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There is a flawed understanding that fis­cal federalism is applicable only in a federal set up. It can be practiced even in a unitary system. In our context, we had exercised a good deal of fiscal federalism in the past. There are mainly four pillars of fiscal federalism.

The first is function analysis or expenditure assignment. This means allocation of specific responsibilities to federal, provincial and local level governments. Even in the past, we had decentralized some rights and duties through legal arrangements. Our constitution has provided 35 exclusive rights to federal govern­ment, 21 to provincial governments, and 22 to local governments.

There are concerns about different areas related to expenditure assignment. The pro­vision of fiscal transfers and grants is clearly mentioned in the new constitution, paving the way for its immediate implementation. The government has done a praiseworthy job on the management and transfers of civil servant.

The second pillar is revenue assignment. Even in the erstwhile unitary state, munici­palities and rural municipalities were granted some revenue-related rights. The new consti­tution has not provided much revenue-related rights to provinces.

The third pillar is related to grants, which falls under inter-governmental fiscal transfer. In terms of federalism, we are highly decen­tralized. But that applies only to works and duties. Most of the rights are given to pro­vincial and local governments. For instance, local governments have the right to decide on educational matters from primary to the higher secondary levels.

Similarly, provinces have the right to decide on tertiary institutions of education, or univer­sities. Moreover, all functions related to drink­ing water, agriculture and livestock, and 80 percent of the functions related to rural roads are with local governments. But institutions are the same. Expenditure assignment is con­stitutionally highly devolved but the revenue system is highly centralized. Only the roles and responsibilities are given to local levels, but no rights related to revenues.

There could be certain reasons behind centralizing the revenue system. More than 80 percent of the rights related to revenue is retained by the central government, whereas 60 percent work is devolved to the local governments. In principle, there should be a balance between allocation of responsibilities and revenues. Here, it is relevant to discuss the third pillar: inter-governmental transfer of funds.

Though we have centralized the revenue sys­tem, we have decentralized the distributions of revenue through laws. Revenue collection is decentralized as around 96 percent of it is collected from 15 districts. But we have 77 dis­tricts, and the government has a responsibility of looking after all districts and provinces. Again, 50 percent revenue is collected from customs points, which is the major source. Revenue control is centralized, and funds are transferred to the local levels as grants. This forms the third pillar.

Now, provinces and local governments get four types of grants—fiscal equalization, con­ditional, complementary, and special grants. Around 30 percent of the total budget is trans­ferred to local government units. In terms of revenue, we transfer 48 percent revenue to provincial and local governments.

Canada transfers highest amount of fiscal money to its local levels (49 percent), while the US transfers about 35 percent. Compared to those countries that embraced federalism two to three centuries ago, the condition of our fiscal transfer is better.

In our country, 15 districts collect 96 per­cent revenue. The Karnali and Sudur Paschim provinces collect less than one percent. Over 60 percent revenue is collected from Bagmati Province, most of which is sent to provinces as grant. We have a constitutional body called the National Resources and Fiscal Commission which recommends the distribution of reve­nues to all three tiers of government. There is also a constitutional provision that provinces have to transfer fiscal resources to local units.

The fourth pillar of fiscal federalism is the right to take loans. Local and provin­cial governments can take loans from the federal government based on the recom­mendation of the National Resources and Fiscal Commission.

Confusions related to expenditure assign­ment need to be cleared, and calls for our immediate attention. There is an overlap in the functions of the three tiers of government. For instance, all three tiers are involved in road construction. There should be clarity about who does what. The federal govern­ment should remain within constitutional boundaries, which is the biggest challenge of federalism. Local governments say they face obstacles from the provincial and federal gov­ernments. The provincial governments blame the federal government of interfering in its jurisdiction.

Another issue that needs our attention is that institutions have not gone to local levels with due responsibilities and rights. Although the constitution has given them rights related to education and agriculture, local govern­ments complain the federal government is building parallel institutions to interfere with these rights. This is like a parallel government, which should not be there. In terms of reve­nue, provincial and local governments have similar rights, creating confusion over distri­bution of resources.

We could have done much better. The fiscal commission has not been effective. Institutions related to federalism should work smarter. But despite everything, we have made good prog­ress on fiscal management. The bureaucracy has done well even in the absence of political leadership. We have allocated common and separate rights to the three tiers of govern­ment, but it has been the bureaucracy that has carried out most of the work.

Over 60 percent expenditure of sub-national organizations is managed through grants. But the transfer system is opaque. There have been complaints that more budget is allocated to electoral constituencies of political leaders. We also need to look after Karnali and Sudur Paschim provinces. For that purpose, we have to develop a scientific framework and ensure equal distribution of funds 

The author is a fiscal federalism expert

(Based on a discussion with Kamal Dev Bhattarai)

 An old debate continues to fester in Nepal: Do we need foreign investment in hydro­power? There has always been a ten­dency in the country to please foreign inves­tors. The past experience of foreign invest­ment in hydropower had proven costly. But thanks to lucrative commission high-level state officials pocket from them, we are surrender­ing one after another hydropower project to foreigners—and for questionable returns.

The former CPN-UML contributed to the cancellation of Arun III. Instead, we signed dollar agreements for Khimti and Bhote Koshi, and the country will continue to pay for these projects in dollars for at least another decade. All major political parties were united in this open loot. There was a lot of hullaballoo over building Budhi Gandaki with Nepal’s own money, and even a petrol tax was raised for the purpose (with the total coming to Rs 37 bil­lion). Yet the project was ultimately awarded to a foreign company via unscrupulous mid­dlemen. Even if political parties disagree on many things, they are one when it comes to pocketing big commissions. The same hap­pened with Budhi Gandaki. Nearly all the projects undertaken with foreign money have been made deliberately expensive. When the World Bank’s IFC entered Khimti, even the PPA rate was revised. These projects given to foreigners generate only a third of the installed power capacity, and yet the state will continue to pay them for 30-35 years.

In this context, a few weeks ago, there was a financial agreement on Trishuli-1. The project would reportedly generate 1,00MW during the winter, and 216MW in the rainy season. Initially estimated at Rs 35 billion, the final project cost ballooned to Rs 65 billion.

Of that money, around 80 percent will be repatriated. Some construction materials and semi-skilled laborers will be Nepali, and some electricity would be added to the grid. But this project has also hindered the entry of Nepali investors into the sector. The PPA of Nepal’s private sector has been stopped after the proj­ect’s ‘connection agreement’. The problem of adjustment of its monsoon-time electricity will be a headache, as NEA has to pay in dollars for spill energy. Interestingly, in this project, the longer the electricity is sold, the more costly it will get.

Certainly, there can be no investment with­out guaranteed return. But we need the kind of investment that benefits both the investors and the country. Here, all benefits accrue to foreign investors. The state is forced to guar­antee investment, provide services, and limit its investment in other neighbors.

Yet domestic investors cannot repay their loans even after generating much electricity. If only 10 percent of the facilities provided to for­eign investors are given to our own investors, plenty of investment can be generated from within the country itself. Yet no such conces­sion is made to potential domestic investors. For instance, the stated government policy goal of getting domestic investment to reduce energy emergency has not been implemented even after it was passed by the parliament. This double standard is at the heart of our hydropower crisis.

Whenever the private sector tries to enter hydropower, the government functionaries rise up to thwart it. A cabinet decision is needed just to cut down a few trees. It takes years to conduct Environment Integrity Index (EII) or Environmental Impact Assessment (EIA). There are hurdles every step of the way, from land acquisition to custom clearance. Generally, there are no such hurdles in the case of foreign investment.

Where we really need foreign investment is in reservoir-based projects. But seldom do the private sector enter these projects as there is no profit. (For instance, Budhi Gandaki’s pay­back period is assumed to be around 18 years.) The private sector cannot pay for West Seti: There is again a long process of payback and the market is uncertain. So why are foreign companies investing in Nepal?

As a Chinese company is interested in Tamor (667MW), Nepalis are excited. But the kind of conditions the Three Gorges forwarded in the case of West Seti will also be replicated in this case, as there is no fixed market for it. Will the Nepal Electricity Authority buy its power tomorrow? At a time the Three Gorges did not trust the NEA with West Seti, in which the NEA itself was a partner, how can it trust the NEA in other projects? This only risks hold-up of licenses.

As it is confident that nobody will come for­ward to build Tamor easily, the BPC has been sitting on Kabeli A (37 MW)—which could be sunk by the building of Tamor—as it expects compensations even without building it. The government has just sold Tamor to a Chi­nese company, with an MoU signed between Nepal’s Hydroelectric Investment Develop­ment Company Ltd. (HIDCL) and Power China Corporation. But the project’s future remains mired in uncertainty.

In Tamakoshi III (650 MW), Norway’s SN Power could have come. This world-famous company had no shortage of equity. But why didn’t it? How can a company backed by a dubious broker named ‘Hey Narayan’ enter a project when the SN Power dared not? Our rulers know foreign investors are not attracted to Nepal’s hydropower. If a PPA is to be opened in the models of Khimti, Bhotekoshi, Upper Marshyangdi, and Chilime, there will be a surfeit of investment.

If there is an agreement on division of spoils among political parties, such agreements will continue to be struck. But where will the power they generate be sold? The political leaders who give orders don’t even need to sign anywhere to be eligible for such commis­sions; they can just verbally instruct the offi­cials of the Investment Board or the Ministry of Energy. Unless there is a mandatory provision of signatures of the leaders who issue such diktats, they will continue to sell our rivers.

Again, we need investment in reser­voir-based projects. But these are not finan­cially attractive. When the private sector does not step forward, the government should step in. We import electricity worth Rs 24 billion, send out even more money in the import of petroleum, and yet we don’t have many ave­nues to increase our exports and reduce our trade deficit. Reducing imports is tantamount to increasing exports. Yet we have no policy to replace imported energy and petroleum with our home-generated power.

Our political leaders seem to have little time to think about the country’s long-term and strategic interests. If they did, the mighty two-third government with a finance minister with a sterling resume would have started construction of reservoir-based projects with state investment. Yet we are forced to continue to indulge in gimmicks like re-exporting palm oil to India to reduce our trade deficit.

There is neither energy security, nor have domestic investors gotten justice. There is a kind of prohibition on the domestic private sector from investing in common (run-of-the-river) projects. Yet foreign investment in such projects is welcomed. We need foreign invest­ment only when our domestic resources are inadequate. If the government has a policy of building reservoir-based projects with the help of private sector, we need not always look up to foreigners. Only then will the country be self-sufficient in energy.

When will the NEA make Upper Arun and Sunkoshi, and when will they start produc­ing power? We also don’t know about the future power demand when they finally come on stream. Thus a kind of darkness has descended on Nepal’s power sector as there is no fixed goal, or imagination. We con­tinue to import electricity despite our huge production potential, we cannot consume the generated power, and we continue to rejoice at foreign investment. How long will this trend continue?

The state does not want to invest in reser­voir-based projects as the ruling parties have to dole out money for its leaders and cadres by entrusting other kinds of projects to for­eign companies. When will our leaders learn to think beyond their immediate interests?

The author, Editor with Annapurna Post, is a veteran hydropower analyst

Just like other growing sectors, the Nepali advertisement indus­try has been evolving and grow­ing in its own unique way. This sector has undergone big changes, which comes with increasing challenges.The contemporary advertis­ing sector of Nepal faces multiple challenges. It lacks adequate man­power, effective plans and policies, as well as competent agencies. But the absence of an advertisement board and an advertising regulatory body are our major concerns at the moment. These two organizations are supposed to control the unnec­essary flow of advertising, catego­rize advertising agencies according to their capacities, and look after other issues that affect advertising. But we don’t yet have any such body.

We have talked to the Ministry of Communication and Informa­tion Technology several times in this regard. According to officials, these bodies will be formed soon. When that happens and the bod­ies come into operation, Nepal’s advertising sector will gain new height. In that case I foresee much progress in this sector.

Another big issue is the steadily increasing number of media outlets. Many media houses have vested interests rather than the motive of informing people responsibly. Such media also form their own advertising agencies to make easy money. It is difficult to say whether they are real media to inform people or fraudulent businesses to make money. This practice harms genuine ad agencies.

Also, there is unhealthy competition between media houses over advertising. Some media outlets run advertisements for the sake of visibility, without signing any contract. So although they seem to be run­ning many ads, they don’t make money and can’t pay their employees.

To resolve the issue, media houses and concerned people should be able to discern proper ways to advertise. They need to distinguish between experienced adver­tising agencies and novices. Placing all agencies in the same basket will be unfair to us. We must sit together, have proper coordination, and work together to find a way out.

On the other hand, the print media are running weak content these days. They have lost reader­ship for this reason. For instance, different newspapers give different data for the same news. If there is a bus accident, one newspaper will report the death toll as five, another reports 10 deaths and, a third, 15 deaths. Confused readers will then lose trust in the papers. Because of this paper readership is shrinking, affecting the advertising sector. Besides, the emergence of dig­ital media and smartphones has significantly lowered the scope of newspapers.

In the past one and half years, digital media has robbed at least 25 percent of the print media’s market. The flow of adver­tisements to the print media has dropped by 40 percent, which has been cap­tured by the digital media. Smartphones and reality shows have a big role in this. The only possible way to overcome this situation is for the print media to focus on winning public trust through reliable and worthy content.

As the chairman of the Advertising Agency of Nepal (AAN), I have been trying for the past one year to boost this sector’s growth. Finally, the gov­ernment has decided to introduce clean feed—a provision by which the content of foreign TV channels will have no advertisement. As per the clean feed policy, only advertise­ments created for Nepal with local content, characters, and language can be aired. I am hopeful that clean feed, which will be implemented from October 23, will be a boon for Nepal’s advertising sector.

We also lack an advertisement act and a code of ethics, another essen­tial area that we need to consider if we are to lift the advertisement sector. The government should look into this at the earliest.

The ad sector is directly related to the country’s economic growth, as the ad industry plays a big role in promoting economic activities, and vice versa O

The author is Chairman, Advertis­ing Agency of Nepal (AAN)

(As told to Prasun Sangroula)

 The government is completing two years without much to show in terms of meet­ing its own economic and development targets. It promised a high growth rate and better budget execution along with sound governance and formulation as well as imple­mentation of reforms to boost investment. The government was able to pass some invest­ment and social security related bills from the parliament, but their implementation is not satisfactory. In terms of major macroeconomic indicators, the government has undershot its own targets. It promised 8 percent GDP growth in 2018/19, and has set an even more ambitious 8.5 percent target for 2019/20, and a dou­ble-digit growth in a few years. However, according to the Central Bureau of Statistics, the economy is expected to grow at just 6.8 percent at basic prices (7.1 percent at mar­ket prices) in 2018/19. Although this marks the third consecutive year of 6-plus percent growth, it is still less than the government target. It does not indicate the economy is on a solid footing with strong fundamentals. The base year effect after the slump in economic activities due to the earthquake and block­ade, and temporary fiscal stimulus related to post-earthquake reconstruction and spending during the elections, have underpinned high growth rates in past three years. Surprisingly, despite all the talk about investment-friendly laws and regulations, there was a contraction of industrial output and a decline in net for­eign direct investment.

The government is set to miss the growth target in 2019/20 too. Although the finance minister continues to assert that the gov­ernment will be able to achieve the ambi­tious milestone, the consensus forecast right now is around 6 percent. Unfavorable mon­soon together with slower than expected industrial activities are exerting downward pressure on economic activities. In addi­tion to accelerated work in major infrastruc­ture projects, the pick-up in post-earth­quake reconstruction and tourist arrivals will be crucial to sustain around 6 percent growth this fiscal.

Perpetual underachievement

The progress on the fiscal sector is also one of perpetual underachievement. While intro­ducing 2019/20 budget one-and-a-half month before the start of the fiscal year, the govern­ment promised improved budget execution, specifically capital spending, and better coor­dination in terms of planning and implemen­tation among the three tiers of government. However, the data till the second half of this year show that the pace and pattern of budget execution won’t be any different from previ­ous years. Of the Rs 408 billion earmarked for capital budget, it was able to spend less than 15 percent by the first half of 2019/20.

Further, as in the past, we will most likely see bunching of spending in the last quar­ter. The government usually spends or dis­burses about 40 percent of actual capital expenditure in the last month of fiscal, raising concerns over quality of spending and gover­nance associated with public spending. From the beginning the budget lacked a robust, credible and a time-bound implementation plan to spend the earmarked money. There was no improvement in allocative efficiency during budget preparation. The same old issues have been plaguing budget execution: structural weaknesses in project preparation and implementation, low project readiness, bureaucratic hassle in approving and reap­proving projects, poor project management and contractor capacity, high fiduciary risk in project implementation at subnational level, and political interference both at planning and operational levels.

On the revenue front, too, the government is missing its own target. Revenue growth target of around 29 percent was ambitious in the first place, but the finance minister kept asserting that it is achievable. In the second half of 2019/20, the government is facing a revenue shortfall of nearly Rs 90 billion already. Revenue mobilization has been hit by declining imports and general slowdown in industrial activities. It appears the efforts to raise tax and non-tax revenues by boosting economic activities, to plug revenue leakages, and to formalize economic activities have been inadequate. The high government spending but slow revenue growth has led to widening fiscal deficit, which is projected to be above 6 percent of GDP. This deficit binge is putting pressure on interest rates.

Bad to worse

On the monetary front, things are not rosy either. Inflation is rising and will likely over­shoot the government’s 6.5 percent target. The consumer price inflation in each of the first five months of 2019/20 was higher than in the corresponding period in 2018/19. The average inflation so far this fiscal year is 6.3 percent, much higher than 4.6 percent in the first five months of 2018/19. This is largely driven by increase in prices of food and bev­erage, vegetables, fruits and spices. Overall money supply in the economy has declined too owing to the deceleration of remittance inflows. Both deposit and credit growth have slowed, but the latter is still higher than the former. The asset-liability mismatch remains unresolved. The low level of nonperforming assets, as per central bank’s statistics, is too good to be true. Evergreening of bad loans and dubious accounting of banking assets are real possibilities.

The vulnerabilities in the external sector remain. Exports have increased but imports have decreased, leading to a lower trade deficit compared to the first five months of last fiscal. The increase in exports is largely due to the export of palm oil, which alone constitutes 35 percent of total export to India. Nepali traders are adding nominal value to imported palm oil or related raw materials and exporting them to India by taking advan­tage of the preferential tariff. Meanwhile, the decline in imports is due to the decrease in demand for imported vehicles, gold and petroleum products. It has helped to reduce current account deficit, which was already at a high level.

Overall, the economic activities and gov­ernment’s performance are not up to the expectation. Progress in most indicators is undershooting the target set when the finance minister presented the budget for 2019/20. The government needs to be realistic about what can be done in the short-term given the constraints it is facing, particularly on financing ballooning expenditure needs and its capacity to deliver. The economy is not on a stable footing and the often talked about dividends from political stability is yet to be realized. The working culture of bureaucracy and the government is not much different from the past trend.

Bombastic statements about the soundness of the economy alone are not going to please worried investors. Some industries (such as cement, iron & steel, and hotels) that drasti­cally expanded capacity in the hope of accel­erated infrastructure development are now facing overcapacity or excess production. The tepid demand is affecting cashflows, which in turn hurt firms’ ability to repay interest and principal on time. There is a possibility that the loans owned by these industries and by small to medium scale hydropower projects might go bad. This will drastically affect the nonperforming assets of the banking sector