12-18 December 2014 #736

Decentralised plunder

The rent from Nepal’s rent-seeking state just went up

Feudal Nepal was a rent-seeking state in the classic sense: rulers profited from the export of human and natural resources without investing in productivity. In this prolonged post-conflict transition to a supposedly ‘new’ Nepal, rent-seeking has not just persisted but become standard operating procedure.

After the first people’s movement of 1990 when Nepal went from being an absolute monarchy to a constitutional one, pro-democracy aparatchiks of the various political parties became the nouveau riche through extraction. After the second people’s movement of 2006, the Maoists showed everyone how to become rich through extortion. Both extraction and extortion were just extensions of feudal rent-seeking.

There is cautious optimism about the new investment climate in Nepal after the first visit here by Indian Prime Minister Narendra Modi. Foreign investors may not be exactly ecstatic,  but there is a stirring of interest. The Economist and the Nikkei Asian Review recently ran rare pieces on Nepal focused on new investment prospects to exploit Nepal’s untouched hydropower reserves.

Yet, as we argued in this space last week, investment in infrastructure without addressing the structural problems of governance will exacerbate inequality, lead to lopsided development, create wastage and harm the environment. This the same kind of ‘resource curse’ faced by countries like Nigeria and Angola where immense oil wealth in the absence of democratic institutions ended up institutionalising corruption and rent-seeking.

We already see evidence of Nepal being blighted by the resource curse. There is a long list, but here are just the most recent examples:  

  • Transmission lines from the private sector Upper Bhote Kosi project supplying 45MW to the national grid were cut by a massive landslide at Jure in Sindhupalchok in August.

Efforts to reinstall seven pylons has been obstructed by representatives of four main political parties who want a bigger share in the company. Power rationing has increased by one hour this winter because Bhote Kosi has been sitting idle. The company has offered 5 per cent of its shares to local politicians, who are demanding between 10-25 per cent. Cadre, some of whom are CA members, are blocking pylon repairs to boost their bargaining position. It would be polite to call this extortion, it is actually decentralised plunder.

  • The same local politicians from the NC, UML, UCPN(M) and RPP-N have also been extorting the Chinese contractor involved in the 102MW Middle Bhote Kosi Project that was supposed to begin construction last year. Although the politicians have put forward various populist demands like generating local employment, it is actually raw rent-seeking pure and simple. The project already suffered a setback earlier this year after the government sacked managing director Kulman Ghising for being too honest. The Rs 1.3 billion project is supported with a loan from the Employees Provident Fund.

  • The World Bank IFC-funded 36.7MW Kabeli A hydropower project in eastern Nepal is in limbo after the corruption watchdog wrote to the Energy Ministry to scrap the license because of delays. It is true that the project had missed the date for financial closure, but that was more because of bureaucratic red-tape. Instead, there are suggestions that the watchdog itself wants to have a slice of the pie in return for giving the project the green light. 

  • Besides hydropower, telecom, highways and manufacturing are other sectors which government ministers, the bureaucracy and the regulators think they can fleece. Dividend repatriation of international shareholders is blocked by officials who want a cut, permission for expanding mobile networks is tied to kickbacks, there are certain ‘demands’ to clear VAT refunds, and bribes to customs to clear urgent equipment imports have become so routine it is treated as a given.

The political parties can’t seem to agree on the terms of the new constitution, but on extorting investors they stand firmly united, as we have seen on the two Bhote Kosi projects. Diplomats from the US and China have appealed to Prime Minister Sushil Koirala, but he seems to be too feeble to rein in his own cadre. When one company lost the bidding contract for the 140MW Tanahu Project, it planted prominent news stories alleging favouritism, delaying the project further.

Not only do these examples discourage potential investors, they provide a disturbing glimpse of the kind of decentralised rent-seeking we will see in a new ‘federal’ Nepal. 

Read also:

Dichotomy in development, Bihari K Shrestha

Superstructure bottleneck, Editorial

Miles to go, promises to keep, Elvin L Shrestha

Rs 6.3 billion extortion, From the Nepali Press

Is Nepal really open for investment?, Ashutosh Tiwari

Great expectations, Anurag Acharya

Generate electricity, or protect tourism?, Paavan Mathema

Believing in Nepal, Srikanth Srinivasamadhavan

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