capacity of community based water users and sanitation committees; and (iii) promote community-based water quality monitoring. During project preparation there was extensive beneficiary participation. This will continue during implementation and beneficiaries will contribute significantly to the capital cost of the schemes and their operation and maintenance.

A loan of $11million to support the Crop Diversification Project approved in November designed to improve the living standards of the rural population in some of the most poverty-stricken regions of Nepal through the production and marketing of secondary crops. The loan will address the issue of food security by providing farmers with cash income and important nutritional sources, and landless laborers with job opportunities. The Project will directly benefit about 45,300 farm households in 12 districts in the Midwest and Far Western development regions. Women will be specifically targeted to participate in project implementation. The project will encourage private sector participation in research and extension, to improve sectoral performance, with the active participation of beneficiary groups.

A package consisting of a $7.3 million loan and $3.3 million technical assistance (TA) grant for Corporate and Financial Governance approved in December will support a long-term process for sustainable private and financial sector development by strengthening the basic foundations of Nepal’s corporate and financial sector. It will improve governance, transparency and accountability in the corporate and financial sector by strengthening the policy, legal and regulatory environment with adequate institutions and effective enforcement. Access to reliable information will be promoted, and a technological infrastructure to reduce transaction costs will be supported. Comprehensive corporate and financial sector reforms have the potential to boost annual gross domestic product growth significantly.

Finally, as noted above, a loan for $120 million was approved yesterday for the Melamchi Water Supply Project. The Project will improve the health and well-being of the people in the Kathmandu Valley by alleviating the critical water stress in the region, where most of the 1.5 million urban dwellers receive piped water for only two hours every two days. This will be accomplished by tapping additional water resources from the Melamchi River, increasing the water treatment capacity, enhancing access to water, and optimizing the use of existing water resources. The Project also embodies a comprehensive institutional framework for water resource management within the valley, including establishment of a regulatory body, a private sector lease contract, a Kathmandu Valley water authority for comprehensive water resource management, and groundwater use licensing in Kathmandu Valley. Social and environmental support will include a social uplift program to mitigate project impacts and channel benefits to beneficiaries. A resettlement action plan and an environmental management plan will be implemented to reduce and monitor any adverse social and environmental impacts.

Technical Assistance Grants approved in 2000

In addition, eight capacity building TAs and one project preparatory TA were approved in 2000 to support capacity and institution building in priority reform areas. The TAs is in the area of financial and corporate governance, governance reform, agriculture sector analysis, management reform of NEA, the strengthening of statistical systems and microcredit for women.

ADB’s Forward Program

Looking at ADB’s forward program agreed with the Government, proposed lending for 2001-2003 consists of 11 loans totaling $270 million, or an average of about $90 million per year. The projects to be supported are designed to reduce poverty, improve economic growth, support human development, improve environmental management, and address key governance issues in the public and private sector. The majority of these projects will directly address poverty.

In line with ADB’s policy on the use of its concessional Asian Development Fund resources, actual levels of lending and grant technical assistance will depend on country and sector performance, including progress in implementing policy and institutional reforms, good governance, absorptive capacity as measured by annual portfolio disbursement and portfolio performance more generally, and an assessment of Nepal’s debt repayment capacity.

In terms of overall portfolio performance, I am pleased to note that there has been a steady improvement over the last four years, particularly in terms of contract awards and disbursements. The ADB appreciates the efforts made by HMGN and the project managers and their staff to improve performance. However, all involved in project implementation and administration, including ADB’s own staff, need to continue to strive for further improvement in project performance. There are also a number of problem projects and sectors where special attention will need to be given.

Rural Electrification, Transmission and Distribution Project

After Melamchi, ADB’s support for the Rural Electrification, Transmission and Distribution Project has probably been the most talked about and debated part of its operations in Nepal this year. The Bank’s $50million loan in support of this project was approved in December last year and signed in July this year, but the loan is not yet effective. Under the loan there are four key effectiveness conditions: (i) passage of an Electricity Theft Control Act; (ii) reduction in overdue accounts of government and municipalities to less than 3 months of accounts due; (iii) introduction of a system for semi-automatic tariff adjustments; and (iv) achievement by NEA of a 23 percent self financing ratio (SFR) and 6 percent rate of return (RoR) on capital. The last condition has been interpreted as implying a further substantial increase in power tariffs. However, the SFR and RoR depend on a number of other variables, including the size of NEA’s investment plan, the level of technical and non-technical losses, the efficiency in collecting accounts due, etc. It cannot, for example, be right that the level of technical and non-technical losses in Bhaktapur, Kirtipur, and Patan amount to some 52 percent, 48 percent and 32 percent respectively. Taken with the huge municipal arrears of some 48 months, this amounts to power theft on a massive scale. One simply cannot run a modern power sector in this way. Clearly there needs to be progress in these areas, and in the other effectiveness conditions, before consideration is given to a further increase in tariffs. However, a further increase is unavoidable if the power sector is to be financially viable in the longer-term and able to provide the quantity and quality of power that the people of Nepal need. It has to be remembered that currently less than 20 percent of the population have access to electricity and most of those in urban area. Of course, ADB is fully aware that power tariffs in Nepal are already high in regional terms but this largely reflects the high cost of hydropower development in Nepal and constraints, including the lack of market, on the construction of larger-scale storage dams. In the short-term at least, greater reliance on imported power from India could help to reduce future investment costs and reduce the pressure on tariffs, although in India too, tariffs are beginning to rise as both the central and state governments undertake reform measures designed to address the urgent need for financial viability. Finally, it is worth noting that ADB is not against all subsidies and a case can be made for subsidizing rural electrification as it can for other basic services such as basic healthcare and social services. However, any such subsidies need to be explicit and clearly targeted. Equally, the Government needs to have sufficient resources to allocate to such subsidies, otherwise the availability and expansion of such services becomes constrained by the lack of subsidies and/or the Government faces a fiscal crisis. Given the low revenue to GDP ratio in Nepal, the pressure on the Government’s fiscal resources is intense and their allocation thus has to be clearly prioritized. In the case of the power sector, we have to ask whether the relatively small percentage of the population who have access to power really should be subsidized at the expense of those who have no such access.

Remarks by the author, Dr. Richard Vokes, Resident Representative, Nepal Resident Mission on 22 December 2000 during a press conference-chief editor.

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