The Bitter Truth About Melamchi – Maoist Ideology at Odds with the 21st Century Political Economy

(Courtesy: Comrade Doberman)

The controversy that Hisila Yami has generated around the Melamchi project is very timely. On the one hand, Yami’s refusal to hand over Melamchi’s management contract to Severn Trent is a stern demonstration of more anti-competitive, collectivist measures to come. On the other, it is also a disappointing display of how outmoded and out of synch Maoist ideology is, with the norms and conditions of the 21st century political economy.

Hisila’s strategy and its flaws

Hisila Yami’s refusal to abide by the terms and conditions of a contract that had been signed and passed by the previous Cabinet fits in perfectly with the larger Maoist economic (and political) framework. Her view that the management contract for the distribution of drinking water should not be placed in “foreign” hands resonates strongly with populist, Maoist rhetoric.

By calling into question the financial disclosure and accounting challenges that Severn Trent (http://www.severntrent.com/mediacentre/) faced in its home country, Hisila Yami has made a strategic move to undermine the company’s credibility in the eyes of the Nepali population. Her strategy is a “double play” aimed at evoking strong nationalist sentiments at home and at garnering the support of anti-capitalist (anti-privatization) groups across the globe.

Without doubt, Hisila’s approach will eventually expose the Maoists’ anachronistic mindset and will also undermine larger Maoist objectives. The reasons behind why this set of eventualities will materialize, are outlined below.

1. Bad Economics

The negative economic ramifications of suspending the Melamchi project at this stage are limitless. Every day the management contract is held in limbo adds to the initial sunk cost of the project that already runs over $100 million, extends the repayment time horizon and, impacts the hurdle rate of the overall business case.

In order to realize the total impact Hisila's deceision has, a true appreciation of the amounts and terms of the loans (taken by the government of Nepal to date) for the Melamchi project is necessary. While some portion of the overall funds may have been provided in the form of grants, it is inconceivable that the interest bearing portion of the accumulated debt will stagnate while Hisila Yami insists on putting the project on hold.

The interest on these loans (plus the principal amounts) are monies for which ultimately, Nepali citizens (and tax payers) are liable. Unlike funds that the Maoists have become accustomed to extorting from the Nepali public, those utilized for the Melamchi project include repayment terms and schedules that cannot be re-negotiated by the threat of armed rebellion (or massive street protests).

In simple terms, every day wasted by Hisila Yami adds to the overall burden of debt that future generations of Nepalis are liable to. Either Yami needs to explain why our country should become poorer (while she acts out her Maoist fantasy) or she needs to show us numbers that tell otherwise.

2. Erosion of credibility

Hisila’s policy of challenging a deal signed by the Government of Nepal calls into question the overall credibility of all concerned parties. This policy severely undermines the political continuity that is essential to long-term development; it weakens the voice of Nepal’s international (mainly donor) supporters; and ultimately, it diminishes the authority of the interim government and jeopardizes Nepal’s peace process.

The short-to-medium term consequences of Hisila’s actions undoubtedly undermines Nepal’s creditworthiness in the international arena – both amongst the donor community as well as private sector actors. The immediate result in financial terms will be a sharp increase in Nepal’s political risk premium which in turn, has the potential to nullify many private sector initiatives in the pipeline (by raising the cost of capital beyond acceptable thresholds).

The long-term ramifications are of course, logical. Diminished overall development, reduced investment and a shrunken income base for the government to tax. There is no apparent reason why the $140 million (that the Asian Development Bank has committed to the Melamchi project), will stay on hold long enough for Hisila to live out her communist fantasy.

Unfortunately for Nepal, the rest of the world (including the donor community) operates neither on collectivist market theory, nor on populist whims. Idle capital chases investments with high yield potential; not projects that are subject to the political fancies drawn from Marxist delusions.

3. Inadequate understating of regulatory processes and capital markets

Hisila Yami’s insistence that the Severe Fraud Office’s investigation (of Severn Trent) be the basis upon which the awarded management contract be revisited, is rubbish. This mode of thought goes to show how out of touch Yami is with regulatory institutions, financial markets and the private sector in general.

That Severn Trent was investigated is fact. That they were found guilty of fraud is also fact. But this is the very beauty of a capitalist market economy. There are rules and regulations, actions and consequences. When regulations are broken, the entity in question is investigated, reprimanded, damages are paid and life goes on.

In addition to legal liabilities, poorly managed companies are punished by market forces (most often by an erosion in the entity’s market value). Investors also suffer losses in the value of their equity holdings which prompts the Board of Directors to step in and take remedial action (on the management). In this manner, poor decision making is constantly judged, remediated, and shortcomings, gradually rectified.

If Hisila Yami’s primary concern is that Severn Trent is being investigated or that the company may cease to exist as a “going-entity” in the near future, perhaps she should take some time to review what the markets think. The full details of Severn Trent’s stock performance (along with financial disclosures as required by regulatory bodies) are publicly available at the following site: http://www.severntrent.com/investors/shareprice/sharepricecharting.php.

Additionally, if the ADB is willing to put up $140 million (with Severn Trent running the management contract), is Hisila also challenging the ADB’s due diligence? Yami may be in a position to question the political merits of the Melamchi project but she is certainly in no position to pass judgment along any other meaningful parameter. Her wish to stall Melamchi is a direct assault on the credibility that accompanies donor-agency endorsement.

Yami needs to quickly learn and educate the rest of her Maoist colleagues on how international capital markets (along with regulatory instruments) work. If this education does not take place immediately, Nepal's Maoist experiment is going to have socio-economic repercussions in excess of the what the insurgency has already cost the country.

Conclusion

The current policy objectives laid out by the Ministry of Physical Planning and Works (under Hisila Yami) are dangerous to the overall health of Nepal’s private sector. Her leanings toward populist dogma over economic reason is a shameful display of political maneuvering that has no place in the “new Nepal.”

Hisila Yami’s position is an unnecessary distraction that is at odds with the social well-being of thousands of Nepalis whose quality of life is subject to the success of the Melamchi project. Her platform reeks of a failed ideology that can only hamper private-sector led development and growth in Nepal.

Hisila and her Maoist colleagues must immediately wake up and understand that even “people’s participation” has limits. Without the economic and technical means to build and manage badly needed infrastructure, no amount of political rhetoric will yield tangible gains. Yami needs to urgently get with the program, get with the century and either abide by the terms and conditions upon which the Melamchi project is based, or she needs to get out of the way.

Yami’s approach to the Melamchi project is a clear demonstration of the disjunct between 21st century reality and Maoist ideology. She has boxed herself into a corner from which she can neither provide credible alternatives, nor retract her position without losing public face.

Welcome to Loktantra, Hisila Yami!