How Nepal’s Shylock bankers dam up progress

Had William Shakespeare’s character said “first let’s kill all the bankers,” I believe that most of Nepal’s SME (small and medium-sized enterprises) investors would have been killed in the rush to be first.

One of the reasons that I closed my legal practice in Nepal in 1968 was that the banks at that time were not sufficiently sophisticated to lend to private enterprises that required substantial funding.

However, once the banks appreciated the obscene profitability of lending to SMEs, the bankers were crawling all over entrepreneurs like vultures around a carcass.

Nepal’s ability to develop an economy that will sustain its needs has been constrained by a number of factors: it is landlocked, is remote, and was largely divorced from the rest of the world for some 100 years before 1952, riven with ethnic rivalries and politically dominated by its priestly elite.

For decades it has relied for its income on tourism, remittances from Gurkha soldiers in the British and Indian armies, and international aid. Indeed, it is classified as an aid-dependent country.

Yet Nepal’s greatest natural asset is its rivers that can be harnessed to generate electrical power. Successive governments have spoken at length about the necessity to develop the hydroelectric industry in order to drive its economy.

Avaricious industrialists, particularly from India, have been slavering to get the contracts for major dam projects. To date, with notable exceptions, these have been disasters. The level of corruption exceeds one’s wildest imagination.

There is, however, enormous potential for hydroelectric power plants using “run of the river” techniques to divert mountain rivers through generators before returning the water to its natural course.

These plants are environmentally friendly, ecologically sound and, in sufficient numbers, can not only meet the country’s needs for electricity but produce a surfeit that can be sold on to India and China.

The pioneers in the development of hydropower in Nepal were the Norwegians, led by the missionary Odd Hoftun. What Hoftun achieved with minimal financial assistance and the gift of plants and equipment by Norway is little short of miraculous.

Plants that had been replaced by the latest equipment in Norway but still had generations of useful work-life in them were transported to Nepal, and entire self-servicing clusters of power plants, parts-manufacturing units, repair shops and technical schools to train the hydro engineers grew from these humble beginnings.

But some enlightened Nepalese businessmen saw the potential for commercial leverage of their country’s natural resource.

As with almost any project requiring complex engineering to divert part of the rivers, run them through piped channels over distances measured in kilometers, then feed them into the turbines that generate the power and then supply the national grid through transmission lines constructed in the mountains, commercial funding is a necessity.

Funding for power plants

Given the virtually ideal characteristics of mobilizing the country’s natural assets for an essential and environmentally supportive infrastructural project, one might have thought that the government of Nepal would take whatever steps were necessary to secure and funnel funding to private investors from the various international financing vehicles at preferential interest rates.

Private investors willing to put up the funds for an equity share of such projects are precious few.

Organizations such as the Asian Development Bank and the World Bank trumpet their altruistic mission statements, and their objectives to help developing countries achieve financial independence.

I quote from the ADB’s website:

“ADB offers loans at very low interest rates to help reduce poverty in ADB’s poorest member countries, and bridge the development gap in the Asia-Pacific region. Concessional assistance to developing member countries (DMC) is meant to help them overcome development challenges, support inclusive and sustainable development, and make progress on the Sustainable Development Goals.”

Objectively, run-of-the-river hydroelectric projects in Nepal meet both the stated purpose and the essential criteria to qualify for such loans.

By “very low interest rates” the ADB cites 1% to 2%.

Most ADB loans are made to governments. But if the true value of these loans is to be utilized to achieve the desired objective, surely the recipient governments should be making those low-interest loans available to private-sector SMEs in the hydroelectric industry, to facilitate urgent infrastructural development.

In Nepal, previous governments advanced what they laughingly described as “soft loans” at 10%. So who ate the 8% or 9%?

Absent a working system in place to assist private-sector hydroelectric SMEs with the ADB funds, their only recourse is to the banks in Nepal.

Now, all these banks are licensed and regulated by the country’s central bank, Nepal Rastra Bank. Yet the commercial loans available to such SMEs have been at a crippling 15% rate of interest, together with terms so onerous that only a blind patriot would agree to be bound by them.

One such “standard contract” that I have seen in effect puts total control of the hydroelectric project, from cutting the first sod to commissioning, into the hands of the bank, its appointed engineering consultant having the final word. Absurdly, if the bank’s appointed consultant makes a mistake, the cost is borne by the borrower, with no recourse against either the consultant or the bank.

It is important to keep in mind that very few businessmen in Nepal trouble to read the small print in the agreements, and even if they did they would be told “take it or leave it.”

Bitter experience has also shown that even to receive what a company is legally entitled to, an entire raft of government officials have to have their palms greased before they sign the checks or the letters of authorization.

‘Incentives’ to officials

In one instance of which I was made aware, even the quarterly payments for the power sold to the Nepal Electricity Authority would only be made over after payment of an incentive to the official involved.

The upshot of all this is that faute de mieux, the investors in the hydropower SMEs are thrust into the hands of the usurious banks that, together with government officials, exsanguinate them financially.

Successive Nepalese governments have sought foreign direct investment (FDI) because there simply are not enough domestic investors ready and willing to put their funds at risk, even though the hydropower projects are, on paper, financially viable and profitable.

Many of Nepal’s hydropower projects have a capital cost between US$5 million to $15 million. But the international funders like ADB – and, it should be added, China’s Asian International Investment Bank – regard them as “too small.”

Environmentally, to pun unintentionally, run-of-the-river plants are light-years superior to the ecologically destructive dams that the big power companies want to get their hands on. They also enhance local communities rather than destroy them.

But India and China are competing to get the lucrative agreements to construct great dams. How, to hark back to the ADB mission statement, will these  “help … overcome development challenges, support inclusive and sustainable development, and make progress on the Sustainable Development Goals”?

Governments all over the world have a virtual monopoly on hot air, and that which floats over the Himalayas is up there with the best of them.

It really is about time that all these international development bodies stopped supporting the lifestyles of the politicians and reached out to the private-sector SMEs that breathe life into the economies of the countries in which they endeavor to operate.

The absurdity of the situation can be well appreciated when one compares the trifling commercial rates of interest in advanced economies, rates that are only available to SMEs in developing countries willing or able to hedge against the risk of unfavorable exchange rates.

It is no exaggeration to conclude that Nepal’s bankers are crippling the country’s development potential and successive Kathmandu governments are complicit.

Even Shylock recoiled at drawing blood.