State Aid/Subsidy Concern on Petroleum Products

Madhab Raj Ghimire*

Recent decision of Government of Nepal to provide state aid/subsidy to consumers by Rs. 125 on Gas Cylinder/month, Kerosene Rs. 10/Liter and other petroleum products will have Rs. 10 state subsidy to farmers as per referring an agitation by students and consumer associations.

Providing state aid to the vulnerable group is good to those affected from high inflation. It is state responsibility to provide basic need to their people. To provide state aid to the consumers much easier while importing petroleum products in Nepal has single authority, Nepal Oil Corporation (NoC). Therefore, there is no need to make worry about anti-competitive effects causing through state aid to consumers.

But there is concern for the irregularities within NOC, citing state aid, petroleum products to certain individuals. We are still not sure, whether NoC handle effectively to regulate the situation to provide subsidy to the consumers. Therefore, using state money thorough those institutions might not be easy task while colleges, Metro office or VDC will play to provide subsidy to the consumers; we verily reserved the doubt.

Why we reserved the doubt for the distribution? The answer is very obvious. The corrupt officials and institutionalizes corrupt practice with in institution.

It is very unfortunate that while in world scenario, petroleum product distributers or producers are in running highly profitable business. On other hand, our NoC is running in loss and incompetence manner too.  Consumers might consider that despite running into loss, it should have operated effectively to service of supply the petroleum product without mingling in corrupt practice. But it’s never happened. It’s contributed to keep long line enough to the consumers to get product while there is product shortage in the market.  Very surprisingly, consumers want to pay whatever the cost, but, NoC incapables to provide so called expensive products. In this case how can we assure ourselves that our institution can flourish while consumers ready to pay extra for the products but incapable to do so?

Thus, to achieve alocative efficiency of the petroleum product in Nepal, the monopoly situation of the NoC needs to be demarking to take off the right of management of petroleum products. Specially, importing petroleum product to Nepal needs to be given to the private sectors following by competitive bidding procedures. Finally, performance of NoC needs to remain as regulatory agency for regulating on quality of product, pricing issue, effective competition and to discouraging collusive practices of importing petroleum products need to remain with NoC to achieve institutional efficiency and effective competition.

mrghimire@hotmail.com

Simplifying Hydro Law and Regulation in Nepal

-Madhab Raj Ghimire

Improved first law and secondary regulatory framework requires for Nepalese energy market to liberalize, achieve economic efficiency, reduce monopoly, achieve cost effective prices and nominal profit to the producers or service providers. Implementing these steps, it is necessary to liberalize the market for competition. All these steps can be taken for simplifying hydro law and regulation in Nepal.

At the time while Water Resources Act (WRA) 1992 enacted, it was too early to expect WRA to provide a boost for hydropower generation or supply sectors. However, WRA recognised hydropower within primary law, though without emphasising the issue of new foreign investment. It put hydro electricity on the priority list, just like drinking water, irrigation and etc. Nonetheless, WRA gave a clear mandate to the license office to conduct a licensing process and to conduct a survey, research for new proposed projects.

After WRA, Electricity Act (EA) 1992 promulgated. In pre-liberalized era, EA opened doors for the private and foreign private investment. EA was essential for Nepal as it laid down clear and harmonized regulatory provisions in line with other relevant legislations. At the time, EA was introduced, 60% of population had no access to existing electrical grid. Thus, prime emphasis was to be put on the power generation rather than issues related to liberalization/privatization or state monopolies in energy sector. Therefore, EA did not have significant effects in promoting competition in the energy sector.

Electricity Regulation(ER) 1993 designed to promote generation, transmission and supply sector of electricity market. Eventually, ER concentrated on to provide license in generation level. Therefore, other licenses got second priority levels of the electricity chain, such as transmission services. On other hand, ER was trying to make responsible those energy producers with a capacity up to 1000 kilowatt for the transmission and distribution. Despite all these efforts, procedures of awarding license become rather ineffective.

Obtaining WRA, EA and ER revolutionised the regulatory development in Nepal. Therefore, Foreign Investment and Technology Transfer Act (FITTA) 1992 enacted to mobilize private capabilities of international investment to confront hydropower related problems. It was believed that international technology and investment can be beneficial step for energy production to combat excessive level of load shedding. At the time, FITTA was not exactly a law for the investment enhancement, but it provided an easy access for foreign companies to launch technical development projects. Due to major emphasis on hydropower production, FITTA received significant attention from international donors and investors. Unfortunately, rather incomplete structure of this legislation, it helped to create confusion in technically specialized electricity market.

All in all, to improve hydro licenses and simplifying sector specific hydro law and regulation, there need to be following improvements; first, total days of registration of the company need to be reduced. Second, financial incentives need to be provided to the developers. Third, it needs to be simplifying the procedures for the establishment, expansion of hydro industries. Fourth, all necessary services to be provided to developers through one window system. Fifth, Benchmarking of new developments projects should be introduced in regulation. Sixth, electricity others chain; transmission and supply sectors shall allow new entrants to enter into those sectors to obtain effective competition. Seventh, income tax exemption to the developers needs to be increased for more years. Eighth, PPA (power purchase agreement) needs to introduce incremental cost harmonising average rate within regulation. Ninth, price cap regulation might be introduced minimum/maximum use of electricity to ensure generators as investment. Finally, simplifying law, regulation and license need to be concentrate on improving livelihood people of Nepal so that both stake holders (consumers and developers) will be in win-win situation.

mrghimire@hotmail.com  *Lawyer/Infrastructure Legal/Regulatory Consultant

Vitalizing Nepalese Postal Industry

Madhab Raj Ghimire*

While we are going to Central Post Office at Sundhara, Kathmandu and will make some remarks of reviving this industry than either people react by laugh or they would make satirical comments of those efforts. Because we are seeing even our other private company working on postal industry such as Everest Postal Service is just making nominal progress since its establishment.

In an opposite, we are being witness that DHL or FedEx companies are increasing their market to our country making reasonable profit from Nepal. Consumers are reliable to such those companies to send and receive their parcel and depending on these companies to send their letter and goods to abroad in an convertible foreign currencies which is considered as expensive to compare with our consumer capacities.

When international companies are doing much better position in postal market than why our domestic companies are breathing almost last breath? The question is easier rather than answer this question to make responsible to someone.

Very interesting fact of our postal industry, our post office never got to know about shorting machine to sort out letters. Still the date manual workers are sorting the letters.  Arriving letters or couriers, apart from post box in Kathmandu, most of our general postage paid letters takes nearly two months to deliver into remote villages of to capital and vice-versa.

Even to our central post office and post box office, most of the valuable goods lost every day from the center. The trust on to our postal office seems almost nil while consumers want to deliver their goods to the required destination. The postal office management never paid notice irregularities within their regulatory bounding. The institution just remained to provide job to the staff. It’s never been motivated to serve the consumers and make profit respectable manner.

Postal sector, especially for the domestic use, we cannot think full competition within market. However, post more than 10 grams collection, transport and delivery can be hand over to the private companies to bring efficiencies and make profitable sector.

If our government really wants to make effective operational of our network, its needs to be follow following steps to vitalize our postal industry; first its needs to be reduce the number of staff from the office. Second, new technology needs s to introduce to sorting the letters or parcels. Third, incompetence activities and staff needs to be discouraged. Fourth, post more than 10 grams needs to be given private companies to operate across the country. Fifth, regional postal office needs to establish modern sorting machine for sorting letters to save time and cost. The result expanded locomotion in rural areas, new strategy need to be introduce to obtain effective delivering system. Sixth, variable cost for the post in longer and less profitable route need to be verify and cost of post need to review. Seventh, postal office workers trust needs to be restored with increasing their salary and discouraging irregularities of post delivering activities. Finally, while internet is taking over the market of postal industries, its needs to bring market strategy to compete with internet service to survive and expand own market.

mrghimire@hotmail.com

Iron Track; Electric Rail in Nepal

Madhab Raj Ghimire*

Whether we get railway network or not but it’s almost confirm that we are going to get railway department soon. Government of Nepal is working on to establish department under Ministry of Physical Planning and Works. This move can be justified until completion Railway infrastructure level for the time being. After completion of the infrastructure, the department can be shifted smoothly for operation to under independent regulatory authority regime.

Despite lack of electric supply in Nepal, recent proposal by Indian and Nepalese consulting companies along with Nepal Planning Commission are trying to accelerate the proposal through recent annual budget. The budget has allocated fund for formation of department as well as going forward to make preparation of DPR for electric Rail network. The ambitious proposal of Mechi-Mahakali Electric rail which is inter-connected to capital Kathmandu and another hilly city of Pokhara.

Expending large lump of budget (Rs. 810 Million) for this project might not be easy task to finalize the issue of financial scarcity to built largest Railway network in Nepal. And conducting feasibility study to Metro train within Kathmandu valley has given some hopes for locomotors to have better mass transportation system in future. For this again, to provide fund for infrastructure building definitely is not an easy task. However, it is already learnt that cabinet officials are not keen to work on this highly ambitious project due to lack of fund to support Railway construction.

Albeit, we have been experiencing failed state owned structure Janakpur-Jayanagar Railway network which is occupying 22 km in total length. To compare with global scenario, we have just sample of product for the Railway network. The network only relies on the government allocated budget and obliged to keep staffs to resolving their every day problem of living. This miniature service is also bearing unfortunate legacy of total loss by every year and corruption within it. In this condition, Nepalese investors would not be assured to invest in such sector, which is already running in loss scale. Unless, government or consultants would assure to profitability of business, there would be no hope of high investment on Electric Rail.

The financial assessment of newly proposed electric Rail network can be drawn to discussion from different stake holders such as donor agencies facilitated by soft loan from WB or ADB or through public private partnership (PPP) modality and complete private investment (even though, which is almost out casted in Nepal) could be other option for the infrastructure building. Apart from these aspects, will power of government with strong leadership is very important to complete such types of projects. The fact is, due to financial weakness of government, it could go through per regional base buildings to built infrastructures level.

To succeed or completion of project, we need to establish effective and capable authority to regulate this highly influencing financial project of Railway network. Therefore, we need regulatory authority which can be evolved through railway department in the starting. Before operation of network, slot of infrastructure and independent infrastructure manager needs to introduce within regulation. But, after completion of the project, it is oblivious that sector needs independent authority to regulate Railway to obtain network efficiency through competitive policy.

mrghimire@hotmail.com  /Network Regulation Consultant*

Optimal issues of Nepalese Hydropower Regulation

Madhab Raj Ghimire

The article proposes improvement of sector specific Nepalese regulation in the areas of generation, transmission, supply and investment to ensure competition within energy market. This task is not easy to implement wide-range of secondary-law adjustments in energy sector while country is hanging on constitutional and political limbo. Therefore, the aim of a work cannot be confined to merely presenting the existing problems. It also presents the possible solutions even implementation might not be easy to process ahead.

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Foreign Investment: - Nepalese hydropower development cannot achieve its ultimate goal without foreign investment regulation. The major challenge of this type of investment is dispute settlement procedure. The two examples of Mid-Marsyandi and West Seti Hydropower cases demonstrate that the  dispute settlement procedure was far from being adequate. To go one step forward, West Seti Project which has condition like project will operate under Nepalese law but dispute issues are going to settle down by British court. It shows that future dispute settlement will be hard, lengthy and costly for country like Nepal. It is therefore of utmost importance that the national regulatory framework and the regulatory authorities are well equipped to deal with investment related issues; in this way Nepal can assure donor agencies, foreign constructors and consultants that the relevant matters are dealt with in a professional and fair manner, providing additional incentives for the investment and avoiding possible legal confrontations.

Private (local) Investment:- There are still some barriers left for private sector involvement. On the infrastructure side finances and costs are vital. The infrastructure issues, such as road access to remote hilly areas are other challenges for the investors. Similarly, transmission networks and high investment costs for their construction remains a problem yet to be solved by the regulatory provisions.

Difficulties related to the measurement of performance efficiency - due to lack of competitive market forces which could be used for yard-stick assessments, especially on the production level another obstacle for private investors and regulatory bodies. In addition, the price of the whole-sale energy traded to downstream markets should be subject to regulation; alternatively, a fair procurement procedure could be used to determine relevant market price.

Government may introduce risk mitigation mechanisms in order to assure investors. In addition, government can build the necessary networks in support of the projects carried out by investors. Finally, in order to avoid disputes related to infrastructure, a clear and detailed regulatory framework is required.

Access Regulation and unbundling: - In Nepal, to improve the unbundling procedure, an Independent system Operator (ISO) should be established. For example, a supply company (such as NEA) can own the physical network whereas the investment, operation and maintenance of network would be delegated to an independent company (ISO). Along with this, regulation for the third party access and protection of their interests would be efficient mechanisms to introduce open and transparent market procedure.

At the same time, the incumbent / owner of the transmission network holding a significant market power (SMP) shall not abuse its position on the market. This does not mean that those operators are not allowed to hold a share of particular sector; this share, however, shall be small enough to ensure that the company holding it does not distort the competition on the market. These conditions apply both to public and private companies. So, NEA or other private companies would benefit from these transparent regulations.

Tariff Regulation: - In a liberalized market, regulating energy tariff does not guarantee a decreased price. However, experience shows that in a liberalized market tariffs become more affordable than in a pre-liberalized market. In Nepal, there is not separate tariff regulation, and the provisions of other legislative instruments do not significantly influence prices on the downstream level. Tariff regulation could be efficient in the market provided that there is more than one supplier which enables consumers to choose their favourite scheme offered by service providers. On the other hand, government has obligation to ensure that service to the public is provided as fairly, transparently and without discrimination as possible. In addition, state has responsibility to serve vulnerable consumers to ensure they receive the service of energy supplies. These goals can be achieved only on a regulated market. Generally, monopolists have to undertake an obligation to provide service of general economic interest (SGEI). However, even Europe has experienced cases where the respective regulator has disrespected the principle of price cap regulation. All in all, an efficient competition combined with provision of SGEI and regulated network can provide better services and pricing.

NEA can introduce peak/base load pricing to meet demands of energy. This pricing method would mostly affect the supply level, thus contributing to its efficiency and more rational power generation.

On other hand, the calculation of the wholesale and retail prices has not been transparent in the electricity sector. Even in developed countries efficient supply is provided at a price which covers total costs of investment and marginal profit for investors. Likewise, by making use of energy more efficient could influence the total price of energy, energy consumption levels and load management.

Cross country transmission: - Cross-border trade in electricity has been assumed long time back by SAARC (South Asian Association of Regional Cooperation). Considering various obstacles of ineffective transmission and lack of interconnection capacity, it has not brought about positive results as expected. On the other hand, cross-border co-ordination between Transmission Systems Operators is not well developed. Third party involvement to this type of transmission has not been practiced so far. These are the problems to be tackled, including the issues related to the load-shedding and congestion management. In this aspect, SAARC has not contributed a lot to economic progress of the region. However, some progress has been made in creating regional grid network for the whole region. In the mean time, NEA has been working on building 220 kV cross-border transmission line with Indian Electricity Authority. Should these projects be implemented in the future, they could serve as examples of an efficient cross-border trade in the SAARC region.

Considering the above mentioned, it is obvious that GoN has to work on a cross border transmission system. For these purposes, harmonization of regulation with India is essential, so it is responsibility of Indian side as well. Issues to address are, among others, pricing, security of supply and provision of services of general economic interest. In south Asia, the regulatory authorities are not as efficient as European regulatory agencies. Thus, to handle these issues, there must be efficient and independent regulatory authority to solve the disputes between two countries.

In SAARC countries, a common grid for the whole region may become reality within some years. Cross-border transmissions between Nepal and India, as well as between Bhutan and India already take place, although no effective competition exists. Furthermore, cross-border trade among Bangladesh-India-Pakistan and India-Sri Lanka is currently being negotiated.

Nepal Electricity Authority (NEA):- Nepal Electricity Authority (NEA) is vertically integrated, state owned company with a monopolized position. Its capacity as a sole buyer of produced energy, has an exclusive authority to conclude all the agreements with investors (also foreign investors) in the energy sector.

Without competition in the market, it is difficult to preserve the goals of energy efficiency. Thus, infrastructure and distribution services should be unbundled and brought into different ownership. On the other side, providing opportunity to build the infrastructure and network only to NEA and certain foreign companies, cannot create fair market. In fact, this will create duel-monopoly in the electricity production. Hence, the Nepalese government should liberalize the electricity market in order to achieve lower prices, efficient and effective services. In doing so, it can learn from the European experience in the fields of energy production and supply strategies, as well as from its knowledge in dealing with unequal, non-transparent and unfair market practices.

The question of ownership of this transmission line remains the key issue in creating a market. For the time being there the competitors cannot get an access the distribution sector. This does not ensure fair market of electricity supply on the downstream level.

Nepal Electricity Regulatory Commission (NERC):- NERC has to aim at providing access for transmission and distribution sector, so that upcoming unbundling process can move smoothly. The future goal of the Commission should direct towards infrastructure and distribution levels to unbundled the networks. The Commission has to provide and implement directives on electricity to ensure an open and transparent procurement for new infrastructure buildings.

Other task of the Commission is to set standards and efficiency based incentives, where it comes with settings of yardstick competition to set bench marking. It also has to address risk mitigation and financial risk problems associated with investments. Similarly, the Commission has to review all the pricing issues and recommend establishing specific regulation, such as peak and loading pricing, market based v. negotiated prices and flat rate of electricity generation. These are important issues to bring fairness in the market.

Water and electricity distribution between regions has to be resolved efficiently by the NERC, a single regulatory authority on the central level. Similar manner, relevant issues such as issue of cross border dispute resolution should be specified and have to be brought under the Commission’s responsibility.

The NERC has to focus on to evolve independent body to regulate the market. Due to reaction of ex-ante regulation, there is risk on the independency of NERC.

mrghimire@hotmail.com  *Advocate/Network Regulation Consultant

Jointly Constructing Oil Pipeline to Nepal; Some Issue to Resolve

-Madhab Raj Ghimire, Infrastructure Legal/Regulatory Consultant

Latest development in between Nepal Oil Corporation (NOC) and Indian Oil Corporation (IOC) to build Oil pipeline by the IOC from Amlekhganj (Nepal) to Raxaul (India) length of 41 km has given little hope to resolve fuel crisis in Nepal. The most potential cross border of Raxaul/Birgunj, Nepal, which has burden to import around 70% of fuel from India, may reduce the number of obstacles such as strike, oil leakage and obstruction from local agitators or form of other political parties (Albeit, price adjustment factor has been analysed through high level Petroleum Sector Reform Taskforce). Very importantly, it will reduce transportation cost contributing to lower the price of oil.

To build the high invested oil pipeline, the first party IOC seems major beneficiary than to NOC. The first party of IOC role for investing to the pipeline can be highly appreciated, in the same time IOC benefits as large economic scale of an externalities needs to be evaluated on the investment side.

Nepal has major and concrete role to give strategic supply and security of challenges of 41 km pipe lines, hopefully will bring service efficiency to deliver the product to Nepal, Port of Amlekhganj, technically lying pipelines below 1.5 meters grounds is standardising the security concern of investments. The financial burden to built 39 km to NOC side and 2 km to IOC side has a lot of inspiration of financial incentives to singular investments.

The context of acquiring the land of 400 bighas and without even purchasing of Nepal Railways could be better steps if same property can be used as both stake holders (Nepal Railway and NOC) to take the ‘right of way’ of permission might be hassle to the NOC in Nepal considering present situation in Terai region.

There need to be contract based regulated regimes in between two countries for simplifying the operation. It is almost sure that potential natural monopoly on oil pipeline will be exist in future. Therefore, there should not be any confrontation based on competitive measurement.

It is learnt that Taskforce has recommended that ‘competition only’ can resolve the crisis within NOC. Very importantly, the proposal of establishment of Nepal Petroleum Authority recommended by Taskforce can resolve and simplify the process to built the joint pipeline and, in case of dispute settlement in between two countries.

However, the concept to build pipelines was introduced in 1995, which already took one and half decade to make formal decision. The reality of implementation might take other more years ahead. However, the initiatives might not be undermine even to transition period of Nepal. Reducing scarcity of the petroleum product and cost will be huge relief as well as daily basis essential needs of consumers. Similarly, other products based on high transportation cost will be reduced automatic reduction will ease the life of consumers.

mrghimire@hotmail.com

Comments on New Merger Directives for Banking Sector in Nepal

Madhab Raj Ghimire

 -Network Regulation Expert

-LLM, Competition Law

Nepal Rastra Bank (NRB), a regulator just released new directive to facilitate to merge future-going banking and financial institutions (BFIs).

NRB claims that merging in between different financial institutions will upgrade the BFI to the national level and those will be benefited from tax exemption. NRB further claims, small BFIs do have unhealthy competition among them therefore, to reduce regulatory lacuna against small BFI, merger is preference to sustain the financial market. NRB claims result of small numbered BFIs; NRB will find enough time and effective mechanism to regulate as well as monitoring. Giving priority to merge by NRB for small and new entrants it will reduce the operation cost as well as to initiate to obtain less profit through merger only can benefited consumers.

The positive aspect of NRB’s directive is- Directive is not enforcing BFIs to merge but its role would be just to facilitate the merge. The Directive intended goal of merger is trying ‘show case’ of international banking competition. But, BFI initiatives has not been focusing on remote areas, most areas are facing lack of banking access within country. BFIs have not been able to provide the accessible access to the common level of consumers. Neither NRB does not have policy to provide license incentives and banking services, which are not cost effective nor has cross subsidy been discussed to fulfil service of general economic interest to vulnerable consumers.

A directive has given excessive benefit to merger oriented institutions might not be rightful decision for the future prospect, without conducting proper study of market share of dominant market players. This might go for price-squeezing against small market players such as Development Banks and Cooperatives Banks to drive out from the market.

However, bigger banks merger may be able to cooperate with international banks on the norms of competition. The light risk of this directive is for giving priority to same organizing –group to merge and to create larger group will bring risk of oligopoly in financial market. The Directives made little a bit easier to invest by 15% investment same family based is strong participation of diverting the finance to different stake holder seems convincing resolution.

NRB has weakest performance for regulating against Banks that are deliberately capturing the market share of Development Banks, who were providing retail services to consumers. This might not serve the interest of new comers into the market, also will serve the interest of large and monopolised BFIs. Therefore, NRB directives could bring rightful result if there were enough players to provide basic services across the country but without encroaching product market of others as well as market share too.

Finally, before regulating BFIs, there need to be enough players not only to the central level but also regional and local level to provide services. Therefore, in competitive and regulatory view ‘first let there are numbers of small players- than we can regulate the market and again de-regulating processing will start after enough competitors.’ This can only help to thrive our financial market to compete with international banking market players.

mrghimire@hotmail.com