Sunday, August 17, 2014

Re: Dissecting Laos model - will it lead Nepal to prosperity?

Dear colleague

Actually Bhutan is in a lot better position compared to Nepal, even Laos (which Nepal is about to emulate badly).

I waited till today to respond to you as last year’s annual report of NEA was to be made public yesterday, according to which industries of Nepal consumed 35.8% of electricity sold by NEA. In Bhutan the percentage of electricity consumption by industries is 80% of the electricity internally sold in Bhutan. This is one of the reasons why per capita income of Bhutan has surpassed that of many countries in South Asia. Most know that one unit of electricity consumed by the economy adds value to the economy by 2.5 times.

Moreover, there is another significantly different way Bhutan benefits from. All the hydropower projects that are in the pipeline in Nepal awaiting PDA and PTA are to be owned by respective “investors”. Whereas, the projects built with 60:40 grant-debt (soft) are fully owned by Bhutan government and any and all profit earned by such projects built in Bhutan goes into RGoB treasury. This also contributes significantly in the increase in per capita income.

If the projects that are to be built in Nepal are to be owned by GoN then the profit from these projects will accrue to treasury of GoN and will drive per capita income up significantly.

However, that is not to be. Indian government is pampering Bhutan as latter is former’s protectorate. People in Nepal are too strong headed to allow Nepal to become a protectorate of India.

Moreover, Indian finance ministry is already finding it difficult to sustain 60:40 grant-debt model of financing hydropower projects for a small country of about half a million people and is proposing to reduce it to 30:70 grant-debt. In order to result in similar impact on per capita income of Nepal with population close to 30 million, India would have difficulty in finding the kind of funding necessary.

With best regards,


Sincerely,

Ratna Sansar Shrestha, fca
Senior Water Resource Analyst
www.RatnaSansar.com


On Aug 13, 2014, at 10:58 AM, wrote:
No different from Bhutan model although Laos has 6 times more people than Bhutan

Sent from my iPad

On 13 Aug 2014, at 07:50, Ratna Sansar Shrestha wrote:

After it was proved that Bhutan model isn't replicable in Nepal, some people are now advocating replication of Laos model. In this backdrop, so called "Laos model" warrants a dissection.

Hydropower project built with foreign investment for export will result in apportionment of economic benefits in following manner:

* forward linkage benefit = zero (0) as electricity will be used in the neighboring country for industrialization and value addition will accrue to the user country's economy.

* investment linkage benefit = zero (0) as the return on investment will be repatriated by the foreign investor.

* backward linkage benefit = zero (0) as most of the construction materials and hydromechanical and electromechanical equipment is not produced in Laos.

* fiscal linkage benefit = depending upon royalty and other taxes levied by Lao government. If these add up to 25% then fiscal linkage benefit will be 25%

Therefore, benefit to Laos:

forward linkage 0/100
investment linkage 0/100
backward linkage 0/100
fiscal linkage 25/100

In total benefit to Laos will be about 25 out of 400.

Clear and better alternative for Nepal is to maximize benefit from forward linkage by using electricity internally and from investment linkage by mobilizing investment from domestic sources as far as is possible. Due to underdeveloped state of Nepal’s industries, increase in backward linkage will take couple of decades more. Increasing benefit from fiscal linkage is advisable for export-oriented projects only, not to project from which electricity will be internally used.

This scribe has conducted similar analysis of West Seti project, license for which held by SMEC has been cancelled and the paper was published in Issue # 5 (July 2009) of Hydro Nepal (journal of water, energy and environment). It can be accessed by following the link below:
http://www.ratnasansar.com/2009/09/erer.html

1 comment:

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