09 - Energy Cooperation in South Asia

Editor Imtiaz Alam Executive Editor Zebunnisa Burki Consulting Editors Bangladesh Enayetullah Khan India K. K. Katyal Nepal Yubaraj Ghimire Pakistan I. A. Rehman Sri Lanka Sharmini Boyle Publisher Free Media Foundation Facilitator South Asian Free Media Association (SAFMA) Designed by DESIGN 8 Printer Qaumi Press Editor’s Post E-mail: journal@southasianmedia.net

Address 09-Lower Ground, Eden Heights, Jail Road, Lahore, Pakistan.

Tel: 92-42-5879251; 5879253 Fax: 92-42-5879254 Website : www.southasianmedia.net

Contents Energy Cooperation in South Asia

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In This Issue

...iii

Integrating Stakeholders in Energy Cooperation Dr Mahendra P. Lama

....6

Gas Pipelines and Regional Cooperation Mohammad Ramzan Ali

...21

Nepal: Thermal Energy for Export Dr Upendra Gautam and Ajoy Karki

...30

India: Energy Scenario D. N. Raina

...39

Pakistan’s Future Energy Needs Fahd Ali

...49

Bangladesh: Natural Gas Export Monzur Hossain

...59

WTO and Poultry Industry in India Dr Rajesh Mehta, R. G. Nambiar and Sujit Ray

...69

Small and Medium Enterprises in Pakistan Iqbal Mustafa and Farrukh M. Khan

...88

Sri Lanka: Cost of the Ethnic Conflict Krishna Chaitanya

..103

Local Government in Bangladesh Pranab Kumar Panday

..113

Food Security in South Asia Suresh Babu

..125

Documents

..135

i) Bhurban Declaration: Evolving South Asian Fraternity May 15-20, 2005, Islamabad-Bhurbhan ii) A Vision for South Asia Dr Akmal Hussain iii) SAFMA’s South Asian Parliament: Security Recommendations

Energy Cooperation in South Asia As South Asia struggles to get out of low-growth equilibrium and achieves above six per cent GDP growth rate, it is faced with one of the biggest challenges of meeting a higher demand for energy. As compared to the last two decades, when the energy consumption was 5.8 per cent against low energy production of 2.3 per cent, the demand for energy is growing at a rate of 9 per cent annually, whereas the deficit in energy production has almost doubled in the last decade. Even though South Asia has the lowest per capita consumption of energy in the world (0.45 toe), it is going to have the highest rate of energy consumption by 2010 and beyond. While 60 per cent (775.3 million) of its population remains without electricity and is dependent on biomass, the energy intensity (total energy divided by per unit of GDP) is 0.65 toe, as compared to the world average of 0.29 toe -- which is much higher.

Higher rates of growth of economy, population and urbanisation in the South Asian region are resulting in higher consumption of energy well above the world average of OECD rates. Therefore, South Asia is faced with the multiple challenges of sustainable development: increasing energy demand, harnessing vast local natural resources, import substitution, making available cleaner and cheaper energy, developing an inter and intra-regional market and an energy grid while exploiting the economy of scale, reforming an inefficient power sector and attracting private investment, conserving natural resources and protecting environment. If South Asian economies are to grow at a higher rate and overcome poverty and backwardness, they will have to grapple with the energy crisis not only at their respective national levels, but also collectively at inter and intra-regional levels.

The South Asian countries have a great potential of energy and have complementary endowments on a contiguous landmass, which is a prerequisite to developing an integrated power infrastructure like power grids and gas pipelines. High levels of complementarities in energy sectors among the countries of the region allow varying comparative advantages: If India has an edge in producing coal-based energy, Pakistan and Bangladesh have the benefit of gas-based power generation, while Nepal and Bhutan are hydro-based. As opposed to trade, where compatibilities are few, these complementarities can be exploited to the mutual benefit of each other. The last SAARC Summit envisaged an 'energy ring' and formed a working group to explore the possibilities of cooperation in the energy sector. A network of gas pipelines and power grid will enhance energy security in the region, essentially of India, and also significantly benefit its smaller neighbours, reduce cost of fuel transportation and help in an optimal and efficient harnessing of energy resources. Although India is much ahead in the energy sector, it will still be depending heavily on external energy sources, especially from and through its smaller neighbours, Nepal and Bangladesh, and geostrategically located Pakistan.

Located in close proximity to the Persian Gulf and Central Asia, South Asia can tremendously benefit from their immense resources of oil and gas. The natural gas

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supplied via pipelines by these countries would cost 35 per cent less than the cost of liquid natural gas (LNG) in India and Pakistan. By 2010, according to estimates, the demand for gas in India and Pakistan would be 8 billion cubic feet per day and only a quarter of it could be met locally while the rest would have to be imported. Pakistan, besides meeting its own needs, can serve as the gateway for supplying natural gas from Iran, Persian Gulf and Central Asia to India and beyond. The Indo-Pak joint working group has agreed on a framework and a tripartite meeting has been convened in August.

But the Iran-Pakistan-India gas pipeline, even if all details are ironed out among the three partners, would critically depend upon the donors from the G-8 countries.

On the other hand, Bangladesh has substantial reserves of gas, 22.9 trillion cubic feet, according to latest estimates, of which 16 tcf has been proven, whose greater utilisation would require huge investment in infrastructure for installations and transportation.

Bangladesh can choose to export it to India -- whose unmet demand would reach 60 bcm by 2010 -- and Nepal. Besides developing gas-based domestic industries, Bangladesh can export 200 mcf gas to India and earn revenues worth US$ 400 million annually while substantially reducing its trade deficit with India.

While there is a huge potential for hydroelectricity in the Hindukush-Himalayan region, only 11 per cent of it has so far been exploited; of this less than one per cent in Nepal, 1.5 per cent in Bhutan, 29 per cent in India, and 13 per cent in Pakistan could be tapped.

Bhutan has the hydroelectric potential of 30,000 MW and Nepal has sites to produce 43,000 MW, mostly for export to India and Bangladesh. India will have to upgrade its transmission lines to reach West Bengal, Bihar and Uttar Pradesh and require a corridor through Bangladesh for such lines ensuring smooth and easy supply of Bhutanese power. The Indian officials often cite Indo-Bhutan collaboration in hydro-power as a successful model for others to emulate. However, given India-Bhutan special relationship, this success story is, perhaps, an exception and cannot be extended even to Nepal which is reluctant to implement Mahakali Treaty and pursue other projects.

Collaboration in hydro-power seems difficult between India and Pakistan, although a large potential for joint projects exists, given the sharp differences over various dams being built by the upper riparian India in the Indian-administered Jammu and Kashmir and Pakistan's serious objections on them under the Indus Water Treaty. Although Pakistan had increased its thermal power with the successful induction of independent power producers (IPPs), it could not supply over 3000 MW of surplus power available in the 1990s to India due to serious differences over rates. Moreover, thermal power is the dominant source of energy in most of the South Asian countries. It accounts for about 92 per cent of the installed capacity in Bangladesh, 73 per cent in India and 69 per cent in Pakistan. India, Pakistan and Bangladesh can cooperate in thermal-based power generation.

The energy cooperation in South Asia presents tremendous potential for the development of regional resources in an integrated manner by exploiting the complementarities and optimal utilisation of available resources. Much will depend on how South Asia benefits from its proximity with south western and central Asia to meet its gas and oil needs. But the real issues are of political economy, both at inter and intraregional levels, further liberalisation and deregulation of an inefficient energy sector, attracting foreign investment and developing an integrated infrastructure of production, transmission and gas pipelines at a regional scale.

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provide transit facilities (Pakistan and Bangladesh) for some of them. He thinks that regional cooperation in the energy sector is in India's interest and it must endeavor to accelerate regional cooperation in energy.

In This Issue (The views expressed in this journal are solely those of the authors)

Integrating Stakeholders in Energy Cooperation Dr Mahendra Lama, Professor at Jawaharlal Nehru University, Delhi, evaluates the scope of regional cooperation in the energy sector against the backdrop of future needs of energy and the potential for regional efforts. Since trade in power and gas will be mutually beneficial in terms of both economic and political gains, the author argues that South Asia needs to seriously consider important regional projects aimed at power trading and gas pipelines. He looks at several imperatives of regional cooperation in the energy sector, such as confidence building, investment, technology transfer and energy market integration.

Gas Pipelines and Regional Cooperation Mohammad Ramzan Ali, Research Associate at the Institute of Regional Studies, Islamabad, tries to cover the changing dimensions of regional trade and economic relations in the context of energy cooperation in South Asia. Focusing mainly on gas pipelines, he says that ultimately Pakistan and India will have to make the more difficult -- yet fruitful -- choices. It should be a win-win situation for all if the South Asian countries expand and diversify their regional cooperation through energy projects.

Nepal: Thermal Energy for Export Dr Upendra Gautam, an institutional development specialist from Nepal and Ajoy Karki, Editor of Biogas, assess water resources and hydel power production in Nepal which is not only costly but also much below the country's potential. They propose ways to make hydel energy cheaper and turn Nepal into a larger exporter of energy to India and China. Against the backdrop of increasing energy demand in India and China, the authors propose a regional framework for hydel energy export from Nepal.

India: Energy Scenario D. N. Raina, Senior Energy Adviser, SARI/Energy Program, New Delhi, provides an overview of the energy situation in India. The author says that while the country has taken up several initiatives in the energy sector, it needs its neighbouring countries to act as energy suppliers (Bhutan and Nepal) or to

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Pakistan’s Future Energy Needs Fahd Ali, consultant at SDPI, Islamabad, empirically looks at the current and future energy situation in Pakistan. Analysing the recently approved Energy Security Action Plan, he says that implementing the plan will require vision on the part of the government. He recommends a few strategies that the government needs to look at to be able to harness the country's vast potential in renewable energy resources, such as improved functioning of the state utilities and promotion of energy conservation.

Bangladesh: Natural Gas Export Monzur Hussain from the National Graduate Institute for Policy Studies (GRIPS), Tokyo, looks at the dilemma the Government of Bangladesh faces on the export of natural gas through pipeline to India or conserving it for future generations of Bangladesh. While the people are against the export of gas, there is pressure on the government from the International Oil Companies (IOCs) to use it for export.

In terms of international political economy of the energy sector, the author presents the challenges faced by Bangladesh in two different ways: to either develop gas-fuelled industry or gas export, rather than retarding the economic development of Bangladesh.

WTO and Poultry Industry in India Dr Rajesh Mehta, Senior Researcher at Research Information Systems (RIS), Delhi, Dr R.G. Nambiar from the Sardar Patel Institute of Economic and Social Research, Ahmedabad and Sujit Ray from RIS, Delhi, review the Indian poultry industry in the light of the WTO regime. The authors elaborate the stark challenges posed by trade liberalisation and changes in tariff and accessibility under the WTO regime. Against the backdrop of subsidies of various kinds being applied to the poultry industry in the developed countries, the case study by the Indian authors provides insights into the complexity of changing ground rules which do not provide an even-playing field to the producers from the developing countries. They take special note of the Agreement on Agriculture, implication of the SSP, withdrawal of Quantitative Restrictions and vulnerability on the grounds of standards that are quite low in this part of the world.

Small and Medium Enterprises in Pakistan Iqbal Mustafa, former CEO Small and Medium Enterprises Development Authority (SMEDA), Pakistan and Farrukh M. Khan, currently associated with SMEDA, evaluate the small and medium sized enterprises in all sectors of the economy identifying a whole range of problems faced by the SMEs. Faced with

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multiple challenges and sandwiched between the large scale sectors and the bureaucratic structures, the informal sector of the economy continues to grow and play an important role in the overall growth of the economy and employment generation. The authors propose measures to strengthen the SMEs and expand their role in the economy.

Integrating Stakeholders in Energy Cooperation

Sri Lanka: Cost of the Ethnic Conflict Krishna Chaitanya, Assistant Professor at the Dhruva College of Management, Hyderabad, studies the cost incurred by the Sri Lankan government on the 23 year-old ethnic conflict in the country. Estimating the immense cost of the conflict, while comparing the country's defence expenditure as a proportion to total public expenditure, the author says that in 2000 and 2001 the government's expenditure on social spending had come down drastically. Consequently, the Sri Lankan economy has grown at an average growth rate of 4-5% per annum, whereas it could have grown at the rate of 6-7% if there had been no conflict.

Local Government in Bangladesh Pranab Kumar Panday, Assistant Professor at the University of Rajshahi, Bangladesh, critically evaluates the process of decentralisation in Bangladesh.

Looking at the way decentralisation has been dealt with by different regimes in Bangladesh, the author comes to the conclusion that decentralisation has not taken place and it is not much different from the pre-independence period.

Although every successive government of Bangladesh has recognised the importance of local government, no government has, in fact, implemented it.

They have, rather, used the local government bodies to strengthen their own political base in the rural areas.

Food Security in South Asia Suresh Babu, senior research fellow at the International Food Policy Research Institute (IFPRI), analyses the issues of food security in the context of agricultural growth and food production in the countries of South Asia. The author looks at emerging trends in policy intervention for food security. Better linkages between agricultural research and technology-transfer, minimising environmental harm, use of geographical information systems (GIS), geo positioning systems (GPS) and institutional help are some of the measures the author proposes to reduce food insecurity.

Dr Mahendra P. Lama

Introduction There are distinct advantages for South Asian countries to cooperate in the energy sector. These countries together possess vast stores of energy, mostly in the form of water resources, oil, forest, coal and gas. However, these countries continue to be characterised by low per capita consumption of energy, poor quality of energy infrastructure, skewed distribution and inaccessible and costly energy availability.

These countries have remained largely energy importers and increasingly faced a serious energy shortfall. This is likely to deepen further both because of ongoing economic liberalisation-led energy intensive activities and rise in income level-led steady switching over of the rural and urban families from traditional bio-fuels to more efficient and convenient modern fuels. The inability to cater to the increasing industrial and other commercial energy needs have adversely affected their productive activities, social development and investment climate. Power shortages, outages and low quality have imposed substantial costs on the economic growth. This is further exacerbated by structural, institutional and financial problems. Energy security is, therefore, emerging to be one of the most critical issues in the South Asian region.

Energy Sector Reforms The South Asian countries have introduced massive reforms in the energy sector, targeted at improving availability, accessibility and affordability and reducing import dependence. Most countries have focused on the following strategy in energy sector reforms. l Segregation of the regulatory functions from the government and vesting them in an independent regulatory commission l Unbundling various activities from a vertically integrated unit to distinct and separate units based on functions l Corporatisation of various units l Tariff and pricing reforms l Private sector participation l Cross-border trading options This restructuring is aimed at making these utilities, particularly power, more efficient and financially viable. The private sector including the foreign investors can now set up thermal, hydel and wind or solar and gas-based energy projects. A large number of private sector investors have entered into the energy sector. At the same time, there has been a realisation that availability and accessibility to energy can transform the quality of life and work substantially, help raise health and educational standards and retard rural-urban and cross border migration by enhancing the level

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and pace of income and employment generation.

country.

Scope for Energy Cooperation

There exists clear seasonality in power generation in India and this becomes particularly prominent hydel power generation. The lean months for hydro power generation are from January to June, whereas in Nepal the supply capacity is maximum during the wet months. It is during the hot summer months that the Indian system is starved of energy and capacity. This is where the complementarity in crossborder power trade emerges.

Regionalism, besides its strategic, geo-political and foreign policy dimensions, has been a major plank of development cooperation and integration in many parts of the world. There are examples of a variety of regional groupings that have transformed the conventional outlook and aspirations into more open, dynamic and wider systems and practices of peaceful coexistence, collective responsibility and regional development. There are instances where bilateral conflictual issues have been effectively dealt with by the larger concept of and win-win situation generated by regionalism and multi-lateralism1. Regional cooperation has brought about significant transformations in some of the region's strategic options, political actions, economic orientation and development gains2.

Economic gains based on regional cooperation in the energy sector have become a firmly established practice across the regional groupings. Many developing countries, because of their low income and small market size, are unable to capture the inherent economies of scale of major infrastructure investments. Cross-border energy exchanges will bring the entire issues of region cooperation and integration in this sector to the forefront.

Given the historical context, topographic and demographic features, natural resource endowments and socio-cultural ethos, South Asia could be the most natural unit of cooperation and integration. Creation of a South Asian energy market and cooperative development of the available diverse energy sources in the region can help increase the level of energy security in the region and, thus, can subsequently contribute to achieving a sustained higher economic growth. This could lead to a South Asian regional power and gas market and competition among producers both public and private that would ensure economic and efficient delivery of services to the consumers in the region. At the same time, the power system networks of Bangladesh, Bhutan, India, Nepal, Pakistan and even Sri Lanka can be interconnected to achieve greater efficiency and economy in the overall system.

In South Asia there are clear options emerging in the arena of regional cooperation in energy sector. Cross-border energy trade is one with the Bhutanese success story spreading to Nepal, Bangladesh and even Pakistan. This is further corroborated by combining gas deposits in Bangladesh, hydro-power potentials of Bhutan, Nepal and North East India and the bourgeoning markets in the South Asian countries. The strong seasonality factor in both generation and demand that is noticeable in the South Asian countries has, in turn, generated a lot of interest in cross border power trading.

In some cases, the imprudent use of power during a typical day and season has led to major losses as well. For instance, in Bangladesh a sizable generation capacity to the tune of at least 1200 MW remains un-utilised during the off-peak hours and in effect power units remain shut off for these hours. They produce power only when they are requisitioned to produce. This available capacity can be a ready source for regional cooperation for import-export of electricity from a neighbouring

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Energy Cooperation: Regional Initiatives A number of organisations in the region and outside have been consistently working towards fostering the cooperation in energy sector in South Asia. This includes the technical and professional public sector organizations, including Petrobangla, Power Grid and Power Trading Corporations of India, Electricity Authorities of Nepal, Sri Lanka and Pakistan. On the other hand, international agencies like the World Bank, ESCAP, Asian Development Bank, USAID (SARI-E initiatives) and UNDP have also been fairly active in the last few years. The SAARC has set up a Technical Committee exclusively on energy sector cooperation under its Integrated Programme of Action and has recently appointed a working group on energy cooperation.

A number of studies have already been conducted on various aspects of energy cooperation in the region. These are conducted by research organisations, such as South Asia Network of Economic Research Institutes (SANEI), Coalition for Action on South Asian Cooperation (CASAC), South Asian Centre of Policy Studies (SACEP) , Bangladesh Unnayan Parishad (Dhaka), Centre for Policy Dialogue (Dhaka), Institute for Integrated Development Studies (Kathmandu), Centre for Policy Research (New Delhi) and Tata Energy Research Institute (New Delhi) and premier universities like Jawaharlal Nehru University (New Delhi), BUET (Dhaka), Quaid-i-Azam University (Islamabad), Lahore University of Management Sciences (Lahore), Tribhuvan University (Kathmandu) and Colombo University (Sri Lanka). Some of these institutes and universities have played very active role in advocating the cooperation issues of cooperation in both water and energy sectors in the region.

The private sector role in the energy cooperation issues in the region is emerging slowly. This is both because of their marginal role in the past in their respective national energy sector and overwhelming public sector domination in energy related activities. After the reforms were initiated in the energy sector in the last decade or so, the private sector could play an active role both at the national and regional level. The SAARC Chambers of Commerce and Industries, a recognised apex body of the federations of chambers of commerce and industries in all the South Asian countries, is now emerging as a major agency of bringing the energy cooperation issues to the forefront.

Energy Cooperation: Options and Models There is a whole range of options for any energy exchange project in the South Asian region. The reality is that till 1947 an overwhelming part of the region had an integrated energy market and system. The choice of a model to trade or exchange electric power and other energy varieties among these countries is a crucial issue.

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There are successful instances of international gas and power trading mechanisms in other regions across the world. One notable enabling feature in the energy markets in these regions is the prevalence of competitive energy trade legislation.

Table 1: Existing Regional Power Pools Regional Arrangement Union for the Coordination of Transmission of Electricity (UTCE)

Member Countries Spain, Portugal, France, Belgium, Italy, Netherlands, Luxemburg, Austria, Germany, Switzerland and now extended to Poland, Czech Republic, Slovak Republic, Hungary, Slovenia and Croatia.

Nord Pool North American Electric Reliability Council (NERC) Southern African Power Pool (SAPP), The Commission of Regional Power Integration (CIER)

Norway, Sweden, Finland and Denmark United States and Canada.

The possibility of energy trading has opened new vistas of cooperation.

Cross-border energy trade could lead to: i) ii) iii) iv)

effective utilisation of natural resources, increase in reliability of power supply, economy in operation and mutual support during contingencies, bring about large scale transformation in the sectors contributing to economic growth, v) act as the single most effective confidence building measure (CBM) through the participation of multiple stakeholders and vi) substantially promote market integration in energy related goods and services.

The changing nature of economic actors and institutions and their increasing support base in the civil society are likely to force policy designers in South Asia to procreate modalities for a substantive and lasting interaction3.

Interconnection of power systems of contiguously located countries and their coordinated operation provide immense technical and economic benefits also. All these interconnections allow each electrical utility to save on power plant investment and operating costs as a result of the improved use of the interconnected system. It also contributes to the quality of electricity supplied to customers as well as reduces environmental damage. Reducing losses in the power system is often more cost effective than constructing more generation capacity. Reduction of transmission and distribution losses (continue to remain very high in South Asia) by 90 MW due to the proposed interconnections would reduce the need for installing new capacity at an investment of Rs. 3600 million (US$ 79.12 million at the exchange rate of US$ 1=IRs. 45.50).

South African Power Pool (SAPP) created in 1995 encompassing among others South Africa, Lesotho, Mozambique, Namibia, Malawi, Zimbabwe and Zambia under the regional cooperation organisation viz., Southern African Development Community (SADC) is one example which matches very well with the South Asian situation. They trade in power with a view to provide a reliable and economical power supply. SAPP countries have a diverse mix of hydro and thermal generation plants serving a population of over two hundred million people. It has a coordination centre located in Harare which carries out a number of functions including monitoring the operations of SAPP, collection of data, undertaking planning studies and training activities, and disseminating information to members. The Pool is working satisfactorily with immense gain to all the participating countries. There are examples of such regional power pools successfully operating in several parts of the world.

(Table 1)

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South America, power trading

South Africa, Lesotho, Mozambique, Namibia, Malawi, Zimbabwe and Zambia Jordan, Bahrain, Tunisia, Algeria, Saudi Arabia, Syria, Libya, Egypt, Morocco, Mauritania, Yemen, Iraq, Lebanon, Palestine, Dubai and Qatar.

Argentina, Paraguay and Uruguay. Central America

There already exists a considerable network of inter-connections among the South Asian countries. India's Power Grid Corporation has worked out the interconnections required, their feasibility and the cost and benefits to the participating countries in the South Asia Growth Quadrangle (SAGQ) region consisting of Bangladesh, Bhutan, North East region of India and Nepal.

All these interconnecting channels will match the Indian efforts to integrate all regions to form a National Grid by the end Eleventh Five Year Plan in 2012.

As options for power trading in the broader ambit of regional cooperation in South Asia, the following three mechanisms can be cited: i) Bilateral power trade ii) Pool based iii) Wheeling Facility Cross-border power trade on a bilateral basis already takes place between India and Bhutan and, to a limited extent, between India and Nepal.

India-Bhutan In case of 336 MW Chukha project, Bhutan earned as high as Nu 2367 million (US$ 52 million) in 2002-2003 mainly from its power export to India (1472 GWh). This constituted almost 45 per cent of Bhutan's exports to India and 11 per cent of the kingdom's GDP4. It fully met Bhutan's power sector objectives of increasing government revenues through the generation of power for sale to India and to industries within the country. The projected revenue generation from the ongoing and the projects in pipeline could transform Bhutan into a middle-income country over the course of next 15 years. The sale of surplus power to highly power deficit areas of West Bengal, Orissa and the North East has been the hallmark of this project. The transmission link has also been a great success, which is likely to be upgraded to help evacuation of 4,500 MW from three large potential power projects, which are being built in Bhutan.

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India-Nepal Power exchange between India and Nepal has been underway since the last three decades. There is an agreement between the Governments of Nepal (HMG/N) and India (GOI) for exchanging power up to 50 MW, as and when required by the border towns. Interconnection is between Bihar State Electricity Board, Uttar Pradesh Power Corporation (formerly known as Uttar Pradesh State Electricity Board) and now also with the newly created State of Uttaranchal. The power exchange at present is on goodwill basis. This exchange has recently been increased to 150 MW. Despite the tariff being very nominal, the revenue generated by Nepal through sale of power to India has recorded almost six-fold increase during the last eight years (Table 2)5.

Table 2 Exchange of Power between India and Nepal

Bulk energy sale to India (GWH) Bulk energy purchase from India (GWH) Revenue from bulk sale to India ( Rs million)

1993 1994 1995 1996 1997 1998 1999 2000 2001 46.1 50.5 39.5 87.0 100.2 67.4 64.2 95.0 126.0 82.2 102.8 113.8 73.0 154.0 210.3 232.4 232.2 226.5

Table 3 Nepal : West Seti (Western Nepal) Project Offer for Export to India

75.5 91.4 97.6 206.7 249.3 199.9 198.1 327.8 441.0

Source: NEA, A Year in Review, 2000/01, Kathmandu, August 2001

West Seti Project of Nepal Another example is that of 750 MW West Seti power project in Western Nepal. This is a third type of bilateral power exchange, which is likely to take place in the region. A unique feature of this arrangement is the involvement of an independent power producer (IPP) to develop this power plant, the entire generation of which will be exported to India through Power Trading Corporation of India. This indicates a changing pattern of power exchange, a direct outcome of new hydro-power development policy that opened power development by private producers6.

It does not require grid synchronisation, as the entire generation will be transmitted to the Indian grid without connection to the NEA system. As such the project would work as an integral part of the Indian system. The power tariff deal is being negotiated for 25 years for which the levelised tariff would be computed at a rate not more than US$ 0.07. If this agreement, as designed, is implemented as per the schedule, Nepal is likely to realise the total payment of Rs. 14030 million (US$ 308.35 million) by 2007 and Rs. 56814 million (US$ 1248.57 million) by 2031.(Table 3).

India-Pakistan Just a couple of years ago Pakistan was producing surplus power mainly because of lower than expected economic growth. Pakistan's informal offer to India in 1998 of selling surplus power very much matched the demand in the northern and the western regions of India. The northern region, one of the largest electricity consuming industrial areas, comprises the most populous states of Uttar Pradesh, Punjab, Haryana and Delhi. However, tariff came up as a major stumbling block in the entire negotiation process that was conducted during the second half of 1998 and first half of 1999. The WAPDA offered a price of US 7.2 cents/KWH while the Indian side offered a price of 2.25 cents7. It is mainly on this ground the negotiations broke off.

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Pakistan already has a 500 KV primary transmission system extending from Jamshoro in the south to Tarbela and Peshawar in the north. All these lines run near the adjoining borders of India and may not require complex transmission extensions to the Indian borders. ‘There is a complete network on our side and, of course, on their (India) side as well. What we need are the connections, which would take only a couple of weeks’8. It is stated that each country will construct and maintain a double circuit twin-bundled 220 KV transmission from the designated substations viz., Dinanath in Pakistan and Patti in India. National Power Grid Corporation of India may play an active role in concretising the Indian side of the transmission of the power purchased from Pakistan. There is a proposal of laying a 50 km high voltage double circuit (HVDC) transmission line to evacuate power form the Dinanath substation near Lahore to the Patti sub-station in the Indian Punjab. If this happens, it is likely to bring about a major transformation in the political economy of regional cooperation in South Asia9.

Year 1 Saleable Energy MUs) 2 Exchange Rate Rs/US$) 3 Rate / Unit a. US$ b. Equivalent Rs [3a x 2] 4 Total Payment (Rs million) [(3b. x 1)/10] Discounting Factor 5 Present Value (Rs) a. Total Payment [4 x 5] b. Unit Rate [3b x 5]

2001-07 3000 66.82

06-12 3000 89.42

11-17 3000 119.66

16-22 3000 160.13

21-27 3000 214.30

25-31 3000 270.54

0.07 4.68

0.07 6.26

0.07 8.38

0.07 11.21

0.07 15.00

0.07 18.94

14031.9

18777.9

25129.0

33628.3

45002.2

56814.3

1.00

0.567

0.322

0.183

0.104

0.066

1403.19

1065.51

809.09

614.38

466.52

374.30

4.68

3.55

2.70

2.05

1.56

1.25

6 Levellised Tariff for 25 years

7.514

Source: Power Trading Corporati on of India, 2001

However, the key issues to be settled before the cross border flow is concretised are the cost of transmission line and its sharing mechanism; the determination of power tariff; the payment mechanism including the currency and the channel to be used like Asian Clearing Union and most importantly the power supply sustainability and its geo-political immunisation. It is very crucial to maintain a fair balance in the energy security equation in order to avert the risk of 'trade and fade'.

India-Sri Lanka Projects The Government of India (GoI) and the Government of Sri Lanka (GoSL) signed a Memorandum of Understanding to build a bridge across the Palk Strait in July 200210.

Indo-Lanka power interconnection through the land bridge is one important area where both countries can benefit. The Joint Study Group appointed by the Governments of Sri Lanka and India (2003), while noting the potential of a regional power pool for Southern India and Sri Lanka, enabled by interconnecting the respective electricity grids has recommended that ‘the interest of Indian companies to

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participate in future bids for coal-fired plants in Sri Lanka may be accentuated by the existence of a regional power pool. A regional power pool would also enable better management of peak-load demands on both sides, as well as enable faster recovery from disasters11.’ There is a considerable degree of provincial disparity in terms of power distribution, as the Western province has at a privileged position and, the North and East are at an underprivileged position. Sri Lanka is likely to have a huge power deficit because of the newly initiated peace and development process.

In a study carried out by the Nexant (2002), the pre-feasibility of a 400kv transmission interconnection with 500 MW transfer capacity in phase I, has been analyzed. Given the existing infrastructure conditions, this transmission line possibly connects to the Sri Lankan national grid at Anuradhapura12. The importance of the Indo-Sri Lankan land bridge in the Indo-Lanka power interconnection lies in the fact that with reduced infrastructure costs, the transmission line can be laid on the bridge and not in the seabed as perceived earlier.

With the proposed transfer of 500 MW power through Indo-Lanka power interconnection - Phase I, the total installed capacity in Sri Lanka would rise by 22 per cent from the current level of 2231 MW to 2731 MW. In the second phase of the project, it is estimated to double the transfer capacity by raising the installed capacity to 3231 MW. Even if the current gross power generation per MW at 3.1 GWh is taken as a benchmark, with this additional capacity the gross annual power generation in Sri Lanka will increase by 1550 GWh in the first phase, and by 3100 GWh in the second phase. By applying the different unit prices that are currently used by the Ceylon Electricity Board, it is possible to estimate the potential revenue from the transmitted power added to the national grid. The current average unit price of electricity in Sri Lanka is estimated to be SLRs. 7.25 (US$ 0.0763) per KWh. At this rate, the additional power supply will generate annually US$ 118.3 million in the first phase, and US$ 236.6 million in the second phase. ii) The pool-based approach, also known as agent-based integrated simulation, can possibly provide support to develop a competitive long run market equilibrium in regional power trade. This approach involves the close working of a set of agents (manufactures), a monitoring, advisory and channelising regional body. These agents develop their own strategies to explore and exploit the capacity and other constraints of plant and market. They also evolve their own market clearing as well as settlement mechanisms. Each of the agent represents one of the generating firms. A key feature of this model is that it uses a micro level, bottom-up representation of the market with each generating firm (public and private) represented at the level of its individual plants.

In this context, establishing a Regional Power Trading Corporation (RPTC) would be highly beneficial to launch this type of market mechanism in SAARC region also. This could be called ‘SAARC-RPTC’ which could provide market feed-back to individual power producers (agents) as well as the power consumers. The SAARCRPTC can maintain and disseminate information on plant structures, avoidable cost

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of production, plant sales prices, sales volume, rate of utilisation, profits generated, target utilisation and market conditions, consumer behaviour, and ongoing plant building and future investment in the sector.

This, in essence, would be a pooling of surplus power generated by individual plants in the participating countries and transporting into deficit ones by a coordinated exchange mechanism depending on demand and consumer categories (estimating consumer surplus). However, information asymmetry in this type of a model can create market havoc and thereby serious aberrations. Therefore, a major task of the SAARC-RPTC is to gather and analyse information on generation, demand, transmission and payment modes well in advance and arrange for the smooth operation of markets. The idea should be to evolve an effective bidding system for individual plant generators depending on the plant capacity, fuel use etc. across the entire spectrum of its activities.

To facilitate the process of setting up of SAARC-RPTC , it is rather essential to assess and understand the nature, direction and extent of intra-country power exchange of the South Asian countries. This gives a broad indications about the nature of power trading within a country and various regions of a country and also indicates geographical locations of load centers within a country.

The physical boundaries in South Asia region are such that it is only India which shares common borders with almost all its neighbouring countries. However, there are very distinct advantages for countries like Bangladesh and Sri Lanka to import power from Bhutan and Nepal, both because of the lower tariff and supply reliability. At the same time the power generating countries would also like to diversify the markets. For instance, Bhutan is keen to expand the market for its power exports, India being the only buyer for its power. This is more so as a number of hydro plants are under construction in the North East region of India, which may to a large extent lead to the diminution in the demand for Bhutanese power. Interestingly, these changing dimensions of power trading are widely matched by the expansive transmission lines that exist in all the bordering states of India including the North East, Tamil Nadu, Jammu and Kashmir, Punjab and Gujarat. Therefore, India as a transit corridor for power transfer could give a major boost to both the power trading activities and the process of regional cooperation and integration. India could also ensure full use of the transmission lines and generate a substantial revenue as wheeling charges13.

There are very strong possibilities of cooperation in other forms of energy.

India can play an effective role in initiating trade in power between Bangladesh and Sri Lanka. For instance, Bangladesh could set up a plant of 2000 MW primarily to supply power to Sri Lanka via India which can also share this power. There is already an example of East Talcher to Kolar to Trivandrum (2200 km) 500 DC system completed in 2.5 years.

However, the power trading is in its infancy in the South Asian region.

Whatever 'trade' takes place today is basically bilateral exchanges or apportioning of power from surplus areas to temporarily needy regions. Neither was any power

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purchase agreement (PPA), for the purchase of power by India from these projects signed with Bhutan and Nepal, nor any principle for fixing the rates for purchase of power have been evolved. In most cases, the tariff has been determined by political consideration, diplomatic goodwill and convenience.

Such an ad hoc arrangement based on negotiations and goodwill could work in the past mainly because the quantum of power purchase was limited. However, in years to come the size of power purchase would be substantial. Power trading will be in bulk and will have to have a more detailed framework of contracts and operating procedures.

Cross-Border Gas Trade Besides electricity, the four areas which can be identified for cooperation in the oil and gas sector in South Asia region are i) trans-boundary natural gas trade, ii) trade in refined petroleum products, iii) cooperation in oil and gas exploration and iv) cooperation in NGV developments.

Sizable gas shortfall is expected in both India and Pakistan unless some major exploration and drilling operations are undertaken. The Tenth Plan of India has projected natural gas demand of 130 MMSCMD in the year 2006/7 which could rise to 175 MMSCMD in 2011/12. Indian Government policy in recent years has sought to promote the imports of natural gas, in view of the fact that demand is projected to outstrip production by 62 MMSCMD in 2006/7 taking the intermediate demand forecasted by Tenth Plan. It could be higher if the latent demand for natural gas is taken into account.

Smaller countries like Bhutan, Maldives and Nepal are also likely to record a quantum jump in the gas consumption in the next decade or so. The optimal technoeconomic solution is for India, Pakistan and other South Asian countries to jointly pose their demands to potential suppliers in north and west and other Central Asian countries so that economies of scale result in a substantial reduction in unit cost of supply to both countries.

Though the South Asian countries, particularly India and Pakistan, have been envisaging both on-shore (Iran-Pakistan, Turkemenistan- Pakistan) and off-shore (Qatar-Pakistan, Iran-India and Oman-India) pipelines, nothing concrete has emerged because of : i) huge financial implications, ii) geo-political apprehensions, iii) unsure confirmation of natural gas reserves, iv) pricing of supplied gas, v) third country approval of transits and vi) environmental fallouts. This has also been the case in intra-regional gas pipeline between Bangladesh and India.

Indian concerns about the safety of the pipeline and assured supply through territory of Pakistan can be addressed through dialogue and legally binding guarantees by multilateral institutions14. This can be even ensured by extending this pipeline to Nepal, Bhutan and Sri Lanka. In fact, recent months have seen considerable progress in India laying gas pipeline into Nepal and Indian Oil Corporation's (IOC) planning to sell petroleum products in Sri Lanka15. Any of these pipelines, if laid, could change the energy as well as the economic picture of the entire region.

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If political apprehensions are set aside, there are strong possibilities and scope for bringing gas from Bangladesh through pipeline. A number of feasibility studies have been done in this regard including by UNOCAL16, and Indian gas utilities like Gas Authority of India Limited (GAIL) and Oil and Natural Gas Commission (ONGC) of India. TERI's estimates suggest comparatively much higher net back for gas imported from Bangladesh if supplied to North India.

Among the several options available to use the rich gas resource base of Bangladesh the electricity generation and export of gas through pipelines are considered to be the most viable and profitable17. There have been numerous studies carried out to assess the gas reserves and also to examine the possibility of harnessing it for cross-border exchanges. This has generated a lot of interest and speculation as the estimates of gas reserves vary sharply18.

Recently two committees constituted by the Government of Bangladesh submitted their reports in June and August 2002. The Gas Reserve Determination Committee concluded that, as of April 2002, the proven as well as probable gas reserve of the country was between 12.04 TCF and 15.55 TCF for 22 gas fields. The possible gas in place was estimated to be in the range of 4.14 TCF to 11.84 TCF19. The Gas Utilization Committee ‘arrived at the finding, after in depth examination, that under the short and mid-term demand supply projections, there is a problem of short supply which militates against export of gas from the current reserves’20.

Swapping of Indian gas with Bangladesh gas is another proposal that also stands as a mutually gainful project. The proposal is that ONGC will sell the gas found in North East India, which could not be brought to mainland India since it would be too costly a proposition, to Bangladesh that would sell equivalent quantity of gas to India in return. However, nothing much has happened on this front.

Yet another proposal is to allow the right-of-way to lay a gas pipeline across Bangladesh to bring Indian gas, stranded in North East, to mainland India. This will bring transit fees to Bangladesh without any gas sales from the country. However, progress on this proposal is also very slow. More than this, the delay in any deal has been very costly for the South Asian countries. There are expert views that recent discoveries in the East Coast (Godavari) in India may thwart the plans to import natural gas into the country21.

An attractive option of this trans-boundary natural gas trade is to undertake the Iran-Pakistan-India Pipeline. Iran has shown urgent interest (particularly after the discovery of gas field at Tabnak) in supplying gas overland through Pakistan to India. The Pakistan government also formally announced its acceptance of such a facility to India22. Annually over U$ 200-400 million is likely to accrue to Pakistan as transit fees and royalty, if the deal is clinched.

Any of these pipelines, if laid, could change the energy as well as the economic picture of the entire region besides providing a robust CBM between India and Pakistan. These projects will substitute expensive imported liquid fuels to improve balance of payment, bring relief to the hard-pressed infrastructure of ports, roads and railways used in movement of liquid petroleum, improve environment, and

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reduce cost of electricity generation, besides several other direct and indirect benefits as a result of multi-billion dollar investment in the gas pipeline as well as in the downstream industry using the gas. As neither India nor Pakistan possess the necessary finances and technology to build such a pipeline, multinational and multilateral resources will have to be tapped.

The economies of scale will substantially reduce the cost of a unit of gas energy imported jointly than individually. According to an economic analysis conducted for a UNDP sponsored project on Energy-Environment Cooperation in South Asia, based on the then prevailing prices in March 1998, the tariff cost of the pipeline project could be reduced by about 26 per cent by having a joint pipeline for India and Pakistan as compared to having separate pipelines.

Therefore, in order to promote regional energy cooperation through trade of natural gas via trans-boundary gas pipelines in South Asia, these countries need to work on four major directions. This could be done only if an appropriate climate of trust is progressively created. l Full-fledged preparatory techno-economic work. l Intergovernmental agreement. l Informed public opinion. l Promotion of international commercial and financial interest in the proposed

projects.

Conclusion South Asian countries continue to be characterised by low per capita consumption of energy, poor quality of energy infrastructure, skewed distribution and inaccessible and costly energy availability. These countries have remained largely energy importers and increasingly faced a serious energy shortfall. All these have adversely affected their productive activities, social development and investment climate. There has been a realisation that availability and accessibility to energy can transform the quality of life and work substantially, help raise health and educational standards and retard rural-urban and cross border migration by enhancing the level and pace of income and employment generation.

The creation of a South Asian energy market and cooperative development of the available diverse energy sources in the region can help increase the level of energy security in the region and thus can subsequently contribute to achieving a sustained higher economic growth. There are distinct advantages for South Asian countries to cooperate in the energy sector. There have been negotiations going on among the South Asian countries on the possibility of power trading and gas pipelines. Given the demand and supply situations in the subcontinent, it is rational to believe that the trade in power and gas will be mutually beneficial in terms of both economic and political gains. The studies conducted up to date reveal some important regional projects that merit serious consideration. They also provide a range of options.

However, there are several challenges ranging from trust and confidence building to investment and technology transfer, demand locations to really integrating the energy market and sustaining the effort to matching the regional aspirations with such efforts. The 12th SAARC Summit held in Islamabad in 2004 clearly indicated the

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need to consolidate in energy cooperation by creating an ‘energy ring’. What is required is a breakthrough project that can be set as an example for other regional energy ventures. In all these efforts and strategisation, the key element should be understanding the neighbours, strengthening both the traditional and emerging ties with them and making a much more concerted regional effort in consolidating a regional identity. The projects need to be depoliticised through sensitising the general mass about the gains that accrue and providing options and alternatives to the policy makers. An equally critical task is to build the capacities of the policy makers in energy sector across the region by re-skilling and reorienting them to the advantages of energy cooperation.

South Asian countries should also realise that cooperation is a goal oriented action wherein not only goal but also certain resources are shared together by the participants. This implies sharing of national control over them which is taken as a loss of national sovereignty. Whenever these countries have felt this, they have tended to withdraw from the regional cooperation process. States are reluctant to cooperate on merely economic goals. Therefore, tackling this perception of national sovereignty itself is a major question as it demands extending a new form of cooperation, sacrifice, contribution which the countries in this region invariably lack. This is why initiatives like ‘beneficial bilateralism’ and ‘unilateral gestures’ have worked in the region.

(Dr Lama is Chairman of the Centre for South, Central, South East Asian and SouthWest Pacific Studies, School for International Studies, Jawaharlal Nehru University, New Delhi) End Notes 1.

2.

3.

4.

5.

6.

7.

8.

Edward D. Mansfield and Helen V. Miner, The Political Economy of Regionalism, (New York: Columbia University Press, 1997). Also see Maurice Schiff and L. Alan Winters, Regional Integration and Development, World Bank and Oxford, Washington, 2003; Miroslav N. Jovanovic, International Economic Integration :Limits and Prospects, (London: Routledge, 1998) Ali M. El-Agraa, Regional Integration: Experience, Theory and Measurement, (London: Macmillan, 1999) Mahendra P. Lama, QK Ahmad & Mohan Man Sainju, ‘Reforms in Power Sector and Cross Border Power Trade in South Asia’, in a forthcoming volume edited by Mohsin Khan, IMF , Washington, 2004.

Selected Economic Indicators, Royal Monetary Authority of Bhutan, September 2000, Thimphu and Kuensel, January 2004.

Fiscal Year 2002/03- A Year in Review, Nepal Electricity Authority, Kathmandu, August 2003.

The government earns revenue through royalty and export tax and gives several incentives and concessions to the private developer. Once the private developer agrees to the term and conditions laid down on the regulations, it receives a license to develop the project and subsequently takes on itself to market the power.

Data collected form the Ministry of Power, Government of India, New Delhi and Malik Masood, ‘A Note on Pakistan Power Sector/WAPDA Restructuring and Privatisation and Other Issues of Interest for South Asian Energy Forum’, South Asia Regional Energy Forum Proceedings, USAID, Kathmandu, 1999.

Statement by the Power Minister of Pakistan Gohar Ayub Khan, Hindustan Times, January 16, 1999. Also see Mahendra P. Lama, ‘Economic Reforms and Cross Border

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9.

10.

11.

12.

13.

14.

15.

16.

17.

18.

19.

19

Power Trade in South Asia’, South Asian Survey, New Delhi, September-December 2000.

A. R. Kemal and Mahendra P. Lama, ‘Energy Trading Between India and Pakistan: Scope and Opportunities’, a collaborative research being conducted by Pakistan Institute of Development Economics (Islamabad) and Jawaharlal Nehru University, New Delhi under SANEI, New Delhi, 2004.

This is aimed at connecting the island nation with the mainland of South Asia by road and rail through India. The proposed multi-purpose and multi-modal land bridge between Dhanushkodi (South-East of Tamil Nadu state) and Thalaimannar (North-West Sri Lanka)] is expected to be 44 kms in length; Mahendra P. Lama et al, ‘India- Sri Lanka Land Bridge Project : Assessment of Economic and Social Impact’, A Report prepared for NEXANT under the USAID-SARI/E Programme, 2003.

Joint Study Group Report on ‘India-Sri Lanka Comprehensive Economic Partnership Agreement’, October 2003. Co-Chaired by Rakesh Mohan (India) & Desamanya Ken Balendra (Sri Lanka ).

Nexant, ‘Indo-Lanka Power Interconnection: Pre-Feasibility Study’, Colombo, 2002; Alternatively, the power transmission interconnection at Puttalam is no longer feasible given the fact that the proposed power plant at Puttalam has already been abandoned Mahendra P. Lama, ‘Energy Cooperation in South Asia: Opportunities, Strategies and Modalities’, (Dhaka: CPD-CASAC, 2004) Mahendra P. Lama and Rasul Bakhs Rais, ‘Pipelines and Powergrid for Peace’, Occasional Paper, (Mumbai: ICPI and London: Kings College, 2001) ‘A joint venture of Nepal Oil Corporation (NOC) and Indian Oil Corporation (IOC) for cooking gas plants through pipeline is being implemented. This will link Nepal's main distribution depot at Amalekhganj, about 175 km south of Kathmandu, with IOC's supply centre at Raxaul in Bihar on the Indo-Nepal border. The pipeline will help Kathmandu save on transportation time and curb adulteration of the fuels while being hauled across the border in truck-tankers’, Himalayan Times, Kathmandu, 29 January 2004.

Unocal Corporation's Natural Gas Pipeline Project from Bangladesh to India includes construction of a new 30-inch diameter 1363-kilometre natural gas pipeline with a capacity to transport 500 MMSCFD of gas from Bibiyana fields in Bangladesh to major markets in India. Government of Bangladesh could expect to begin receiving estimated revenues and tax receipts of at least US$ 3.7 billion over the 20-year life of the project. The proposed pipeline is also expected to result in a direct investment of $ 500 million to US$ 700 million for field development and pipeline construction in Bangladesh. There are several additional benefits to Bangladesh.

As of today power generation with 46 % of the total gas consumption constitutes the most vital sub-sector for gas use followed by fertilizer production 30 %, industry 13 % and domestic and commercial 11%. All gas fields so far discovered are located in the East Zone, Consequently, all the power plants in the East Zone use gas as the fuel, while all plants in the West Zone are fuelled by oil of various grades. The completion of the bridge on the (Brahamaputra) river and the construction of a gas pipeline through the bridge and the subsequent gas supply to west zone and its connection with Baghabari plant is likely to change the power situation drastically.

A study stated that the estimated hydrocarbon resource base of Bangladesh ranges from a low side scenario of 34.2 TCF to a high side scenario of 51.5 TCF with a mean or ‘best technical’ estimate of 42.1 TCF. Another study carried out jointly by Petrobangla and the US Geological Survey in 2001 estimated the technically recoverable, undiscovered resource or ‘New Field Discoveries’ on a countrywide basis for Bangladesh. This showed that the total potential of New Field Discoveries ranges from a minimum case of 8.4 TCF to a maximum case of 65.7 TCF, with a mean of 32.1 TCF. Brown TA, AHM. Shamsuddin and MJ Rickard, Hydrocarbon Resource Base of Bangladesh, Proceedings of the 13th South East Asia Petroleum Exploration Society (SEAPEX), Exploration Conference, Singapore, 46 April 2001.

Report of the Committee for Gas Demand Projections and Determination of Recoverable

Reserve and Gas Resource Potential in Bangladesh, submitted to Government of Bangladesh (GoB), Ministry of Energy and Mineral Resources, June 2002.

20. Committee Report on Utilization of Natural Gas in Bangladesh, submitted to Government of Bangladesh, Ministry of Energy and Mineral Resources, August 2002.

21. Preety Bhandari, India Country Study on Regional Cooperation in the Energy Sector in South Asia, CPD-CASAC Research Programme, 2003.

22. Iran proposed such a pipeline almost a decade back during Benazir Bhutto's regime. Since then Pakistan has been consistently denying such permission, Business Recorder, Karachi, April 8, 2000.

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Gas Pipelines and Regional Cooperation Mohammad Ramzan Ali

Introduction Rich energy resources are the lifeblood of thriving economies. In the South Asian context, regional cooperation to harness energy resources poses some basic questions aimed at understanding the changing scope and dynamics of regional economic relations.

Given the current dynamics and the composite dialogue process between India and Pakistan, how can the leadership expect win-win geo-economics? What is the role of energy resources for regional economic cooperation and how can these resources and related technologies contribute to such cooperation? What are the prospects and implications of regional energy projects? What are the geopolitical considerations on energy questions? Can India and Pakistan, with their legacy of conflict, emerge as potential regional partners along with other South Asian countries? Given the various security threats haunting the region and the presence of extra-regional powers complicating the picture, how can efficient energy producerconsumer arrangements, i.e. energy transfer routes, be drawn up? Can the corporate sector in South Asia play a decisive role in conflict resolution and achieve the objective of a single market on the pattern of the European Union?

Historical Parallels: The EU Before considering the subject in the South Asian context, it is important to look at the first successful experiment that turned almost a whole continent into a model of regional cooperation -- the European Union.

The Schuman Plan provided the basis for the European Coal and Steel Community (ECSC) that was established in 1952. In late 1954, the six governments that made up the ECSC began to consider a new economic initiative that would complement their original coal and steel pact. It was agreed that the six countries that signed the Treaty of Paris -- Belgium, France, Italy, Luxembourg, the Netherlands and West Germany -- would pool their coal and steel resources. In 1958 the European Coal and Steel Community evolved into the European Economic Community (EEC). In 1993 the organisation was renamed the European Union (EU). In January 2002 the Euro became the sole currency. Along with political will, resources like coal and steel also contributed in promoting European economic cooperation and integration. The EU, despite all odds, realised its objective of economic integration. The EU provides a good example for the member countries of the SAARC. The way Robert Schuman proposed the integration of coal and steel

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production in Europe, the South Asian nations can take the same route and reach an agreement for the realisation of their common economic interests. Increased intraregional market accessibility prompts investment, reduces product costs and increases surplus. By integrating economies, the SAARC countries are likely to gain more from improving intraregional market accessibility than from tougher external trade policies.1

Energy in South Asia Major South Asian countries use a variety of energy sources, both commercial and non-commercial. Fuel wood, animal waste and agricultural residue are the traditional or `non-commercial' sources of energy that continue to meet the bulk of the rural energy requirements in South Asia even today. However, the share of these fuels in the primary energy supply has declined. The traditional fuels are gradually getting replaced by the 'commercial fuels' such as coal, lignite, petroleum products, natural gas and electricity. Economic and population growth in South Asia has resulted in rapid increase in energy demand. The region's energy demand as a percentage of the world's energy demand increased from 2.4 per cent in 1987 to 4 per cent in 19982. The US Energy Information Administration (EIA) estimated a 50 per cent growth in the primary energy demand in the period 1990-98. This figure, however, excludes the traditional energy forms that account for more than half of the energy demand in the region3.

According to SSGC calculations, Pakistan would face a shortfall of 350mmcfd from the year 2010 and up to 1,691-mmcfd in 2015 and 3,156 mmcfd in 2020.

The demand for gas is increasing by 7-8 per cent per annum and further delay in completion of pipeline projects would create supply problems for Pakistan.

Similarly, India's commercial energy demand, which makes up the dominant share in the South Asian energy demand, is projected to increase by 3.8-4.3 per cent a year through 2020. The oil demand growth rate for India is projected at 2.3 per cent per year in the low economic growth scenario and is the highest in Asia. However, despite rapid growth in energy demand, the per capita energy consumption in South Asia continues to be amongst the lowest in the world, while energy consumption per unit of GDP is amongst the highest4. Driven by the rising population, expanding economy and a quest for improved quality of life, energy usage in the region is expected to rise in the coming years. Considering the ever-increasing demand of energy and its geo-economic significance, cheaper and environment friendly natural gas will continue to occupy centre-stage in the region's total energy scenario. In recent years, South Asia has been recognised as an area of increasing interest due to its vast size and opportunities for trade. After former US president Clinton's visit to South Asia in 2000, a new economic and trade emphasis in the U.S.-South Asian, EU-South Asian and Sino-South Asian relations is assuming added importance. The active economic diplomacy is expected to inspire some key decisions on energy contracts, corridors and development activity in the entire region.

Current gas production in South Asia is estimated at 56 bcm, with India accounting for about 50 per cent of the total production. Domestic availability in India is, however, expected to decline in the future. As per estimates made by the Group on

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India Hydrocarbon Vision 2025, domestic gas production by 2025 is expected to decline to 13 bcm from the current 27 bcm.(5) Indian gas requirements are, thus, likely to be met primarily from gas imports. The outlook on gas production in Bangladesh is optimistic. While current gas reserves are estimated at 10.6 TCF, opinions on actual reserves vary from 30-50 tcf. A detailed reassessment of reserves is currently underway. The oil major, Unocal, has struck significant gas finds in Bangladesh. The company is keen on exporting gas from the Bibiyana gas field to India via a 0.5 bcfd pipeline. Reportedly, the government would consider gas exports to India only if the domestic resources are enough to cater to home requirements for the next 50 years6. India is also considering gas imports from Iran, Qatar and Turkmenistan via Pakistan. It is also negotiating with Myanmar and Bangladesh.

For the first time, both Pakistan and India are discussing energy issues at the highest level. During the Musharraf-Manmohan meeting on 24 September 2004 at New York and then the Shaukat-Manmohan meeting on 23 November, 2004, at Delhi, the two countries discussed the proposed Iran-India gas pipeline project. India once again demanded guarantees from Iran and assurances from Pakistan, for continuous supply of gas, without disruption and compensation in case of such an eventuality.

India also initially maintained its position of linking the gas pipeline deal with a ‘larger context of expanding trade and economic relations’ -- a term used by the Indian prime minister in the joint statement issued after his New York meeting with President Musharraf. The trade context explicitly refers to the Indian demand for transit trade facilities from Pakistan for trade with Afghanistan, Central Asia and Iran.

Pakistan's Prime Minister Shaukat Aziz discussed the energy issue with his Indian counterpart when he visited New Delhi. Pakistan's offer of ‘an energy corridor to India’ as a ‘stand alone’ project is justified by the increasing needs of both countries for imported energy. India has already announced plans for a US$ 2 billion pipeline that would run from Myanmar to eastern India through Bangladesh. Pakistan-Iran gas project would be even more ambitious. A third of the gas would serve Pakistan and the rest would go to India as Iran is the most convenient supplier geographically for both countries9. The two countries and their leadership is conscious of the energy scale and supply as they know that more than any other commodity, energy is the lifeblood of modern economies and the engine of all machines. The major powers have gone to great lengths over the past century to secure access to it and influence the terms of its trade10.

India and Pakistan today have prime ministers who represent the modern face of peace and development. The new leadership in the two countries needs to show that the modern corporate mind can deliver on the national and regional policy objectives11. Inflexible and rigid past approaches of confrontation and futile fighting will not pay any more. The construction of more energy pipelines will help further improve relations between the regional countries and if the pipelines are extended from Pakistan to China or from India to Bangladesh and then possibly extended to Myanmar and Thailand, Asia will get an interlinking gas system12.

Iran, South Asia's immediate neighbour, is rich and has an edge in terms of natural gas reserves. And since the discovery of natural gas reserves in its South Pars fields in 1988, the Iranian government increased efforts to promote higher gas

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exports. The prospects for profit are especially high in South Asian countries where energy demand exceeds supply. This is the background where a customer-consumer relationship can be conceived, evolved and strengthened for enhanced regional and trans-regional economic cooperation13. Energy experts are of the opinion that natural gas would become the fuel of choice for power generation by 2030 in the face of the growing energy needs.

Economic Factors and Shifting Priorities India's burgeoning industry is desperately looking for natural gas, the cleanest and cheapest fuel. India's existing demand of 151mm cmpd is likely to shoot up to 391 mm by 202514. The present domestic gas supply is 65 mm. Pakistan is the shortest and most proximate route through which India can access the Central and Western Asian markets. The matrix of the mutuality of interests is going to influence the policies of the regional countries.

Pakistan's economy is growing rapidly and has achieved a GDP growth rate of over eight per cent in the year 2005. ‘With the rising growth rate and to meet energy requirements Pakistan is planning to import gas or LNG at competitive rates and is committed to the pipeline projects at the highest level. The success of the energy projects can bring the significant economic shift in inter and intra-regional politics.

The only goal that can lift Pakistan and India from their bilateral, indeed regional, difficulties is a true rapprochement from grassroots up on the Franco-German model.

This reconciliation can easily be extended to the whole of South Asia. If a people-topeople reconciliation is to be expanded, and more stress is laid on economic realities, most disputes can be resolved peaceably in the changed climate’15.

The dream of regional prosperity can gain a new boost once these energy pipeline projects materialise. The potential for economic and developmental gain from natural gas will help the countries to reassess their roles and policies. There is an undeniable international trend towards the formation of regional and trans-regional groupings for the realisation of peace and development.

Keeping in view the changed economic and political conditions at regional and international levels, the role of energy resources has become a key factor for economic cooperation. Energy deposits are not limited to oil and gas resources alone.

The geographic situation of the region and characterisation allows the utilisation of other energy resources, namely electricity and water. Once numerous energy alternatives are factored into arrangements between energy producers and consumers, new circumstances will certainly govern the geopolitics of the region. The unique geographical situation of Pakistan at the threshold of China, Central, Western and South Asia makes it an important destination and transit route for future trade and economic activities. Given the various threats haunting the region and the presence of extra-regional powers, it remains to be seen how the energy arrangements are shaped and developed and how they contribute to regional peace and prosperity.

Trade, Pipelines and Regionalism The speedy and smooth export of energy supplies from Western or Central Asia to South Asia can be a venture that may change the face of regional politics and

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economics. Economic collaboration possesses the power to engender as well as transform social and political discourse. It facilitates conflict resolution. The energy projects can also be a source of strength for expanding regional economies of Asia and will help normalise the hostile relationship between Pakistan and India. Prospects of enhanced trade and the larger experience of regional economic cooperation hold the new dawn. A new economic partnership is evolving between Pakistan-Russia, Pakistan-China, Pakistan-Iran, on the one side, and Iran-India, China-India, RussiaIndia, on the other. For larger economic gains, there is larger convergence of interests between the adjacent regions stretched from East to West and North to South.

Addressing the Third India-Asean Business Summit on 19 October 2004, Indian Prime Minister Manmohan Singh was remarked, ‘As we look east and you look west it is natural that we look at each other in this enterprise of resorting Asia to its rightful place16.

Trade is gradually becoming an important factor for the healthy growth of the economies of both Pakistan and India. The two countries export much more to countries in other regions than to each other. Not only do the people on both sides want peace and steady movement on all counts and peaceful settlement of disputes but several powerful lobbies and influential regional constituencies and non-state actors have also actively pushed the process forward in the areas of energy, trade and economic relations. The Associated Chambers of Commerce and Industry (Assocham) estimated that trade between India and Pakistan could touch the $10-billion mark by 2010, provided the execution of the agreement on South Asian Free Trade Area (SAFTA) is not thwarted and the trade basket is diversified17. The future prosperity of South Asia will be characterised more by energy factors. The current economic realities in Asia highlight the necessity of energy and economic collaboration in coming decades.

The energy projects herald an approach for inclusion, unity and reconciliation. They can be a formidable piece of political and economic reconstruction. The 'peace pipelines' of energy resources can contribute to real and meaningful regional cooperation. No serious attempt had ever been made by South Asian leaders to restructure the regional economy and to remove the weaknesses that had caused growth to stagnate and poverty to increase. With signs of recovery on the horizon, it is time to lay a solid foundation for a robust structure that would last.

Pakistan and India should keep in mind that it is very important to improve the condition of the people and give them the opportunity to realise their economic, social and intellectual potential in a competitive world. The regional leadership should concentrate on protecting its people from poverty. Once out of the groove created by past conflicts, mis-perceptions and isolationist rhetoric, the regional countries are bound to emerge as powerful economic actors in the region and the world.

In January 2005 at Davos in Switzerland, Pakistan's prime minister reiterated that Pakistan's offer of ‘an energy corridor to India is justified by the increasing needs of both countries for imported energy’. ‘This is a win-win situation for us all and this will promote peace. The project offers attractive returns to all players.’ Pipelines would be driven by economics and this is a pretty complex stuff and it makes economic sense.

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Economic and Commercial Complementarities Regional energy cooperation is in the interest of entire Asia. South Asia's growing energy demands, its skilled and hardworking manpower, together with regional strengths in industrial and managerial know-how and science and technology make it ideal for long-term economic complementarities and regional partnership.

With the economic agenda of SAARC countries gaining importance, the idea of setting up an energy grid in the region is very encouraging. In this regard, the gas pipeline project would be an outstanding example of regional cooperation18.With limitless possibilities, the idea of cooperating in supply and availability of energy resources should be taken up on a priority basis. Discussions on fostering regional connectivity in the field of energy and the establishment of a ministerial forum on energy have been held in addition to considering proposals for setting up a SAARC Energy Centre. However, these well-intentioned proposals need to be followed up with some tangible action.

Indian Petroleum Minister Mani Shankar Aiyar, while inaugurating the third Asian Gas Buyers' Summit in February 2005, proposed that the gas pipeline from Iran via Pakistan should be extended to China, a move that could lend political security and urgency to the billion-dollar project. ‘We should look beyond a national gas grid.

Asian natural gas industry players should come together to form an Asian gas grid,’ Asian region was rising as India, Pakistan and China were turning major buyers of gas. ‘It is possible that Iranian gas would be made available to China by extending the proposed Iran-Pakistan-India pipeline to South China.’ Aiyar also stressed that the Asian gas grid would enable the countries in the region to maximise the gains, end the ‘western dominance’ and ensure energy security and economic growth in Asia.

On 6 January 2005, India, which imports most of its crude oil needs, called for the development of an Asian petroleum market with trading exchanges to serve the region's fast growing economies and soften price volatility. ‘It's essential we develop a sophisticated Asian market for petroleum and petroleum products” to ensure supply stability and reduce price volatility, Indian Oil Minister Mani Shankar Aiyar told a regional energy conference19. India, which has a vital interest in stable oil markets as it sources 70 per cent of its crude oil needs abroad, is interested in promoting supply security through regional linkages. Booming economic growth has turned Asia into one of the main buyers of Gulf oil but a lack of partnerships between producers and consumers has made Asian nations vulnerable to global oil price volatility. Asian nations are also trying to diversify and gradually move towards other alternatives of energy like gas for their future needs.

With the emergence of giant Asian consumers, the continent is ‘set to become the gravity centre of the world's energy consumption’. A regional energy market could be formed through sustained dialogue. ‘Asian countries, especially rapidly growing economies of the region, need long-term energy supply security. Energy producing countries are concerned about demand security. This is where regional interdependence may best serve the interests of all parties. Regional countries need to strive to establish a structure in which regional producers would charge less from regional consumers on the basis of reciprocity in the region. Asia is one of the fastest

26

growth markets for oil in the world where half of the total incremental oil demand is forecast to take place during the next few decades. Gas is increasingly taking the place of oil as a comparatively cheaper and cleaner source of energy. It is, therefore, quite logical that the development of partnerships between producers and consumers should go a long way in addressing mutual concerns. The surge in international energy prices leads to higher costs of production and, to some extent, slows economic growth.

Regional economic cooperation is unlikely to succeed without political harmony and convergence in economic perceptions that are essential prerequisites for future economic and trade alliances. The signing of SAFTA has created euphoria in the South Asian countries. However, there may be some hindrances in the free flow of goods and services but intra-regional trade may grow at a rapid rate after some time if mutual trust is sustained and enhanced. At the same time it is all the more important to build trust on the issues of energy, trade and economic cooperation. The ‘trust deficit’ between Islamabad and New Delhi will widen if the two fail to undertake the gas pipeline projects amicably, and this is bound to have an indirect impact on the continued peace process and regional atmospherics.

Pakistan and India have taken a significant step towards their common objective of restoring peace and prosperity by holding their sustained dialogue. The two countries have signalled their will to strengthen their contacts. They proposed to do so not by setting up formal institutional mechanisms but through a process of sustained discussion. With the commencement of the pipeline and energy dialogue, Pakistan and India have begun to consider the bigger perspective, and in particular common interests, shared perceptions, and coordinated action on the regional and world stage. As the process of dialogue gathers momentum, they could begin to explore the vast potential that exists for cooperative endeavour in a variety of fields.

Both face formidable threats and challenges, which require to be addressed with sincerity and flexibility.

While some hardliners perceive Pakistan and India as rivals competing for pre-eminence in the subcontinent, the leaders of the two countries appear determined to prove them wrong. The pace of bilateral visits has picked up. The economic relationship between the two countries needs to be transformed and strengthened, with the two-way trade exceeding US$ 5 billion in 2006 when SAFTA comes into formal existence. There are indications that scope exists for two countries to cooperate in the development of petroleum resources in Central and Western Asia and other parts of the globe.

Picking Preferences and Alternatives Ultimately it is Pakistan and India that will have to make the more difficult, painful yet fruitful choices. It will be unrealistic if the policymakers fail to realise the great long-term trade and economic benefits which come with the energy pipelines. The ideal way out should be a win-win situation for all. South Asian partners are required to embark on a concerted 'pipeline diplomacy' to meet their growing energy demands.

When Indian officials sit down with their counterparts in the coming days, the negotiations are expected to be long and tortuous, but if deals are struck it would be,

27

most of all, to the advantage of India, whose energy demands, both in oil and gas, are expected to double by 202020.

According to a report, a few months ago it would have been unthinkable for Bangladesh to strike any deal on either exporting gas to India or offering a transit pipeline for Burmese gas. Indian officials say with the proposed deal Bangladesh can get a hefty transit fee and eventually Dhaka may also decide to sell its gas. For its part, Dhaka is reportedly trying to extract additional concessions from its big neighbour like a trade corridor to the landlocked Nepal and Bhutan21.

A new chapter in the geopolitics of South Asia was opened on 12 January 2005 when energy ministers from India, Bangladesh and Myanmar sat down together to consider the proposal for supplying Myanmar offshore gas to India via a pipeline traversing Bangladeshi territory. The meeting was unique and historic since this was the first such trilateral encounter where the three countries agreed in principle to the formation of a techno-economic working committee.22 (More importantly, the visit of Indian Minister of Petroleum Mani Shankar Aiyar to Islamabad and the understanding reached between Islamabad and New Delhi has opened a new era for regional cooperation in the energy sector with reference to gas pipelines running from Iran, Central Asia and the Gulf to Pakistan and India, and even beyond). India may be hard-pressed to satisfy its energy requirements, but on the other hand Indian oil companies are extending their reach -- from Russia to Angola -- and in the past few years India's public-sector oil companies like the Oil and Natural Gas Commission, Videsh and Oil India have made bids in oil exploration and production deals in Libya, Iran and Central Asia23. If South Asian countries don't get sufficient energy and fail to expand and diversify their regional cooperation, they will not be able to achieve the required rate of economic growth. South Asia needs to prepare for the future challenges and should promote regional trade and energy cooperation because, in the coming years, economies would be determined regionwise and not country-wise. The countries need to develop and institutionalise regional energy pipeline association that should be dedicated to ensuring a strong and viable transmission pipeline industry in the region in a manner that emphasises public safety and pipeline integrity, social and environmental stewardship, and cost competitiveness for the entire region.

(Mohammad Ramzan Ali is a research analyst at Institute of Regional Studies, Islamabad).

Note: This paper is the modified version of an article by the same author published in Regional Studies Spring 2005.

End Notes 1.

2.

Thomas Andrew O'Keefe, ‘Economic Integration as a Means for Promoting Regional Political Stability: Lessons from the European Union and MERCOSUR’. See <http://operationkosovo.kentlaw.edu/symposium/okeefe-revised-Kosovo%20Paper% 20on%20Economic%20Integration.htm>, accessed on 7 February 2005. <http://www.terina.org/energy.htm>.

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3.

4.

5.

6.

7.

8.

9.

10.

11.

12.

13.

14.

15.

16.

17.

18.

19.

20.

21.

22.

23.

ibid. ibid. <http://www.terina.org/prog/abs1.htm>.

ibid.

Nadeem Malik, ‘Pakistan wants Iran gas with or without India’, The News, Islamabad, 10 January, 2005.

‘Pak-India ties better to take up gasline’, The Nation, Islamabad, 27 January, 2005, See also, ‘Aziz will take up gas pipeline with Singh,; The Daily Times, Lahore, 27 January, 2005. ibid.

See the writings of Michael Renner, a Senior Researcher at the Worldwatch Institute and the author of The Anatomy of Resource Wars, a 2002 Worldwatch monograph.

B Muralidhar Reddy, ‘From World Bank to vote bank’, The News, 12 September 2004.

Based on discussions and interviews with journalists and researchers working on the theme. <http://www.bitpipe.com/data/detail>. <http://www.gasandoil.com, Op.cit.>. ibid.

Manmohan Singh's speech at Third India-Asean Business Summit 19 October 2004, New Delhi. See http://www.embassyofindia.com/IndiaNewsNovember2004/page4.htmlIbid.

‘Indo-Pak trade may touch $ 10 b by 2010 Assocham’, The Hindu, 5 January 2005.

‘Gas pipeline: bilateral or trilateral?’, Dawn, 7 January, 2005.

‘India calls for Asian oil market’, Dawn, 7 January, 2005.

‘India to launch pipeline diplomacy’, The Nation, 7 February 2005. ibid. ibid. ibid.

Nepal: Thermal Energy for Export Dr Upendra Gautam and Ajoy Karki

Background Nepal is ideal for the development of hydro-power due to its vast water resources and steep topography. Furthermore, the only significant source of energy in Nepal, apart from bio-mass (which is a traditional source comprising firewood, animal dung and agricultural residue), is hydro-power. The present techno-economically feasible hydro-power potential (given the state of infrastructure and price of fossil fuel) in the country is estimated to be around 43,000 MW. However, to date, the Integrated Nepal Power System (INPS) has a total installed capacity of about 610 MW, of which about 550 MW is hydro-power based. Of the hydro-power plants, only 92 MW (cascaded between Kulekhani I of 60 MW and Kulekhani II of 32 MW) is from seasonal storage and the rest is from run-of-river schemes (some have daily pondage).

Thus, so far, less than 2 per cent of the techno-economically feasible hydro-power plants have been developed in the country.

The annual electrical energy available for use within the country in the fiscal year 2003-2004 was 2381 GWh (92% of which was from hydro sources) -- an increase of about 5.3 per cent compared to the previous fiscal year. The state-owned utility, Nepal Electricity Authority (NEA), has estimated the total number of grid connected consumers to have reached 1,060,700 by the end of 2004. Of these, the domestic consumers were expected to be around 1,018,000. Thus, in 2004 among the country's population with access to the electricity grid (23 per cent), the average national consumption per connection was 187 kWh/month. In the domestic consumer category, the consumption per household was about 56 kWh/month. Assuming average household family size to be between four to five members, the electricity consumption per capita would be around 11 KWh/month to 14 KWh/month. These figures indicate that on one hand only limited population has access to grid electricity in Nepal, and even among those who are grid connected the consumption is nominal.

It should be noted that electricity consumption in developed countries such as Canada and Sweden had reached 4500 kWh/annum per capita (i.e., 375 KWh/month per capita) in 1998.

Based on a load forecast study undertaken by NEA, the expected peak load in the Integrated National Power System (INPS) by the year 2020 is estimated at 1820 MW with the corresponding annual energy availability at 8300 GWh. Thus, even if Nepal is able to meet the projected demand for electricity in 2020 (and reach an installed capacity of 1820 MW), only about 4.2 per cent of the techno-economically feasible hydro-power potential of the country will have been developed. These projections clearly indicate that within the distant future, Nepal's hydro-power

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potential will far exceed the growth in demand for electricity within the country. It is against this backdrop that this paper discusses the possibilities of how Nepal's hydropower potential can be used to meet regional energy demand creating a win-win situation. The relevance of the regional context is obvious when one looks at the map entitled: "Earth at night, lights of the world" produced by the National Geographic Society in November 2004. Darkness carpeting South Asia and western part of China adequately reflects the need of a substantive inter-Himalayan regional energy drive to take this part of the world from darkness to light.

Hydro-power Development Plan The only significant hydro-power plant currently under construction is the 70 MW Middle Marsyngdi Project located in Lamjung District, Western Region of the country. Due to various delays, this hydro-power project is now expected to be commissioned in 2007. At present, the Nepali private sector is mainly involved in developing small hydro-power projects that are limited to 5 MW installed capacity.

This year (2005), the 2.5 MW Sun Koshi and the 500 KW Rairang hydro-power plant have been commissioned and the 1.5 MW Chakhu is also expected to come on line within a month. Although, the Nepalese private sector hydro-power developers have acquired a number of licenses and have also entered into power purchase agreements (PPA) with NEA, at present not one has entered the construction phase. After having successfully implemented the 60 MW Khimti and 36 MW Bhote Koshi projects in the early 2000, the multi-national companies too do not seem to have immediate plans to develop more hydro-power plants in the country. Thus, in the next four-five years the installed capacity in the INPS is likely to be limited to 700 MW. Snowy Mountain Engineering Consultancy (SMEC) had acquired the license to develop the 750 MW West Seti Hydropower Project in the mid 1990s. SMEC plans to develop this project for export of hydroelectricity to India. Under the terms of the licence, Nepal will be entitled to receive 10 per cent of the generation capacity free of cost from the project. Thus, with the completion of West Seti (planned for 2012/13), the INPS will have an equivalent 75 MW of additional installed capacity. SMEC has successfully concluded the PPA with India.

The tentative list of hydro-power projects that NEA has identified for development in the near future are presented in Table 1. These projects were initially planned to be commissioned by 2015. However, since only the feasibility studies have been completed for most of these projects and furthermore, none have reached the construction stage and the 2015 commissioning target now appears to be over optimistic basically due to large number of power plants and limitation of funds. It

Table 1: Hydropower projects identified for development in the near future S.N.

Hydropower Project Kabeli A Chameliya Lower Modi Upper Modi-A Rahughat Upper Marsyngdi A Budhi Ganga Hewa Khola Likhu-4 Khimti-2

Installed Capacity (MW) 30 30 19 42 27 50 20 10 44 27

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

164 196 123 285 165 340 106 67 270 157

11.

Upper Seti

122

592

12.

Madi Ishaneswar

86

355

13.

Upper Tamakoshi

250

1568

14.

15.

Tamur -Mewa Dudh Koshi -1

101 300

489 1702

Remarks Feasibility study completed Feasibility study completed Feasibility study completed Feasibility study completed Feasibility study completed Feasibility study completed Feasibility study completed Feasibility study completed Feasibility study completed Pre-feasibility study completed Storage type, Feasibility study completed Storage type, Feasibility study completed Feasibility study- Phase 1 completed Feasibility study completed Feasibility study completed

Source: Nepal Electricity Authority, Corporate Developme nt Plan FY 2003/04 - 2007/08.

should be noted that if all of the hydro-power plants listed in Table 2.1 were to be developed, the installed capacity within the INPS would reach around 1850 MW which would be sufficient to meet the predicted system demand till the year 2020.

Challenges One of the main challenges in the hydro-power sector in Nepal is the excessively high consumer end tariff. The present domestic (household) tariff in Nepal and that of Delhi, India, are compared in Table 2.

The current exchange rate between Indian Rupee-IRs. and Nepali RupeeNRs. is one IRe. is equal to 1.60 NRs. As can be seen from Table 3.1, the electricity tariff (on per kWh basis) in Nepal is around 90-250 per cent higher than that of Delhi, Table 2: Domestic electricity tariff in Nepal and Delhi, India Monthly Energy Consumption (kWh) 0-20 21-100 101 -200 201 250 251-400 Over 400

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Average Annual Energy (GWh)

Tariff, NRs./kWh (IRs./kWh) Nepal Delhi, India 4.00 2.10 (1.31) 7.30 2.10 (1.31) 7.30 2.53 (1.58) 7.30 5.04 (3.15) 9.90 5.04 (3.15) 9.90 6.05 (3.78)

Remarks Nepal: Min. monthly charge varies from NRs. 80, 299, 664 and 1394 based on 5A, 15A, 30 A, and 60 A meters installed.

Delhi, India: Min. monthly charge varies from NRs. 80 to 160 for 1 kW and 2 kW loads and NRs. 96 per additional kW load thereafter.

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India, although the Indian electricity tariff is subsidised (i.e., cost of supply in Delhi is 20 per cent higher than the consumer end tariff). However, even when the subsidy is

Himalayan regional significance, in the water resources management, the same was not true when it came to water-energy security and conservation. The joint IndiaChina statement as published by the Indian Ministry of External Affairs stated: ‘The two sides agreed to cooperate in the field of energy security and conservation, including, among others, encouraging relevant departments and units of the two countries to engage in the survey and exploration of petroleum and natural gas resources in third countries.’

But the two sides do not specifically offer cooperation in water energy, a proven resource that is not only renewable, clean, and environmentally friendly but is integral to water, a natural endowment in the inter-Himalayan region.

China and India, with higher rates of pollution due to the excessive use of fossil fuels, require a regime of more environment-friendly energy under the Kyoto Protocol. As the sustainability of increasing China-India trade depends on progressive use of environment-friendly energy in the coming time, Nepal can offer comparative advantage to both neighbors through regional cooperation and management of its water resources.

The Way Forward The first two priorities for hydro-power in Nepal are: to ensure that the consumer end tariff is affordable, and to continue to increase supply of electricity to the general population. These require the country to come out of the ‘cost plus pricing”’mindset and to develop a mechanism which rewards efficiency. One option would be to initiate competitive bidding for electric power (kW) and energy (kWh) where the authorised agency would request developers to quote the price they are willing to sell the electricity generated from their proposed hydro-power plants. The authorised agency will then have the option of buying electricity on a least cost basis to meet the growth in demand.

A second option that can be considered to ensure competition in the electricity sector in the country is to create an environment where multiple generators and distributors of electricity can operate in a free market instead of having a monopolistic and dominant player. Although the private sector has been investing in the generation sector (24 per cent of the INPS installed capacity is contributed by the private sector), the distribution sector is still entirely owned by NEA. Thus, all IPPs need to sign PPA with NEA in order to sell electricity into the national grid. With multiple generators and distributors, the prices could be brought down, as the monopolistic barrier would be broken. With such an arrangement and free market, Nepal could move closer to establishing a spot market in electricity similar to the one set up by India recently. His Majesty's Government of Nepal is currently preparing to divide NEA into generation, transmission and distribution entities. As a result of this and providing a greater room to the private sector, one can expect a competitive electricity market with the end result being affordable end tariff for the consumer.

Given the high price of electricity from generation cost to consumer end tariff, the electricity market has been operating on a suppressed demand. The projections that have been made by NEA of a system demand of 1820 MW in the

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country by the year 2020 also reflect such suppressed demand and not the actual or potential demand. If the price of electricity is based on its ‘real market value’ and extensive transmission and distribution networks are established allowing the general population and industries access to virtually unlimited electrical energy, the aggregate demand would be much higher. However, even with such growth that caters to the development driven demand, it is unlikely for the country to have the capacity to fully utilise the 43,000 MW of techno-economic potential hydroelectricity even in the distant future. Priority needs to be given to domestic consumption of electricity, as this would ensure that the secondary benefits (industrial output, employment, etc. resulting form forward and backward linkages in the economy) remain within the country, due to the sheer hydro-power potential. An enormous possibility still exists for Nepal to develop this resource base as an exportable commodity. Apart from being a constant source of revenue for the country, this can also contribute towards regional energy security.

There is a growing deficit in the supply of electrical energy in India and more specifically in its northern states. Against the target of adding 6,000 MW annually, India has been able to meet it only halfway and consequently, the demand-supply gap has been increasing annually. With the growing Indian economy, this deficit is likely to increase. Nepal can contribute in bridging this gap in the Indian electricity supply by developing its hydro-power potential further. With the planned implementation of the 750 MW West Seti, to a certain extent, export of electricity from Nepal to India is about to start.

China's annual energy need has been increasing rapidly to meet its development pace. According to China Daily of 28 January, 2005, ‘…car ownership and fuel consumption are growing inexorably and today China is the second largest importer of oil in the world’. It is interesting to note that prior to 1993, China was an exporter of oil. To curb the use of fossil fuel, China has also launched grain-fed vehicles programs, i.e., vehicles are driven by gasohol, which comprises 10 per cent ethanol. Corn, wheat and sugar cane serve as raw materials for ethanol and it is claimed that with gasohol, vehicle carbon monoxide emissions can be reduced by as much as 40 per cent.

change. In fact, this is the basis for the Kyoto Protocol, which has been ratified this year with Russia signing the ‘Protocol’.

The Kyoto Protocol is the outcome of the meeting of more than 160 nations in Kyoto in 1997 when an agreement was reached among the developed nations to limit their greenhouse gas emissions, relative to the levels emitted in 1990. Now that the Protocol has entered into force, the emissions target by the developed countries would have to be achieved on average over the commitment period (2008 to 2012). The Kyoto Protocol has established the Clean Development Mechanism (CDM), which enables Annex I countries (developed countries and economies in transition) of the United Nations Framework Convention on Climate Change (UNFCCC) meet their greenhouse gas (GHG) reduction targets at lower cost through projects in developing countries. Thus, carbon has now become a tradable commodity with an associated value. One tonne of carbon dioxide (CO2) reduced through a CDM project, when certified by a designated operational entity is known as a Certified Emission Reduction (CER) and can be traded like any other commodity.

Apart from standard climate change implications due to carbon emissions such as changes in rainfall pattern and frequent occurrences of extreme hydrological events (droughts and floods) affecting agricultural sector and livelihood, other common areas of concern between Nepal, China and India are: l Melting of the Himalayan snow in Nepal and China resulting in Glacial Lake

Outburst Floods (GLOF). l Reduction in river discharges in Nepal and India affecting mostly hydropower

generation in Nepal and supply of irrigation water in India. Studies now indicate that over the past 10 years, the average discharge in the Mahakali River has been gradually decreasing.

In the context of climate change, Kyoto Protocol and CDM, there exists a viable cooperation possibility in water-energy sector among the three nations, namely Nepal, China and India. By supplying electricity to its northern and southern neighbors, Nepal can produce other multi dimensional effects. That are as follows: l The trade in energy will help China and India reduce their oil imports. l The sharing of CDM benefits the countries along with a reduction in pollution

It should be noted that only domestic production and huge imports of oil and innovations such as the use of gasohol would not be sufficient to meet China's growing demand for energy. Thus, along with developing huge hydro-power project such as the 18,200 MW Three Gorges which when fully commissioned will produce 84,000 GWh/annum (enough to provide 11% of China's soaring electricity demand), China plans to build nuclear reactors at a rate of nearly two a year between now and 2020 (International Herald Tribune, 17 January 2005).

level, due to the reduction in carbon emissions in China and India after a decrease in their reliance on thermal as a result of hydro-electricity supplied by Nepal. l The market opportunity for both China and India to supply construction materials and equipment to Nepal for the development of hydro-power plants. For example, construction materials such as steel are imported from India and some small hydro-power plants have recently installed Chinese generating equipment.

Due to high volume of fossil fuel consumed, projections are that China will be among the leading countries in terms of carbon emissions. Similarly, India's electricity generation is also significantly thermal power plant based and coal, which is the primary fossil fuel used by Indian thermal plants, produces more carbon than most other fossil fuels. The scientific community is of the opinion that high carbon emissions (greenhouse gas emissions) leads to global warming resulting in climate

However, for such a win-win situation, it is essential for the three countries to have the political will at the highest level. First, Nepal needs to take measures to ensure that it is able to supply electricity at a competitive market price and treat water-energy from a business perspective.

This may also require allowing multinational investment, including from China and India, in Nepal's hydro-power sector. China and India need to diversify sources of energy to ensure energy security.

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36

Furthermore, India needs to duly recognize the benefits (mainly irrigation benefits) that will accrue from regulated flows of water from Nepal if it agrees on a mutually

37

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India: Energy Scenario D. N. Raina

Introduction India's economic growth has been steady but slow. The GDP increased to over Rs 22,000 billion by 2003-04 and the per capita income increased to over Rs. 21,000 per year. The growth pattern, which started with 3 to 3.5 percent during the early years of development, has consistently been over 5-6 per cent during the 1990s. Of late, the GDP has grown over 6-8 per cent. With these growth levels it has emerged as one of the fastest growing economies in the world. India needs large quantities of energy not only to sustain these growth levels, but also to meet the growing energy needs of its growing population, which is now over 1.05 billion.

The level of economic performance and fast growing population has made India one of the largest consumers of commercial energy (coal, oil, gas and electricity). However, it still continues to be among the large consumers of traditional energy (like firewood, animal and vegetable waste). In addition, even now, mechanical energy obtained from animal power and manpower is used to draw water, plough the land and transport men and materials in substantial quantities. These contributions to the energy availability of the country are never measured or even taken note of.

While production and consumption of commercial energy is properly measured and recorded, only some approximate estimates are available in respect of traditional fuels.

Energy Consumption The consumption of traditional fuels has grown at the rate of 2.7 per cent from 185 million tonnes of oil equivalent (mtoe) in 1980-81 to 331 mtoe in 2002-03. Coal consumption has increased at the rate of 5.8 percent from 109 million tones to 358 million tones; oil consumption increased at the rate of 6.4 per cent from 31 million tones to 111 million tones; natural gas consumption increased at the rate of 15.6 percent from 1522 million cubic meters to 29,718 million cubic meters; hydroelectricity consumption has increased at the rate of 3.2 per cent from 46,557 million Kwh to 84,619 Kwh; nuclear electricity consumption has increased at the rate of 9 per cent from 3,001 million Kwh to 21,273 million Kwh and electricity consumption from renewable sources has increased from 69 million Kwh to 16,122 million Kwh over the same period.

Indigenous Resources India has primarily been meeting its electricity requirements indigenously, except for about 300 MW imported from Bhutan and small exchanges of the order of 50 MW with Nepal. India has one of the largest coal reserves in the world that has helped to

39

sustain the fuel supply for the coal based thermal power stations, which generate about 70 per cent of the total electricity in the country. Recently, the problems with the local coal have resulted in import of small quantities of high-grade coal from countries like Australia. India has some oil and gas reserves, which have been meeting a small portion of its demand for hydrocarbon fuels. As a result India imports large quantities of liquid as well as gaseous hydrocarbon fuels to meet its energy requirement.

Import Dependence It is necessary to examine the import dependence of fuel supply. The data of fuel consumption, production within the country and the imports each year in detail is set out in Table 1.

Table 1:Consumption, Production and Imports of Commercial Fuels Sl. 1.

2.

3.

4.

5.

6.

7.

8.

9.

Item Coal/Lignite consumption Coal Imports Dependency of Coal Oil Product Consumption Oil Imports as Crude Products Oil imports Dependency Consumption of Natural Gas (All domestic) Electricity Consumption (All domestic) Total fuel imports as % of total Consumption in toe terms.

Units mtoe mtoe % mt mt %

1980-81 58.5 0.2 0.3 % 31 7 23

1990-91 108.2 4.0 2.8 % 68.2 26.1 38

1995-96 140.7 9.0 4.4 % 77.3 49.8 64

2000-01 169.1 11.0 7.0 % 98.6 83.4 85

2001- 02 181.9 12 6.7 % 99.2 85.7 86

mtoe mtoe

0.2 5.0

10 6.0

16 8.0

25 8.0

27 9.0

8

16

24

24

31

%

The above table shows that the import dependence has increased in the decade of the 1980s and 1990s and this is due to the increased imports of oil products.

The increase in oil import dependency has generated a phenomenal growth from a low 23 per cent in 1980-81 to 86 per cent in 2001-02.

Impact on Foreign Exchange Oil prices have sharply fluctuated in the international market and the heavy dependence on oil imports have had a big impact on the foreign exchange requirements. Though in absolute terms, the oil imports have substantially increased from US$ 6,655 million in 1980-81 to 10,482 million in 1999-2000, in terms of percentage of the total foreign exchange earnings, the oil imports have come down from 78.4 per cent to 27.8 per cent over the same period. The reason for this situation is that the foreign earnings have increased substantially over this period. However, the volatility of the oil prices in the international market creates uncertainties and sudden jolts to India's foreign exchange balance. Though, the overall oil imports have proved to be manageable. But behind the figures of imports are several risk prone features, which need to be carefully addressed.

Indian Energy Sector In order to appreciate the prevailing energy scenario in the country, it is important to look separately at the various sub-sectors within the energy sector.

Electricity sector Generation and availability

40

The overall growth of power sector has been very impressive. Starting with a modest installed capacity of 1564 MW in 1950, the installed capacity under utilities has grown to 115,544 MW as of end January 2005. This comprises 80,201 MW thermal; 30,135 MW hydro; 2,720 MW nuclear and 2,488 MW wind resources. As per the annual report of the Ministry of Power for the financial year 2004-05, the country generated 558 billion units (Bu) of energy. However, shortages continue. Against the energy requirement of 491,348 MU the energy available was 456,009 MU, resulting in the energy Shortage of 35,339 MU (7.1%). Against the peak-demand of 87,906 MW; the peak demand met was 77,281 MW, resulting in peak shortage of 10,625 MW (12.1%).

The overall PLF of all the power plants at the national level is 74.3%. The generation has grown from 5100 Mu in1950 to 558 billion units in 2004. About 81 % of villages in India are electrified. Over 13.9 million agriculture pump-sets are energized through electricity. The per capita consumption of electricity has increased from about 16 units per person to 556 units per person in 2004.

In addition to the figures stated above, there are a number of large industries, which have their captive power generation facilities to meet their in-house requirement. Power shortages have forced other consumers as well to resort to captive generation. As such the latent demand is not reflected in the figures above.

Ownership Of the above capacity 58 per cent is owned by the state governments, 32 per cent by the central government, and 10 per cent by the private sector. Indian power system has been divided into five regional grids. These link all the state grids within a region.

There are a few inter-regional linkages also. Plans have been formulated to form an operational national grid in the near future linking all the regional grids.

Forecast The forecast of demand for the Tenth Five Year Plan ending with 2006-07 and Eleventh Five Year Plan ending with 2011-12 has been made by CEA in 2000 and approved by the Government. It has projected that the energy demand would be 719,097 MU and 975,222 MU and peak load will be 115,705 MW and 157,107 MW in the year 2006-07 and 2011-12, respectively.

To meet the demand the plans for additional capacity in power generation for the Tenth and Eleventh Plans have been fixed as 46000 MW and 65000 MW, respectively. In effect the power generation capacity at the end of the Ninth Plan would be almost doubled with the addition of about 100,000 MW in the Tenth and Eleventh Plan.

Power sector reforms The projected power sector plan would call for massive investment in expansion of power generations and the associated transmission and distribution capacities.

However, the operational and financial health of the power utilities calls for remedial action. The major shortcomings to be remedied through reform and restructuring are: a) high level of T&D losses extending from 30 per cent to 50 per cent, b) non-rational tariffs, c) un-metered supplies to agriculture and rural small households d) poor quality of service, e) poor consumer service, f) weakening of the financial viability of power business, especially of rural distribution business. Reform efforts since 1998

41

were based on a two-pronged approach â&#x20AC;&#x201C; regulatory reform and restructuring initiatives. Electricity Regulatory Act 1998 was enacted as a Central Act under which each state was to set up a State Electricity Regulatory Commission (ERCs) which would take over the responsibility for fixing tariff through an open transparent system and so far 18 states have set up ERCs, besides the Central Electrical Regulatory Commission (CERC). On the restructuring side, the efforts were to un-bundle generation, transmission and distribution to enable the introduction of competition through private investments by several players in generation and distribution.

Electricity Act 2003 After years of debate and wide consultation, the old Acts governing the power sector were replaced by a Comprehensive Single Act, Electricity Act 2003. The key objectives of the Electricity Act 2003 are to: l Consolidate the laws relating to generation, transmission, distribution, trading

and use of electricity. l Promote competition in the industry. l Protect the interests of consumers and to provide for reach of electricity to all

areas. l Rationalise electricity tariffs. l Ensure introduction of transparent policies regarding subsidies.

The Electricity Act, 2003 contains several far-reaching reforms. Some of them are listed below: l Generation de-licensed. l Captive generation liberalised l Distributed generation encouraged. l Open Access on Transmission lines. l Open Access in Distribution. l Trading in power l Removal of exclusivity in Distribution license. l State Government shall establish a State Load Despatch Centre (SLDC). l State Load Despatch Centre shall not engage in the business of trading. l State Government may notify the Board or a Government company as the State Transmission Utility (STU). l STU shall not engage in the business of trading.

Other Energy Resources The major commercial energy resources in the country are coal and lignite, oil and natural gas, nuclear power and hydropower. Other (non-conventional) sources of energy such as wind, solar energy, biogas and geothermal energy are also available but the technology for the use of these sources is in the developing stage. The primary energy resources available in the country are: Coal Coal reserves of India have been estimated in different ways by different agencies. The issue of assurance of different categories of resources can be addressed on the lines accepted by the Association of German Metrological and Mining Engineers (AGMME). The estimated assured resources in the depth range of 0-1200 meters is 204 billion tonnes comprising proven reserves of 84.4 billion tonnes, indicated 69 billion tonnes, inferred 15.3 billion tonnes, prognosticated 35.8 billion tonnes. The

42

Table 3: Region -wise Distribution of Hydroelectric Potential

sum of all these estimates works out to 204.5 billion tonnes.

Region

The recoverability of the assured geological resources can also be estimated on the basis of the norms specified by AGMME, which are based on the mine depth, seam thickness etc. That gives the ratio of recoverability. The estimates of mine-able reserves have been put at 39.6 billion tonnes. This estimate indicates that even on a very strict assessment 39.6 billion tonnes could be recovered from the known resources of coal. Considering that the coal demand may reach over 500 million tonens in 2006 and over 800 million tonnes in 2020, we can be assured of 45-50 years of required production. There are efforts to acquire technology which can mine in conditions that are not amenable to mining now. The resources are likely to be much more and according to some estimates the available coal can last for more than 75 years.

Petroleum Known reserves of crude oil and natural gas are not adequate and the country has to depend on bulk imports of crude oil. In 2002, the balance recoverable reserves of crude oil are about 660 million tones and that of Natural Gas are about 763 billion cubic meters, excluding the latest finds in the Krishna Godavari basin of the coast of Andhara Pradesh.

Exploration for hydrocarbons has so far been limited to the on land and shallow water offshore areas. Private and public sector companies have made a beginning to undertake deep-sea exploration for oil and natural off the west and east coast of India falling below 400 meters. The results are very encouraging. Public sector E&P companies are also registering reasonable success in gas finds at deeper levels.

Nuclear power The Nuclear Power Corporation of India is a Public Sector Undertaking under the Department of Atomic Energy entrusted with the responsibility for design, construction and operation of nuclear generating units. The Nuclear Power Corporation has a program for commissioning additional capacity in order to obtain a total installed capacity of 11,600 Mwe of nuclear power by the end of the 11th Plan.

Hydro-power potential The Central Electricity Authority undertook assessment of the hydro-power resources of the country in the 1980s. In this survey, the theoretical hydro potential of the Indian rivers was also worked out and the economic hydro-electric potential assessed by identifying specific sites found suitable for setting up hydro power stations based on topographical studies. The reassessment of hydroelectric potential is based on water availability corresponding to a 90 per cent dependable year. The total potential of the river systems in India at 60 per cent load factor was assessed as 301,117 MW, and the economic potential at 84,044 MW. The resources are concentrated in the Northern and Eastern sectors. The details of this potential are indicated in Table 3 below.

43

Northern Western Southern Eastern

Energy Potential (TWH) 225.0 31.4 61.8 239.3

Capacity Potential at 60 % Load Factor (MW) 30155 5679 10763 31857

Percentage Developed 14.3 31.9 49.2 1.0

Non-conventional energy resources The non-conventional energy resources are particularly attractive for development because they are renewable and environmentally benign. The development of such resources was initiated in the country on a small scale following the energy crisis of 1973. Since then as a result of the continued thrust on the part of the government, information base on non-conventional energy resources for the commercial exploitation of these resources has been created. The most important renewable energy resource, which has been developed so far, is the wind energy. The country had an installed generation capacity of 2,488 MW at the end of January 2005 based on wind resources. The capacity under micro hydro-power is about 205.3 MW. The potential and exploited potential of various renewable energy technologies is given in the Table 4.

Table 4: Renewable Energy Potential & Achievement March (2003) Source Potential Potential Exploited Solar Energy 5x10 whr/yr 47 MW Biomass-based power 17,000 MW 484 MW Small hydro 15,000 MW 1509 MW Wind Energy 45,000 MW 1870 MW Ocean Thermal 50,000 MW -Sea Wave Power 20,000 MW -Tidal Power 9,000 MW --

Outlook for Energy Demand and Supply Long-term energy forecast for a large country like India has always been problematic.

The task has become more complicated, as in the recent years India's economic growth rate is over 5 per cent per annum (after exceeding 6 per cent) showing a discontinuity from the earlier trend of 3-4 per cent per year and the composition and structure of industrial sector is undergoing a big shift towards Information Technology and service industries. However, the Planning Commission has produced two important reports, the Tenth Five Year Plan in 2002-2003 and the Report of the Committee on India Vision 2020, which provide a reasonable basis for the analysis in this paper.

The elasticity of energy consumption to GDP in the world has become less than unity. The elasticity of primary commercial energy consumption in India which was over unity in the early years of development has over the long period 1953-2001, been found to be a little less than unity. Based on this trend in elasticity, the commercial energy demand was forecast as 408 mtoe in 2006-07 and 544 mtoe in 2011-12 (See Table 12 ). This is in line with the demand projections made for different fuels organised by the respective ministries with groups of experts and other stakeholders. This resulted in the estimates for commercial energy growing at 6.5 per cent during the Tenth Plan and at 6.1 % during the Eleventh Plan. Table 5 sets out the

44

Table 8: Achieved & Required Growth Rate of Commercial Energy

Table 5: Estimated Energy Demand in 2006-07, 2011-12 Primary Fuel

Unit

Coal Lignite

mt mt

Oil Natural Gas Hydro Power Nuclear Power Wind Power Total Commercial Energy Non-Commercial Energy Total Energy Demand

Mt BCM BKwh BKwh BKwh

Demand (in Original Units)

Demand (MTOE)

2006-07 460.50 57.79

2011-12 620.00 81.84

2006-07 190.00 15.51

2011-12 254.93 22.05

134.50 47.45 158.08 23.15 4.00

172.47 64.00 215.66 54.74 11.62

144.58* 42.70 12.73 6.04 0.35 408.02 151.30 559.32

185.40* 57.60 18.54 14.16 1.00 544.23 170.25 714.48

Source: Planning Commission of India 10th Five Year Plan document. * As oil products would be fully produced from Indian refineries 1 tone of product is assumed to be 1.075 mtoe.

summary of fuel-wise demand.

While analysing the availability of energy resources to meet this level of demand, the highly skewed distribution of India's energy resources has to be kept in view. Details set out in Table 6 below: Table 6: Regional Distribution of Commercial Energy Resources Region Northern Western Southern Eastern North-Eastern Total

Coal (bt)

Lignite (bt)

Crude Oil (mt)

1.06 56.90 15.46 146.67 0.89 220.98

2.51 1.87 30.38 0 0 34.76

0.03 519.47 45.84 2.19 166.17 733.70

Natural Gas (BCM) 0.0 516.42 80.94 0.29 152.00 749.65

Hydro BKwh 225.00 31.40 61.80 42.50 239.30 600.00

bt: Billion Tones BCM: Billion Cubic meters BKwh: Billion Kilo Watt hour; mt: Million Tones

Resource Coal Lignite Electricity

Growth Rate 1960-61 to 1980-81 to 1980-81 2001-02 3.5 5.1 8.5 7.8

Required Rate 2001-02 to 2006-07 to 2006-07 2011-12 4.5 6.1 18.2 7.2 6.7 6.2

The growth rates increases necessary to meet the demand may not be very difficult to achieve. The issues in increasing production to meet the fast growth in demand of specific fuels are discussed below: Coal Of the indigenous fuels, Coal is the least expensive and the prices are stable for long period. Coal is safe and easy to transport. The drawbacks are the high ash/content, and the environmental hazards. The new clean coal technologies can increase the fuel utilization efficiency to 45 per cent as compared to 22 per cent. Given price relatives, coal will continue to remain India's principal source for meeting its every needs. Even now 70 per cent of the installed capacity of power generation is based on coal and the trend will continue. Even in 2004, the coal industry could not rise up to meet the demand from power industries. This is due to coal production being under one public sector agency Coal India Limited. While Coal India Limited (CIL) has several achievements to its credit, it has not been able to meet the production targets in time.

Several years, small import of coal has to be arranged to meet the gap in supply. The law governing coal sector permits only public sector units to produce coal and offer it on sale. Private participation has so far been not allowed except for production by the power plants from coal bearing areas assigned to them on lease, from which they can produce coal, but only for their own use.

Vision 2020 The Committee on India Vision 2020 has made forecast up-to 2020. The first level scenario was based on the trends of the past with some adjustments for the recent developments in energy efficiency in the energy using sectors. This was further improved by assuming that rational corrections to energy consumption patterns and improved energy efficiency of usage could be made and a Best Case forecast was built and the energy demand estimate revised (Best case scenario). The results are summarised in Table 7 .

The feasibility of meeting these demand figures have to be examined with reference to the reserve available and the trends in production within the country. The trends of production growth and the required growth rate of production from 1960-61 to 2001-02 may be seen in Table 8.

Table 7: Forecast for Energy Consumption 2020 Sl.No.

Fuel

Coal

1.

2.

Units Business As Usual Scenario Forecast Best Case Scenario Forecast

mt 688 538

Source: Report of the Committee on Vision 2020, Planning Commission of India.

45

Oil Products mt 245 195

Electricity Billion Kwh 1551 1363

During the Ninth Plan, a Committee was setup to ensure an Integrated Coal Policy. On the basis of its report, coal prices have been deregulated and the Coal Mines (Nationalization) Amendment Bill of 2000 permitting private sector in Commercial Coal Mining has been introduced in the Parliament. However, the Bill has not been taken up for various considerations for several years. In November 2004, the government set up an Expert Committee under the Chairmanship of T. L. Sankar to draw the road map for the reforms in coal sector and to suggest immediate measures to match the demand and supply in the near future.

Coal Bed Methane Recently, a new and clean coal resource has emerged. The availability of an estimated quantity of over 100,000 billion Cubic meters of Coal Bed Methane (CBM) was known for quite some time. A demonstration project is under implementation with the assistance from Global Environment Facility (GEF) and UNDP. In April 2001, Government invited bids for CBM blocks and private companies have taken up the blocks besides two public sector undertakings. Recent reports indicate that commercial production of Coal Bed Methane is established in at least one of the private blocks. If this deposit and other deposits prove to be commercially viable, a large number of CBM based power plants can be set up.

46

Oil and gas The demand from petroleum products in the terminal year 2006-07 is 33.97 mt and that of Natural Gas is 103.08 mmcm. As against this domestic production of crude oil, it is likely to stagnate around 33-34 million tones as in the Ninth Plan and the remaining nearly 90 m.t. of oil requirements will have to be imported mostly as crude to be refined in Indian refineries or as oil products. In respect of natural gas there might be a slight increase from the current 80 Mmscmd (million standard cubic meters per day) to about 103-104 Mmscmd. The projected year wise anticipation production from 2002-03 to 2006-07 within India of oil and gas will be as in Table 9 given below:

situations and adopt ourselves to the new dynamics, burying the past inhibitions. If India is to be where it wants to be in the comity of nations either economically or politically, it shall have to endeavor to accelerate its economic programs and also carry the neighbours along on the trajectory of growth.

(D. N. Raina is Senior Energy Advisor, SARI/Energy Program, India)

Table 9: Crude Oil/Natural Gas Production in Tenth Plan Resource

Crude Oil Natural Gas

Million tones Mmscmd

2002-03

2003-04

2004-05

2005-06

2006-07

33.08 86.56

33.22 90.54

34.63 103.84

34.48 101.99

33.97 103.08

mmscmd: million standard cubic meters per day.

The table above shows that only about one third of the hydrocarbon needs are met by indigenous production. The rest of the needs have to be met by imports. In respect of oil, the import will not cause insurmountable physical problem. However, volatility of high price in the international markets and possible supply disruptions due to unrest in Middle East, raise questions of oil supply security. A number of initiatives are under consideration to address these issues.

Renewable energy resources development Among other developing countries of the world, India has made the largest progress in terms of developing renewable energy resources both by finding new applications for known resources and for bringing out systems and procedures of making renewable energy resource utilisation cost effective. Much of the success can be attributed to the fact that India is the only country in the world with a separate Ministry for Non-Conventional Energy Resources (MNES). This ministry has a number of divisions dealing with wind, solar, biomass, bio-fuels etc. India has also set up Indian Renewable Energy Development Agency (IREDA), exclusively devoted to the renewable energy sector. Some of the innovative tax concessions given to corporate sector to take up investment in wind power have been very successful.

Today, India has wind energy system for over 1870 MW. Biomass utilisation for power generation and bio-fuel development is receiving priority attention now. India could benefit by developing cooperation among the Institutions doing similar work within the South Asian region.

Conclusion A large number of initiatives have been taken up to mitigate the shortage in energy supply faced by India. Though several of the initiatives could be taken by India independently, but for several of others, India would need the help of the neighboring countries to act as energy suppliers, such as Bhutan and Nepal. For several of these initiatives, India would require the participation and support of the neighbors to provide transit facilities, such as in the case of gas pipelines India would need the support and may be participation in these projects by Pakistan and Bangladesh. The globalisation of economy teaches us to be more pragmatic and open to new emerging

47

48

Pakistanâ&#x20AC;&#x2122;s Energy Sector The energy sector in Pakistan consists of the following:

Pakistanâ&#x20AC;&#x2122;s Future Energy Needs Fahd Ali

Introduction Pakistan's economy is undergoing significant changes since 1998-99; the improvements made in the macroeconomic indicators are, in particular, noteworthy.

The real GDP increased from 5.1 per cent in 2002-03 to 6.4 per cent in 2003-04 and was 8.5 per cent for the fiscal year 2004-05. The projected growth rate for the next five years is estimated to be 7-8 per cent1. One can assume that without significant expansion in the economic activity in the country, this growth rate will be difficult to sustain for the next five years. With expansion in economy the demand in energy will also increase. Government of Pakistan's (GoP) Medium Term Development Framework (MTDF) projects the growth in the demand of electricity, petroleum products, natural gas and coal at an average annual rate of 8.4%, 4.3%, 7.6%, 18.9% respectively2. Although, both the demand and supply of energy has been increasing for the last decade and a half, the per capita consumption of energy in Pakistan remains low. As compared to their counterparts in Malaysia and China -- where per capita consumption of energy stands at 92 MBTU and 34MBTU, respectively -- the per capita consumption in Pakistan is 14 MBTU3. Figures 1 and 2 show an upward trend in the supply and per capita availability of energy in tonnes equivalent of energy (TOE) in Pakistan since 1990.

Figure 1: Energy Supply (Million TOE). Source. Economic Surver 2004-05

55 50 45 40 35 30

Figure 2: Per Capita Availability in TOE

0.34 0.32 0.3 0.28 0.26 0.24 0.22 2003-04

2002-03

2001-02

2000-01

99-00

98-99

97-98

96-97

95-96

94-95

93-94

92-93

91-92

49

90-91

0.2

2003-04

2002-03

2001-02

2000-01

98-99

99-00

97-98

96-97

95-96

94-95

93-94

92-93

91-92

90-91

25

l Power l Gas l Oil l Coal

Pakistan's total primary energy supply in tonnes equivalent of oil (TOE) in the fiscal year 2003-04 stood at 50.8 million TOE. The primary energy supply has seen a constant increase since 2001. It increased by 4.4 per cent from 2001-02 to 2002-03 and by another 8 per cent from 2002-03 to 2003-04.

Figure 3 shows the share of different energy resources in the primary energy mix supplies.

The patterns of energy consumption have also registered an upward trend.

Figure 3: Share of various energy resources in Primary Energy Mix (Source: Economic Survey of Pakistan 2004-05

Energy Consumption According to the latest economic survey, in the past 14 years -- from 1990-99 to 200304 -- the consumption of petroleum products, natural gas, electricity an coal increased by an annual average rate of 2.5%, 4.9%, 5.1% and 5.2%, respectively. However, one major change in consumption patter has been registered in the consumption of oil.

The use of oil has reduced since 2001, particularly in the cement industry and power generation, because the cement industry has shifted to natural gas and the power generation sector is increasingly using gas. Similarly, the consumption of various petroleum products in household and agriculture registered marked decline of 16.2 and 16.8 per cent, respectively. This is primarily because of the availability of cheaper fuels like LPG and natural gas. However, the consumption of petroleum products have increased in transportation, industrial and other government sectors. In the last 14 years, the transport sector saw the largest use of petroleum products with a share of 48.7 per cent. The share of power sector, industry, households, other government sectors and agriculture stood at 31%, 12.1%, 3.8%, 2.5% and 1.5%, respectively. The sector wise consumption is given in Table 1.

Table 1: Sector wise natural gas consumption from 1990-2004

Sector Power sector Fertilizer Industrial Household Commercial Cement

Natural Gas Consumption 35.4% 23.4% 18.9% 17.6% 2.8% 1.5%

The consumption of natural gas in the cement sector in the first nine (9) months of fiscal year 2004-05 registered a 100 per cent increase. Similarly, for the same time period the consumption for industrial, power, commercial and household sectors

50

In order to achieve these targets, the GoP is actively pursuing the extraction and commercialisation of vast Thar coal reserves. The Thar coal reserves are estimated to be at 185 billion short tonnes. It is estimated that with these reserves Pakistan can generate 100000 MW of electricity for the next 30 years5. In order to achieve the new targets, the Government of Sindh has signed MOU for a 600 MW Thar coal power project with a Chinese company. Another MOU has been signed with an Australina firm for a 1200 MW project at Thar that will utilise the new technology of ‘Underground Coal Gasification’6.

jumped up by 15.5%, 12.3%, 10.5%, 3.8%, respectively.

In electricity consumption, the household sector has always been the largest consumer with a share of 41.4 per cent. The share for industrial, agricultural, other government sectors, and commercial consumers for the same time period (1990-04) has been 31.1%, 14.1%, 7% and 6%, respectively. Figure 4 shows the sector wise shares of electricity consumption for the period: 2004-05.

Natural Gas Figure 4: Sector wise share of electricity consumption for 2004-05

Future Energy Forecasts

(source: Economic Survery 2004-05)

According to the 2004-05 Economic Survey of Pakistan, the double digit growth in the large scale manufacturing sector has resulted in an increase in demand of electric power in some industrial sectors. The survey also projects that demand in electricity will grow at an average yearly rate of 7.9 per cent from 2005 to 2010. The table below summarises the sector wise power demand till the year 2010.

Table 2: Sector Wise Power Demand (2005-10) Domestic Commercial Agriculture Industrial 7,199 1,216 1,763 5,891 7,585 1,251 1,820 6,481 8,127 1,312 1,893 7,252 8,783 1,354 1,979 8,181 9,531 1,408 2,079 9,267

Year 2005-06 2006-07 2007-08 2008-09 2009-10

Other 1,035 1,086 1,159 1,243 1,341

Total 15,500 16,600 17,900 19,600 21,500

Pipeline from Turkmenistan: this 1400 kilometer 48 inch diameter pipeline will fetch 2 billion cubic meters of gas every year from Turkmenistan's Daulatabad gas field to Multan in Pakistan.

The recently approved 25 year ‘Energy Security Action Plan (ESAP)’ aims to increase Pakistan's reliance on indigenous fuels. Before that the Poverty Reduction Strategy Paper (PRSP) outlined similar measures. The paper aims to significantly improve Pakistan's energy mix. It envisages a hydel-thermal ratio of 39:61 from an existing ratio of around 28:72. The ESAP also envisages significantly reducing reliance on oil While increasing reliance on coal. Table 3 shows the energy mix plan for the next 25 years as proposed in ESAP4.

Table 3: Energy Mix Plan (MTOE)

Current

Short Term

2004

2010

2015

2020

2025

2030

50.5

79.39

120.18

177.35

255.37

361.31

Total (MTOE)

51

Medium Term

Pipeline from Iran: 1638 kilometers in length, this pipeline will bring 1.6 billion cubic feet of gas from Assalyye in Iran to Gadani near Karachi, Pakistan.

Pipeline from Qatar: 1670 kilometers in length, this pipeline from Qatar's North field will bring 1.6 billion cubic feet of natural gas through Oman following a subsea route to Karachi.

Souce: Planning Commission

Energy Mix Plan Projections

Natural gas is also expected to play a crucial role in country's future energy needs. The government plans to make gas the ‘fuel of choice’ for future electric power generation.

This is an important move as it will reduce the burden on national exchequer as natural gas is a suitable substitute for imported foreign oil7. This compels the government to increase the natural gas exploration activities in the country. It also prompts the government to look into various pipeline options from three different countries. The following options are being considered8:

Long Term

Oil

15.2

30.0%

20.69

26.0%

32.51

27.0%

45.47

25.7%

57.9

22.7%

66.84

18.5%

Natural Gas

25.45

50.0%

38.99

49.0%

52.98

44.0%

77.85

44.0%

115

45.0%

162.6

45.0%

Coal

3.3

6.5%

7.16

9.0%

14.45

12.0%

24.77

14.0%

38.3

15.0%

68.65

19.0%

Hydro

6.43

12.7%

11.03

13.9%

16.4

13.6%

21.44

12.1%

30.5

12.0%

38.93

10.8%

Renewable

0

0.0%

0.84

1.1%

1.6

1.3%

3

1.7%

5.58

2.2%

9.2

2.5%

Nuclear

0.42

0.8%

0.69

0.9%

2.23

1.9%

4.81

2.7%

8.24

3.2%

15.11

4.2%

The Government of Pakistan also aspires to change the hydel thermal ration in the national energy mix in favor of hydel power by the year 2025. To achieve this, the government intends to pursue ‘fast track development of hydel power generation dams’9. Similarly, ESAP also envisages to increase the share of nuclear energy in the national energy mix and the government plans to develop nuclear energy plants on sustainable basis. The plan envisages increasing the standard capacity of nuclear power plants from current 300 MW to 600 MW and eventually taking it to 1000 MW in coming years. These two options need to be studied in order to gauge their suitability to meet Pakistan's future energy needs.

According to ‘Policy for Power Generation Projects Year 2002’, Pakistan plans to construct and commission 12 large scale hydel power plants, besides other relatively small scale projects. Table 4 provides a list of these 12 large scale projects with their installed capacity (in MW) and their commissioning date.

52

Table 4: Future Hydel Power Generation Projects with Installed Capacities and Commissioning date

Name of Project Neelum Jehlum, AJK Doyian, NA Kalabag Kohala Jehlum, AJK Munda Dam, NWFP Suki Kinari Karrang, NWFP Tarbela 15 -16, NWFP Spath Gah, NWFP Basha, NA Dasu (Indus) NA Pathan (Indus) NA Thakot (Indus) Bungi (Indus) Chor Nallah Total

Installed Capacity (MW) 960 425 2400 740 600 652 454 960 851 3600 2712 1172 1043 1500 1500

Commissioning Date June 2010 June 2015 Postponed until consensus is reached among all concerned June 2010 Dec 2015 Dec 2015 Dec 2020 Dec 2008 Dec 2015 Dec 2012 Dec 2015 Dec 2015 Dec 2015 Dec 2015 Dec 2020

19569

Source: 2002 Power Generation Policy)

Large hydel power generation projects have a number of issues associated with them, such as resettlement and environmental issues. According to Khan10, the reduced outflow has resulted in visible Indus delta degradation. At same time the dammed rivers have also resulted in a four -fold reduction in the silt discharge from an original annual discharge level of 100 million tons. The subsequent effects of these have been felt by the mangroves, which are a foundation of the Indus Delta Ecosystem. Mangroves need freshwater to survive and grow and are natural hatcheries for a variety of fish. They also act as natural barriers to sea encroachments and bank erosions and are an important source of fodder and fuel wood to the fishermen living in the Indus delta along the Sindh coastline. At present, out of a total estimated outflow of 27 MAF, only 20 MAF reaches the sea. The rest is taken up by various diversion and absorption by soil and evaporation. It is estimated that for sustainable growth and maintenance of the Indus Delta Ecosystem 34 MAF of water is required, which is 7 MAF more than the current inflows into the sea11. The construction of more hydel power generation projects and dams on the Indus River will further aggravate the problem and will result in a complete destruction of the Indus Delta Ecosystem because of reduced inflows of freshwater into the sea.

Similarly, the promises of cheap hydel energy, if analysed from a sustainable development prism, are not reliable because of two reasons. First, the investment analysis of large hydel power projects and dams has come under great scrutiny. There is a vociferous demand to include the social displacement and environmental degradation costs in the up-front capital costs of such projects. However, this will only address one particular aspect of this problem. The financing of such projects remains the most important part of this problem. The funding from international donors for such a project is difficult to receive, considering their commitment to facilitate investments in private thermal based power plants. Second, if one assumes that government funding is available for such projects, the outlays involved in resettlement compensations are huge in case of large dams and hydel power generation projects.

53

For example, the government intends to spend Rs. 2025 billion on the resettlement issues of Kalabagh Dam by constructing 20 model and 27 extended villages12. This proposition seems a far fetched idea in the light of the Government of Pakistan's defense and debt-servicing commitments.

The ESAP aspires to increase the nuclear energy share in the national energy mix from its current 0.8% to 5-6% by the year 2025. The current installed capacity of nuclear power plants in Pakistan is 425 MW. The government plans to increase it by another 8400 MW by the year 2025, which is a substantial increase in nuclear power generation capacity. Considering the country's vast unexplored coal and natural gas (particularly coal) reserves, nuclear energy may not be an appropriate investment to meet future energy needs. Furthermore, nuclear power plants tend to be capital intensive and have long gestation periods. The construction period in nuclear power plants may be seven to eight years as compared to natural gas or coal powered fired plant which may go on line with in 4 years. Also, nuclear power plants tend to be highly capital intensive. For instance the proposed CHASNUPP-2, a replica of CHASNUPP-1, will cost Rs. 52 billion or approximately US$ 900 million13 including a Chinese loan of Rs. 150 million14. On the other hand, a coal or natural gas power plant with three times the capacity of CHASNUPP-2 will require similar investment.

Furthermore, the operations of CHASNUPP-2, like its predecessor CHASNUPP-1, will be dependant on the fuel supplied by China. This will increase Pakistan's dependence on foreign sources of fuels which goes against spirit of ESAP. There are many security and safety concerns attached to nuclear power plants. Safe disposal of nuclear waste and risk of potential accidents have become major issues. Compared to other cheaper options (coal and natural gas), nuclear energy option does not seem to be in the national interest.

Fig. 5

Nuclear Renewable Hydel Coal

Gas

Oil

54

Fig. 6

MW in 2010 if no adequate measures are taken to bridge the gap. Figure 8 shows the indicative electricity demand and supply curve till the year 2010. The curve clear shows gaps beginning to appear in the demand and supply of electricity after the year 2006. To cover this gap, the MTDF outlines the increases in the installed capacity in the country in Table 5.

Figure 8: Electricity Demand - Supply Curve of Pakistan (Indicative) Source: Private Power Infrastructure Board Power Demand and Firm Supply Position 25000 Demand (MW) Firm Supply (MW) 20584 19080

20000 17689 16548 14366

15046

15483

15082

15000

Megawatts

Fig. 7

Demand Import-4 Import-3 Import-2 Import-1 Imported Oil

15072 13831

15091

15055

15055

15055

2007

2008

2009

2010

14642

13071 10000

5000

Supply 0 2002

2003

2004

2005

2006

2011

Year

Table 5: Installed Capacity and Projected Demand During MTDF (MW)

Figures 5, 6 and 715 show the energy demand projections by fuel, indigenous supply projections, and energy gap coverage through imported gas for the next 25 years. The graphs also show the projected increase in the production of electric power in the country. The ESAP ambitiously envisages to increase Pakistan's power generation capacity from current installed capacity of 19540 MW of electricity to 162590 MW by the year 2030. Currently, only half of the Pakistan's population has access to electricity. Increasing urbanisation and industrialisation in the country warrants expansion of the power sector. This massive expansion in installed capacity will take place in many stages. The current demand and supply indicate that the country will face power shortages from year 2006, and these will grow to around 5500

55

SI # 1 Installed Capacity (MW) hydro gas oil coal Nuclear Renewable Growth Rate % 2 Maximum Demand (MW) Growth Rate %

Benchmark 2004-05 20289 6459 5940 6400 150 462

14621 3.4

200506 20753 6540 6230 6400 150 462 180 2.3 15511 6.1

200607 22594 7021 7130 6560 150 462 480 5.6 17904 8.3

Targets 200708 22594 7021 7130 6560 150 462 480 5.6 17904 8.3

200809 24899 7476 8630 6560 600 462 680 10.2 19534 9.1

200910 27389 7719 10620 6560 1050 462 880 10 21462 9.7

Addition During MTDF 7880 1260 4680 160 900 0 880 6.2 21426 7.9

56

Conclusion Development and growth demand readily available energy resources. The Government of Pakistan aim at energy resources maintaining a high growth rate of energy sources in the coming years. However, the implementation of these objectives require careful policy formulation. The energy sector in Pakistan has experienced a considerable change since 1994. The experience with Independent Power Producers (IPPs) suggests that new polices should be formulated by keeping long term scenarios in mind. Although the 1994 power policy was instrumental in bridging much needed power shortages in the country, it failed to deliver inexpensive power to the masses.

Electricity tariffs have seen a constant upward trend since 1994. The bulk power tariff again was a major incentive to attract foreign investment in this sector. However, it proved to costly in the medium term for the consumers. The switch to competitive bidding in the last power generation policy (2002) is, therefore, a step in the right direction. As the government further privatises the energy sector in Pakistan under the influence of various international lending agencies, there is a strong need to strengthen the regulatory mechanism in the country. At present both National Electric Power Regulatory Authority (NEPRA) and Oil and Gas Regulatory Authority (OGRA) operate in an extremely centralised manner. Establishing offices for NEPRA and OGRA in cities where the DISCOS exist will vastly improve their functioning, since the public will have more accessibility to them.

Besides restructuring various government departments. Pakistan needs to bring in the following in its future energy strategies: l The government must improve the functioning of the state utilities, namely:

Water and Power Development Authority (WAPDA) and Karachi Electricity Supply Corporation (KESC). The energy losses in the two utilities were one per cent of the GDP in the year 2003, whereas the financial support offered to them during the same year stood at 1.8 per cent. l Private and public partnership in exploration of oil, gas and coal reserves in the country to meet energy demands l Renewed stress and active support to promote renewable energy resources in Pakistan. Renewable energy resources can prove vital in the electrification of remote areas in the provinces of Balochistan and Sindh, in particular, and in other areas, in general. l The government must also actively promote energy efficiency and conservation. A right step in this direction will be the enactment and implementation of laws that promote energy efficiency and conservation.

other energy sectors. This is important to ensure supply of energy be it natural gas or electricity at cheaper and affordable prices to its consumers.

(Fahd Ali is a Mechanical Engineer, working with Sustainable Development Policy Institute as a consultant. His main focus has been the marketability of renewable energy resources particularly wind and solar energy and Pakistan's power sector. He may be contacted at: fahdali@gmail.com) End Notes 1.

2.

Pakistan Economic Survey 2004-05, Chapter 15, Energy, Government of Pakistan , Finance Division, Economic Adviser's Wing, Islamabad, Pakistan Data obtained from ‘National Energy Needs’, presentation to Pakistan Development Forum by Secretary, Planning and Development Division, 26-04-2005.

Http://siteresources.worldbank.org/PAKISTANEXTN/Resources/2930511114424648263/Session-VII-Energy.pdf

3.

4.

5.

6.

7.

8.

9.

10.

11.

12.

13.

14.

15.

MBTU = Million British Thermal Units ibid, 2 ‘Pakistan Coal Power Generation Potential’, June 2004, Private Power Infrastructure Board. ibid, 5 Pakistan, Country Analysis Briefs, EIA, Department of Energy , Government of United States of America, http://www.eia.doe.gov/emeu/cabs/akistan.html Niaz A. Naik, ‘Energy Scenarios in South Asia’, Nuclearisation of South Asia, UNESCO, LNCV & USPID, 20-22 May 1999. ibid, 2 Shaheen Rafi Khan, ‘The Case Against Kalabagh Dam’, Kasier Bengali (ed.), ‘The Politics of Managing Water’, (Islamabad: Sustainable Development Policy Institute and Karachi: Oxford University Press, Pakistan, 2003). ibid, 10. ibid, 10.

Assuming a conversion rate of Rs. 58 to 1 US Dollar.

Hussain Ahmad (Engr.) Siddiqui, ‘N-Power Generation needs least priority’, Dawn Economic and Business Review, June 27 - July 3, page 5. ibid, 2.

As stated in the previous sections both large scale hydel power projects and nuclear energy are inappropriate to meet future energy needs. The issues attached to large scale hydel power projects are not environmental and social in nature only. Projects like Kalabagh Dam and other such massive projects have political connotations as well. Any urgency on the part of GoP in this regard can prove costly to the federation of Pakistan. GoP should actively pursue coal, natural gas and renewable energy options to meet future energy demands. Similarly, at the same time GoP should also invest in public sector energy projects. The projects should be both in power and

57

58

Bangladesh: Natural Gas Export Monzur Hossain

Introduction One of the most controversial issues in Bangladesh is the export of its natural gas.

Bangladesh has been divided into 23 blocks for gas exploration and, among them, the 8 richest blocks were allotted to the International Oil Companies (IOCs). The IOCs are now investing 52 per cent of the country's total foreign direct investment (FDIs) in the energy sector, and there has been a Production sharing contract (PSC) with the IOCs. The PSC allows Petrobangla (a government-owned corporation) to buy gas from the IOCs as cost recovery and it sells it to the domestic market at a lower price. Since Bangladesh has very limited capacity for payment, multinational companies know that only the way of getting their money back quickly is to export gas. In PSC, there is a provision of gas export in LNG form, but now the issue is of export of gas through pipeline to India. It is being argued with good reason that export of gas would not be for the national interest. The question related to this issue is of the quantum of gas to be exported and the country's own short-term as well as long-term requirements.

Table 1: Gas in Place And Reserve Of Different Gas Fields As Declared By Petrobangla Sl. No

Fields

A. Producing 1.

Bakhrabad 2.

Habiganj 3 Kailashtilia 4 Rashidpur 5.

Sylhet 6 Titas 7.

Narsingdi 8 Meghna 9 Sangu 10 Saidanadi 11.

Jalalabad 12 Beanibazar Sub-total A B. Non-Producing 13.

Begumganj 14 Fenchuganj 15 Kutubdia 16 Shahbazpur 17 Semutang 18 Bibiyana 19 Moulavibgazar Sub-total B Sub-total (A+B) C. Production Suspended 20 Chattak 21 Kamta 22 Feni Subtotal C Grand Total (A +B+ C) in BCF Grand Total (A +B+ C) in Tcf

Year of Discovery

Reserve Estimated by Company Year

GIIP (proven + probable)

Recoverable (proven + probable)

Cumulative Production (Dec. 2000)

Net Recoverable

1969 1963 1962 1960 1955 1962 1990 1990 1996 1996 1989 1981

IKM IKM KM IKM HHS IKM IKM IKM Cairn/Shell Bapex Unocal/PB IKM

1992 1992 1992 1992 1986 1992 1992 1992 1997 1996 2000 1992

1432 3669 3657 2242 444 4138 194 159 1031 200 1195 243 18604

867 1895 2529 1309 266 2100 126 104 848 140 815 167 11166

586.568 818.315 231.820 194.920 166.084 1783.400 29.205 23.278 91.026 14.816 52.298 4.681 3996.411

280.432 1076.685 2297.180 1114.080 99.916 316.600 96.795 80.722 756.974 125.184 762.702 162.319 7169.589

1977 1988 1977 1995 1969 1998 1999

Welldrill Bapex Welldrill Bapex HHS Unocal Unocal

1991 1988 1991 1995 1991 2000 2000

25 350 780 514 164 3150 500 5483

15 210 468 333 98 2401 400 3925

0 0 0 0 0 0 0 0

15 210 468 333 98 2401 400 3925

240087

15091

3996.4

11094.59

447 33 178 658 24745 24.745

268 23 125 416 15507 15.507

27 21.1 40 87.11 4083.52 4.08

241.5 1.9 85.49 328.89 11423.48 11.42

1959 1981 1981

Niko/Bapex Niko/Bapex Niko/Bapex

1998 1998 1998

Source:Marketing and Production Division, Petrobangla (Revived on 15/02/2001)

59

Natural gas is a non-renewable energy source and perhaps Bangladesh's only resource of great value. In a recent study of Petrobangla, it is estimated that the total gas initially in place (GIIP) and initial recoverable reserve of Bangladesh is 24.745 TCF and 15.51 TCF, respectively. Out of this reserve, 4.07 TCF has already been produced (up to February 2001), and the remaining reserve is 11.42 TCF (Table 1).

Since all gas-prone blocks have been distributed to foreign operators, it could be foresee that within a very short period of time, Bangladesh may be left with almost nothing of its only real resource, having palmed off 80 per cent to the foreigners -whatever the reserve at 7.5 per cent of annual extraction of total discovered reserve, it would all be exhausted by the year 2011 or thereabouts1. Around 12 multinational energy companies signed Production-Sharing Contracts (PSC) with GoB, which is also questionable to some extent for some controversial clauses in the contract, and two are now engaged in gas production and exploration with about 16 per cent participation in gas production and supply to the domestic market2.

At a dialogue organised in 2002 by the Centre for Policy Dialogue (CPD), Dhaka, politicians, bureaucrats, business leaders, representatives from IOCs, experts, academicians and noted economists observed that the export option of gas could be considered only after ensuring a reserve for long-term domestic consumption. They also demanded that production-sharing contracts (PSCs) with international oil companies (IOCs) should be renegotiated if it is certain that the country is paying much more than the existing international gas price. They, however, observed that all aspects of energy security must be taken into account while taking a major policy decision about the sector. Some selected comments and thoughts from the policy makers are outlined below3: l State Minister for Energy and Mineral Resources A. K. M. Mosharraf Hossain

(sacked in June, 2005 for allegedly taking a luxurious car from a Canada-based IOC, NIKO) said that the country required huge investment for meeting local demand of gas supply. According to him, by the year 2030, 20-40 billion US dollars will be required for supplying gas to the local people. He observed that the government is giving a huge subsidy to Independent Power Producers (IPPs) for making huge profits. He also agreed that different aspects of energy security should be taken into consideration and there should be transparency at the time of taking any policy decision. l Political Secretary to the opposition leader in the parliament, Saber Hossain Chowdhury, said the Awami League is not against the export of gas, but before that, domestic consumption of the natural resource should be ensured for a long period. He also pointed out that the national resources should be utilised for national development. l Former state minister for foreign affairs, Abul Hasan Chowdhury, said only four per cent people were getting gas from pipelines and only 20 per cent people have access to electricity. ‘…there (seems to be) a consensus that under the present circumstances, the question of (exporting) gas (does not arise),’ he said. Awami League lawmaker Kazi Zafarullah also said the contracts with IOCs were not right. ‘(They were) against the interest of the country and must be renegotiated,’ he said.

Another member of parliament from the opposition Awami League, Faruk Khan, said there was no logic behind export of gas from the present reserves. He

60

expressed the fear that the security and sovereignty of the country might be jeopardised if the pipeline was installed to export gas. l Opposing the gas export, general secretary of the Communist Party of Bangladesh (CPB) Mujahedul Islam Selim said that, if necessary, public opinion could be mobilised internationally for terminating the 'unfair PSCs with IOCs'. l Acting managing director of Unocal Bangladesh Limited, James R. Stone, said Bangladesh has huge gas reserve potential. â&#x20AC;&#x2DC;There is a significant number of high quality and creditworthy customers in Delhi, who have the ability to pay better prices for surplus gas of Bangladeshâ&#x20AC;&#x2122;, he said. Mr. Stone also said a clear-cut policy decision to allow export of gas through pipeline is required in order to attract more investments into the sector. l Leader of the Jatiya Samajtantrik Dal (JSD), Hasanul Haq Inu, warned that if the IOCs installed pipelines for gas export, people of the country will blow it up.

It is evident from the above comments that the people of the country were against the export of natural gas. Some government ministers have been trying to convince people in favour of exporting gas. In this connection, it is important to have answers to the following questions: l Is gas export unavoidable? l Do we have enough gas to export? l What is the domestic demand? l Do we need to explore all reserves? l What would be the benefit of export earnings? l What is the world's energy scenario?

Estimated Gas Reserves

Various studies have been conducted with differing results. Table 2 summarises the GIIP, reserve, field growth, and resource potential of various studies conducted so far. It should be observed that the scope as well as the result of various studies is quite different.

Table 2: Summary Of Giip, Reserve And Resource Potential Of Different Studies

IKMa Petrobangla BUETb Shell Unocal Petrobangla-USGS HCU-NPD

61

GIIP (TCF) 15.65 24.745 24.4 28.79 e

Reserve (TCF) 9.04 15.51 18 16.1 20.44

Since the creation of Bangladesh, there have been several projections of natural gas demand. These are reported in the planning documents of various plans (five 5 year plans and one 2 year plan), ADB studies, Task Force Report, National Energy Policy Report and Petrobangla's own reports/studies. These documents have envisaged considerable annual growth of the power and fertiliser sectors. Some of the important underlying assumptions include4: 7-10% increase in gas demand for fertiliser yearly, 10-13% growth of natural gas fuelled power generation yearly, industrial growth in excess of 7% requiring 7% rise in gas demand yearly, growth of gas demand to exceed the growth in GDP. Newspapers predict approximately 10% annual growth of gas demand in Bangladesh.

Petrobangla: Pricing and Fund Constraint

Table-1 shows number of gas fields, year of discovery, name of multinational energy company, estimated reserves and net recoverable gas, etc. The total GIIP and initial recoverable reserves of Bangladesh are 24.745 TCF and 15.51 TCF respectively. Out of this reserve, 4.07 TCF has been produced already (up to February 2001), and the remaining reserve is 11.42 TCF.

Name of the Study

Gas Demand in Bangladesh and Projections The use of natural gas in different sectors of Bangladesh can be broadly divided into following categories: power, fertiliser, industrial, commercial, domestic and seasonal (e.g. brickfield). The consumption pattern during the past decade shows that power sector consumes approximately 45 per cent, fertiliser 35 per cent, and the others 20 per cent. In domestic fuel use, only 4 per cent people have access to the piped gas.

Most people still depend on other traditional fuel sources, like wood and kerosene, which have an adverse effect on the environment. The demand for gas is rapidly rising in the country as it moves towards industrialisation.

Field Growth (TCF) 5-6 12.8c 2.03f

Resource Potential (TCF) 20-40 13.2d (50%) 32.1 (50%) 41.6 (50%)

Petrobangla is currently paying 50 per cent of the production as cost recovery (CR), it shares the remaining 50 per cent with IOCs, implying that it is getting some gas free of cost. The price Petrobangla is paying is greater than what it has paid earlier.

Petrobangla has to pay 92.5 per cent in foreign exchanges and 7.5 per cent in local currency for the contractor's share of gas. The foreign exchange will obviously come from the government coffers, but Petrobangla will have to generate the local currency component (Taka) from its own resources. Annual payments to the contractor will be around Tk.4000 million at US$ 2/MCF and more if the price escalates.

The additional problem facing Petrobangla is the price differential between supplies to particularly bulk consumers like fertiliser and power and the gas supplied by the contractor. For example, at present the subsidised price for fertiliser is around one US Dollar/MCF whereas at the minimum it is US$ 2/MCF for the contractor.

Further, there are defaulters with considerable overdue to Petrobangla such as power, whereas the terms under the GPSA are stringent with penalty provisions for delayed payment. The price differential for Petrobangla would become more onerous if Taka is devalued against the US Dollar.

Therefore, as a result, Petrobangla is exposed to double jeopardy -- having to pay to the Contractor without being paid by at least some consumers and having to meet the difference in prices as well. Petrobangla managed to arrange some funds in terms of Bangladesh Petroleum Exploration Company's (BAPEX) share and also introduced a Hydrocarbon Development Fund (HDF). These are being used to cover the gap between what Petrobangla is buying and selling (see CPD Report # 24).

62

Export of Gas Petrobangla is already having difficulty meeting its obligations to the gas companies, which, in turn, will not be willing to continue investing in Bangladesh unless they can count on a market in foreign exchange. This makes a strong case for Bangladesh to authorise some level of exports, most probably to India. Petrobangla is faced with a shortage of funds; it is not in the position of buying CR gas from foreign IOCs. Since demand and production are rising sharply, Petrobangla faces a difficult situation. So the export of gas issue has come up to get the money the IOCs invested. The PSC allows them to export gas in a LNG form. Liquefied Natural Gas (LNG) was less profitable as compared to the export of gas by pipeline. This is why they are looking into options of a pipeline. In that case, it will require amendment of PSC and some other bilateral treaties.

A US study5 showed that Bangladesh might get US$ 1.50 by exporting 1,000 cubic feet gas through pipeline to India. It is estimated that if Bangladesh opts for gas through pipeline, it would take at least five years to build the pipeline and the relevant infrastructure. Alternatively, another view is that the country could earn US$ 1.25 by export of power by using the same amount (1000 CF) of gas (value added) (see CPD Report # 24).

Other theories: Bangladesh has approximately a US$ 48 billion economy and the foreign oil companies are offering around US$ 180 million annually through taxes and other revenue from the pipeline export. This is charity in terms of the economy and Bangladesh can earn a lot more by selling only fruits and vegetables. Bangladesh has proven recoverable natural gas reserves of 13 trillion cubic feet (TFC). With the proper utilisation of this sector, Bangladesh can exhaust this reserve within 10-15 years. Can it afford to export the most needed commodity?

Another important factor is the country's sovereign right over its own resources. Since all blocks (including gas-prone as well as discovered) are being parted with under internationally enforceable contracts, one may question whether at the end of the day the country would at all have any control over the disposal of its only valuable resource.

Besides this, Bangladesh could maximise its benefits by investing export earnings from gas into productive sector like power generation, plant for diversified use of gas, alternative source of fuel generation after finishing gas reserve etc. From past experience, it can be said that since Bangladesh has no capability, expertise and efficiency to make the best use of gas export earnings, there is a fear of fungibility of export proceeds, and/or Dutch Disease6. There is also fear and distrust about India that once export of gas starts, it would not be possible for Bangladesh to stop it in case of any violation of contract by India due to its geographical and military superiority over Bangladesh.

The IOCs are continuously pressurising the government to export gas through pipeline although there is no provision for this in the PSCs. The situation in Nigeria and some Latin American countries, where rapid inflow of energy resources seems to be strongly correlated with high levels of corruption, also add to the fear

63

about the fate of gas export in Bangladesh.

It is also clear that gas production rate is higher than the consumption rate.

The government will have to decide whether they need to explore gas with the present rate, and also they need to take care of the benefits of the IOCs.

Government's Dilemma There are many impediments to development in Bangladesh, some of them being low income, high population growth, scarcity of resources and corruption. Gas is the only valuable natural resource of Bangladesh. The best utilisation of natural resource could be the basis of the economic development of Bangladesh. It is the government's responsibility to make sure natural resources are utilised in the most efficient manner.

Due to lack of resources, expertise and technology, the Bangladesh government was not able to accelerate natural gas production and discovery till 1990. After liberalising the economy in the early 1990s, the government invited the IOCs to produce and discover natural gas. The Government of Bangladesh signed PSC with the IOCs that Petrobangla will buy gas from IOCs as Cost Recovery (CR) and distribute it in the country.

It is thought that the PSCs were not fair and were signed under great pressure from the international community (like USA, UK, who owned the IOCs). Some international organisations like the World Bank, ADB are also financing energy sector development and exerting pressure to sign the PSC and allocate rich blocks to the IOCs. During the 1990s, the then Prime Minister of U.K., John Major and U.S. President Bill Clinton visited Bangladesh and one of the main issues discussed was to get gas business in favor of their own IOCs. Under PSC, Petrobangla has to buy gas from IOCs at a higher cost than the international and local markets. The government is providing subsidy to this sector.

As discussed earlier, there was a provision in the PSC of gas export, but in LNG form.

The provision was made with the aim of getting benefits by establishing and transferring technology of LNG plant that will also encourage motor vehicle owners to use environment friendly and less costly fuel. It is true that Petrobangla is facing shortage of funds and domestic private market is not capable to meet-up the costs of IOCs. But it would not pose any serious problem if they maintain PSCs. Before investing, IOCs also knew the situation of Bangladeshâ&#x20AC;&#x2122;s economy.

It is now clear that export of gas will not give benefit more than that of its diversified utilisation for productive purposes. The IOCs are continuously threatening to leave the country if no decision is taken. The then U.S. Ambassador to Bangladesh, Ms. Marry Ann Peters gave an ultimatum to the government to take a decision by January 2003. On the other side, civil society and opposition political parties often give threatened to burn out the pipeline in case of a decision.

The government is in a dilemma: if it concedes to the pressure by the IOCs, it annoys the public at home, and if it represents the public view, it annoys the investors.

Developing countries like Bangladesh have to depend highly on assistance and support from the bigger powers. Bangladesh economy is dependent on foreign assistance. It is also important to note that donor countries and agencies play a vital

64

role in the political process of developing countries like Bangladesh. The issue of gas export from Bangladesh is a case that explains the global political economy of energy.

Until now (2005), the ruling party has not taken any decision in favor of gas export; no quick decision is expected until next general elections in 2006.

Model 2 Long-term payment

by GoB to IOCs cost recovery and profit (FDI)

India's Interest The Indo-Bangladesh relationship can be explained through the term: 'good neighbours with bad taste'. The people of Bangladesh do not trust India for many reasons. The apprehensions about India are further reinforced due to the galloping trade deficit. In formal terms India's exports to Bangladesh exceeds US$ 2 billion.

Despite being urged by Bangladesh, which reduced its tariffs, Indian authorities did not take any steps to reduce their existing tariff structure. India continues to pressurise Bangladesh to allow transit to transport goods and services to other parts of India.

There is tension over land and maritime borders with India. As different disputes and misunderstandings continue to mar Indo-Bangladesh relations, the steps being taken by the IOCs, on the one hand, and India, on the other, are seen as a conspiracy against the national interest of Bangladesh, even if their interests are coincidental.

Gas remain unexploited

Further Investment

Export

Power generation and other gas oriented industries

Export of manufactured product (e.g. electricity, fertilizer etc.)

Accelerate economic growth

Model-2: More acceptable to the people and no question of ethics

Challenges of Globalisation Globalisation involves a large variety of human activities that cut across technological innovation, global communications, and the internationalisation of commercial, financial and economic activities across countries and political and cultural

Model 1 (B) FDI of IOCs

(A) Gas remain unexploited

(C) Payment by GoB to IOCs cost recovery and profit (limitations of GoB)

(D) Alternative source of payment: Export

dimensions. Flow of FDI is the result of economic globalisation and it involves most of the dynamic factors of globalisation. The dilemma is between short term gains and long term unsustainability. Natural gas export could be a litmus-test for Bangladesh to meet the challenges of globalisation.

Advanced countries prioritise their interest in terms of profitability by ignoring the interests of developing countries. The unrestrained commercial exploitation of natural resources, regardless of what is in the interest of a developing country, creates a no-win situation that leads to the depletion of natural resources.

There are several major limitations that should be taken into consideration while inviting FDI. The multi-national companies have clear objectives when invests in abroad. They are the global players and can benefit from lower variable costs due to economies of scale. Export of gas to India has added a regional dimension to this dilemma. The forces of globalisation and regionalisation are acting in a manner that hurts Bangladesh.

Conclusion The export of natural gas of Bangladesh brings out some issues.

(F) Retard economic growth

(E) Gas reserve will finish within short period

Model-1 Shows no alternatives for Bangladesh

65

l If Bangladesh does not export, it will not be able to pay the IOCs. l If it does export, within a short period of time the gas reserves will be finished.

And there is no optimistic view that export proceeds will be utilised in a productive manner. l If it does not export, it can use the gas to meet the domestic demand and further investment of IOCs in gas-based power generation, fertiliser production can

66

recover IOCs cost as well as helping the country move toward sustainable economic development. l If it does not allow IOCs to export, they will leave the country and gas will remain unexploited under soil or will be exploited at a slow rate and economic growth will be stunted.

No. 24.

The Financial Express, October 18, 2002. l l Michael Du Pont, Foreign Direct Investment in Transitional Economies, A case study of China and Poland, (McMillan Press Ltd., 2000) l Nasiruddin M. Kamal, ‘The tricky business of gas exploration’, The Daily Star, December 13, 2002.

The above situations are modeled diagrammatically in two ways. There is no problem with the second model and the Government of Bangladesh signed the contract with the IOCs keeping this objective in mind. But at present the IOCs are interested in acting more as Model-1 depicts. Model-1 implies that we have no choice, which is not only Bangladesh's predicament, but also the problem of other developing countries.

(Monzur Hossain is a Phd candidate at Monzur Hossain is a Phd candidate at the National Graduate Institute for Policy Studies (GRIPS), Tokyo and may be contacted at: scqjk313@ybb.ne.jp) Author's Note: I am grateful to Prof. Ryokichi Hirono for his inspiration and encouragement to write such a challenging paper. The views expressed in this paper are my own and in no way reflect those of the institutions with which I am affiliated.

I was heavily dependent on the information available, and proper citations have been made.

End Notes 1 2 3 4 5 6

a. b. c. d. e. f.

Optimising Use of Bangladesh's Gas Resources, Report # 14, Center for Policy Dialogue (CPD), October 1999.

Nasiruddin M. Kamal, ‘The tricky business of gas exploration’, The Daily Star, December 13, 2002 The Financial Express, October 18, 2002 An Exploratory Review of Bangladesh Gas Sector: Latest Evidence and Areas of Further Research, The National Bureau of Asian Research, 2001.

United States Geographical Survey (USGS)-Petrobangla joint study The deindustrialisation of a nation's economy that occurs when the discovery of a natural resource raises the value of that nation's currency, making manufactured goods less competitive with other nations, increasing imports and decreasing exports. The term originated in Holland after the discovery of North Sea gas.

Based on 8 gas fields Based on producing gas fields of Petrobangla Includes reservoir management, 3D, thin bed and compression Based of 30 selected prospects of 6 PSC blocks Re-estimated four fields, rest Petrobangla figures Includes compression only

Bibliography l Allen V. Kneese, Natural Resource Economics, Edward Elgar, USA, 1995. l Alfredo Eric Calcagno and Eric Calcagno, The Sustainability of Development (pp. 289310), G-24 The Developing Countries in the International Financial System, Central Bank of Venezuela, (London: LYNNE RIENNER Publishers, 1999) l Annual Report, Bangladesh Bank, 2000-2001. l An Exploratory Review of Bangladesh Gas Sector: Latest Evidence and Areas of Further Research, The National Bureau of Asian Research, 2001. l Board of Investment (BOI), Bangladesh. l Report No. 14, Center for Policy Dialogue (CPD), Bangladesh, (October 1999) and Report

67

68

Table 1.1: Growth of the Indian Poultry Sector, 1991- 2002

Production Total Egg Production (million)

1991

2002

22743

39092

25

39

-

0.76

Per Capita Egg Consumption (No)

WTO and Poultry Industry in India Dr Rajesh Mehta, R. G. Nambiar and Sujit Ray Prior to the 1990sâ&#x20AC;&#x2122; reforms, India's foreign trade regime was highly complex and cumbersome. There were different types of import licences, depending on their actual use. Import of agriculture and poultry items was, for instance, subjected to import licensing. Their imports were permitted under the recommendation of different departments of Government of India. But after the commencement of economic reforms in the 1990s, the government placed the whole range of poultry products under the category of Open General Licence (OGL), also called the 'Free List'.

Per Capita Poultry Meat Consumption (Kg) Source: Poultry Times of India, various issues; Dept. of Animal Husbandry, GOI

Figure 1.1 illustrates the increase in poultry meat production in 2004 to a volume of nearly 1715000 metric tonnes. Table 1.2 shows that, apart from increases in volume, poultry meat also increased its market share in meat production. Based on volume, poultry meat has emerged from the smallest meat sector in 1977 to the third largest meat-producing sector in 2000, after the leading meat sectors of veal and buffalo.

Figure: 1.1 Poultry Meat Production in India,1961-2004 2,000,000 1,800,000

The move to remove all Quantitative Restrictions (QRs) and instead place them in OGL, raises several questions: What are the implications of the removal of Qualitative Restrictions to the domestic poultry industry?; How would this shape the growth of domestic poultry industry? and What kind of policies are warranted during this transitional phase so that the domestic poultry industry faces no serious adjustment problem?

The main objectives of this paper are: (i) to outline some salient features of Indian poultry industry, (ii) to review the process of dismantling QRs and other trade restrictions on poultry imports and (iii) to draw lessons from experience of other countries who had sought to open up their poultry sector.

1,600,000

Mt

1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 1955

Broiler production has also accelerated at an annual growth rate of about 15 per cent, and currently stands at about 1000 million broilers. The poultry sector is able to contribute 12 per cent to 15 per cent of agricultural gross domestic product and drive the growth of agriculture and allied sectors. Table 1.1 displays the growth in egg production during 1991-2002.

69

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

Years

Source: FAOSTAT Website (Food and Agriculture Organization of the United Nations)

Indian Poultry Industry Introduction Among different activities in the livestock sector, poultry farming is the fastest growing. What was once started as a novelty in the 1970s -- egg and broiler production -- has now turned out to be a highly organised agribusiness with an estimated capital investment of Rs.100 billion, contributing Rs.110 billion to the gross national product (GNP), and employing around 1.5 million people, mostly in rural areas. In 2003-04, India produced 40.4 billion eggs (and ranked fifth in the world), and 1,715,000 metric ton of poultry meat (G.O.I., Economic Survey, 2004-05; FAOSTAT Website).

1960

1978

Table 1.2: Market shares of various meats in Indian Meat Production, 1978-2000 (Percentage share based on Quantity) Beef and Buffalo Mutton Goat Meat Pork Meat Poultry Meat Veal meat Lamb 34 34 6 12 10 4

1990

34

28

5

11

10

9

1995 2000

32

31

4

10

10

11

31

30

5

10

12

12

Source: FAO Production Year Book FAOSTAT Website

A peculiar feature of the poultry industry in India is that it is highly fragmented. There are several thousand independent poultry producers. There is little or no promotion of brands either in the egg or chicken meat sector. There are also significant variations in poultry development across regions. The four southern states -- Andhra Pradesh, Karnataka, Kerala and Tamil Nadu -- account for about 44 per cent of the country's egg production. The eastern and central regions account for about 20 per cent of egg production with a per capita consumption of 18 eggs and 0.13 kg. of broiler meat. The northern and western regions record much higher figures than the eastern and central regions with respect to per capita availability of egg and broiler meat. Table 1.3 shows the status of the poultry industry across the states of India.

70

Table 1.3: Egg Production in Indian States, 2001-02 State Andaman & Nicobar Andhra Pradesh Arunachal Pradesh Assam Bihar Chandigarh Dadra & Nagar Haveli Daman & Diu Delhi Goa Gujarat Haryana Himachal Pradesh Jammu & kashmir Karnataka Kerala Lakshadweep

Production (lakh nos.)

470 63160 403 5577 15656 336 67 34 806 1176 6921 11661 873 4872 23248 24659 67

State

Production (lakh nos.)

15454 32488 873 975 340 544 11725 101 33461 5913 202 36989 739 9978 30572

Madhya Pradesh Maharashtra Manipur Meghalaya Mizoram Nagaland Orissa Pondicherry Punjab Rajasthan Sikkim Tamil Nadu Tripura Uttar Pradesh West Bengal

Source:G.O.I., Department of Animal Husbandry

Significance for the national economy Recent studies suggest that the poultry sector has an enormous potential to improve the socio-economic status of rural population. Poultry farming is labour-intensive, requires minimum capital, and ensures quick returns. It thus helps to improve the quality of rural population. Estimates show that it can create as many as 25000 additional jobs on the consumption of one more egg per head, and 20,000 additional jobs on the consumption of 50 grams of more chicken meat per head. It has tremendous potential to create non-farm employment, and check migration from rural to urban areas.

Besides this, India has also great potential to exploit the international market. Owing to the strong agrarian base, India is favorably placed for poultry production. Although India's current share in world trade is small, in the emerging global trade, the Indian poultry industry has great potential. Table 1.4 shows Indiaâ&#x20AC;&#x2122;s relative position in world production and trade of poultry products.

Table 1.4: Status of Indias Poultry Industry in World World poultry meat production 1 (2004)

78225231 Mt

Indias poultry meat production (2004)

1715000 Mt

Indias share in world production (2004)

2.19 percent

World poultry meat

exports 2(2003)

10109913 Mt

Indias poultry meat exports 3(2003)

6918 Mt

Indias share in world total (2003)

0.07 per cent

Notes: 1. Main producing countries: USA (23%t), China (17%), EU (11%), Brazil (11%) 2. Main exporting countries: USA (28%), EU (29%), Brazil (21%t) 3. Main importing countries: EU (24%), China (7%t) Source:FAOSTAT Website ( Food and Agriculture Organization of the United Nations)

Problems faced by the poultry industry The domestic poultry industry has been facing a severe shortage of its major feed ingredient, namely maize. Feed cost amounts to nearly 75 per cent of the cost of

71

production of eggs and broilers; and maize constitutes 50 per cent of feed rations.

Therefore, even a small increase in the price of ingredients can wipe out the profits. If the growth of the poultry sector is to be sustained at 10 per cent for the layer sector and 15 per cent for broilers, the country needs to push up availability.

Poultry, being a livestock sector, needs certain vital infrastructure facilities that can facilitate storage, distribution, marketing, and exports. There is an acute shortage of refrigerated road transport and an efficient cold chain, which makes widespread distribution difficult and expensive. The country does not have a proper testing system; presently issues like pesticide residue, antibiotic residue, and hormonal residues are creating enormous problems while exporting.

Although poultry is an integral part of agriculture and treated at par with livestock in India, it faces restrictions on use of agricultural land, attracts higher electricity tariffs and sales tax than that of agriculture, pays tax on income earned from poultry farms, and is subjected to different land/labour laws including the Minimum Wage Act. In India there is no tradition of processed poultry in which the poultry is frozen which provides higher shelf life to the poultry. This leads to wide price fluctuations thus impacting the profitability of poultry farms. Lack of vertical integration of poultry industry is another important problem Indian poultry industry is facing.

While some of the traditional economic problems are still persisting, new areas of concern have cropped up. The foremost is the reported move of the government to open up the domestic poultry sector for import competition. For long, the domestic poultry sector has remained protected because its import was subject to Quantitative Restrictions (QRs). Most of these items were imported after obtaining licences.

Processed poultry meat preparations and egg products attracted an effective import duty of 30 per cent1. Though the duty has increased in the last four years, imports were subject to quantitative restrictions till April 2001.

Trade Liberalisation and WTO India's custom tariffs have been consistently declining since the adoption of the reform process in the early 1990s. The average (simple) MFN custom duty rate has declined consistently and significantly from an average of 80 per cent or more in the early 1990s to an average of around 24 per cent in 2004-05.

There has also been a decline in the peak tariff2 of Indian custom duty rates during mid-1990s and early 2000s. For non-agriculture items, it declined significantly from more than 100 per cent during early 1990s to around 20 per cent in 2004-05. After the removal of Indian QR regime, the custom tariffs will emerge as the crucial trade policy instrument.

What is the present state of India's QR regime? In the pre-reform period, India's QR regime was complex and highly cumbersome. Imports of almost all commodities and goods, except especially permitted (sometime called commodities under Open General Licence), were restricted and they could be imported against a licence. The items that can be imported under the open general licences are sometimes

72

called 'Free'. In the pre-reform period, the total number of goods and commodities, falling under open general licence category was less than 10 per cent of all commodities/lines.

In the post-reform period, the coverage of open general licence has been enhanced. Table 2.1 gives the number of items/lines that have been categorised under open general licence or 'Free' from 1995-96 onwards. One can notice from this table that India has been consistently removing its QRs for the last couple of years. Although dismantling of the QRs was started by India on unilateral basis during mid 1990s, most of the QR removals during 1997-2001 were due to dispute settlement proceedings of the WTO3.

Table 2.1: Indias Imports Subject to QRs, 1995 -2004 Year Apr.1995 Apr.1997 Apr.1998 Apr.2000 Apr.2001 onwards

Number of Lines, which are Free (as per cent of total number of lines*) 56.00 65.80 70.20 86.41 94.37

* At 8 or 10-digit HS level.

Sources of data: (i) Mehta, R. (1997), Trade Policy Reforms, 1991 -92 to 1995-96: Their Impact o n External Trade, Economic and Political Weekly, April 1997, pp.779-784. (ii) Mehta, R. (1999), Tariff and Non -Tariff Barriers of Indian Economy: A Profile , RIS. (iii) Mehta, R. (2000), Removal of QRs and Impact on Indias Import , Economic and Political Weekly, Vol.XXXV, No.19, May 2000. (iv) Goldar, B.N. and Mehta, R. (2001), The Budget and Customs Duties , Economic and Political Weekly, Vol.XXXVI, No.12, March 2001.

Tariff rates of poultry products The tariff rates of different poultry products for the recent financial years 1999/2000, 2001/2 and 2004/5 are given in Table 2.2. Most of the products listed were â&#x20AC;&#x2DC;restricted itemsâ&#x20AC;&#x2122; before 1999/2000. In 1999/2000, the tariff rates ranged from 15 per cent (of meat and edible offal) to 40 per cent (of live poultry and food preparations of poultry products). During the same year, tariff rate of 'maize for use for poultry feed' was 0 per cent. But in the budget proposal of 2000-01, the rate was hiked to 70 per cent.

However, with the adoption of tariff quota regime, the rate has been brought down.

All other products of the poultry sector attracted a tariff rate of 35 per cent4 during 2001/02. In the import policy of 2001/02, QRs on all poultry products were dismantled.

In the budget proposals for 2000/1, the government had proposed 35 per cent tariff rate for items of the poultry sector (and items of other sectors) whose QR is removed. It is difficult to rationalise that the tariff-equivalence of QRs for all the items is 35 per cent, if the government wants to accord the same level of protection to all5. It seems that the government realised this anomalous situation and revised the tariff rate from the level of 35 per cent to 100 per cent for two commodities of the poultry sector6: HS 1601.00 (sausages and similar products of meat, meat offal, food preparations based on these products) and HS 1602.32 (other prepared or preserved meat of fowls of species; of poultry products). This leaves us to speculate that either (i) the government believes that the tariff-equivalence of most of poultry products is

73

close to 35 per cent7, or (ii) the government wants to import the products of this commodity group by opening trade. This commodity group contains a large number of prepared and preserved meat. It is difficult to rationalise that only commodity groups defined by HS 1601.00 and HS 1602.32 have a tariff equivalent of 100 per cent, while the commodity HS 1602.39 has tariff-equivalence of 35 per cent.

In the Uruguay Round, a large number of countries fixed the level of tariff bindings, after estimating the tariff equivalence of QRs. India (and many other developing countries) probably fixed the bound rates without examining their tariff equivalence; and did it mostly because a large number of our imported commodities were subject to QRs. Hence, it is not wrong to realise that the binding rates for a large number of commodities were not necessarily tariff-equivalence rates.

Implication for the poultry sector What effect will this unfettered free trade regime have on the local poultry industry?

There has never been serious discussion on its underlying effects. What can be inferred from the available indications is that the local industry would not be able to survive in an open trade environment. The new regime would lead to reckless cheap imports, a glut in the domestic market, and un-remunerative prices to local producers the local producers may be forced to pack up and leave the field. The domestic industry is price competitive only in eggs. However, some studies have shown that India's 'whole chicken' and chicken products does not show much competitive advantage over other suppliers. The price in India of whole chicken is around 30-40 per cent higher than the import price of Brazilian chicken. In addition, it should be noted that there is not much significant difference in prices of different cuts of chicken in India, while the prices in other countries vary significantly for different cuts, like breast meat, thigh meat and leg quarters. There are several reasons why local poultry products are relatively expensive compared to imported products.

First, there is a big difference in the size of poultry farms operated here and abroad. In India, there are about 1 million poultry farmers of whom 95 per cent have 500 to 5000 birds. Anyone here who keeps 50,000 birds and above is considered a big farmer. But in the United States, an average poultry farmer maintains a flock of 0.4-0.5 billion birds.

Second, a farmer in India has to buy maize feed (for poultry) at relatively higher price. Since the feed cost accounts for nearly 75 per cent of the cost of production of eggs and chickens, the relatively higher price of maize in India leads to higher costs of production.

Third, U.S. and European poultry processors are said to earn their profits by selling the breast portion of chicken, which is conveniently promoted as lean/white meat at a premium price of around US$3 per pound (or Rs. 250 per kg) in their own markets. The leg portion (the leg quarter), on the other hand, is treated as dark meat and is targeted for dumping in Asian markets at a throwaway price of 20-25 cents per pound (i.e. around Rs.35 per kg). In the Indian market, the thigh and leg quarter is considered a delicacy and is preferred over the breast portion. Therefore, when the local markets are dumped by imported leg quarters at throwaway prices, local producers are definitely going to be hurt.

74

Table 2.2: : INDIA: MFN Tariffs and UR Bound Rates for Poultry Products Harmonized System (Commodity Groups)

India's Tariff Rate b ( per cent)

UR Final Bound

HS Codea

HS Description

1999/00

2001/02

2004/05

Ratec( %)

01.02

Live bovine animals

0102.10

Pure-bred breeding animals

40

35

30

100

Ex 0102.10

Cows, heifers, bulls, goats, sheep, and pureline poultry stock

5

5

5

100

0102.90

Other

40

35

30

100

Ex 0102.90

Grand Parent Poultry Stock and donkey stallions

25

25

N.A.

100

01.05

Live poultry, that is to say, fowls of the species Gallus domesticus, etc.

0105.11

Fowls of the species Gallus domesticus; weighing not more than 185 g

40

351

30

100

0105.92

Fowls of the species Gallus domesticus, weighing not more than 2000 g;other

40

35

30

100

0105.93

Fowls of the species Gallus domesticus, weighing more than 2,000 g; other

40

35

30

100

02.07

Meat, and edible offal, of the poultry of heading 01.05, fresh, chilled or frozen

0207.11

Not cut in pieces, fresh or chilled; Of fowls of the species Gallus domesticus

15

35

30

100

0207.12

Not cut in pieces, frozen; Of fowls of the species Gallus domesticus

15

35

30

352

0207.13

Cuts and offal, fresh or chilled; Of fowls of the species Gallus domesticus

15

100

100

100

0207.14

Cuts and offal, frozen; Of fowls of the species Gallus domesticus

15

100

100

100

Ex 0207.34

Fatty livers, fresh or chilled; Of ducks, geese, etc.

15

35

30

352

04.07

Birds' eggs, in shell, fresh, preserved or cooked

35

35

30

150

04.08

35

35

30

150

0408.19

Birds' eggs, not in shell, and egg yolks, fresh, dried, cooked by steaming or by boiling in water, molded, frozen or otherwise preserved, whether or not containing added sugar or other sweetening matter Egg yolks : other

35

35

30

150

0408.91

Other than Egg Yolks: Dried

35

35

30

150

0408.99

Other than Egg Yolks: other

35

35

30

150

1601.00

Sausages & similar Products, of meat, meat offal or blood; food preparations basedon

40

100

100

150

these products 16.02

Other prepared or preserved meat, meat or blood

1602.10

Homogenized preparations

40

35

30

552

1602.20

Of liver of any animal

40

35

30

150

1602.31

Of turkeys; of poultry of heading No. 01.05

40

35

30

150

1602.32

Of fowls of the species; of poultry of heading no. 01.05

40

100

100

150

1602.39

Other, of poultry of heading no. 01.05

40

35

30

150

1602.41

Of swine, Hams and cuts thereof

40

35

30

552

1602.42

Of swine, Shoulders and cuts thereof

40

35

30

552

1602.49

Of swine; Other, including mixtures

40

35

30

150

1602.50

Of bovine animals

40

35

30

150

1602.90

Other, including preparations of blood of any animal

40

35

30

150

a. The commodity groups defined by the Harmonized System of Indian Trade Classification (HS-ITC), in 1999/2000. b. These rates represent the Most Favored Nation (MFN) tariff rate defined as the Basic Custom Duty ( ad valorem) in Indian custom classification. The different types of exemptions are not taken into consideration to work out the tariff rates. c. The Uruguay Round Final Bound Rates. The definition of HS Codes for some items was different during the year of UR commitments. The final bound rates are worked out after making correspondence between the custom classification (HS) of the Uruguayround negotiation period (1992) and HS-1996.

1 The basic custom duty of Grand Parent Poultry Stock is 25 per cent instead of 35 per cent 2 Commitments for these items were made in earlier rounds.

Sources of data: (i) WTO, Country Tariff Schedule of India, 1995. (ii) G.O.I., Custom Tariff of India, Varios Issues

75

Fourth, foreign governments, especially the U.S. and EU, support poultry exports with subsidies such as the Restitution Money Scheme of the European Union, and the Export Enhancement Scheme of US. The amount of subsidy works out to be more than 25 per cent of the domestic price in EU, and 40 per cent in the U.S. The result is an unequal playing field in which the ball inevitably bounces towards the Indian goal.

UR: Tariff Bindings and Sanitary Measures Tariff bindings In the Uruguay Round negotiations, India had agreed to bind (and reduce) tariff rates for 3373 commodities at 6-digit level or commodity sub-groups of 6-digit HS level8. The bound commodities account for around 65 per cent of India's total tariff lines9. As far as agriculture commodities (or lines) are concerned, India has committed to bind rates of all the lines. India has basically three bound rates for agriculture sector: 100 per cent for raw material, 150 per cent for processed agro-commodities, and 300 per cent for edible oil. The concerned reductions, wherever needed, will be done in equal installments beginning from March 1995 to March 200410. However, the bound rates for a number of agriculture commodities are low and, in a few cases, even zero, the range varying between 0 and 55 percent11. These were owing to commitments made by India in the earlier rounds (earlier than the Uruguay Round) of negotiations. Thus, it includes some poultry products where bindings have been made in earlier rounds.

During 1999/2000, India has successfully renegotiated the binding rates on products with 'principal supplying interests'. The negotiations have been conducted mainly for those agriculture commodities whose binding have been made at rounds earlier than the Uruguay Round. Under Article 28 of GATT, India had agreed to keep its import duty on some agriculture items at 0 per cent as India was a food deficit country when the pact was signed. India had not bothered to change the rate of import duties of these commodities in the Uruguay Round, probably because it was following the QR regime. The renegotiated agreement would enable the country to change the import duty on 17 items such as rice, spilt wheat, skimmed milk powder, sorghum, jawar, maize, etc.

The deal was a part of a trade-off with agriculture exporting countries under which India has given more access on other items by decline/restructure in tariff bindings like groundnut oil; or developed countries would be allowed to raise their bound tariffs on certain items. India had to begin renegotiations of the bound rates with principal suppliers of the commodities in the light of removal of QRs. It began bilateral negotiations with principal supplying countries of WTO, following sharp increase in import of skimmed milk powder, which was estimated to be around 18000 tonnes between April and October 1999, as compared to import of 2000-3000 tonnes during the same period in 1998.

India has made tariff bindings for all the commodities of the poultry sector. The bound rates for different commodities of the poultry sector are given in Table 2.2. The range of tariff binding rates varies from 35 per cent to 150 per cent. Most of the finished (consumer) goods of the poultry sector, i.e. items of commodity groups like ‘birds' eggs’, ‘sausages or other prepared meals’, etc. are bound at 150 per cent, except for items of commodity groups defined by HS 1602.10 (homogenised preparations), 1602.41 (hams

76

and cuts thereof of swine) and 1602.42 (shoulders and cuts thereof of swine). The tariff rates of these three commodity groups of the poultry sector are bound at 55 per cent.

Most of the items of 'live poultry' and 'meat, and edible offal of the poultry' are bound at 100 per cent. However, there are some exceptions in this category also. The commodity group defined by HS 0207.12 (meat, and edible offal of fowls of species Gallus domesticus, not cut in pieces, frozen) and a sub-group of HS 0207.34 (Fatty livers, fresh or chilled of duck and geese) are bound at the rate of 35 per cent. The bound rate of maize, a vital input of poultry sector, was fixed at 0 per cent in the UR. India did successfully renegotiate, in early 2000, raising the bound import duty on maize and other range of agriculture products with 'principal supplying interests'. The new bound rates would be applicable uniformly to all the countries as per the MFN principle of WTO. Sanitary barriers The importance of product standards in domestic and international business transactions can hardly be over emphasised. National governments often lay down health and safety standards for various products to protect consumers. Standards are usually established to protect the environment and natural resources. Standards are also indispensable in international business transactions because they ensure a uniform level of quality in merchandise, and reduce disputes over specifications and quality of goods exported or imported.

Many countries restrict import of agricultural products, particularly plants, fresh fruits and vegetables, meat and meat products, and other prepared foodstuff on the grounds of sanitary and phytosanitary regulations.

Until UR, international rules applicable to sanitary and phytosanitary measures fell within the scope of the agreement called Technical Barriers to Trade (TBT). The TBT agreement, also called the â&#x20AC;&#x2DC;standard codeâ&#x20AC;&#x2122;, resulted from the Tokyo Round of Multilateral Negotiation. This agreement permitted its signatories to introduce sanitary and phytosanitary measures in the pursuit of legitimate objective, for example, the protection of human, animal, or plant health, the protection of environment, animal welfare, and national security motives.

When negotiations during the Uruquay Round led to lowering of trade barriers, some countries felt that the trade barriers may be circumvented by disguised protectionist measures in the form of sanitary and phytosanitary regulations. This concern ultimately led to signing of a separate agreement on the application of sanitary and phytosanitary measures in parallel with the Agreement on Agriculture. In fact, the two agreements are complementary.

One of the objectives of the SPS agreement was to reduce the possible arbitrariness of sanitary and phytosanitary measures. The agreement specifies principles and rules which member countries must follow in regulating imported products. The agreement defines sanitary and phytosanitary regulations as measures taken to protect human, animal, or plant life and health.

The SPS agreement requires countries: l to base their SPS regulations on international standards, guidelines and recommendations

77

to play a full part in the activities of international organisations like the CODEX, l International Plant Protection Convention, etc. in order to promote the harmonisation of SPS regulations on an international basis.

While the SPS agreement has much in common with its predecessor, i.e. the TBT agreement, there are two major differences.

1.

The TBT agreement requires product standards to be applied on a MFN basis. The SPS agreement, on the contrary, permits standards to be applied on a discriminatory basis, so long as they do not arbitrarily discriminate between members. The rationale behind this discriminatory treatment in SPS is that it is not appropriate to apply same sanitary and phytosanitary standards on animal and plant products originating from different countries because the incidence of pests or diseases and food safety conditions differs owing to climatic differences.

2. The SPS agreement provides greater flexibility for countries to deviate from international standards than is permitted under the TBT agreement. The TBT agreement, for instance, allows a country to deviate from international standards only if it can be justified on scientific or technical grounds. The SPS agreement, on the other hand, states that a country may introduce or maintain a SPS measure resulting in a higher level of SPS protection than that achieved by an international standard if that country determines to have a higher level of protection.

Resorting to sanitary and phytosanitary measures provides yet another safety valve for countries to shield domestic industries from unfair competition. Regrettably, India does not have detailed food safety standards for its poultry products (except eggs) at present. As a result, India cannot regulate imports of poultry products from major exporters. At the same time, India can also not export poultry products to major trading partners, because the latter have not recognised India's food safety standards12.

State Supported Measures in Select Countries As mentioned earlier India's economic reform, launched in the 1990s, has placed the industry in a different situation. From the 1950s to the late 1990s, the indian poultry industry operated in a highly protected market. However, this environment has changed drastically after 1990. This section draws lessons from international experience, i.e. how governments in other countries have designed ways in WTO, to protect their industry, directly or indirectly. Toward that proximate goal we investigate the state support to the industry in the form of production and export subsidies.

Production subsidies of select countries An important outcome of the Agreement on Agriculture under the Uruguay Round is the institutionalisation of developed countries' subsidies. The agreement committed developed countries to cut their agricultural production subsidies by 20 per cent and export subsidies by 36 per cent over ten years. However, even after this reduction, the subsidies continue to remain high because the 'Green Box' provision of agreement allows direct income subsidies to farmers on the grounds that these are 'decoupled' from production and thus 'non-trade distorting'. In fact, subsidies to agriculture provided by the direct income support mechanism are enormous. A United Nations Development Programme (UNDP) estimate places the subsidy per farmer in the United States to US$

78

29,000 in 199513 -- a figure that is several times the per capita income of developing countries like India.

To illustrate how much of price support (sometimes known as price subsidy) these countries offer per unit production of different poultry products, we show in Table 4.2 the market price support for select poultry products in select countries. In 1997, Switzerland's price subsidy to poultry products works out to 60 per cent - for instance, the applied administrative price (which is close to production cost) of one tonne of poultry was Sw F 3997 while the external reference price (which is close to the domestic market price) was Sw F 673 per tonne. Hence, Switzerland gave a domestic price support (or price subsidy) of Sw F 3324 (=3997-673) per tonne (US$ 2290 per tonne). In other words, the external reference price was one-sixth of the applied administrative price.

The ratio of applied administrative price to external reference price is quite high ranging from 2.53 to 8.30 for different poultry products/eggs in different countries (see Table 3.2). Further, the table shows that the magnitude of price support has been increasing over time in some countries. For example, the price support for poultry meat of Iceland in 1998 is ISK 822.2 million as compared to ISK 636.3 million in 1997.

Export subsidies of select countries Out of 136 WTO members, 25 countries have made export subsidy reduction commitments in the Uruguay Round. These commitments have been made for: (i) total agriculture and (ii) product-specific commitments in many product groupings. The numbers of product groupings vary from country to country. Member countries have made commitments on: (i) budgetary outlay and (ii) volume basis. The total number of groupings of volume-commitments (product specific) is less than the number of groupings of budgetary outlay commitments. All member countries, including those, which have no export subsidy reduction commitments, have to notify the quantum of export subsidy to WTO.

79

Table 3.1: Total aggregate Measurement of Support (AMS) and Product Specific Domestic Support of poultry products, by select member countries, as notified to WTO

l Both committed and current level of AMS, whether total or product specific has fallen over time for Australia, Brazil, Canada, and Korea. However, the total amount of AMS is still significant-the United States alone gave AMS of US $ 6.2 billion in 1997. l For the Philippines and Thailand, AMS is found to have increased over time. l It should be noted that a large part of the total AMS is of non-product specific, hence that support does not get reflected in product specific AMS. For example, product specific AMS for poultry meat or chicken will not be reflected in the domestic support given through non-product specific amount. l Although the current level of total AMS of Japan has declined from 1995 to 1997, AMS for eggs has increased from 1.2 billion yen in 1995 to 1.6 billion yen in 1996 (and 1997).

Member Currency Base 1995 1996 1997 1998 1999 Period Total AMS Current Total AMS Current Total AMS Current Total AMS Current Total AMS Current commitment Total/ commitment Total/ commitment Total/ commitment Total/ commitment Total/ level product level Product level Product level product level product AMS AMS AMS AMS AMS Australia-Total $A million 570.16 151.72 550.5 144.19 530.84 131.62 511.18 119.71 491.52 Eggs $A million 62.5 Brazil-Total US$ '000 1039125.79 295032.98 1025012.39 363284.3 1010898.98 306844.7 996785.58 982672.17 Canada-Total Can$ million 5197 777 5017 618.7 4838 522.1 4659 4480 Chicken Can$ million 1.7 1 2.3 0.8 Turkey Can$ million 0.1 0.0 0.0 Eggs Can$ million 0.2 0.0 0.0 Cyprus-Total C million 57.6 36.5 56.8 35.5 56.1 25.5 55.3 21.8 54.5 Livestock Prod.

C milli on 17.9 11.4 8.7 8.9 8.5 Eggs C million 1.7 1.4 1.6 0.7 Poultry Meat C million 1.7 7.3 7.3 4.3 EC-Total ECU billion 78.67 50.03 76.37 51 74.07 71.76 69.46 Japan-Total billion 4800.6 3507.5 4635 3329.7 4469.5 3170.8 4304 4138.4 Meat of Swine billion 604.5 323.3 291.8 285.8 Eggs billion 1.3 1.2 1.6 1.6 Korea-Total W billion 2182.55 2075.44 2105.6 1967.36 2028.65 1936.95 1951.70 1562.77 1874.75 Poultry Meat W billion 0.35 Eggs W billion 0.24 Philippines-Total Mill Pesos 483.9 257.2 920.4 766.0 1129.3 Thailand-Total B million 21816.41 15773.25 21506.64 12932.47 21196.87 16756.58 20887.10 16402.10 20577.33 United States US$ million 23083.14 6213.86 22287.17 5897.66 21491.2 6238.4 20695.2 19899.3 Total Product specific domestic support includes: (i) market price support (Supporting Table DS:5), (ii) non -exempt direct payment (Supporting Table DS:6); (iii) other products -specific support (Supporting Table DS:7) and (iv) any support measure via. the equivalent measure of support methodology (Supporting Table DS:8), as reported to WTO. Blank cell means that figures are not reported to WTO. Source: WTO, Domestic Support: Background Paper by The Secretariat, Committee on Agriculture, G/AG/NE/S/1, 13 April 2000.

Table 3.1 exhibits total Aggregate Measure of Support (AMS) and product specific domestic support in terms of both committed and actual for poultry products in select countries. Product-specific domestic support includes market price support, nonexempt direct payment, and other product-specific support. An examination of this data shows the following:

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Table 3.3: Export subsidy of poultry products for Select Countries notified to WTO Country Product Period Type of Actual Outlay Units Year Commitment or Committed 1995 1996 1997 1998 /Outlay Australia: Commitment made for 5 products, excluding Poultry Products Brazil Poultry Meat Calander Budgetary Outlay Committed U$ 4805171 4687011 4568851 4450691 Actual U$ 0 0 0 0 Volume Outlay Committed Tonnes 96566 95195 93824 92453 Actual Tonnes 0 0 0 0 Canada: Commitment made for 11 products, excluding Poultry Products European Commission Poultry Meat Marketing Year Budgetary Outlay Committed Mio ECU 136.3 127.2 118 108.9 Actual Mio ECU 115.9 73 76.1 89.7 1 July-30 June Volume Outlay Committed Tonnes 434500 404700 375100 345400 Actual Tonnes 418100 401400 393700 343400 Eggs Marketing Year Budgetary Outlay Committed Mio ECU 60.7 57.3 53.9 50.5 Actual Mio ECU 12.9 6.9 13 17.3 1 July-30 June Volume Outlay Committed Tonnes 126100 120600 115200 109700 Actual Tonnes 95100 67900 103800 114200 Korea: No reduction commitment made in WTO, but reported to WTO it has not given export subsidy to poultry sector during 1995-98 Philippines: No reduction commitment in WTO, bur reported to WTO it has not given export subsidy to any sector including poultry USA Poultry Meat Year Budget Outlay Committed US$ 21377402 20012887 18648372 17283857 fromOct.1 Actual US$ 5153000 0 862500 1399762 Year from Volume Outlay Committed Tonnes 34196 32955 31715 30475 July 1 Actual Tonnes 22250 0 0 3546 Eggs(dozen) Year from Budget Outlay Committed US$ 7587922 6391233 5194545 3997856 Oct. 1 Actual US$ 0 0 Year from Volume Outlay Committed Dozen 30261813 25593371 20924929 16256487 July 1 Actual Dozen 7565500 0 0 0 1999 4332531 91082

99.8 315600 47.1 104200

15919342 29235 2801167 11588045

Japan Switzerland (1)

Eggs

Meat of Swine

Beginning April 1997 Price Stabilisation

1997 Price Support

Eggs in Shell External Reference Price

(6)

14.3 Bill. Yen Bill US$ Unit Mill. Sw F/t

0 Mill. Sw F/t Amount

0.6b 822.2 11.5871361 381.6 5.37782914 636.3 8.96778194 354.2 4.99196663 2.3b 1.6@ Amount 146.3 100.81 138.2 95.22 285.8 2.3628399 (9)={(6)-(5)}*(7)-(8)}

4.26 3.61 8.30 6.13 2.53 4.72 5.94 (10)= (5)/(6)

Associated Fees Total Market Price Support Price levis Ratio

Unit

1288*** Bill. Yen 40 Amount 44

Eligible Production

(7)

Price Unit Price Unit 3997 SW F/t 673 000 tonnes 2754.08 463.72 4383 SW F/t 928 000 tonnes 3020.05 639.43 385* `000 Y/t 152** 000 Y/t 3.1820812 1.2563022 (5)

(4)

Unit SW F/t US $/t1 SW F/t US $/t `000 Y/t US $/t2 Applied Administered Price

Measure Support

1997 Price Support Calender/ Marketting Year (3)

Poultry (2) Description of Proudct

Table 3.2: Product specific domestic support: market price support for poultry products, select countries/commodities

Country

(8)

April 1997 Payment relates Bill. Yen Price (ISK) Icelandc Poultry Meat 1998 Payment relates ISK/t 374 61 2644 Mill. ISK Price (ISK) US $/3 5.2707235 0.8596635 Mill. US$ Egg 1998 Payment relates ISK/t 224 27 1953 2600 Mill. ISK Price (ISK) US $/t 3.156797 0.3805068 Mill. US$ Poultry Meat 1997 Payment relates ISK/t 417.71 115.82 212.5 5249 Mill. ISK Price (ISK) US $/4t 5.8870536 1.6323252 Mill. US$ Egg 1997 Payment relates ISK/t 220.5 51.7 2113 2497 Mill. ISK Price (ISK) US $/ t 3.1076472 0.7286411 Mill. US$ Canada Chicken Fiscal 1996 Provincial Direct Mill C $ Payment Chicken Fiscal 1997 Provincial Direct Mill C $ Payment Source of Data: Different country Notifications relating to Domestic Support, submitted to WTO. Standards stabilization price, ** Sluicegate Price in EC, *** Total Production (MAFF Statistics), @: Non-exempt Direct Payment , b: Provincial Ministries of Agriculture, c: Avg. Exchange Rate: ISDR=ISK 98.94.

1: SWF/US$ (1997)= 1.4513, 2: Yen/US$=120.99, 3: ISK/US$ (1998)= 70.958, 4: ISK/US$ (1997)= 70.904, 5: C$/US$ (1996)= 1.3635, 6: C$/US$ (1997)= 1.3846

Thailand: No reduction commitment made in WTO but it has given Export subsidy to egg and other sectors; Amount of export subsidy => US$ 15.24* 6.24* 4.53** * For eggs and rice ** for manioc pellet. Note: Blank cell means that figures not available.

Source of Data: WTO, Export Subsidies: Background Paper by the Secretariat, Committee on Agriculture, Special Session, G/A/NG/S/5, 11 May 2000.

82 81

Table 3.3 presents information pertaining to export subsidy offered by select countries to poultry products poultry meat and eggs. The table provides information on both the committed and actual outlay, and a further break down of each in terms of budgetary outlay and volume outlay, wherever such details are available. In the case of some countries/products, for instance, only the amount of budgetary outlay is reported, not the actual outlay. A few interesting observations emerge from the table: l Budgetary outlay, whether committed or actual, has declined, with the result that the 1998 budgetary outlay is below the 1995 outlay. However, the quantum of export subsidy is still high. l The quantum of actual budgetary outlay is less than the corresponding committed level for select poultry products of different years. However, there are some exceptions in the case of volume-commitments. There are instances where the quantum of actual volume outlay is more than the corresponding committed level.

For example, EC gave away export subsidy to 393700 tonnes of poultry meat as against its commitment to 375100 tonnes in 1997. This is also true of eggs in 1998.

The discussion until now was confined only to aggregate export subsidy. How much is the export subsidy per unit of select poultry products? To shed some light on this, we have sought to work out actual export subsidy per unit of select poultry products. This data is reported in Table 3.4 for select countries. The quantum of export subsidy per unit has tended to increase over time. For example, in the United States it is US $ 394.74 per tonne in 1998 as against US $ 231.60 in 1995, for 'poultry meat'. Similarly, the amount of export subsidy offered by EC to eggs has gone up from ECU 135.65 per tonne in 1995 to ECU 151.49 in 1998, and to poultry meat has gone up from ECU 181.86 per tonne in 1996 to ECU 261.21 per tonne in 1998.

Table 3.4: Actual Export Subsidy per unit of Select Poultry Products in Select Countries Country European Commission

Product Poultry Meat Egg

Unit 1995 1996 1997 ECU/tonne 277.21 181.86 193.29 US $/tonne 362.61 230.60 219.22 Mill. ECU/Tonne 135.65 101.62 125.24 US $/tonne 177.44 128.85 142.04 US Poultry Meat US $/tonne 231.60 0/0 * Eggs US $/tonne ** 0/0 N.R. * Value of budgetary actual outlay is US $ 862500, while volume is reported 0, as reported to WTO. ** Value of budgetary actual outlay is reported 0, while volume reported to WTO is 7565500 dozen 1. Based on Annual Average Exchange Rate N. R. Not Reported

1998 261.21 295.17 151.49 171.18 394.74 N.R.

Source of Data: Same as Table IV.3

Tariff quota As mentioned earlier, the market access commitment is one of the major achievements of the Agreement on Agriculture (AoA) in the Uruguay Round (UR). As a part of this process, AoA entailed conversion of all non-tariff barriers (NTBs) into equivalent tariff barriers, which is sometimes referred to as tariffication. Apart from the tariffication of NTBs, UR negotiations led to a reduction in the base tariff under a time bound programme by 24 per cent (average) over ten years in the case of developing countries and by 36 per cent (average) over six years for developed countries. In addition to this, it was also decided to maintain current access opportunities and establish a minimum access tariff-quota. The minimum access of tariff quota was to be established at reduced

83

tariff rate for those basic products where minimum access was less than a proportion of domestic consumption in the base year14. Minimum access import quota must be equal to 1 per cent of domestic consumption for developing countries (3 per cent for developed countries), increasing to 4 per cent by 2004 (5 per cent by 2000 for developed countries).

The tariff quotas were fixed at reasonable levels on tariff-line-by-line basis with the objective of facilitating market access. In the Uruguay Round, 36 member countries opted for tariff-quota on 1371 lines15 (or commodities).

Table 3.5: Number of Tariff Quotas by Member -countries, committed in WTO, 1999 No. of Lines ( or Country No. of Lines ( or Country commodities) commodities) 2 Mexico Australia 11 36 Morocco Barbados 16 2 New Zealand Brazil 3 73 Nicaragua Bulgaria 9 21 Norway Canada 232 67 Panama Colombia 19 27 Philippines Costa Rica 14 24 Poland Czech Republic 109 14 Romania Ecuador 12 11 Slovakia El Salvador 24 87 Slovenia EC-15 20 22 South Africa Guatemala 53 70 Switzerland Hungary 28 90 Thailand Iceland 23 2 Tunisia Indonesia 13 12 United States Israel 54 20 Venezuela Japan 61 1368 TOTAL

Table 3.5 gives the number of lines with tariff-quota committed by different countries in UR. It shows that Norway made commitment for the maximum number of lines: 232. EC committed tariff quota for 87 lines in the UR, while the United States made commitment for 54 lines. A significant number of these commitments were made for poultry, egg, and egg products. WTO categorised the different lines of the tariff quota in 12 broad commodity groups (see Table 3.5). In this context, it should be remembered that different countries are following different administrative methods (Table 3.6) to fill tariff quotas.

Although the tariff-quota leads to provide a minimum market access for imports16, the high levels of over-quota tariff and stringent administration methods (for imports) do not allow imports above the quota levels.

In the Uruguay Round, India had not opted for tariff quota for any tariff line (see Table 3.5). The removal of India's QRs led to a significant increase in imports of select agriculture items. For example, skimmed milk powder imports increased from 20003000 tonnes between April and October 1998 to around 18000 tonnes during the same period in 1999. Since, India had no options to restrict increase in the level of imports, this forced India to renegotiate the binding rates and/or establishment of quota-tariff with 'principal supplying interests' like the United States, European Union, Canada and New Zealand in 1999/2000. India has successfully renegotiated this deal for 17 commodities.

The renegotiated deal would enable the country to enhance the import duty, or establish tariff quota on select lines. In this context, it should be remembered that the deal was part

84

of a trade-off with agriculture exporting countries, under which other developed countries were allowed to increase their market access in India for certain other items like edible oil.

Table 3.6: Principal Tariff Quota Administration Methods- Number of Tariff Quotas by Product Category, 1999 DA Dairy

ME Meat*

EG Eggs**

BV Beverage

TB Tobacco

FI Fibres

72 13 28 2 3 3 3 -

22 13 8 3 3 1 1 -

54 16 47 18 13 2 10 21 -

88 26 77 18 23 4 9 -

7 11 2 1 -

9 11 11 2 2 -

211 26 62 10 17 6 3 1 13 5

7 1 3 1 1 -

7 7 2 1 1 -

21 14 14 2 1 1 3 -

38 2 8 1 4 -

642 147 337 56 75 21 9 15 60 6

TOTAL

217

124

51

181

245

21

35

354

13

18

56

53

1368

**

OA Other

SG Sugar

106 18 66 3 11 7 1 4 1

CO Coffee, tea, etc.

OI Oilseeds

Applied tariffs First-come, first served Licences on demand Auctioning Historical importers State trading Producer groups Other Mixed methods Non specified

Administrative Method

FV Fruit & veg.

CE Cereals

Product Categories =>

ALL

* Bovine meat, pigmeat, poultry meat, sheepmeat, live animals, aggregate d meat tariff quotas (e.g. beef and sheepmeat), processed animal products Eggs, other egg products, aggregated egg and products tariff quotas

Conclusion l The Indian poultry industry has recorded extraordinary growth during the last two

decades. Demand for poultry products has also been found to be steeply rising. l The United States, China, European Union (EU), and Brazil are the leading

producers, consumers, and exporters of poultry products. The main importers are Russia, Hong Kong, Mexico, and Japan. The level of imports is significantly increasing over time. l An important characteristic of poultry industry is its oligopolistic structure a few large companies dominate the international market. l There is still government intervention in the market economies of the west. The United States supports its domestic poultry industry through price support and export subsidies, besides levying import duties at a specific rate whose ad valorem equivalent works out to be high. Similarly, Canada also supports its home poultry industry through domestic price support and export subsidies; besides, there is a two-tier tariff, one for in-quota and another for out-quota. l Trade liberalisation in developing countries is slowly changing the structure of native poultry industry. This can be illustrated by the case study of the Philippines poultry industry. Imports of poultry products in the Philippines grew tremendously after 1996, even though domestic production was enough to meet local requirements. In 1997, the United States accounted for four-fifths of chicken imports to the Philippines. Imports started competing with local production because the costs of poultry imports were lower than the price of domestically produced meat. l A review of import policies of select countries demonstrates how the member countries, particularly western countries, have adopted different instruments to protect their national interests such as producers interest, consumers interest, farmer's interest, or implementation of 'domestic policy objectives'. Some

85

important instruments adopted by these countries are: i) ii) iii) iv) v)

Production subsidies, Export subsidies, Non-tariff measures, Special safeguard protection, and Tariff quota.

l India has not opted for any of these instruments in the Uruguay Round. It may have

done so because (i) India's imports were subject to different types of QRs, and (ii) India could negotiate for a relatively higher level of bound rates (for agriculture items). The removal of QRs is forcing India to consider alternate measures. l What are the options for the Indian poultry industry? In the short run, it has very limited options. One such option for the Indian industry is to impress the government to work out the tariff equivalent of QR on poultry products. The second is to impress the government to introduce tariff rate quotas (TRQs). Even countries like the Philippines have introduced this two-tier tariff: one for minimum competitiveness of the industry, and second for protection. l Already negotiations on Agreement of Agriculture (AoA) have started. India has to keep the interests of various actors, i.e. interests of its producers, consumers, employment, revenue, etc. Some of the policy options available for India are: l The government may take up the issue of special safeguard protection (SSP) in the on going review of AoA. Currently SSP is available to a few countries. The benefits of SSP should be extended to other countries. l A large number of developed countries are giving substantial production and export subsidies. On the other hand, the Indian poultry industry is taxed. To provide the domestic industry a level-playing ground in the international market, the steps may be taken to neutralise the subsidies provided by developed countries to the poultry sector. l An Association of Indian Poultry Industry should be set up which can also compile vital information/statistics relating to economic and trade policies/ variables.

This association should provide early signals to the industry so that the latter could initiate appropriate steps to safeguard interests of consumer and farmers (particularly small and marginal farmers). l India should speed up enforcement of technical standards for poultry products.

This step will not only restrict cheap imports, but will also help the industry penetrate export markets. l The poultry industry also should adjust itself to the changing world environment.

The economies of scale associated with large-scale production, marketing, and processing could probably be the right answer.

(Dr Rajesh Mehta is Senior Fellow at Research and Information System for Developing Countries (RIS), New Delhi can be contacted at: rajeshmehta@ris.org.in) (Dr Nambiar is Director, Sardar Patel Institute of Economic and Social Research, Ahmedabad, India) End Notes 1.

Chicken cut-ups (HS 020713 and 020714) and some preparations (i.e. HS 16023 and

86

2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

12.

13.

14.

15.

16.

160239), attract a duty of 100 per cent basic customs duty.

Not for some commodities which have mega tariff.

For details, see WTO, India-Quantitative Restrictions on Imports of Agricultural, Textile and Industrial Products: Agreement under Article 21.3 (b) of the DSU, WT/DS90/15, Jan. 17, 2000.

Except for four tariff lines, whose tariff rate is 100 per cent see Table II.3 for details.

It has been noticed that the tariff-equivalence of a large number of items of poultry products is significantly higher than 35 per cent.

The government has revised the tariff rates of two more groups of the poultry sector, i.e. HS 0207.13 (Meat and edible offal, of the poultry of heading No. 01.05: Cuts and offal, fresh or chilled) and 0207.14 (Meat and edible offal, of the poultry of heading No. 01.05: Cuts and offal, frozen).

In 2004-05, tariff rates were reduced from 35 per cent to 30 per cent.

India defines custom tariff rates at 6-digit HS level.

Out of 5112 lines for which tariff rates are defined.

In some items the phasing-out period is 6 years.

Except for a few types of juices (at 85 per cent) and a commodity, i.e. hop cone (75 per cent).

India is exporting Egg powder to select countries, including Germany, against a temporary permit.

Cited in W. Bello, and A. Kwa, â&#x20AC;&#x2DC;The GATT Agreement on Agriculture and Food Security: The Philippines Caseâ&#x20AC;&#x2122;, 1998.

Average for 1986-88 for most of the countries.

For details see WTO, Tariff Quota Administration Methods and Tariff Quota Fill, Committee on Agriculture, G/AG/NG/S/8, 26 May 2000.

Around 3 to 5 per cent.

Small and Medium Enterprises in Pakistan Iqbal Mustafa and Farrukh M. Khan One of the defining characteristics of a prosperous and growing economy is a flourishing small and medium enterprise (SME) sector. SMEs contribute to economic development in multiple ways, creating employment for expanding rural and urban workforce and providing much needed flexibility and innovation in the economy as a whole. Their ability to diversify economic activity makes a significant contribution to exports and alleviates poverty. Such benefits, however, have not been fully realised in Pakistan as yet.

Development of small businesses has long been debated at public and private forums in Pakistan, but until recently the motivation behind these efforts was more socio-political than economic. The main focus of economic policies, budgetary measures and regulatory regime was large scale industry. As a result, structural imbalances were created in Pakistan's business environment, which got skewed unhealthily towards promoting large scale industry.

Coined by economists during the 1990s, SME is a relatively new term in Pakistan's development jargon. In 1998, the government of former prime minister Nawaz Sharif, becoming cognizant of SMEs' economic importance, formed Small & Medium Enterprise Development Authority (SMEDA) as the flagship organisation meant to provide support to SMEs in Pakistan through: 1.

2.

3.

the creation of a conducive and enabling regulatory environment; development of industrial clusters; and the provision of Business Development Services to SMEs in all areas of business management.

The present government also regards the SME sector as the future conduit for growth and investment in the country1.

SMEs There is no uniform definition of SMEs applicable across the board in Pakistan, which is an indication of the absence of concerted efforts to promote SMEs in the country.

Different departments and organisations define SMEs in accordance with their functional ease rather than market situation. For example, the SME Bank defines an SME as that which has total assets up to Rs. 20 million whereas a medium scale enterprise may have total assets equaling Rs. 100 million. On the other hand, SMEDA defines SMEs according to the dual criterion of productive assets and number of employees. This disparity in definitions adopted by various SME support departments (Table 1), in itself acts as an impediment for the growth of these businesses.

87

88

Table 1: Various Institutional Definitions of SMEs in Pakistan

Economic Importance of SMEs in Pakistan

Institution

Small

Medium

Small and Medium Enterprise Development Authority (SMEDA)

10-35 Employees or Productive assets of Rs 2-20 million

36-99 Employees or Productive assets of Rs. 20-40 million

SME Bank

Total Assets of Rs. 20 million

Total Assets of Rs. 100 million

Federal Bureau of Statistics

Less than 10 employees

N/A

State Bank of Pakistan (SME Prudential Regulations effective since January 2004)

An entity , ideally not being a public limited company, which does not employee more than 250 persons ( manufacturing) and 50 persons (trade / services) 2 and also fulfills one of the following criteria: (i)

A trade / services concern with total assets at cost excluding land and buildings up to Rs 50 million.

(ii)

A manufacturing concern with total assets at cost excluding land and building up to Rs 100 million.

(iii)

Any concern (trade, services or manufacturing) with net sales not exceeding Rs 300 million as per latest financial statements.

Punjab Industries Department

Fixed assets with Rs. 10 million excluding cost of land

Sindh Industries Department

Entity engaged in handicrafts or manufacturing of consumer or producer goods with fixed capital investment up to Rs.10 million including land & building Fixed investment. up to Rs. 20 million excluding land and building

Punjab Small Industries Corporation

SMEs constitute more than 90 per cent of businesses in Pakistan, all of which function within the private sector and mostly operate in the undocumented informal part of the economy. They represent a significant component of Pakistan's economy in terms of both value addition and employment generation. As they predominantly provide employment to lower income groups, they are also considered an important vehicle for poverty reduction. SMEs, in particular, play a key role in the manufacturing sector by providing 80 per cent of the total employment, contributing over 30 per cent to GDP, and generating one-fourth of the sector's export earnings.

Table 2: Contribution of SMEs in Manufacturing Sector

Employment

GDP

Value Added

Export Earnings

80%

30%

30%

25%

Source: Economic Survey of Pakistan, 2003 -04

The ILOSMEDA study titled: Creating a Conducive Business Environment for MSMEs in Pakistan, estimates the share of SMEs in the total employment of labour force of Pakistan to be about 35 per cent3. Approximately, half of the total SMEs activity is concentrated in five sub-sectors; grain milling, cotton weaving, wood and furniture, metal products and art silk. For the past three decades, the fastest growing export industries have been dominated by the SMEs. Export contribution from SMEs emanates from sub-sectors, cotton weaving and other textiles and, surgical equipment4.

Table 3: Share of Key SME Sub sectors in Pakistan

N/A

Sub-sectors

Percentage Share

Cotton Weaving

13%

Global SME Scenario

Other Textiles

6%

SMEs play a vital role in the growth and development of leading economies of the world such as USA, Japan, South Korea, Thailand, Malaysia and many others. SMEs in these countries make major contributions to employment creation as well as GDP growth (see charts below).

Metal Products

7%

Carpets

4%

Art Silk

5%

Grain Milling

16%

Jewelry

4%

Wood & Furniture

10%

Others

35%

SME Share in Total Employment

GDP Contribution of SMEs

100% 80% 60%

100%

81%

40%

80%

63%

63%

60%

42%

47%

57%

40%

20% 35% 0% India

S. Korea Indonesia

Source: Economic Survey of Pakistan, 2003-04 60%

USA

Pakistan*

Source: SMEDA-ILO Study on Creating a Conducive Environment for MSMEs in Pakistan

60% 90%

58% 53%

20%

Japan

50%

60% 50%

40%

40% 10%

0% Italy SME Contribution to GDP

USA

Russia Others than SMEs

Source: SMEDA-ILO Study on Creating a Conducive Environment for MSMEs in Pakistan

There are a number of factors responsible for the importance of SMEs in Pakistan. First, SMEs foster an entrepreneurial culture and provide resilience in the economy. Second, SMEs dominate the fastest growing export sub-sectors, such as cotton weaving and surgical instruments. Third, they are an important vehicle for poverty reduction. Finally, SMEs are significant contributors to the Pakistani economy in terms of both value-addition (30 per cent) and employment (80 per cent)5.

One of the strongest arguments advanced for favouring SMEs in Pakistan is that their efficiency in resource allocation is higher from a social viewpoint in that

89

90

they provide more employment at lesser capital costs compared to large enterprises.

For instance, the Ministry of Labour, Government of Pakistan, estimates that between 2003-2008, there will be an addition of 16 million persons to the labour force. To put these new entrants to work would take an investment of Rs. 5.2 trillion in large scale sector while only Rs. 8 billion in the small/micro scale sector. In the medium scale sector the cost would be Rs. 0.8 trillion. These figures are based on SMEDA estimates assuming that in a textile spinning unit (large scale) Rs. 330,000, in a Stitching Unit (medium scale) Rs. 50,000 and in a hand-knotted carpet factory (small/micro scale) Rs. 500 is required to create one job.

Table 4: Investment Estimates for Job Creation

Investment Required to Create Jobs (Rs) Year

Labour

Large Scale Sector

Medium Scale Sector

Small/Micro Sector

New Labour Injected 2003-2008

16 Million

5.2 Trillion

0.8 Trillion

8 Billion

New Labour Injected 2008-2013

14 Million

4.6 Trillion

0.7 Trillion

7 Billion

Source: SMEDA estimates based on approximated number of future entrants in the job market.

Employment Statistics Wide differences exist between various data sources on total labour force estimates for Pakistan. Nevertheless, the figure below maps the sectoral distribution of employment based on 1997-98 Labour Force Survey (LFS) data.

Total Employment 35.9

Employment Distribution in Pakistan The share of non-agricultural sector in total employment is 53 per cent. Further classification of data is done on the basis of formal and informal sector. 'Informal' is defined as those establishments that are not registered with any government department or agency. All establishments of less than 10 workers fall under this definition, given that they are not required to register under labour laws. Almost 68 per cent of non-agricultural employment is estimated to be in the informal sector, indicating that the majority of establishments in the non-agricultural sector are micro enterprises.

According to the Census of Manufacturing Industries (CMI) 1995-966, total employment in the formal manufacturing sector is 0.6 million (or 10 per cent of the total formal non-agricultural sector employment) The remaining employment in the formal non-agricultural sector is absorbed by the trade and services sectors.

Employment in the informal manufacturing sector is estimated at 3 million persons7, with a share of 23 per cent of the total employment in the informal nonagricultural sector. Thus, 77 per cent of non-agricultural informal employment is being generated by micro enterprises in the services and trade sectors.

MSMEs' Share in GDP Micro, Small and Medium Enterprises (MSMEs) contribute around 7 per cent of the GDP, and 9 per cent of agricultural GDP. This low share is due to the dominant presence of micro-enterprises in the three sub-sectors services, manufacturing and trade & hotels. Although the contribution of MSMEs to total GDP is not very high, it still represents almost 13 per cent for the manufacturing sector and 11 per cent for the trade and services sector.

Table 5: Distribution of Estimated MSME GDP by Sector

Non-Agriculture 18.94 Rural 8.8 Urban 10.2

Agriculture 16.96 Rural 16.4 Urban 0.6

Formal 6.1 Rural 2.4 Urban 3.7

Non Manufacturing 5.5

Manufacturing 0.6*

Informal 12.8 Rural 6.4 Urban 6.4

Non Manufacturing 9.8

*: CMI 1995-96

Sector

Share in GDP

1.

Services

17%

2.

Manufacturing

30%

3.

Trade & Hotels

53%

Source: Creating a Conducive Policy Environment for Micro, Small & Medium-Sized Enterprises in Pakistan.

ILO/SMEDA, SEED Working Paper No.29. (Geneva, 2002).

Manufacturing 3

Some studies have estimated the share of MSMEs in GDP at a much higher level. In this context, it is interesting to note that it has been estimated that the â&#x20AC;&#x2DC;undocumented economyâ&#x20AC;&#x2122; accounts for 55 per cent of the GDP of Pakistan. Depending on the methodology, the size of enterprises covered and the varying results obtained in surveys, figures about the share of MSMEs in GDP may be either under or overestimated.

SME Development: Potential and Opportunities Source: Labour Force Survey 1997-98 figures quoted in Creating a Conducive Policy Environment for Micro, Small & Medium-Sized Enterprises in Pakistan. ILO/SMEDA, SEED Working Paper No.29. (Geneva, 2002).

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There is considerable evidence to show that sectors dominated by SMEs are better able to exploit 'dynamic' gains through widely dispersed learning, both geographically and in terms of the number of firms. Sectors dominated by SMEs tend to generate higher levels of competition and mobility, which in turn forces higher levels of

92

learning among firms. This occurs through two mechanisms. First, the discipline imposed by competition forces firms to innovate at a faster rate in order to survive.

institutions (DFIs) to develop new financing techniques and innovative products which can meet the financial requirements of SMEs and provide a viable and growing lending outlet for banks/ DFIsâ&#x20AC;&#x2122;.

However, the market mechanism has not significantly improved the access of smaller firms to formal credit, especially due to the absence of any role models in the market. Commercial banks and DFIs, in spite of having established SME departments are still reluctant to come up with any viable loan products and lending schemes. And the SME Bank remains incapacitated to deal with SMEs financial problems on account of the restructuring process.

Taxation issues Fiscal measures have decisive role to play in initiating and promoting SME growth in Pakistan and nothing could be worse than ever shifting policies.

Typically, small businesses are characterised with relatively high compliance costs in terms of tax laws and other forms of government regulation. Compliance costs have monetary implications such as paying tax advisor fees or salary payments to personnel dealing with tax issues, time cost implications in the form of time spent by a taxpayer to handle tax issues and psychological cost in terms of anxiety, stress, and apprehensions related to possible mistakes leading to the possibility of audit by the tax authorities.

Table 6: Contribution of the Dominant Sub-sectors in Manufacturing Value -Added (As a percentage of value-added) Large-Scale Manufacturing

SMEs

1995-96

1987-88

1996-97

1987-88

All Industries

100

100

All Industries

100

100

Textiles

22.31%

17.35%

Cotton Weaving

11.16%

13.19%

Food & Beverages

15.19%

15.95%

Silk and Art Silk

6.96%

5.11%

Electrical Machinery & Supplies

7.67%

3.27%

Jewellery Products

5.95%

7.65%

Industrial Chemicals

8.53%

6.98%

Wooden Furniture

6.18%

5.96%

Non-Metallic Mineral Products

7.15%

7.69%

Leather Footwear

3.65%

4.11%

Tobacco

6.18%

10.08%

Structural Products

5.08%

3.26%

Total contribution of dominant sectors

67.03%

61.32%

Total contribution of dominant sectors

38.98%

39.00%

Source: Bari, F., Cheema, A. & Ehsan -ul-Haque. Barriers to SME Growth in Pakistan: An Analysis of Constraints, June 2003.

Firms in the SME sector, encounter an increasingly complex legal, tax and administrative environment, both in starting up and developing their business.

According to the survey conducted for World Bank SME Policy Note (June 2001), 67 per cent of responding enterprises termed tax regulations as most problematic. The survey reports that 56 per cent of businesses reported the crunch of taxes, while 28 per cent of businesses felt that taxes in the country are too high. It also shares that present tax structure and administration generally distort incentives and discriminate against small firms, who are harassed by the tax authorities.

Smaller firms found tax related issues more restrictive than larger firms, 69 per cent of firms, whose size of assets was less than Rs.1 million faced the greatest of tax related problems. Due to cost constraints, it was not possible for such small enterprises to maintain books of account13 as per law.

Table 7: Firms Access to Formal Finance

(as percentage of total in the category)

Firm Size

Age of Firm (years)

No of Employees

0-5

6-10

11-20

21 and more

All Firms

0-10

0%

0%

0%

0%

0%

11-49

0%

35%

0%

0%

29%

50-99

100%

67%

75%

15%

50%

100 or more

100%

75%

75%

83%

80%

All Sizes

50%

67%

64%

50%

59%

Source: Bari, F., Cheema, A. & Ehsan -ul-Haque. Barriers to SME Growth in Pakistan: An Analysis of Constraints, June 2003

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Labour issues Labour laws and regulations in Pakistan14 are considered to be one of the most complicated areas with which a business enterprise deals. Based on concerns related to the rights of labour, there are 56 labour laws complying to which is literally impossible for SMEs. Not only are these laws inherently inconsistent but also entail numerous labour inspections that further impede the growth of small and medium enterprises.

Other issues are related to reforms of local labour offices and active measures of labour market policy still remain outside the scope of the reform agenda being undertaken by the government. Limited training options for middle management, low skills of work force, inadequate vocational training facilities are weaknesses that need immediate attention.

Market constraints A typical SME in Pakistan caters to the domestic private sector and their activities are mostly concentrated in specific regions. Only 8 per cent SMEs are exporters15 and fewer than 4 per cent are suppliers to the government sector. Some of the issues are related to the inability of SMEs to enter export markets are: tough bargaining price (36%) and supplies on credit (34%) and other are related to absence of public sector programs aiming at internationalisation of SMEs and binding public sector for procurements from SMEs. High market transaction costs, inefficient contract repudiation and distorted competition are some of the key retardants in the growth of manufacturing and retail firms in Pakistan. Competition from smuggled goods and unregistered companies is also acting as a severe constraint on firm-level SME growth, especially for small and medium scale manufacturing sector.

For growth-oriented exporting firms, sourcing of quality inputs is a major problem due to the lack of a network of reliable suppliers, which adds to the transaction costs. SME firms are not large enough to furnish sufficient demand to be an incentive for high quality input suppliers. Second, in the absence of diverse sources of credit, SMEs have to rely on suppliers' credit to procure high quality raw materials, which prevents them from investing in manufacturing high quality products.

Law and order The law and order situation in Pakistan has always been regarded as worrisome.

According to a survey conducted by Gallup, Pakistan, in 2002, one in five businesses interviewed had been a target of at least one crime during the survey year. Firms in NWFP spend 4.5 per cent, in Sindh and Punjab 1 to 2 per cent of their revenue on security. One in four SMEs consider law and order to be a severe problem16.

Law and order problems weaken property rights and as a result weaken the investors' decision to invest. These problems are clearly linked to the manner in which the law enforcement and criminal justice system functions.

Human resource development

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One of the major challenges that SMEs have to face is the emergence of the knowledge-based economy. In order to maintain their competitive advantage these days, nations must continue to innovate, change and upgrade, by nurturing a burgeoning entrepreneurial spirit and skill development of human resources.

Competitive advantage is determined by the productivity with which a country, region or cluster uses its human, capital and natural resources. Pakistan's international competitiveness markedly declined over the past few years17. Part of the blame is shared by lower productivity of the workers. Evidence reveals that median labour productivity, as measured by annual value added per worker, is 25 per cent lower in Pakistan than in India and 35 per cent lower than in China. Labour productivity, however, in Pakistan is 46 per cent higher than Bangladesh18.

Infrastructure Basic physical infrastructure is a prerequisite to growth and development. According to the Investment Climate Assessment of Pakistan conducted by the World Bank, issues related to power supply, i.e., unscheduled power shut downs and access to connections are irritants which significantly affect the productivity of firms in Pakistan. The survey estimated that a typical business in Pakistan loses 5.6 per cent in annual sales revenue due to just this single factor. Differences associated with firm size recognize that smaller firms are relatively hard hit in comparison to the larger ones because of their inability to arrange alternate power source in the form of private power generators. Regarding power supply, high rates of power, poor quality of delivery and unreliability are serious concerns for SMEs in Pakistan.

Similarly, lack of access to telecommunication facilities and transport also prove detrimental to smooth growth and transition of smaller firms to larger ones.

The Investment Climate Assessment notes that the chief problem in the provision of telecom services is the shortage of new fixed line connections, which stand at a mere 0.50.6 million a year for the whole country. A review19 of trade in selected commodities estimates that Pakistan could save up to 16.5 per cent of the value of exports by improving its trade and transport logistics systems. Inefficiency in transport alone is estimated to cost the economy Rs. 320 billion a year.

Globalisation Of the many impacts of globalisation, the following two are of particular interest to SMEs: l Acceleration in the pace of growth of world trade l High levels of competition in the global market place

With the coming of WTO regime, SMEs have to manage growth and change in an environment where the pace, patterns and organization of production will need to be transformed fundamentally. Trade liberalisation at the global and regional levels, the new Information & Communication Technology (ICT) tools have combined to create rich opportunities as well as formidable challenges to all interdependent countries and enterprises. Competition has become increasingly fierce among the global and regional economies and enterprises. Consumer preferences and market

96

standards have become more sophisticated and exacting. Competitive advantage is now determined by several non-price parameters such as quality, health and safety,

Enhance export readiness of SMEs through enabling policy measures and an l action plan. For this purpose, effective collaboration among SMEDA, Export Promotion Bureau (EPB), and Pakistan Standard and Quality Control Authority (PSQCA) has been proposed for the development of a policy and action plan to enhance export readiness of SMEs with the help of these institutions. Therefore, the business plans for SMEDA & EBP are being developed so that SMEs are facilitated.

Improving SMEs' access to finance l In addition to SME friendly Prudential Regulations, following steps are required for increasing their access to formal financial sources: l Establishment of support infrastructure to improve coverage of credit information to facilitate quick and reliable loan processing mechanism l Improve access to risk capital by revising tax regulations for risk capital investors l Deepen supply and marketing channel financing to small clients of corporate entities through partial credit guarantee. l Support commercial banks to develop SME dedicated financing capabilities, equity investment products and to invest in capacity building of their staff to deal with the peculiarities of the SME sector.

Improved access to Business Development Services (BDS) To develop demand for upgrading technical and management skills of SMEs, subsidized training facilities need to be developed, preferably through private sector BDS providers. In addition, cluster specific, demand driven technology common facilities centres should be established to benefit a large number of enterprises.

SMEDA as a facilitator for SMEs. l SMEDA has so far undertaken significant advocacy work, awareness-building

activities, and prepared a number of important sector strategies, publications and feasibility studies for SMEs. However, the qualitative fruits of these efforts are yet to reach the SMEs. Thus in order to achieve a significant outreach to the SMEs and fulfil its mandate more effectively, SMEDA needs to be empowered in terms of resources and its autonomous status needs to re-established as the apex body for SME growth stimulation.

Conclusion As discussed earlier, a number of developed countries of the world depend on their small and medium for technological innovation, revenue growth and employment generation. In fact, SMEs are the foundation upon which the edifice of their large scale sector stands. A similar potential exists in Pakistan. However, to kick start an economic revolution of this nature, if not magnitude, would require nothing short of a shift in cultural paradigm among all the public and private sector stakeholders. The government with its archaic state machinery in the form of ministerial departments and SMEs with their characteristic short-term outlook and non-entrepreneurial attitude, will not be able to provide viable answers to the current and impending challenges that Pakistan economy faces. This situation leads to a non-conducive business environment for SMEs in the country, i.e., low business start-up and survival rates, compounded by the inability of SMEs to graduate from micro to small to medium to large scales. All the growth impediments discussed above are symptoms of

97

98

this basic problem. Given this scenario, SME development efforts in Pakistan will have to be comprehensive, dynamic and sustainable over a long period. In contrast to the piecemeal and sporadic (mostly donor induced and politically hyped) approach of the past.

(Iqbal Mustafa has been a member of the Central Board of the State Bank of Pakistan from 1997 to 2001. He was the CEO of Small and Medium Enterprises Development Authority (SMEDA) from 2001 to May 2003. He can be contacted at: mustafa@hujra.com) (Farrukh M. Khan is a marketing professional with an academic background in development economics. He is currently working as Manager, Marketing Services at SMEDA, Lahore).

14.

15.

16.

17.

End Notes 1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

12.

13.

99

Government of Pakistan has declared the SME sector to be one of the four major drivers of growth, along with Oil & Gas, Telecommunications & Housing & Construction sectors. As the Economic Survey 2003-04, Chapter 3 puts it ‘…the foundation of industrialization could not be established without an efficient network of SMEs’.

Enterprises exporting up to US$2.5 Million a year are considered Small by the State Bank of Pakistan and Export Promotion Bureau.

Creating a Conducive Policy Environment for Micro, Small & Medium-Sized Enterprises in Pakistan. ILO/SMEDA, SEED Working Paper No.29. (Geneva, 2002).

Economic Survey of Pakistan, 2003-04 Economic Survey of Pakistan, 2003-04 The CMI is a census of all manufacturing sector establishments that are registered under the Factories Act 1934. The data might be underestimated, as not all the registered establishments report their data in the census whereas they might as well be in operation at the time of the census. Data from the latest CMI are for 1995-96 while data from the LFS survey are for 1997-98. However, as there was hardly any growth in the registered manufacturing employment between 1990-91 and 1995-96, it can be safely assumed that the growth between 1995-96 and 1997-98 would be minimal and no extrapolation between these two years is necessary.

Obtained by deducting employment in the formal manufacturing enterprises (CMI data for 1995-96) from that of total employment in manufacturing according to LFS data.

However, this inference should treated with caution, as it could well be a consequence of poorly designed sampling frames employed for both the Census and Survey data-sets in Pakistan.

World Bank Investment Climate Assessment survey was conducted between May and November 2002 by SMEDA in collaboration with the World Bank covering a random selection of 965 mainly manufacturing businesses (90% being SMEs), drawn from 12 largest cities of Pakistan. To date it represents the most comprehensive data set.

F. Bari, A. Cheema and Ehsan-ul-Haque, Barriers to SME Growth in Pakistan: An Analysis of Constraints, June 2003.

This is also corroborated by recent State Bank of Pakistan Annual Reports (various issues), which show that loans up to a size of Rs. 5,000,000 represent a very small proportion of the credit volume. Table 7, however, does not point to a strong correlation between access to credit and firm-age.

The 56% figure is an addition of the three tax related responses: High taxes 28%, High Sales tax16% and high Income Tax Rate 12% In Japan, after the war in 1949, old taxation system was replaced by new system to resolve the problem of incomplete bookkeeping and fear of over-taxation of SMEs. The new system

18.

19.

20.

allowed certain tax merits if a tax return is made with a ‘certain formula of quick bookkeeping.’ This system resulted in not only the improvement of financial accounting but also the strengthening of financing systems for SMEs. A committee on Reforms in Regulatory Legal and Policy Environment was established in the Ministry of Industries & Production in 2000 with the purpose to coordinate, review, identify issues of concern and formulate recommendations on various laws effecting businesses. Some of their efforts have resulted in the consolidation of labour laws as announced in the Labour Policy 2002 and proposed amendments in the Factories Act 1934, Drug Act 1976, Boiler Act 1923, and Explosives Act 1884, and as such reviewed 101 commercial and labor laws that effect industrial sector.

World Bank SME Policy Note 2001. The results of SMEDA-World Bank Investment Climate Survey 2003 also confirm this finding.

The survey was conducted for Investment Climate Survey of Pakistan (2003), published by the World Bank Group.

World Bank Development Policy Review 2002 reveals that the annual manufactured exports of Pakistan are barely 12 per cent of those of Malaysia, 18 per cent of Thailand's, and less than a third of Philippines countries whose combined manufacturing exports were less than Pakistan's in the mid-1960s.

Investment Climate Survey of Pakistan (2003), published by the World Bank Group.

World Bank Development Policy Review (2002).

For instance, in the wake of implementation of WTO rules, tariff barriers have become an ineffective tool for developing countries to discourage exports which they deem unfit for imports to their economies. To counter this situation, countries of the European Union have come up with non-tariff barriers such the ‘Eco-labelling’ of products with strict environmental and health friendly criteria.

For details, visit < http://europa.eu.int/comm/environment/ecolabel/index_en.htm >

21. According to the World Bank's survey for SME Policy Note 2001, a vast number of small entrepreneurs are highly interested (42%) or moderately interested (40%) in acquiring new technology. It further elaborates that SMEs learn their skills from own family (40%), working for another employer (35%), and educational institutions (25%). On sources of technical know-how it reveals Books and journals (30%), other companies working in the same field (23%), internet (13%), and only 4% from formal institutes as a source of acquiring technical know-how.

22. Under PRSP government is following a five point strategy which includes: 1) Macroeconomic stability and Fast growth 2) Investment in Human Resources 3) Government's involvement in particular sectors (including SME) 4) Expansion in social security system and 5) Good Governance.

100

101

102

Sri Lanka: Cost of the Ethnic Conflict Krishna Chaitanya

Introduction Since the early 1980s Sri Lanka has experienced an ethnic conflict waged between the government and Tamil rebels, most notably the Liberation Tigers of Tamil Eelam (LTTE).

Table 1: Ethnic Composition of Sri Lanka

Population Group Sinhalese Sri Lankan Tamil Indian Tamil Sri Lankan Muslims Burghers

Proportion 1981 74.0% 12.7% 5.5% 7.0% 0.3%

Ever since the war broke out in July 1983, more than 60-70,000 people are estimated to have been killed. In the late 1990s, almost a million people, amounting to one-third of the total population of the north-east were living as internally displaced persons (IDPs), while a quarter of the total Sri Lankan Tamil population left the country.

Direct Economic Effects i. Various studies conducted in Sri Lanka estimate that the approximate expenditure incurred by the government for the years 1983-1995 was 131 per cent of the GDP in 1995. ii. Big companies like Motorola, Sony, Bank of Tokyo etc., were interested in investing in Sri Lanka during the early 1980s, but they later shied away fromdue to the uncertainty brought about by the war. iii. Potentially, the biggest income generator for the Sri Lankan economy is Tourism.

Sri Lanka had the best tourism statistics in South Asia in the early 1980s. But in the 1990s, countries like Maldives, Mauritius, which were way behind Sri Lanka in the 1980s, overtook Sri Lanka in the tourism sector. iv. More than 50 per cent of the trading in stocks in the Sri Lankan stock exchange is done by the Foreign Institutional Investors (FIIs). From the mid-1990s, the index fell from 986.7 to 447.6 as the FIIs shied away from investing in Sri Lankan stocks. v. The uncertain war climate forced the Sri Lankan government to offer an additional package of incentives for MNCs and other foreign companies to setup their industrial base in Sri Lanka. vi. The internal conflict weakened the Sri Lankan government's bargaining power with respect to attracting FDI, as the foreign companies started asking for a Required Rate of Return (RRR) of 27 per cent which is 5 per cent more than the international average rate of return of 22 per cent.

103

vii. The government was forced to concentrate on LTTE forces, thereby diverting attention from the reforms process. This led many other countries to overtake Sri Lanka on the economic front. If one compares Sri Lanka with India, the latter started the economic reforms program in 1991, whereas Sri Lanka started it in 1977. However, India has managed to achieve more in terms of economic growth and prosperity as compared to Sri Lanka. viii. The biggest setback for Sri Lankan economy is the fishery industry. Sri Lanka is 90 per cent self-sufficient in fishery allied industry. However, unfortunately most of the fishery industry is situated in the war region of North Eastern part of Sri Lanka.

Indirect Economic Effects i. The war gave a huge threat to infrastructure-related projects which involved millions of rupees, forcing the government to cut capital expenditure and divert that amount to fund the defense sector. ii. The government stopped some big highway projects because of shortage of funds.

Later the government opted for soft loan debt financing by various international donors. iii. An enormous brain drain occurred in the country. iv. Frequent security checks and scrutiny in the North Eastern part of Sri Lanka, which is under LTTE administration, create long delays, resulting in loss of productivity. v. The Prevention of Terrorism Act (1979) has been widely misused by various political parties at different forums, leading to political clashes. vi. The LTTE gave birth to and nurtured a lot of illegal activities such as smuggling, arms and ammunition sales. vii. Serious questions were raised on the law and order situation prevailing in Sri Lanka as the death toll till date is more than one lakh (100,000) people.

Benefits of War? Has the economy gained any thing from the 22-years old civil war? Who gains from this war? What are the benefits (if any) from this war? (a) Sri Lanka's military forces have expanded rapidly. According to various sources, the army has expanded by more than 2,00,000 from 1985 to date. (b) By taking into account the expansion of the armed forces, additional employment has been generated in the economy. (c) Certain key companies have prospered with the advent of the ethnic war as they provide the necessary goods and services required for the Sri Lankan government to run the armed forces. (d) Huge numbers of families are dependent heavily on the armed forces and many families earn their daily bread and butter from the salaries given to the army. (e) The standard of living of many Tamil families in Sri Lanka has improved because of migration to other countries and the remittances which they send from abroad.

Is War Good for Economic Growth?

Various research studies conducted in Sri Lanka state that the Sri Lankan economy has grown at an average of 4-5% per annum. Without the war, the economy would have grown at an average rate of 6-7% per annum. In a study conducted by IMF in 1998 the contribution of expenditure on the war to the growth rate of the economy is

104

estimated at 0.22 per cent of GDP, suggesting that the war did not act as a major source of demand to stimulate the economy.

benefits and pensions of soldiers, which is a further source of underestimation.”

Defence Budget Table 2: Post conflict & pre conflict time economic growth

Years 1. 1983-2002 (20 years of civil war) 2. 1963-1982 (20 years prior to war)

Annual Average GDP growth rate 4.35 % 4.55 %

The breakdown of Sri Lanka's defence budget into recurrent and capital expenditures from 1991 to 2001 is provided in Table 3.

Table 3: Defence Budget of Sri Lanka from the year 1991 2001 in Rs. Million

Source: Central Bank of Sri Lanka, Annual Report 2000, Special Statistical Appendix Table 7 .

The average annual growth of the GDP during the 20 year period of ethnic conflict (i.e.1983-2001) was 4.35 per cent, whereas in the 20 year period prior to the ethnic conflict (i.e., 1963-1982) it was 4.55 per cent (Table 2). The average annual conflict-time growth rate was marginally lower than the average annual pre-conflict growth rate. With profound economic liberalisation since 1977, the economic growth rate in the 1980s and 1990s should have been much higher than the previous two decades, but that did not happen. The primary reason for this relatively low growth rate during the post-liberalisation period could be attributed to the negative effects of the ethnic conflict since 1983.

According to M. Sarvananthan (2002a): ‘The average annual conflict-time GDP growth rate of 4.35% is an over-estimation, because since 1990 the national income accounts of Sri Lanka do not include the North East province. As the government lost control of vast areas of the North East province to the rebels, the economic and social data gathering in that province became impractical. Most of the statistical tables in the Department of Census and Statistics and the Central Bank publications have a footnote mentioning that the North Eastern province is excluded.

If the supposedly negative growth rates of the North East province were added to the positive growth rates of the rest of the country, the overall growth rates would have been lower than the official figures of the Central Bank. Therefore, the conflict-time economic growth rates may be considerably lower than the pre-conflict rates in spite of economic liberalisation. Thus, the notion that the Sri Lankan economy has been resilient in spite of a deadly conflict could be a myth.’

Year

Recurrent Expenditure

Capital Expenditure

Total Expenditure

1991

12,609 (81%)

3,054 (19%)

15,663

1992

15,627 (87%)

2,369 (13%)

17,996

1993

17,627 (85%)

3,105 (15%)

20,782

1994

21,989 (86%)

3,538 (14%)

25,527

1995

25,815 (74%)

9,156 (26%)

34,971

1996

33,117 (72%)

13,168 (28%)

46,285

1997

35,094 (76%)

10,874 (24%)

45,968

1998

45,314 (79%)

11,832 (21%)

57,146

1999

44,632 (82%)

9,601 (18%)

54,233

2000

57,841 (75%)

19,313 (25%)

77,154

2001

52,537(77%)

15,977 (23%)

68,514

Source: Central Bank of Sri Lanka, Various Issues

According to the above table, 80 per cent of the defence budget during 19912001 went into recurrent expenditures, while only 20 per cent was allocated to capital expenditures. This clearly shows that it is a labour intensive military expenditure which is incurred largely by the Sri Lankan government.

Budget Deficits and Expenditure on Defence (M. Sarvananthan, 2002a): ‘The defence expenditure, which was minuscule in the pre-conflict period, has shot up enormously since the early 1980s. For example, the defence expenditure shot up from Rs. 16 billion in 1991 to Rs. 77 billion in 2000, i.e. nearly fivefold increase in just a decade.’ The breakdown of Sri Lanka's budget deficits, defence expenditure and total government expenditure from 1982 to 2001 is provided in Table 4.

Table 4: Budget deficits & Expenditure on Defence, 1982-2002 selected years

Defence Expenditure The Sri Lankan government deficit is over 8% per annum, which could have been managed in a much better way had it curtailed its defence expenditure. The government was forced to spend heavily on the defence sector to recruit the army, pay salaries and pensions to the soldiers and purchase arms and ammunition, etc. But there are also contradictions in data on government spending on defence.

(Rs. in Millions) items 1. Government Expenditure 2. Budget Deficit as a % of GDP 3. Total Defence Expenditure 4. GDP (market prices)

1982 1983 33,531 39,637

1985 55,234

1988 1990 74,535 99,814

1993 1994 1995 1996 1997 1998 1999 2000 2001 1,40,460 1,67,768 2,00,482 2,14,710 35,097 2,68179 2,79,159 3,35,823 3,87,537

17.4

11.7

15.7

8.4

9.9

8.4

7.8

7.9

5,612

10,722 14,602

20,782

25,527

34,971

46,285

45,968 57,146

13.3

1,117 1,754

9.9

9.2

7.5

9.9

10.9

54,233

77,154

68,514

99,238 1,21,601 1,62,375 21,982 3,21,784 4,99,565 5,79,084 6,67,772 7,68,934 90,272 10,17,986 11,05,963 2,57,634 4,00,180

Source: Central Bank of Sri Lankan, Annual Report, various issues

(Sen & West, 1992) argue, “the data on defence expenditures of most developing countries are unreliable; usually they are underestimations. There are legitimate methodological problems in the measurement of defence expenditures.”

(M. Sarvananthan, 2002b) opines, “There are also deliberate attempts to camouflage defence expenditures supposedly to maintain secrecy. Sri Lanka is a country where defence expenditure data are unreliable due to both the aforementioned reason. The defence budget of Sri Lanka does not include disability

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The defence budget went up drastically due to the breakdown of the peace talks between the government and the LTTE and the outbreak of the war in June 1990.

According to Samam Kelegama (2000): ‘a number of military operations in early 90's escalated the defence budget to about 4.5 % of GDP. This led the government to introduce a defence levy, later termed as national security levy, of 1 % as a source of defence financing in 1992.’

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The overall deficit went up by over 10 per cent by the year 2001, a dangerous sign for the economy. The government had the biggest setback in early 2000 as the LTTE captured a major part of the North Eastern region and it was felt that the governement was losing control of the situation. The government was forced to make huge expenditure commitments to purchase defence equipments and ammunitions.

Therefore, the defence budget amounted to over 6 per cent of the GDP – the highest since 1983.

Defence Expenditure vis-à-vis Social Expenditure The breakdown of Sri Lanka's defence expenditure as a proportion to total public expenditure from 1991 to 2001 is provided in Table 5, which indicates that the government's expenditure on social spending decreased drastically in 2000 1nd 2001.

Table 5: Defence expenditure as a proportion to total public expenditure

Empirical Studies (Smith 1977, Lindgren 1984, Chan 1985, Knight et al. 1996, Galvin 2003) have found that ‘increased military expenditure (milex) reduces investment which in turn decreases economic growth. That higher military expenditure reduces investment has empirically been established and is one of the few robust conclusions from research on the economic consequences of military expenditure.’

Table 6: Various studies on Economic costs of internal conflict on Sri Lanka Author (s)

Period of Study Year of publication

Cost of Conflict

Methodology adopted

1. Richardson & Samarasinghe

1991

1983-1988

68% of GDP of 1988

Direct & indirect cost (built on assumptions)

2. Grobar & Gnanaselvam

1993

1983-1991

20% of GDP of 1991

Comparing the effect of military expenditure of investments, growth,

1997, 1999

1983-1992

88% of GDP of 1982

Increase of govt. milex less growth based on HarrodDomar Model

4. Kelegama. S

1999

1983-1994

131% of GDP 0f 1995

Study on increased military expenditures on growth, investments, damaged infrastructure,

5. Arunatilake, Jayasuriya, & Kelegama

2001

1984-1991

140%, 168%, 205% of GDP 1996

Increase of govt. milex less growth based on Harrod-Domar + extrapolated lost FDI.

3. Harris

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Defence Exp

11.2

12.0

10.9

12.9

14.3

17.7

16.8

16.9

16.4

17.0

14.2

Social Exp

11.2

13.0

9.9

12.8

12.7

13.5

12.6

12.0

12.7

9.8

9.3

(i) Education

3.5

5.4

4.3

4.5

3.5

4.2

4.2

4.7

5.0

3.8

2.6

(ii) Health

2.4

3.1

1.9

2.6

5.2

5.0

4.7

4.0

4.8

3.9

3.8

(iii) Poverty

5.3

4.5

3.7

5.7

2.0

3.2

3.0

2.5

2.6

2.0

2.4

Source: Goran Lindgren, (2003), Measuring the Economic Costs of Internal Armed Conflict

2.0

1.1

0.69

0.80

0.27

0.14

0.47

In Table 6, all five empirical studies have been conducted during the war period in Sri Lanka and revealed the impact of cost of war on the economic growth (during the war period) expressed in terms of percentage of GDP either with the staring or the ending year of their study.

(iv) R&R

Source: Central Bank of Sri Lanka, Annual reports, various issues

(M. Saranvananthan, 2002a) opines, ‘In 1995 the civil war entered a vicious phase with the strategy of 'war for peace' or 'peace through war'. One of the outcomes of this strategy is the acceleration of defence expenditures and the deceleration of social expenditures. Since 1995 the gap between defence expenditures and social expenditures widened considerably. This had profound negative impact on the human and social development indicators of Sri Lanka, which historically had an impressive record among the developing world.’

Outcome of High Defence Expenditure Heavy military expenditure has a negative impact on the growth of the economy.

Fig. 1.

High Military expenditure

Foreign Direct Investment Sri Lanka attracts foreign investors. When compared to its Asian counterparts, there is the potential to build on the country's rich natural resource base to develop highervalue-added agricultural and manufacturing products and tourism and related services. More than anything else, Sri Lanka offers an abundant supply of trainable workers. The adult literacy rate of 92 per cent is the highest in South Asia.

But the biggest drawback for Sri Lanka is its infrastructure. It fares very badly when compared to other Asian economies like Thailand, Malaysia, India and even Pakistan.

It needs a significant boost in order to attract private investments into infrastructure area.

The following factors are important for attracting FDI:

Low Economic Growth

Reduces investments

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l An educated and skilled labour force. l An efficient and fair legal system. l An adequate transportation system and other infrastructure facilities. l A strong anti-monopoly policy. l A sound macroeconomic policy and l Government policies.

Table 7 shows the FDI inflows into Sri Lanka from the year 1992 to 2002.

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Fig. 2. High growth leading to investments

Table 7: FDI inflows in Sri Lanka (in US $ Mn)

Year 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

FDI inflows 122.6 194.5 166.4 56.0 119.9 430.1 193.4 176.4 173.0 171.1 241.5

High GDP

Attract FDI into the country

Increase in per Capita Income

Source: adb.org

Incentives to Attract FDI Governments generally use some form of marketing techniques to attract FDI into the country. The most common type of incentives used by many nations include: l Direct Cash grants (capital grants). l Subsidies on land and building purchases. l Interest subsidies. l Tariff protection. l Exemption of imports and export duties. l Exemption or Lower rates of income taxes, dividend and capital gain taxes. l Guarantee for profit and capital repatriation.

Minimum Incentives Model This model states that the level of incentives provided by a government would come down as the market opportunities goes up. If the investors' Minimum Required Rate of Return is 20 per cent and the market opportunity provides only 15 per cent, there is a shortage of 5 per cent. Moreover, the value of incentives package should at least be equal to or more than 5 per cent, otherwise no foreign investor will consider the country for investment. Whether a country offers a high, average, low or negative incentive depends on the market opportunity. In some cases, no incentives may be required if the market opportunities are very high. Generally, developed countries need to offer very low incentives and under developed and developing countries need high incentives to attract FDI. Explanation Required Rate of Return: The rate of return needed to induce investors or companies to invest in something (stocks, projects etc).

Market Opportunity: Marketability of a product in an economy. The market opportunity for a product is determined by the purchasing power of consumers in the country.

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Increase in Purchasing power Greater Market Opportunity It is time for the Government of Sri Lanka to take stringent measures to attract FDI into the country. To attain a growth rate of over 6 per cent, Sri Lanka should attract investments up to 40 per cent of its GDP. A strong publicity mechanism needs to be adopted by the Government of Sri Lanka which can project the success stories in various sectors. The government should focus on highlighting the cases of successful FDIs and it should present a welldesigned publicity campaign bringing out the advantages that foreign nations could reap from investing in Sri Lanka.

The following recommendations can be used to attract FDI: a)

There is an urgent need from the state governments in Sri Lanka to provide separate investment laws relating to infrastructure and making private participation in infrastructure mandatory. b) The existing strategy of attracting the FDI should be more of company oriented in specific sector than broader ones. c) The Government of Sri Lanka should create separate investment fund for the purpose of attracting FDI into the nation. (In India the state government of Andhra Pradesh has Infrastructure Development Enabling Ordinance). d) There is no clear-cut policy framework in India for attracting FDI. Hence there is an urgent need to frame policy, which should sepal out ways and means to attract FDI. e) Sector-wise targets should be set and sector ministries must be made responsible for achieving these specified targets. f) Separate 'Investment Commission' can be created which should include eminent experts from national and international forum. The commission would work on

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g)

parlance with Government and would suggest government the required suggestions with respect to investments.

Do away with the BOI (Board of Investments) and implement a 'Two way system'.

Where it would be: i.

Automatic Approval. ii.

Though Government's Approval.

h) The Investment Commission has to give a statement 'Investment policy' for each year and at the end of the year the commission should give an 'Action Take Report' on the progress made and targets achieved during that fiscal. i)

Depending upon the industry, the government should provide tax holidays in order to woo the potential foreign investors. (India retained the incentives for IT sector for another six to seven years).

j)

The government should take a series of measures in attracting FDI by providing location specific incentives.

For example, if the foreign company establishes its branch or subsidiary immediately then the company need not pay 75 per cent of land registration charges. If the company has signed the Memorandum of setting up its base but will start the actual production after 6 months or one year then in that case it would get 15-20 per cent reduction in land registration charges.

Conclusion In the year 2001 the public debt of Sri Lanka was greater than its GDP (Sri Lanka Budget report, 2001) and the major reason was heavy expenditure on defence sector.

If the trend continues then Sri Lanka will find itself in a deep economic crisis from which it will not be able to recover for decades. It is time for the Sri Lankan government to draw a strategy for attracting FDI perhaps by visiting the Fortune 500 companies personally and presenting them the investment benefits in Sri Lanka. The government and the LTTE need to make sure that the peace talks initiated by the support of Norway should not fail.

(Krishna Chaitanya is Assistant Professor at the Dhruva College of Management, Hyderabad) End Notes N. Arunatilake, ?

S. Jayasuriya, and S. Kelegama, ‘The economic cost of the war in Sri Lanka’, World Development, 2001, vol. 29, Issue 9, p. 1483-500. ?

Central Bank of Sri Lanka, Annual Report, various years.

?

Steve Chan, ‘The

Impact of Defense Spending on Economic Performance: A Survey of Evidence and Problems’, Orbis, vol.. 29, issue 3, 1985, pp. 403-34. ?

D. Dunham and S. Kelegama, ‘Does leadership Matter in the Economic Reform process?

Liberalization & Governance in Sri Lanka’, World Development, vol. 25, no. 2, 1997. ?

Goran Lindgren, ‘Measuring the Economic Costs of Internal Armed Conflict A review of Empirical Estimates’, Paper for the conference: Making Peace Work in Helsinki, (4-5 June 2003) arranged by The United Nations University, World Institute for Development

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Economics Research.

?

L. M. Grobar and S. Gnanaselvam,

'The Economic-Effects of the Sri-Lankan Civil-War', Economic Development and Cultural Change, vol. 41, issue2, 1993, pp. 395-405. ?

Hannah Galvin, 'The impact of defence spending on the economic growth of developing countries: A cross-section study', Defence and Peace Economics, vol. 14, issue 1, 2003, pp.

51-59. ?

Government of Sri Lanka, Budget 2002, Colombo.

?

Geoff Harris, 'Estimates of the economic cost of armed conflict: The Iran-Iraq war and the Sri Lankan civil war,' Jurgen Brauer and William G. Gissy (eds.) Economics of Conflict and Peace, (Aldershot: Avebury, 1997), p. 269-91. ?

Geoff Harris, 'The costs of armed conflict in developing countries,' in Geoff Harris, Recovery from Armed Conflict in Developing Countries. An Economic and Political Analysis, (London: Routledge, 1999), p. 12-28. ?

IMF (2001), Sri Lanka Country Report No.01/71 (Internet edition).

?

IMF (2002), Sri Lanka Country Report No.01/71 (Internet edition). ?

Malcolm Knight, Norman Loayza and Delano Villanueva, 'The Peace Dividend: Military Spending Cuts and Economic Growth', World Bank, Working Papers No.1577, 1996.

Economy of War and Peace', Economic and Political Weekly, Nov. 23, 2003, pp. 4678-4685. ?

S. Kelegama, 'Economic costs of conflict in Sri Lanka,' in Robert I. Rotberg (ed.) Creating peace in Sri Lanka: civil war and reconciliation, (Cambridge, Mass. Washington, D.C.: World Peace Foundation and Belfer Center for Science and International Affairs, Brookings Institution Press, 1999). ?

Saman Kelegama, 'Economic Cost of Conflict in Sri Lanka', in R.I. Rotberg (ed), Creating Peace in Sri Lanka, Brookings Institution Press, Washington D.C., 1999. ?

Krishna Chaitanya, 'Growth of Foreign Direct Investment in India', Journal of Economic Research, vol 17, June 2004. ?

M. Sarvananthan, (2002a). 'Economic imperatives for peace in Sri Lanka', working paper.

?

S. Kelegama, 'Sri Lankan

?

M. Sarvananthan,

(2002b), ‘The International Monetary Fund in Sri Lanka: A Critical Dialogue’, Contemporary South Asia, vol.11 no.1, March, pp77-87, Oxford. ?

J. M. Richardson Jr. and S.W.R.d.A. Samarasinghe (eds.), (1991). ‘Measuring the economic dimensions of Sri Lanka's ethnic conflict’, in Economic dimensions of ethnic conflict, London New York: Pinter; St. Martin's Press, pp. 194-223. ?

Ron P. Smith, ‘Military Expenditure and Capitalism’, Cambridge Journal of Economics, vol.1, issue 1, 1977, p. 61-76. ?

Somnath Sen, (1992), 'Military Expenditure Data for Developing Countries: Methods and Measurement', in Geoffrey Lamb and Valeriana Kallab (ed.), Military Expenditure and Economic Development: A Symposium on Research Issues, Discussion Paper no.185, The World Bank, Washington, D.C.

? www.adb.org ? www.lanka.net/centralbank/notes.html ? www.imf.org ? www.Srilanka-Timeline.htm ? www.priu.gov.lk/EditorialReviews.html

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of the attributes of good governance have a chance to survive and prosper.

Strengthening of local government institutions can, therefore, be seen as a positive trend towards good governance.

Local Government in Bangladesh Pranab Kumar Panday

Introduction Bangladesh has repeatedly experimented with decentralisation in the post-colonial and post-independence period. Every successive regime between 1957 and 2001 attempted to reform the local government structure. The induction of local government, however, failed to ensure access and participation to the poor. The absence of tangible rewards for participating in local affairs often resulted in apathy and frustration to the villagers.

All successive governments in Bangladesh felt the need to have viable local government for ensuring effective governance. As a result, we have seen 'decentralisation' as an important policy agenda of all governments. The repetitive process of local government reform has been handed down to Bangladesh from Pakistan as a post-colonial extension. However, the necessity to reform the existing structure of local government by various successive governments in Bangladesh indicates their failure to create effective institutions for enhancing local democracy and delivering development programmes.

In order to analyse the process of decentralisation in Bangladesh and its justifiability, the following questions need to be addressed:

The main concern of this essay is to evaluate the process of decentralisation that took place under different regime in Bangladesh and analyse to what extent decentralisation has been ensured.

To what extent have the governments of Bangladesh been successful in ensuring decentralised local government?

2) What are the major issues associated with the decentralisation of local government in Bangladesh?

The Problem

Local Government

Local government is part of overall governance. Local government institutions, being nearer to people, can involve them in various ways: (a) planning and implementation of projects (b) supervision of educational institutions, hospitals and other government financed units (c) mobilisation of support for new initiatives like campaign against dowry, child labour etc. (d) enforcement of laws regarding gender discrimination, violence against women, environment protection (e) mobilisation of resources in the form of taxes, fees, tolls etc. Popular participation also assumes importance because of its potential for holding the local government institution accountable to the community.

On the other hand, local government institutions can enforce accountability of the central/national government authorities. The more aware, vigilant and active the community becomes through its participation in local government bodies, the greater is the pressure on both local government institutions and the government authorities to become transparent and responsive (Z. R. Khan: 1999).

The potential of local government institutions can be realised more effectively where there is decentralisation and devolution of power. Accountability, transparency, participation, empowerment, equity and all other attributes of good governance can become a part of the daily work of both the government and local bodies when decentralisation and devolution take place. Without decentralisation and devolution, local government bodies remain paper organisations without any effective role. It is no exaggeration to say that it is in a decentralised local government system that most

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1)

In some countries, the local extensions of the central government, and in others, traditional local power structures utilised for supporting field administration, have been misconstrued as being equivalent to local government. At times local government has been mistakenly considered an insignificant segment of the government. However, in industrialised countries, the number of civil servants at the local level is much larger than is commonly believed. In the United States, for example, there are four times as many local government employees as federal employees; even in a developing country, like India, the number of local level employees is as high as 40 percent that of federal employees (Siddique, 1994: 2).

With a view to avoiding confusion, it is better to differentiate ‘local government’ from ‘local politics’ and ‘local administration’. Local politics is a wider term and covers a host of areas besides local government. On the other hand, local administration means implementation of decisions by not only local government institutions but also national/ provincial government units operating at the field level.

In South Asia, local government is widely known as local self-government1.

For the purpose of this essay, local government is defined essentially in terms of some attributes: first, its statutory status; second, its power to raise finance by taxation in the area under its jurisdiction; third, participation of the local community in decision making on specified subjects and administration; fourth, the freedom to act independent of central control; and lastly, its general function, in contrast to the single-purpose character of many autonomous bodies.

Constitutional and Legal Basis of Local Government In any democratic polity, local government is given legal recognition either by an act of Parliament or by incorporation of relevant provisions in the Constitution (Khan,

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1996: 1). Bangladesh's Constitution of 1972 clearly spelt out the legal basis and responsibilities of local government. Article 59, Chapter III of the Constitution states that, 'Local government in every administrative unit of the Republic shall be entrusted to bodies composed of persons elected in accordance with law’. Article 60 of the Constitution states 'for the purpose of giving full effect to the provision of article fifty nine, Parliament shall, by law, confer powers on the local government bodies referred to in that article including power to impose taxes for local purposes, to prepare their budgets and to maintain funds (Constitution of People's Republic of Bangladesh, as modified up to 30th of November, 1998).

It is necessary to mention the constitutional and legal basis of the local government of Bangladesh because if the duties and responsibilities of the local government institutions are not demarcated by the Constitution or by the act of the parliament, or if there is no scope for the government to decentralise powers to elected local bodies, it is difficult to devolve powers. It is evident that the legal basis of the local government is clearly spelt out in the Constitution and the Constitution through Article 59, Chap III has ensured the devolution of power to local government bodies.

Figure-1 (Existing Structure of Local Government in Bangladesh3) Ministry of Local Government, Rural Development and Co-operatives Rural

Urban

Zila Parishad (64)

City Corporation (6)

Thana/Upazilla Parishad (460)

Pourashava (193)

Union Parishad (4449) Gram Sarkar

Brief Background

Decentralisation in Bangladesh

The institution of Local Government (LG) in Bangladesh goes back a long way. The origin of the existing local government institution can be traced back to the demand for self-government in British India. Initially local government was developed by the British to maintain law and order in the rural areas with the help of local elite backed by local police (Ali, 2001). The local elites were to be nominated in the local government institutions from among those who were trusted by the colonial authority. The British rulers institutionalised this system to perpetuate their political, economic and administrative ends and colonial extortion (Ali, 2001). In 1870, they introduced 'Choukidary Panchayet'2 as the local government institution. This system was later changed and renamed in different regimes from the British period to present Bangladesh as three-tier Union Committee (1885), two-tier Union Board (1919), fourtier Union Council (1959), and Union Parishad (1973) (Shafi, et.al, 2001: 3). After 1973, Union Parishad became the lowest unit of local government in Bangladesh.

British period Decentralisation in Bangladesh began even before the country's liberation in 1971. The British colonial administration established local governments through the Local SelfGovernment Act of 1885 to maximise land revenue collection and maintain law and order. Local officials during this period came from the local elite. But the process of decentralisation during British rule was obscure. The British were not interested in any degree of devolution. What appears from the real practice of local bodies is a picture of oppression and exploitation. There has not been any positive result for rural people apart from the fact that these experiments served the colonial interests of the empire. Although India was the first colony to become the experimental ground for such policies of decentralisation, the British reluctance to implement any real degree of decentralisation is also evident. One example of such reluctance is when the empire rejected the report of the Decentralisation Commission in 1907 which recommended an elected Panchayat (Tinker, 1967: 87).

There are two distinct kinds of local government institution in Bangladesh – one for the rural areas and another for urban areas. The local government in the rural areas represents a hierarchical system comprising four tiers: Gram Sarkar, Union Parishad, Upazilla Parishad and Zilla Parishad while the urban local government consists of Pourashavas and Municipal Corporation (Alam, 1984: 48). The following figure shows the existing local government structure in Bangladesh:

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Pakistan period Reforms regarding local governance were also introduced during the Pakistan period.

A new system of local government, known as the system of Basic Democracies, was introduced in the late 1950s. According to Zarina Rahman Khan of the University of Dhaka, ‘General Ayub Khan devised a decentralisation policy for rural development under the banner of the Basic Democracies System, which offered a four-tier government reflecting a mix of deconcentration and devolution.’ Rahman and Khan (1997:8) also added that the system of Basic Democracies was designed as a blend of democratic and bureaucratic values. It was, in other words, between 'devolution' and 'deconcentration' having nothing in common with the 'principles' and 'characteristics' of a democratic decentralised system. Though explicitly propagated as a programme of decentralisation, the system actually helped the military regime of General Ayub Khan in extending the stronghold of bureaucracy to the local level.

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Bangladesh period As a result of the long history of struggle for freedom and democracy, Bangladesh saw the importance of developing a sound democracy and increasing people's participation in the political process, decision-making, and development of the country after it emerged as an independent nation. Though slow in progress, reforms to strengthen local governance and expand democracy were made. Decentralisation was viewed as a strategy that would allow democratic governance and encourage people's participation. It was also a response to the challenge of reducing poverty.

‘The Constitution…gives enough opportunity to the lawmakers to develop viable selfgoverning local government institutions. However, as far as the implementation of the objective is concerned, the achievement is far from satisfactory.’ (Mujeri and Singh) The following are the various decentralisation strategies and developments in the local government system after 1971: The Mujib Period (1972 to 1975) After the independence in 1971, the Awami League government, headed by Sheikh Mujibur Rahman, brought the following reforms in the local government.

1)

The system of basic democracies was abolished and government bodies carried over from the days prior to independence were dissolved.

2) Public officials were authorised to form committees at different tiers of government to fill the void created by the termination of some government bodies. The committees created would, for the interim, perform local functions.

3) District governorship was introduced in 1973. This provided for a three-tier system with a directly elected Union Parishad (Council), a Thana development committee under the control of the sub-divisional officer, and Zila Parishad under the control of deputy commissioner. (An almost replica of Ayub Khan's Basic Democracies - Ed.) 4) Union councils were elected but were not able to function effectively due to the coup in 1975.

Mujib paid more attention to national than local issues. Although the Union Parishad (Council) was designed as a decentralised body of local government and the election in 1973 was to ensure grassroot democracy, the Awami League did not hold elections to the higher level councils, nor did it take any measures to devolve authority to any of them. There was a substantial lack of political and behavioural support among Awami League leaders for democratizing the system of governance. It was manifested when Sheikh Mujib abolished the parliamentary system altogether, introduced presidential rule under one-party rule known as BAKSAL, along with the 'governor system' introduced at the district level ( Rahman and Khan, 1997:8).

Under General Ziaur Rahman (1975 to 1981) In August 1975, Major General Ziaur Rahman seized all power as the Chief Martial Law Administrator. Nevertheless, Gen. Zia played a critical role in reviving the local government institutions in the country. The Local Government Ordinance 1976, promulgated by Zia, created Gram Sbaha (village councils) in an attempt to decentralize government down to the village level. In 1980, two years after General Zia became the elected president, all the Gram Sbahas were transformed into Gram

117

Sarkar (village government) in each of the 68000 villages of Bangladesh. The Gram Sarkar was a body consisting of gram pradhan (village executive) and 11 elected members representing different classes of the village. The Gram Sarkar was a minigovernment which could undertake planning and promotional programmes (Chowdhury, 1987:20).

The reforms initiated by Gen. Zia were different from the earlier policies of decentralisation. The bureaucracy was given a free hand to control the local councils once again. These bodies of local government remained as the deconcentrated form of decentralisation. The only exceptions were the Union Parishads and Gram Sarkars.

The Gram Sarkar had many characteristics common to those of Mawhood model of decentralisation. Although for the first time in Bangladesh, the Gram Sarkar provided for an equality of representation to various functional interests, many argue that implicit objectives of the reform package of decentralization during Zia's period was to gain direct political support for the military regime in its process of civilianisation (Hossain, 1989).

Lieutenant General Ershad (1982 to 1990) After Gen. Zia was assassinated by a military coup d'etat in 1981, the Gram Sarkar was abolished by the new military regime of Ershad, which seized power in March 1982. In his first year of office, Ershad initiated the reform measurers to decentralise the administration through the abolition of former subdivisions and upgraded the Thanas into Upazillas (sub-district). In hundreds of public meetings in the beginning of reform, Ershad and his associates of the Upazilla model pronounced that improving access and promoting participation were the primary goals of their reform. In contravention of this pledge to the nation, the military regime exploited every possible opportunity to weaken the democratic forces in the country and strengthened the autocratic bureaucracy. The political history of Bangladesh was repeated in the 1980s as the Upazilla was politicised in favour of the ruling military regime the way Pakistan's dictator Ayub Khan used the system of Basic Democracies in the 1960s, and the Gram Sarkar of the 1970s (Rahman and Khan, 1997:9).

Under Khaleda Zia's Five-Year Rule (1991 to 1996) It took Prime Minister Khaleda Zia only a few months after she came to power to abolish the Upazilla Parishad and reinstate the previous bureaucracy-dominated thana administration by promulgating the Local Government (Upazilla Parishad and Upazilla Administration Reorganization) (Repeal) Ordinance, 1991. In June 1992, a cabinet division resolution was passed to replace the Upazilla Parishad with Thana administration (GOB, 1992). Khaleda Zia’s decision to depoliticise the Upazilla system was also due to the fact that her party Bangladesh Nationalist Party (BNP) had only a handful of chairmen in the Upazilla of the country. Since BNP had not taken part in the first Upazilla election in 1985. In the second Upazilla election in 1990, BNP was placed at the 5th position getting only 24 Upazilla (out of 460) under its control (Mukta Barta, 31 March 1990). However, the abolition of the Upazilla is seen as a victory of the bureaucrats whose plan during this crucial period was to exploit the changed political situation to their own benefit. Ironically, the democratically elected government of Khaleda Zia indulged in anti-democratic practices with regard to decentralisation.

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Begum Khaleda Zia, who failed to provide any new form of local government during her five-year rule, is criticised for the persistent crisis in governance. The local government institutions have become weak. The NGO's effective intervention rendered the local government institutions purposeless since they failed to perform.

The rural people apparently getting more resources from the foreign funded NGOs seemed to have distanced themselves from local government (Rahman and Khan, 1997:9).

Sheikh Hasina's Period (1996 to 2001) When the Bangladesh Awami League came to power in 1996, it constituted a Local Government Commission and came up with a Report on Local Government Institutions Strengthening in May 1997. The Commission had recommended a fourtier local government structure including Gram/Palli (Village) Parishad, Union Parishad, Thana/Upazilla Parishad and Zila (District) Parishad. While local government bodies' exercised some degree of local autonomy, the central Government or a higher body in the administrative hierarchy of the state closely supervised them.

Westergaard (2000) observes that, ‘like the previous local government systems, the local bodies are controlled by the central government in all aspects.’ Mujeri and Singh, in their study on the impact of decentralisation in Bangladesh, describe the patronclient relationship existing between the national and local governments. According to them, ‘the territorial jurisdiction, functions and revenue/expenditure patterns of different tiers of the local government are determined by central legislation and their activities are guided and supervised largely by departments/agencies of the central government.’

The present government (since 2001) The present government, after assuming power in 2001, initiated a change in the local government structure. Gram Sarkar in place of Gram Parishad has been introduced.

There has been recent legislation creating Gram Sarkars. These bodies will be created at the Ward levels. Each Gram Sarkar will represent one or two villages comprising about 3,000 people at an average. The UP member elected from the Ward will be the Chairman of the GS, which will have other members -- both males and female -elected in a general meeting of the voters of the Ward under the supervision of a 'prescribed/ directing authority'. There are defined functions of the Gram Sarkar (GS) and other functions may be assigned to it as may be specified by the government from time to time. Gram Sarkars will have the right to constitute issue-based standing committees as and when required, and determine the membership of such committees. The way the Gram Sarkar Act has been passed and its members selected in each ward, has been criticised by every section of society. It is obvious that this has been done for strengthening the power base of ruling Bangladesh Nationalist Party in the rural areas.

Major Issues The local government bodies had never been, in independent Bangladesh, ‘selfgoverning’ bodies in the true sense of the term. They could simply be labelled as an extension of the central government with guided and limited local participation.

Consequently, local governments have always been institutionally and financially weak, poorly managed and lacked social and political credibility. The importance and

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significance of earlier reform efforts with regard to local government lie in their contribution towards some incremental strengthening of the system. However, there is a consensus that the following issues should be taken into consideration in any future attempt to reform the local government institutions and reorganise them to make them truly decentralised, institutionally effective, financially viable, participatory, gender sensitive, transparent and accountable.

Role and functions Traditionally, Local Government (LG) in Bangladesh has limited jurisdiction over specific (and limited) developmental functions. The area of regulatory administration has always been kept aside from the purview of the role and functions of these bodies (Hussain and Sarker et al, 1994). Most of the developmental functions for which LG units are made responsible under the legal framework, such as: family welfare, education, public health, social welfare, etc., are administered by different agencies of the national government. For example the UP4 has no authority other than reviewing and reporting to the Upazilla Nirbahi Officer (UNO), a national government functionary. UPs virtually have no scope to get involved in the implementation of development projects initiated by these agencies at the local level. The exact relationship between the field level units of various government departments and the LG is vaguely defined.

Local level infrastructure development is one of the important functions of the LG. These projects are generally implemented through food aid and grants received from the national government. Food aids are channeled thorough different agencies of the national government. In this area, for example the role of UP as a Local Government (LG) unit is again limited to the selection of the possible projects only. Such selected projects are finally approved by the UNO in consultation with the Upazilla Engineer (UE) and the Project Implementation Officer (PIO). The above type of scenario clearly suggests that the role and functions of LG units are restricted in the area of development administration. In addition the other functions of the LG units are again subjected to bureaucratic supervision and guidance (Khan, 2000).

Centre-local government relations In the context of the LG, central-local government relations have always been an issue. In Bangladesh, statutorily, the central-local relationship has been authoritative in nature. This may be due to the colonial legacy and the absence of democratic government at the centre for a considerable period of time. The central or the national government primarily exercises its control over the LG bodies through its field level government functionaries such as the Deputy Commissioner (DC) and the UNO, heads of district and Upazila administration respectively. In addition, LG units are further controlled through a web of intricate and complicated orders and circulars from different agencies/ministries which very often contradict the original legal framework. Under law, the national government is also empowered to carry out inquiries into the affairs of local government institutions. And after such inquiry, if the government considers that a LG unit is 'unable' to discharge its duties; or 'fails' to meet its financial obligations; or otherwise exceeds or abuses its power, then the government may suspend such a local government unit for a period as may be specified by the law. This provision allows the district administration to axe an LG

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unit such as the UP at any time and consequently, make them extremely vulnerable to the political and administrative whims of the government.

In addition, the central government also exercises substantial financial and administrative control over the local government institutions in different ways. The annual budgets of the LG units are scrutinised and approved by different levels of central government agencies. Again, in the case of UP authority over the appointment and payment of salaries of the staff is held by central government bureaucracy. In the internal functioning of LG, the national government functionaries also exercise control over them. For example, the Local Government Ordinance requires a UP to constitute a number of standing committees and for the formation of any additional committee it needs the formal approval of the DC. The above facts reveal that the LG units in Bangladesh are being constantly controlled by the national government through various mechanisms for almost every aspect of their operation and functioning. Such practices, in reality, have turned the local government institutions in Bangladesh into mere extension of the national government and of their various agencies.

Resource mobilisation Local government bodies have been chronically resource poor in Bangladesh. The LG regulations empowered them to mobilise resources from local sources through assessment and levy of taxes, leasing of local Hats5 and Bazaars6, water bodies, etc.

But they do not receive the total resources generated from their entitled sources. For example, in the case of UPs, of the revenue generated from the leasing of the rural market, 25 per cent is retained by national government, 10 per cent by the Upazilla, and 15 per cent is earmarked for the maintenance of the market, and the rest 50 per cent is the entitlement of the UP. Another feature of financial control is that the UNO receives funds transferred from UP mobilised resources like share of land transfer tax, market lease money for retention in the accounts maintained by him for later distribution to UPs on basis of prescribed government guidelines. This shows that the UPs have no direct control even over resources generated from their jurisdictions.

Such practice of regulating and controlling of the financial resources by the national government functionaries keeps the LG units ever resource poor and resource dependent on the national government (Khan, 2000).

The local government institutions are entitled to Annual Development Plan (ADP) grants from the national government. The local government regulation holds strict instructions that the block grant must be used specifically in certain sectors determined by the central government. This pre-determined sector allocation seriously limits the scope of local level planning as well as the flexibility of local bodies to utilise the financial resources for satisfying the immediate needs of the community.

This also runs contrary to the concept of functional autonomy of the LG units.

Institutional capacity Institutional capacity includes both human competence and logistics. Relevant studies reveal that the overwhelming majority of the chairmen and members of LG units lack knowledge and understanding of the operational procedures and functions of these bodies (Aminuzzaman, 1998). They are also unaware of the intricate rules with regard

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to budgeting, planning, and resource management. Moreover, for example, Union Parishads are required to maintain and preserve more that 100 registers (for general office management, village courts, test relief programs, food-for-work programs etc.).

It is a huge task considering the managerial capacity of the LG unit. In effect, very few registers are actually maintained. This is due to the fact that very little effort has been made over the years to impart training in the relevant fields of local institutional operations to the elected officials and salaried staff particularly the Union Parishad secretaries. Moreover, relevant institutions have inadequate facilities and the training modules are also outdated. Most of the LG units have inadequate physical facilities.

Accountability and transparency Accountability and transparency of operations and functions of the LG units are essential for ensuring their credibility to the electorate. This can only be achieved through adequate supervision and monitoring. Legally the Monitoring & Evaluation Wing of the Local Government Department of the Ministry of Local Government Rural Development and Cooperatives (LGRD&C) is responsible for monitoring the functions of the local bodies. But its monitoring mechanism is weak, inadequate and ineffective. The other mechanism is through the inspection and visits by the field level government functionaries, such as, the UNO and the ADLG. However, their functions are more of control than monitoring. The relevant LG regulations prescribe that UPs are to ensure public display of (in the UP notice board) the budget and major decisions of the UP meetings particularly with regard to development projects. But this practice is almost absent in most Union Parishads.

Conclusion In Bangladesh there have been six major attempts to reform local government under six different governments. The objective of all, at least at the level of rhetoric, was to introduce participatory and accountable local governance through decentralisation of functions and powers to locally elected institutions. All these governments also recognised the relevance of the role of decentralised local institutions in planning and implementing need-based development projects for poverty alleviation and reduction of socio-economic inequality. However, the objectives were not realised and the governments failed to keep their commitment towards grassroot democracy and to devolve power to the people at lower levels to manage their own affairs. Nevertheless, every successive government of Bangladesh has used the local government bodies to strengthen their own political base in the rural areas, ignoring the principles and importance of decentralisation of power to the local level. Consequently, the primary goal of poverty reduction, economic equity and gender balance remained unfulfilled.

(Pranab Kumar Panday is an Assistant Professor in the Department of Public Administration, University of Rajshahi, Bangladesh. He can be reached at: pranabpanday@yahoo.com) End Notes 1.

The term local self-government originated during the colonial times when most of South Asia did not enjoy any self government, either at the central or provincial (state) level. At some point in time, a decision was taken by the British Government to associate South Asians in administering local affairs. It meant a slice of self-government for the people.

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Today the term self-government has lost its old significance as all the seven countries of South Asia now enjoy self-government at the national level. However, in the changed context, the justification of the prefix ‘self’ perhaps lies in emphasising the representative character of local government.

2. In the British period, Union Parishad was called as 'Choukidary Panchayet'.

3. The figure has been drawn by author based on Siddique, 1994: 325 and http://www.unescap.org/huset/lgstudy/country/bangladesh/bangladesh.html#ahead

4.

5.

6.

UP stands for Union Parishad.

Hats is the Bengali name if big markets which generally sits one or two times in a week in a village.

Bazar is the Bengali name of small daily market which are generally seen in the village level in Bangladesh.

Bibliography l Shafi Ahmed, et al., 'One Decade of Bangladesh Under Women Leadership’, Alochona Magazine, October 2001, p.3 (Retrieved from http:// www.magazine.alochona.org/). l Bilquis Ara Alam, ‘Women's Participation in the Local Government in Bangladesh’, The

Journal of Local Government, (National Institute of Local Government, Dhaka) vol. 13, No-2, July -December, 1984. l Md Almas Ali, ‘Women's Participation in Local Government’, The Daily Star, Dhaka, November 27, 2001. l Salahuddin M. Aminuzzaman, ‘State of Art of Local Government in Bangladesh’, Asia Profile, vol.12, No.2, 1998. l G.S. Cheema and D. Rondinelli, ‘Implementing Decentralization Policies: An Introduction’, G.S. Cheema/Rondinelli (eds.), Decentralization and Development: Policy Implementation in Developing Countries, (Beverly Hills, 1983) pp. 9-35. l L. H. Chowdhury, Local Government and its Reorganization in Bangladesh, Dhaka, National Institute of Public Administration (NIPA), 1987. l M. Clark and J. D. Stewart, Choices for Local Government for the 1990's and Beyond, (London: Longman, 1991) l Constitution of People's Republic of Bangladesh, As modified up to 1996, Government of Bangladesh. l Cabinet Resolution on Renaming the Upazilla (in Bengali), (Dhaka: Cabinet Division, Government of Bangladesh (GOB), 1992) l G. Hossain, ‘General Zia's BNP: Political Mobilization and Support Base’, E. Ahmed (ed.), Society and Politics in Bangladesh, (Dhaka: Academic Publishers, 1989). l Mujibul Huq, et al., ‘Policy Brief on “Administrative Reform and Local Government’, CPD Task Force Report, Centre for Policy Dialogue, Dhaka, 2001. l A. Hussain, A. E. Sarker and M. Rahman, 'Governance in Bangladesh: An Analytical Review', Theoretical Perspective, 1994, p. 1.1 l Nelson Kasfir, ‘Designs and Dilemmas: an Overview’, Philip Mawhood (ed.), 1983: Local Government in the Third World: the Experience of Decentralization in Tropical Africa, (New York: Chichester, 1983) pp. 25-47. l Mohammad Mohabbat Khan, ‘Urban Local Governance in Bangladesh: An Overview’, Journal of Administration and Diplomacy, vol.4, January-June, 1996 l Zarina Rahman Khan, ‘Patterns and Processes of Decentralization in Bangladesh: Challenges and Issues - Abstract’, Technical Consultation on Decentralization and Sustainable Development, Food and Agriculture Organization of the United Nations, 1997. l Zarina Rahman Khan,(1998) ‘Political Participation of Women: The Problematic, in Towards Gender Equity, Poverty, Rights and Participation,’ Report of the Regional Workshop, CIRDAP 7, the British Council, Dhaka, July, 1998. l Zarina Rahman Khan, ‘Decentralized Planning and Financing of Rural Development in Bangladesh’, Regional Development Dialogue 20, no. 2, 2000a, pp.43-57. l Z. R. Khan, 'Decentralized Governance: Trials and Triumphs', Raunaq Jahan (ed.), Bangladesh: Promise and Performance, (Dhaka: University Press Limited, 2000b) l D. King and G. Stoker (eds.), Rethinking Local Democracy, (London: Macmillan Press

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Ltd, 1996) l Philip Mawhood, ‘Decentralization: The Concept and the Practice’, Philip Mawhood (ed.),

1983: Local Government in the Third World: the Experience of Decentralization in Tropical Africa, (New York: Chichester, 1983) pp. 1-25. l Mustapha Mujeri and Lisa Singh, ‘Case Study on the Impact of Decentralization: Bangladesh’,1997. (Retrieved from http://www.fao.org/sd/pub). l Mukta Barta (A widely circulated Bengali national daily newspaper), 31st March, 1990. l H. R. T. Rahman and M.M. Khan, ‘Decentralization and Access: Theoretical Framework and Bangladesh Experience’, Asian Profile, vol. 25, no. 6, December 1997. l Joel Samoff, ‘Decentralization: The Politics of Interventionism’, Development and Change, 1990,21, 2, pp.513-530. l Kamal Siddiqui, Local Government in Bangladesh, National Institute of Local Government, Dhaka, 1994. l H. Tinker, The Foundations of Local Self-Government in India, Pakistan and Burma, (New Delhi: Laluani Publishing House, 1967) l Local Government in Bangladesh: An Agenda for Governance, United Nations Department for Development Support and Management Services (UNDDSMS), New York, 1996. l Kirsten Westergaard, ‘Decentralization in Bangladesh: Local Government and NGOs’, Colloquium on Decentralization and Development, Yale University, 7 April 2000.

(Retrieved from http://www.yale.edu/ycias/events/decentralization/).

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125

1997 1998 1999 2000 2001 2002

1997 1998 1999 2000 2001 2002

Pakistan

Sri Lanka

Bangladesh

-2 Source: World Development Indicators, 2004

2002

1985 1990 1995 2000 2002

a ny Ke

d la n

2002

1985 1990 1995

Th ai

2002

1985 1990 1995

an Pa

ki

st

al ep N

iL

1985 1990 1995 2000 2002

1985 1990 1995

an ka

a Sr

ng

di

0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0

1985 1990 1995 2000 2002

Figure 2. Monitoring Progress in Human Development across South Asi a

Ba

Status of Food Production The countries in the region have been growing much faster in the last decade as compared to the decades following independence. Figure 1 presents the rate of economic growth in South Asian countries during the years 1997-2002. With the exception of Pakistan, all countries in the region have experienced a growth rate of more than 4 per cent over the last several years. In Sri Lanka and India the growth rates have surpassed 6 per cent in selected years. Such increased growth in the national income should lend itself to improved food security for the population. Yet, human development across the countries in South Asia lags behind other developing regions as shown by the monitoring progress in human development across South Asia (Human Development Report, 2004).

Nepal

0

la

In order to understand the challenges that countries in the South Asian region face in achieving food security it is important to review the current status of food production in the region. The challenges of improving food security in the region relate to a complete set of constraints along the food supply chain from production to marketing and distribution (Babu, et al., 2005). Evaluating past solutions in the region for their impact is important to refine and redefine appropriate approaches for food security interventions.

India

2

In

Introduction Achieving food security for its inhabitants remains a major challenge for South Asia.

This paper identifies major causes of food insecurity due to poor access to food in South Asian countries. Presenting empirical evidence on the extent of food insecurity in South Asia, this paper reviews technological, institutional, and policy challenges facing policymakers in increasing access to food. The paper introduces emerging strategies and options for meeting food security needs by identifying various factors that hinder the appropriate implementation of policies and programs that aim at increasing food access. Examples of successful food and nutrition intervention programs both within and outside of the region, are also presented.

4

1985 1990 1995 2000 2002

Suresh Babu

6

de sh

Food Security in South Asia

1997 1998 1999 2000 2001 2002

8

1997 1998 1999 2000 2001 2002

1997 1998 1999 2000 2001 2002

Figure 1. Economic Growth in South Asia

Source: Human Development Report, 2004

The human development index during 1985-2002 is given in Figure 2 and shows an increasing trend in all countries, although it is at a lower level in Pakistan and Nepal. Another indicator of growth and economic development in developing countries is the share of agriculture in the national income (GDP). Figure 3 shows the share of agriculture in the national income for South Asian countries during the years 1997-2002. In general, the share of agriculture in GDP ranges between 20-30 per cent, except in Nepal which is closer to 40 per cent. The share of agriculture in GDP has been declining in all countries except Nepal. Although agriculture continues to contribute less and less to the national income the percentage of the population who depend on agriculture remains between 50-60 per cent in these countries. This indicates that the value of production in agriculture as well as the labour productivity level continues to be low.

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a an k Sr iL

ki s Pa

1997 1998 1999 2000 2001 2002

1997 1998 1999 2000 2001 2002

l

ta n

1997 1998 1999 2000 2001 2002

ep a N

1997 1998 1999 2000 2001 2002

In d

Table 2. Comparative Performance in Poverty Reduction

B

an g

la d

es

h

50 40 30 20 10 0

ia

1997 1998 1999 2000 2001 2002

Figure 3. Share of Agriculture in GDP Region

Living on less than $1 Total population a day undernourished

People without access to improved water sources

Sub-Saharan Africa

323

185

273

East Asia and Pacific

261

212

453

South Asia

432

312

225

All figures in millions for 2000.

Source: World Development Indicators, 2004

Source: World Development Indicators, 2004

Table 1 provides selected information on food production, food exports, food imports, and food balance in South Asian countries for the year 2002. All countries in the region have been producing an adequate amount of food at the national level. In fact, all the countries have been exporting some food although the amount of food exported from Bangladesh, Nepal, and Sri Lanka continues to be insignificant. Food imports are very high for Bangladesh and Sri Lanka while some food is also imported

by India, Nepal and Pakistan. Food balance is negative only for Bangladesh indicating that their imports are more than their exports and the local food production does not fully meet the local food requirements. While the growth rate of the South Asian economies has been increasing over the last ten years, and the poverty in the region has been declining, the region continues to be home to about 40 per cent of the world's poor.

Table 2 presents a comparative performance in poverty reduction in various regions of the world. South Asia still has the highest number of people living on less than one dollar a day followed by Sub Saharan Africa and East Asia and Pacific. South Asia also leads the world's regions in the total number of undernourished people. It has improved in terms of providing better access to water as compared to Sub Saharan Africa.

The percentage of those living below the poverty line in South Asia has been on the decline in general, although in comparing the early 1990s to the later years of the 1990s, a decline in poverty is noted in Bangladesh and India while the percentage of poor increased in Pakistan and Sri Lanka. Figure 4 presents the percentage of people living below the poverty line during the 1990s in South Asia.

The prevalence of child malnutrition is considered one of the final welfare indicators of a society. In South Asia, child malnutrition is very high compared to other impoverished regions of the world. India ranks the highest in the prevalence of child malnutrition -- measured as the percentage of children below 5 years of age who

Table 1: Food Security in South Asia (1000 tonnes) Country

Food Production

Food Exports

Food Imports

Food Balance

Figure 4. Percent of People below Poverty Line in South Asia

45 Bangladesh

26,924

1.6

2,827

-4, 601

42

40 35

India

1,74,655

9,490

56

23,826

30

Nepal

5,839

11

39

57

25

Pakistan

24,936

2,966

288

3,818

Sri Lanka

1,938

9.8

1,307

252

34.4 33.7

36 32 28

28 25 20

20

Source: FAO, 2004

Figures in thousand metric tones for 2002

15 10 5 0 Bangladesh

India

% below poverty 1990s

Nepal

Pakistan

Sri Lanka

% below poverty 1995-2000

Source: World Development Indicators, 2004

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128

60 50

Sri Lanka

Pakistan

Nepal

India

Bangladesh

Figure 5. Prevalence of Child Malnutrition in South Asia

53 48

the early 1990s through the late 1990s. Thus, the level of food insecurity has not shown much change during the 1990s. Furthermore, a recent comparative estimate of percentage reduction in undernourishment (Figure 7) during the 1990s shows India has only reduced its food security by a 16 per cent reduction in the level of undernutrition compared to other countries such as China, Indonesia, Malawi, and Kenya which have made more than a 25 per cent reduction in the level of undernourishment during the last decade (Economist, 2004).

48 Figure 7. Percentage Reduction in Undernourishment between 1990-2000

38

40

33

34

Malawi

30

10

Kenya

0

China

Weight for age, as % of children below 5 years Source: World Development Indicators, 2004

Figure 6 presents the prevalence of under-nutrition in South Asia. About 35 per cent of the population is undernourished in Bangladesh followed by 25 per cent in India, 20 per cent in Nepal and Pakistan, and 25 per cent in Sri Lanka. There has been little change in the prevalence of under-nutrition in South Asian countries from Figure 6. Prevalence of Undernourishment in South Asia 40 35 30 25 20 15 10 5 0 India

1990-92

Nepal

Pakistan

1998-2000

Figures are % of population Source: World Development Report, World Bank , 2002

129

25 31.3 16

India

have less weight for their age -- with 53 per cent of children under 5 years of age below their weight for age followed by Nepal, Bangladesh, Pakistan and Sri Lanka (Figure 5).

Even in Sri Lanka, where considerable progress has been made towards reducing child malnutrition through social sector development one third of the children under 5 are still chronically malnourished. This is also reflected in the prevalence of under nutrition as reflected by the amount of calories consumed by the population.

Bangladesh

33.3

Indonesia

20

Sri Lanka

0

10

20

30

40

Source: Economist, 2004

The food security status in South Asia is reflected by about 303 million people who were food insecure in 2000 compared to 288 million people in 1991. This is an increase of 5 per cent in the region. Currently about 40 per cent of the food insecure people in the developing world live in South Asian countries, highlighting the gravity of the food security problem in South Asian countries (FAO, 2004).

Economic Reforms and Food Security The national food security status of South Asian countries also reveals a positive trend. The countries have transformed themselves from food deficit countries in the 1960s and 1970s to food surplus countries in the 1980s and 1990s. However, increased food production has not been fully translated in terms of household and individual food security. This is partly due to a high level of poverty that coexists with nutritional and food insecurity. Furthermore, malnutrition remains a challenge even in urban areas where there has been a relative increase in income among the households. Higher prices paid to farmers for their produces have been partly responsible for a growth in the food grain reserves at the national level. Lower food prices have increased accessibility to food and increases prospects for exports of food.

Yet food insecurity continues to be a major development challenge because of the low purchasing power of the majority of the population which is below the poverty line.

Economic reforms and market liberalisation in the food and agriculture sector in South Asia have spurred private investments in high value agriculture such as fruits, vegetables, livestock and fisheries. However, it is not clear whether investments in high value crops will result in reducing food insecurity of the vulnerable sections of the population.

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The emerging trends in food security intervention policies and programs show that there has been increased privatisation of food markets in South Asia. A case in point is Bangladesh. When the country was affected by severe floods in 1998, The Economist predicted that the country faced starvation and the death of about 20 million people, due to floods, which wiped out more than two thirds of the country's rice crop. Yet, Bangladesh did not see a single death due to starvation from the flood because it had developed its private sector to deal with food shortages. Bangladesh's private sector imported adequate amounts of food from India and other countries in the region to meet the deficits caused by the floods. Along with food aid, the private sector ‘helped in preventing starvation and death in Bangladesh’. This example shows that liberalising local markets and encouraging private sector participation will help in preventing starvation and death due to national disasters (Dorosh, et al., 2004).

There has been a considerable reduction in food subsidies in the countries of South Asia. Pakistan's experience in abolishing its wheat rationing system in the 1980s and allowing private traders to participate in food trade presents a stark contrast to Indian system of maintaining a huge level of subsidies through food distribution system to protect its vulnerable population (Islam and Garrett, 1997).

There is also a diminishing role of the public sector participation in food distribution, particularly in countries like Pakistan and Bangladesh. There has been a shift from broad based public distribution system toward target interventions through social safety nets in the region (Babu, 2003).

Strategies and Options for Increasing Food Security The major policy question that remains to be addressed in the South Asian region is: ‘Has a reduction in poverty led to greater food security in South Asia?’. Food security can be addressed through several options and strategies by using technology, institutions and policy alternatives. One of the reasons for continued food insecurity in the region is the low productivity of crops and livestock in the region as compared to many developing and developed countries. Increasing productivity of crops through increased investment in agriculture research and development that focuses on crops grown and consumed by the poor is needed. The investment in agriculture research as a percentage of agriculture GDP has been declining in many of the South Asian countries. The trend has to be reversed in order to develop new technologies that will reduce food insecurity. Bio-technology can improve crop productivity and food crops should be explored with the challenges in developing bio-technology policy, bio-safety regulations and capacity for using bio-technology. Increasing the nutritional content of food consumed by the population, as well as increasing the resistance to biotic and abiotic stresses through bio-technology can help solve the food insecurity problem in the region. The use of better technology for minimizing environmental harm from the intensive cultivation of food crops is also important.

The use of remote sensing technology to minimise weather fluctuations will help in forewarning drought-related food production challenges.

There is a need for better linkages between agricultural research and technology-transfer. The extension systems that were successful in transferring technology to the farmers during the Green Revolution period have declined, both in terms of quantity and quality. Unless the extension systems of the South Asian

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countries are revived through better partnership of public and private institutions, the adoption of new technologies by the farmers will lag behind. Use of information technology to transfer knowledge across the countries as well as within the countries is important. Understanding the benefit of information and communication technologies in transferring information for increasing the productivity of farmers will help in reducing food security. Furthermore, use of geographical information systems (GIS) and Geo Positioning Systems (GPS) for identifying opportunities for precision agriculture will help in reducing the waste of inputs such as water and fertiliser and in increasing the productivity of South Asian agriculture.

Institutions could also play an important role in improving access to food.

Well functioning institutions that facilitate the smooth transfer of produced food to consumers are important. National level institutions such as the Public Distribution System in India should have adequate access to remote areas in order to improve food security at the local level. Food insecurity has been high in areas where the public distribution system has not been functioning effectively. The role of food parastatals as an institution in procuring and distributing food in the region must be revisited because it is becomingly increasing clear that the parastatals that participate in procurement and distribution of food have become inefficient partly due to poor governance and accountability. Reforming these institutions to better serve the poor by reducing cost and increasing benefit to the poor will improve access to food (Rashid, et al., 2005).

Good governance is fundamental for increasing access to food and reducing food insecurity. Pro-poor policies should target the most vulnerable sectors of society.

Food entitlement should reach the targeted population. Even well-functioning programs such as Integrated Child Development Services program (ICDS) do not fully address the problem of food access of the vulnerable population. Ownership rights on land and reduction in income inequality will also serve in improving access to food.

Minimum wages to guarantee the right to food as well as access to credit and marketing networks are important low income groups.

South Asia is home to successful examples of targeted food and nutrition intervention programs. For example, the Integrated Child Development Services (ICDS) has been the largest child nutrition intervention program in the world. In India’s 10th five-year plan, it is envisaged that the program will be implemented throughout the country, providing universal coverage for the program. Yet, ICDS continues to face major implementation challenges and does not fully translate the investments made into adequate nutrition. The Tamil Nadu Integrated Nutrition program, a variant of ICDS program which is currently incorporated as part of ICDS has shown that when effective monitoring and evaluation is conducted and appropriate follow up activities are undertaken, child nutrition could in fact be improved through integrated nutrition programs (Dev, 2005). The Food for Education program in Bangladesh provides adequate evidence that not only can food be transferred to poor households through targeted interventions but it can also be an effective tool to bring children to school, particularly the girls (Ahmed and del Ninno, 2005). The food-based nutrition intervention program Triposha in Sri Lanka has also shown a positive impact on reducing child malnutrition.

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The policy priorities for improving food security and nutrition in South Asia include greater public investment in agriculture as well as in the social sectors. For example, an additional US$ 50 billion investment in South Asia in the social sector will reduce child malnutrition by 13 million (Smith, et. al, 2000). Improving access to productive resources and employment for vulnerable sections of society is also important. Greater linkage between agriculture research and food policy should be pursued in order to translate agriculture technology into adequate food security.

Recent trends indicate that community-based targeting programs works better in improving access to food. However, policymaking should involve poor farmers and vulnerable sections of society to directly benefit in terms of improved access to food.

Greater involvement of the private sector is also required in establishing and maintaining food distribution centers in rural areas.

Another area that needs policy attention is to improve interregional trade liberalisation in South Asia. Harmonisation of customs and tariffs among the countries in the region to facilitate better food trade is needed. A multi-disciplinary approach is needed for greater involvement of nutritionists in policymaking. The early warning systems to forewarn of impending food shortages due to natural disasters should be developed in all of the countries in the region as well as at the regional level to increase cooperation to share such information among the countries.

Effective communication that is user specific and user sensitive to various levels of decision making is also important from scientists to policymakers for solving the food security problem in the region.

IFPRI, 2005. l S. M. Dev, 2005. ‘Market Reforms in Agriculture: An Indian Perspective’, S. Babu and A. Gulati (eds.), Economic Reforms and Food Security in South Asia, (New York: Haworth Press, 2005) l P. Dorosh, C. Del Ninno and Q. Shahabuddhin, The 1998 Floods and Beyond: Towards a Comprehensive Food Security in Bangladesh, (Dhaka: The University Press and Washington, DC: IFPRI, 2004) l The Economist, Economic and Financial Indicators, London, December 2004. l FAO, Statistical Databases, 2004. http://faostat.fao.org/faostat/collections?version=ext&hasbulk=0&subset=agriculture. Accessed 01/10/2005

l Human Development Report, 2004, Human Development Institute, UNDP, New York. l Y. Islam and J. Garrett, ‘IFPRI and the Abolition of the Wheat Flour Ration Shops in Pakistan: A Case Study on Policymaking and the Use of Impact of Research’, Impact Assessment Discussion Paper No. 1., (Washington, DC: IFPRI, 1997) l L. Smith and L. Haddad, ‘Explaining Child Malnutrition in Developing Countries: l A Cross-country Analysis’, IFPRI Research Report, (Washington, DC: IFPRI, 2000). l World Bank, 2004, World Development Indicators, Washington, DC. l World Bank, 2002, World Development Report, Washington, DC.

Conclusion During the last 30 years a lot has been accomplished in terms of increasing food production through technology and policy interventions in South Asia. However, an organised effort is still needed from all sectors of the economy to reduce the high levels of food insecurity and child malnutrition. Various technological, institutional and policy options for increasing food security in the region require a greater involvement of nutritionists and food scientists in food and nutrition policymaking.

In that process the importance of conducting quality research through improved capacity for food and nutrition intervention and better communication of research results to policymakers cannot be underestimated.

(Suresh Babu is Senior Research Fellow and Program Leader at the International Food Policy Research Institute and may be contacted at: s.babu@cgiar.org) Bibliography A. Ahmed, and C. del Nino, ‘Feeding Minds While Fighting Hunger: Food for Education in l Bangladesh’, in Economic Reforms and Food Security in South Asia, S. Babu and A. Gulati (eds.), New York: Haworth Press, 2005) l S. C. Babu and A. Gulati (ed.), Economic Reforms and Food Security – The Impact of Trade and Technology in South Asia, (New York: Haworth Press, 2005) l S. C. Babu, 2003. ‘Social Safety Nets for Poverty Reduction in South Asia – Global l Experiences in Sri Lankan’, Journal of Agricultural Economics, 2003, 5 (1): pp. 1-8. l S. R. Cummings Rashid and A. Gulati, ‘Grain Marketing Parastatals in Asia: Why do they have to Change Now?’, Markets Trade and Institutions Division Discussion Paper 80,

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Bhurban Declaration: Evolving South Asian Fraternity SAFMAâ&#x20AC;&#x2122;s South Asian Parliament May 15-20, 2005, Islamabad/Bhurbhan We, the members of parliaments from the member countries of SAARC, representing all major parties and from all shades of opinion in our parliaments, having met at SAFMA's 'South Asian Parliament: Evolving South Asian Fraternity', from May 15- 20, 2005, at Islamabad-Bhurban, Pakistan, have arrived at the following vision and cooperative, equitable and strategic understanding on meeting the challenges of the 21st Century and globalisation and ushering in a new era of South Asian Fraternal Partnership: 1.

South Asia is at a historic moment of unprecedented potential for transforming its economic and social conditions and, together with China, emerging as two large economies in the next two decades, playing a key role not only in the global economy, but also in the development of human civilisation in the 21st century.

Yet the world cannot be sustained by economic growth alone. Human life is threatened with environmental crises, conflicts, endemic poverty, natural calamities and an arms race.

2.

Our societies have a rich cultural tradition of unity in diversity, creative growth through human solidarity and harmony with nature. In bringing these aspects of their culture in facing contemporary challenges, the people of this region could bring a new consciousness and institutions to the global market mechanism that can take the world on to a new trajectory of cooperative, sustainable development and human security. Global cooperation in environmental protection, poverty reduction and defusing the flash points of social conflict and an end to violence, terrorism and repression will become the essential underpinning of sustainable development and human security in this century. Thus it is not the military muscle of a state/region that will be the emblem of status, but its contribution to meeting the challenge of peace, overcoming global poverty, protecting the planet from environmental disaster and contributing to humanizing the world and advancement of its people.

3.

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The global environment provides a historically unprecedented scale of capital flows, trade opportunities, information and technologies, which, if utilized, can dramatically transform the material and social conditions of life of the countries of South Asia. A vision is efficacious to the extent that it can be concretized. This requires bringing to bear the new consciousness of South Asian Cooperative and Equitable Partnership to undertake specific policy actions. Apart from implementing the decision at the Islamabad SAARC Summit to establish a South

Asian Free Trade Area, SAARC Social Charter, ISACPA Report on Poverty Alleviation, three broad areas for deepening economic cooperation can be identified for the purposes of specific policy action: (1) Energy Cooperation and Water Management and Conservation within South Asia; (2) Increased investment for accelerating economic growth, especially in physical and social infrastructures; (3) Restructuring growth for faster poverty eradication and human resource development.

4.

With the most contiguous region of the world, a common history to share and similarities of cultures, South Asia has fewer baggage(s) to shed than Europe or the Far East. It is now booming with the ideas of regional cooperation that take a wholist approach towards the collective good of the region as they increasingly find state-centric and security-centered approaches inconsistent with the interest of our 1.4 billion people and the imperatives of our times.

5.

Remarkable concurrence of views expressed by the elected representatives of our peoples at SAFMA's Forum of South Asian Parliament reflect the immense urge of our peoples to outgrow the past and take a leap into a future that is free from want and conflict. Certain stages of history can be skipped, so can various evolutionary stages through which, for example, the European Union had to pass in the 20th Century. The intrastate conflicts and interstate disputes must move from management to resolution in a result-oriented process that must at the same time allow, rather than hinder, regional cooperation to address the demands of our peoples. The lines of conflicts must change into the bridges of friendship and the fenced-borders must gradually soften before the urge of South Asians to become a fraternal and indivisible community of people with nation states, while keeping their sovereign equality, joining hands in submitting before the will of their real sovereigns -- The People.

6.

The steps can be simultaneously taken, in an integrated and well calibrated sequencing and realistic stages, towards South Asian Free Trade Area, South Asian Union, (Tourism/Environment/Water/Energy/Communication /Information/Economic), South Asian Tariffs and Customs Union, South Asian Monetary Union, South Asian Bank and Development Fund, South Asian Collective Security and South Asian Parliament. However, to take a leap forward, there will have to be no hegemon, nor ganging up by the small against the bigone. A new paradigm of equitable partnership must evolve to reshape our allsided relations.

7.

Welcoming the current peace process between India and Pakistan with its twofold objectives: the exploration of all options for a final settlement of the J&K question in an atmosphere free of violence, terrorism and normalization of bilateral relations while implementing their joint statements of January 6, 2004, September 24, 2004 and April 18, 2005 in their letter and spirit. Appreciating the efforts by India and Pakistan to undertake nuclear and conventional military confidence-building measures, we urge them to put in place a comprehensive regime of CBMs that will ensure a nuclear-tension free subcontinent. We endorse the demands of India and Pakistan for negotiations with the other nuclear

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weapons powers to promote global non-proliferation and effective nuclear disarmament.

promotion of trade the countries will have to facilitate cross border movement of people and goods. Visa and custom facilities will have to be simplified.

Appeal to all countries in the region to put in place comprehensive sustainable dialogue mechanisms for resolving all bilateral disputes. While India and Pakistan today have a composite dialogue in place which has gathered momentum, similar exercises are needed, for example between India and Bangladesh.

3. Water Sharing and Management Increasingly, the governments and concerned institutions are realizing the need to address acute shortage of energy and water, incidence of drought and floods that often bring miseries to the people and, at times, states into conflict. The distribution and management of water resources, though quite a divisive issue among the upper and lower riparian regions across states, needs to be undertaken amicably without depriving the lower and upper riparian regions of their due to avoid a conflict over water issues which must not be politicized.

Sharing the aspirations of our people for a better life and collectively face the challenges posed by globalization and meeting the demands of the WTO regime, have reached a broader consensus to pursue the following agenda and goals: 1. South Asian Free Trade Area The agreement on South Asian Free Trade Area (SAFTA) requires effective implementation, expanding the space for trade and, more importantly, economic collaboration, investment and development. If South Asia's economies are to be integrated, it presupposes development of transnational communication networks and physical infrastructure and monetary cooperation involving greater coordination among the governments and the central banks. In spite of limited complementarities in trade-able items, due to similar comparative advantages, expansion of trade warrants vertical and horizontal integration of industries and investment in joint ventures by public and private sectors. However, trade and investment will not move ahead unless tariffs are lowered, the negative-list kept to most minimum, para and non-tariff barriers removed and standards harmonized.

Streamlining borders transactions through trade facilitation at sub-regional junctions, special attention needs to be focused on promoting border trade. Increase in efficiency within the sub-region often spills over into trade outside the region as well, because improving customs or improving efficiency of ports helps both intraregional trade and international trade.

2. South Asian Customs, Tariffs and Monetary Union This will, subsequently and gradually, translate into a South Asian Customs and Tariffs Union which may lead to a common exchange rate policy that will, eventually, necessitate the creation of a South Asian Monetary Union underwritten by macroeconomic management and harmonization of trade, fiscal and monetary policies at the regional level.

No less important is the cooperation in the transport and communication sectors envisaging an integrated transport infrastructure that allows uninterrupted travel across and beyond our region and communication highways, facilitating free movement of people, goods and flow of information across the region and beyond, connecting South Asia with Central, South Western and South East Asia. Not only do rail and road links between Pakistan and India need to be rehabilitated, a system of connectivity will have to be constructed especially for the railways and the truckers will have to be issued special permits.

Nevertheless, the Indian and Pakistani governments must agree to transit of trade between Pakistan, Bangladesh and Nepal and India and Central Asia. For

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The bilateral treaties, such as Indus Water Treaty between India and Pakistan and the Treaty over Ganges between Bangladesh and India must be respected and upheld in letter and spirit. The Mahakali Treaty between Nepal and India may be implemented by removing reservations of either side. The quadrangle of Bangladesh, Bhutan, India and Nepal may take up an integrated approach to manage water resources while keeping the interests of upper and lower riparian, on the one hand, and India and Pakistan must overcome their differences over Tulbul, Baglihar and Kishanganga projects within the framework of the IWT, on the other.

There are other major water related problems that need to be addressed on a priority basis with water cooperation among the member countries of SAARC to enhance water and food security. There is a great hydro-power potential in Bhutan and Nepal that can be utilized by other countries of the region. However, that would involve the need for a common or bilateral grid, on which all concerned countries would have to agree.

4. South Asian Energy Grid Similarly, the energy cooperation should evolve into a South Asian Energy Grid with integrated electricity and gas systems. As India and Pakistan now agree, and they must move forward, the gas and oil pipelines can run from Central Asia, Gulf, Iran and Myanmar through Pakistan, Afghanistan and Bangladesh to whole of South Asia and beyond. In this context of developing energy markets, power trading in the region calls for establishment of high voltage interconnections between the national grids of the countries. India, Pakistan and Bangladesh should cooperate in transportation of gas and jointly developing, trading and sharing of energy.

5. South Asian Development Bank Given a low rate of investment to GDP ratio, South Asia must create attractive environment for investment in high value-added manufacturing lines and transregional projects. Enhanced investment flows, both from within and outside the region, would culminate in production facilities located across the region through integrated production systems. Shares of both national and regional companies would be quoted on our stock exchanges as capital moves without hindrance across national boundaries to underwrite investment in joint ventures and projects in any part of our region through a South Asian Development Bank.

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6. Addressing LDCs' Concerns However, economic cooperation and trade would not produce tangible results unless the concerns of Least Developed Countries (LDCs) are genuinely addressed, the negative-list is minimized, tariffs are substantially brought down and non-tariff and para-tariff barriers lifted, the economies are gradually opened up with a recourse to investment-trade linkage that takes care of trade deficits between partners through investment flows and capital account, vertical and horizontal integration of industries that benefits from relative advantages and economies of scale. The time frame envisaged in the agreement on SAFTA must be strictly adhered to.

7. South Asian Cooperative Security We resolve to get out of the straitjacket of enmity, overcome obsession with overdemanding militaristic security paradigms and look beyond the traditional notions of security and focus on an integrated South Asian Cooperative Security that recognizes interdependence and mutuality of interests. The states ought to act in their enlightened self-interest to resolve their conflicts and differences through peaceful means and to the mutual benefit of our peoples. The choice is often, erroneously, posed between regional cooperation and conflict resolution. We urge all our states to simultaneously move forward to address long-standing political disputes through peaceful means. The main obstacle to regional cooperation and economic integration remains political and strategic. Therefore, we the elected representatives of the people vow to be courageous, flexible and consistent to resolve interstate and intrastate conflicts and dismantle political barriers to regional economic takeoff.

Countering the widespread threat of terrorism, the SAARC countries must implement the current protocol for cooperation against terrorism and bring it in line with the international norms. The regional efforts against terrorism must also include measures to combat the spread of small arms and light weapons, narcotics trafficking, smuggling, organized crimes and criminal mafias. This will require exchanges and interaction between the national intelligence and security agencies with their counterparts across the border and greater interaction between the armed forces and military establishments in the region.

The conference strongly emphasizes the principle that there can be no intervention in the internal affairs of any nation in the subcontinent. Yet, given the implications of internal conflicts for regional security as a whole, the SAARC must pay greater attention to the relationship between internal and regional security. It calls on both parties to the ethnic conflict in Sri Lanka to take immediate steps towards a revival of the stalled peace process and creation of an interim administration in the Tamil-dominated regions while securing integrity of the country and the rights of minorities there.

Without prejudice to the current positions of the SAARC governments on amending the SAARC charter, the conference calls upon the SAARC to initiate a study on mechanisms for cooperative security in the region. Given the increasingly intrusive nature of the international system, it is imperative that the region develop its own security and Conflict Resolution Mechanisms. In this context, the conference calls upon the SAARC to consider the establishment of a SAARC Security Forum on the lines of the ASEAN Regional Forum.

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Advancing the SAARC charter, the conference welcomes the decision, in principle, of the Islamabad SAARC summit to establish procedures for cooperation with other countries and organizations. Given the increasing interdependence among regions, cooperation with neighboring countries, such as China, Afghanistan and Myanmar and Central Asia, and other regional organizations, it is an essential future activity for SAARC. 8. South Asian Human Security Beyond cooperative security, South Asian nations must ultimately move towards South Asian Human Security by placing people -their well being and rights to peaceful life and development-at the centre of security concerns, rather than intensifying the arms race. To include the excluded, governments of South Asia should take concrete steps to implement the SAARC Social Charter and give priority to poverty eradication by implementing ISACPA Report on Poverty Alleviation and meeting the Millennium Development Goals. This can be done by increased investment, enhanced economic growth and development, which do not necessarily translate into poverty alleviation unless structured to address the root-causes of poverty and give priority to human resource development, employment generation and empowerment of the dispossessed, women and poor in particular.

9. South Asian Parliament The participants overwhelmingly endorsed the view to initiate a process of moving towards the creation of an institutional interactive mechanism for parliamentarians of South Asia keeping in mind the concept of a South Asian Parliament. A full fledged SAP may take a decade or two, but it is time to initiate moves in that direction. To begin with, the conference proposes: a) Creation of an Intra-Parliamentary Union in South Asia; b) SAARC may in principle agree to create a South Asian Parliament and appoint a group of experts, responsible before the SAARC Speakers Forum, to prepare a comprehensive report and a timeframe to establish it in stages and through an evolutionary process; c) The SAARC Speakers Forum should be activated and; d) To begin with, SAP may be set up as a deliberative and consultative body, not as a legislative body, so as to create regional opinion on and build regional pressures on the issues pending for implementation at the SAARC level. This deliberative body may work within the SAARC agenda. By ultimately creating a South Asian Parliament, the evolution of a regional South Asian identity, without in any sense compromising on or conflicting with respective national identities and sovereignty of nation-states of the region.

10. South Asian Human Rights Code It is imperative for the South Asian countries to agree to and set up institutions under the Paris Principles and purposefully set about creating the required mechanisms to implement all internationally recognized fundamental human, civil and democratic rights. The Proposed Draft on Human Rights Code for South Asia presented before the conference will be circulated among the human rights bodies of the region and Human Rights Commission of Pakistan and other human rights bodies in the region will be requested to develop broader understanding among the major stakeholders to develop a regional framework at the level of SAARC and its member countries.

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11. People to People Contact The prevailing barriers to cross-border movements make neither commercial nor logistical sense and originate in the pathologies of interstate, as well as domestic, politics. There is an urgent need to allow greater interaction among the policymakers, parliamentarians, businessmen, media practitioners, professionals, youth and the leaders of civil society. To enable it to happen, it is necessary that India, Pakistan and Bangladesh, who have the most restrictive visa regimes, drastically revise their visa policy and remove impediments to free movement of people. Allcountry visas may be granted at separate South Asian counters on arrival at the airports and on all border-crossings.

We, the parliamentarians, acknowledge and appreciate the role being played

by SAFMA in developing understanding, promoting regional cooperation, bringing people together and demanding access to and free flow of information in our region and propose to it holding of a follow-up SAFMA's South Asian Parliament in May 2007.

12. South Asian Information Society To overcome information deficit in the region, it is essential that all restrictions on access to and free flow of information are removed forthwith and media persons and products are allowed free movement across frontiers. In this regard, SAFMA's Protocols on 'Free Movement of Media Persons and Media Products' and 'Freedom of Information' must be adopted by the national legislatures/governments and the SAARC. The parliamentarians also pledged to provide bipartisan support to ensure press freedom, legislate and implement right to know and protect right to express and ensured SAFMA to jointly lobby with its national chapters to bring appropriate changes in the respective media laws that in any way hinder press freedom. The media, on their part, should rise above national divides, avoid demonization and give special attention to the coverage of the countries of South Asia that remain underreported. Given the rising numbers of South Asian Cyber citizenry, there is an urgent need to upgrade, integrate and facilitate cyber connectivity and accessibility.

13. Culture and Tourism The scope of collaboration in the sphere of culture, tourism, sports, education, health, research, human resource development and environment is infinite. At the level of SAARC, measures should be taken to promote cultural exchanges, tourism, health and education services and research in all fields.

14. On Nepal The Conference expressed its serious concern over the arrest of a former Nepalese member of parliament while he was about to board the plane to Pakistan to attend this Conference. Protesting his arrest, other parliamentarians from Nepal also decided to stay back. The absence of the parliamentarians from Nepal denied the Conference of their invaluable inputs. In solidarity, the Conference calls upon Nepal to restore all fundamental rights and civil liberties, announce a ceasefire with the Maoists, initiate early political negotiations to come up with a sustainable process to end the conflict in the country and restore multi-party democracy.

Let a South Asian fraternity benefit from the fruits of a new era of peace in which our people could become the master of their destiny while contributing tremendously to the progress of whole humanity regardless of geography, ethnicity, nationhood, gender, creed and color. This is a historic moment when the people of South Asia have recognized that they have a new tryst with destiny. They are affirming that their security and well being lies not in interstate conflict but in their peaceful resolution and cooperation. Let the governments hearken to the call of their people.

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interdependence of people and states on each other and on the ecology within which they function.

Let us briefly critique each of these propositions to lay the basis of proposing an alternative paradigm of policy, as this region develops a leadership role in the world:

A Vision for South Asia Dr Akmal Hussain Presented at: SAFMA's South Asian Parliament, May 15-20, 2005

South Asia can lead the World South Asia is at a historic moment of unprecedented potential for transforming their economic conditions and together with other Asian countries playing a key role not only in the global economy but also in the development of human civilisation in the 21st century. For the first time in the last 350 years, the global economy is undergoing a shift in its center of gravity from the continents of Europe and North America to Asia. If present trends in GDP growth in China, U.S. and India respectively continue, then in the next two decades China will be the largest economy in the world, U.S. the second largest and India the third largest economy. However, if South Asian countries develop an integrated economy, then South Asia can become the second largest economy in the world after China. Given the geographic proximity and economic complementarities between South Asia on the one hand and China on the other, this region could become the greatest economic powerhouse in human history. Yet the world cannot be sustained by economic growth alone. Human life is threatened with the environmental crisis and conflicts arising from the culture of greed, from endemic poverty and the egotistic projection of military power. Societies in this region have a rich cultural tradition of experiencing unity through transcending the ego, of creative growth through human solidarity and a harmony with nature. In bringing these aspects of their culture to bear in facing contemporary challenges, the people of this region could bring a new consciousness and institutions to the global market mechanism. In so doing South Asia and China can together take the 21st century world on to a new trajectory of sustainable development and human security. It can be an Asian century that enriches human civilisation.

South Asia and the New Paradigm of Policy The policy paradigm underlying the last three centuries of economic growth within nation states and political relations between states has been characterised by two propositions that are rooted in conventional social science theory: (a) Maximisation of individual gains in terms of continuous increases in production and consumption, within a competitive framework ensures the maximisation of social welfare at the national as well as global levels. (b) The economic and political interests of a nation state are best achieved by translating economic gains into military power. The assumption here is that a state can enhance national welfare by initiating, or being part of an initiative for projecting imperial power over other states.

These propositions now need to be questioned because of the increased

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(a) First, the idea that competition alone ensures an efficient outcome may not be necessarily true in all cases in view of the work by Nobel Prize winning economist John Nash, who proved mathematically that in some cases the equilibrium, which maximises individual gains, could be achieved through cooperation rather than competition.

The Nash Equilibrium solution may be particularly relevant in the context of India-Pakistan relations. Consider. India, if it is to sustain its high growth rate, will require sharply increased imports of oil, gas and industrial raw materials from West and Central Asia, for which Pakistan is the most feasible conduit. Similarly India's economic growth which has so far been based on the domestic market will in the immediate future require rapidly increasing exports for which Pakistan and other South Asian countries are an appropriate market. Thus the sustainability of India's economic growth requires close cooperation with Pakistan. Conversely, peace and cooperation with India is essential for Pakistan, if it is to achieve a GDP growth rate of 8 to 9 per cent, overcome poverty and build a democracy based on a tolerant and pluralistic society. It is clear therefore that governments in India and Pakistan will need to move out of the old mindset of a zero-sum game, where gains by one side are made at the expense of the other. Now the welfare of both countries can be maximised through joint gains within a framework of cooperation rather than conflict.

The missing dimension of the relationship between competition and welfare in conventional economic theory is that of institutions. The recent work of another Nobel Prize winning economist, Douglas North has shown that if competitive markets are to lead to efficacious outcomes, then they must be based on a set of underlying institutions. He defines institutions in terms of constraints to behaviour for achieving shared objectives within an appropriate combination of incentives and disincentives.

We can apply Douglas North's principle to the role of new emerging economic powers for seeking a broad framework of cooperation for the efficient functioning of a competitive global economy.

Our proposed logic of locating competitive markets within broader institutional structures of cooperation at the regional and global levels is necessitated by the integrated ecology of the planet. Global cooperation in environmental protection, poverty reduction and defusing the flash points of social conflict and violence will become the essential underpinning of sustainable development and human security in this century. (b) The second proposition from conventional social science theory and political practice, that the economic welfare and political influence of a nation state can be best achieved by translating economic gains into military power is also questionable. In the new world that is now taking shape, the influence of an

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emerging power will be determined not by the magnitude of the destruction it can wreak on other countries but by its contribution to enhancing life in an interdependent world. Thus it is not the military muscle of a state that will be the emblem of status, but its contribution to meeting the challenge of peace, overcoming global poverty and protecting the planet from environmental disaster.

Meeting these challenges will require a deeper understanding of the processes that shape nature and human societies, as well as a deeper awareness of our inner self and the shared wellsprings of human civilisation.

Concretising the Vision of South Asia: Some Specific Policy Actions South Asia stands today at the cusp of history: Between a past, darkened by poverty, disease, illiteracy and conflict, and a bright future, when the great potential of its human and natural resources, and the shared humanity of its diverse cultures can be actualised. The global environment provides a historically unprecedented scale of private capital flows, trade opportunities, information and technology, which if utilised can dramatically transform the material conditions of life of the countries of South Asia.

A vision is efficacious to the extent that it can be concretised. This requires bringing to bear the new consciousness of South Asian cooperation to undertake specific policy actions. Apart from implementing the decision at the Islamabad SAARC Summit to establish a South Asian Free Trade Area, three broad areas for deepening economic cooperation can be identified for purposes of specific policy action: 1.

2.

3.

Energy Cooperation within South Asia Increased Investment for Accelerating Economic Growth Restructuring Growth for Faster Poverty Reduction

Specific policy actions for each of the above three areas, are as follows: Energy cooperation within South Asia (a) In the context of developing energy markets of these resources, power trading in the region calls for establishment of high voltage interconnections between the national grids of the countries of the region. India, Pakistan and Bangladesh should, also cooperate closely in establishing gas pipelines in South Asia for transporting gas from Iran, Qatar and Turkmenistan and even Myanmar.

Specifically the ongoing official negotiations on transporting oil and gas from Iran through Pakistan to India should be brought to an early and successful conclusion. To strengthen the mutual inter dependence between India and Pakistan the recent proposal by Mr. Mani Shankar Aiyar1 for transporting diesel fuel from Panipat to Lahore should also be taken up quickly. (b) The precondition to create a competitive power market is to allow freedom to generators to produce electricity and distributors to sell in the market. In this context joint developing, trading and sharing of energy should be pursued.

Increasing investment within South Asia through joint venture projects The key joint venture projects that can be undertaken to increase investment and growth in the region are as follows:

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(a) Facilitating private sector joint projects in building a network of motorways and railways at international quality standards through out South Asia. These modern road and rail networks would connect all the major commercial centers, towns and cities of SAARC countries with each other and with the economies of Central Asia, West Asia and East Asia. (b) Facilitating regional and global joint venture projects for developing new ports along both the western and eastern seaboard of South Asia, and at the same time up-grading existing ports to the highest international standards. (c) Facilitating regional investment projects in building a network of airports, together with cold storages and warehouses that could stimulate not only tourism but also export of perishable commodities such as milk, meat, fish, fruits and vegetables.

Restructuring growth for rapid poverty reduction (a) Generating Employment and Incomes for the Poor Economic growth must not only be accelerated but restructured in such a way that its capacity to alleviate poverty is enhanced for given growth rates of GDP. In this context of achieving pro poor growth, three sets of measures can be undertaken at the country as well as the regional levels: (i) Joint venture projects need to be undertaken to rapidly accelerate the growth of those sub sectors in agriculture and industry respectively which have relatively higher employment elasticities and which can increase the productivity and hence put more income into the hands of the poor. These sub sectors include production and regional export of high value added agricultural products such as milk, vegetables, fruits, flowers and marine fisheries. (ii) Regional network of support institutions in the private sector can be facilitated for enabling small scale industries located in regional growth nodes, with specialised facilities such as heat treatment, forging, quality control systems and provision of skill training, credit and marketing facilities in both the country specific and regional economies. (iii) A SAARC Fund for vocational training may be established. The purpose of this Fund would be to help establish a network of high quality vocational training institutes for the poor. Improved training in market demanded skills would enable a shift of the labour force from low skill sector to higher skill sectors and thereby increase the productivity and income earning capability of the poor. It would at the same time generate higher growth for given levels of investment by increasing factor productivity. (b) SAARC Educational Foundation A SAARC Educational Foundation in South Asia may be created on the basis of contributions by individual SAARC member countries and more substantially by multi lateral donor agencies. The purpose of this Foundation would be to create a network of high schools at an international standard in selected districts in each of the countries of South Asia. These SAARC schools could act as role models and set the standards for both the private sector and the individual governments to follow.

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(c) SAARC Health Foundation2 In South Asia as much as 43 per cent of the population lives in absolute poverty3.

The majority of the poor suffer from diseases requiring urgent medical care but are unable to afford it. The high costs of medical care for those on the poverty line that somehow manage to access it, push them further into debt. Others, who cannot access health care, suffer an income loss due to reduced productivity or loss of livelihood resulting from illness. Indeed illness in South Asia is a major factor that pushes people into poverty, and those already poor into deeper poverty4. Therefore provision of preventive and curative health facilities would be a strategic intervention for poverty reduction, human development and economic growth in the region. In this context I have proposed that a SAARC health foundation may be instituted as a private-public partnership with the following objectives. It can be financed primarily by the private sector, with contributions by regional governments and multi lateral donor agencies: (i) SAHF District Hospitals: To start with, SAHF would establish 25 general hospitals located in the relatively low income regions (districts) and distributed across each of the countries of South Asia, according to an agreed criterion5. Each hospital in terms of the professional standard of medical care and the quality of humanity with which it is given, would set standards for others in the private/public sector to follow. The doctors, nurses, medical technicians and some of the administrative staff of the SAHF hospitals in a particular country could be drawn from other South Asian countries to signify the commitment of the South Asian community, to the people of each country in the region. The healing and humanity in these hospitals would stand as a living symbol of both the promise and fulfillment of South Asian cooperation. (ii) SAHF Community Based Preventive Health Care: Each SAHF district hospital would initiate community-based campaigns for preventive health care. These would include facilitating community-based campaigns for hygienic drinking water, sanitation and inoculation campaigns. They would also design and disseminate information packages on disease control during periods of epidemics, and also vital information regarding hygiene and health measures at the household level. (iii) SAHF Network of Basic Health Units: Each hospital would have a network of 10 Basic Health Units (BHUs) to give maximum coverage of population and convenience of access over a modest sized but flexible health care system.

The basic health units in the hinterland of the SAHF district hospital would provide initial assessment of the nature of the disease and filter out patients who have minor illnesses treatable at the BHU level, while referring those with more serious medical problems for treatment at the SAHF district hospital. The BHUs would also act as conduits for SAHF district hospital initiatives in community action and information dissemination for preventive health care. The BHUs inspite of the limited scope of their medical service would, like the SAHF hospitals, set new standards of professionalism and humanity in their medical care. (iv) SAHF Mother and Child Health Clinics: Each hospital would also have a

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network of 10 Mother and Child Health Clinics in its hinterland region. These clinics would provide reproductive health care, pre natal and post natal care to mothers and basic pediatric services to infants.

Conclusion If South Asia is to play a leadership role in the new world that is taking shape, then it must undertake specific initiatives within a new policy paradigm for pursuing peace, overcoming poverty and protecting the life support systems of the planet. However this requires that governments move out of a mindset that regards an adversarial relationship with a neighbouring country as the emblem of patriotism, affluence of the few at the expense of the many, as the hallmark of development, individual greed as the basis of public action, and mutual demonisation as the basis of inter state relations. We have arrived at the end of the epoch when we could hope to conduct our social, economic and political life on the basis of such a mindset.

This is a historic moment when the people of South Asia have recognised that they have a new tryst with destiny. They are affirming that their security and well being lies not in inter-state conflict but in peace and cooperation. Let the governments hearken to the call of their people.

End Notes 1. This proposal was made by H.E. Mr. Mani Shankar Aiyar, during his key note address at the SACEPS seminar on Regional Cooperation in South Asia in New Delhi, 31st August 2004.

Also see Akmal Hussain, ‘A New Beginning in the Peace Process’, Daily Times, September 28, 2004.

2. For a more detailed discussion of this concept see, Akmal Hussain, ‘South Asia Health Foundation’, A Concept Note, 8th November 2004. Note presented to the South Asia Centre for Policy Studies.

3. Mahbub ul Haq, Human Development in South Asia, Oxford University Press, Karachi, 1997.

4. Akmal Hussain, Pakistan National Human Development Report 2003, UNDP, Karachi: Oxford University Press, 2003).

5. This could be either in terms of the proportion a particular country has of the total poor population of South Asia, or the prevalence of disease as a percentage of the national population, or in terms of a broad inter country balance in the distribution of the hospitals, or a combination of the above.

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8.

SAFMA’s South Asian Parliament Security Recommendations Introduction The following recommendations on security, prepared by C. Raja Mohan and Ejaz Haider, are based on the presentations and discussions in Session V: ‘Cooperative Security and Conflict Resolution Mechanism’, May 19, 2005, at SAFMA’s South Asian Parliament, Islamabad/Bhurban, May 14-20, 2005.

I.

Bilateral Mechanisms 1. Welcomes the current peace process between India and Pakistan with its two fold objective: the exploration of all options for a final settlement of the J&K question in an atmosphere free of violence and normalisation of bilateral relations. Calls on India and Pakistan to implement their joint statements on January 6, 2004, September 24, 2004 and April 18, 2005 in their letter and spirit.

2. Welcomes the efforts by India and Pakistan to undertake nuclear and conventional military confidence-building measures. Urges them to put in place a comprehensive regime of CBMs that will ensure a nuclear-tension free subcontinent.

3. Supports the demand of India and Pakistan for negotiations with the other nuclear weapons powers to promote global non-proliferation and effective nuclear disarmament.

4. Calls on India and Pakistan to ensure an effective balance between military security and human security. We recognise that some modernisation of military forces in both countries is necessary and inevitable. At the same time, they must ensure that the acquisition of new arms do not affect the security of their neighbours and prevent a shift of resources from development to defence.

5. Calls on all countries in the region to put in place comprehensive sustainable dialogue mechanisms for resolving all bilateral disputes. While India and Pakistan today have a composite dialogue in place which has gathered momentum, similar exercises are needed, for example between India and Bangladesh.

II. Multilateral Mechanisms for Traditional Security Threats 6. Recognising the importance of regional cooperation on countering the widespread threat of terrorism, the Conference calls on the SAARC to upgrade the current protocol for cooperation against terrorism to bring it in line with the international norms. The regional effort against terrorism must also include measures to combat the proliferation of small arms and light weapons, narcotics-trafficking, smuggling and criminal mafias.

7. Calls on the SAARC countries to promote exchanges and interaction between

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9.

the national intelligence and security agencies with their counterparts across the border. This cooperation must include intelligence sharing, joint training and cooperative cross-border missions.

Proposes greater interaction between the armed forces and military establishments in the region. This must include exchanges of military delegations, training of officers in other countries and a discussion of military doctrines to promote greater military transparency in the subcontinent.

Calls upon Bangladesh, India, Nepal and Pakistan to share their rich experience in international peacekeeping operations. Together these countries account for a substantive potion of the international peace keeping operations, but have no interaction with each other.

III. Multilateral Mechanisms -- Non-Military Threats to Security 10. Calls upon the SAARC states to pay greater attention to the non-military threats to security that affect the lives of millions of people in the region.

11. Underlines the special importance of water security for the region and recognizes that this cannot be met by exclusive national approaches alone.

Given the natural integrity of the river systems in the Subcontinent, the conference demands that SAARC adopt a comprehensive multilateral approach that ensures the interests of all in both the upper and lower riparian states.

12. Welcomes the recent proposals for multilateral trans-border pipeline projects in the region, including those between India, Pakistan, Iran, Afghanistan, Bangladesh and Myanmar. An early and successful conclusion of at least one of these projects is necessary demonstrating the relevance of multilateral approaches for energy security.

13. Bemoans the lack of effective cooperation among the SAARC states to protect the regional environment and demands an immediate multilateral mechanism to address the collective environmental challenges in the Subcontinent.

14. Calls upon the SAARC states to develop an effective multilateral mechanism for prediction, prevention and management of natural disasters in the region.

Efforts of the regional states in the management of the Tsunami earlier this year should provide valuable lessons for the region as a whole.

IV. Internal Conflicts 15. The conference strongly emphasizes the principle that there can be no intervention in the internal affairs of any nation in the subcontinent. Yet given the implications of internal conflicts for regional security as a whole, the conference calls on the SAARC to pay greater attention to the relationship between internal and regional security.

16. It calls on both parties in Sri Lanka to take immediate steps towards a revival of the stalled peace process.

17. It calls upon Nepal to restore the democratic rights in the country, announce a ceasefire with the Maoists and initiate early political negotiations to come up with a sustainable process to end the conflict in the country.

V. Extra-Regional Security Cooperation 18. Many countries of the region are increasingly being called upon to undertake

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security responsibilities beyond South Asia. India and Pakistan are members of the Asean Regional Forum and part of its efforts to promote regional security. In this context, the states of SAARC must expand their own bilateral and regional security cooperation as well as create mechanisms for greater contribution to extra-regional and international security.

19. Beyond South East Asia, SAARC countries could explore the prospects for contributing collectively to security in Central Asia and the Persian Gulf.

20. Cooperation between the naval forces of South Asia and between them and extra-regional actors will particularly contribute to protection of sea lanes that pass through Indian Ocean, prevent piracy and promote energy security.

VI. Advancing the SAARC Charter 21. Without prejudice to the current positions of the SAARC governments on amending the SAARC charter, the conference calls upon the next SAARC summit to initiate a study on mechanisms for cooperative security in the region.

22. Given the increasingly intrusive nature of the international system, it is imperative that the region develop its own security mechanisms. In this context, the conference calls upon the SAARC to consider the establishment of a SAARC Security Forum on the lines of the ASEAN Regional Forum.

23. The conference welcomes the decision, in principle, of the Islamabad SAARC summit to establish procedures for cooperation with other countries and organizations. Given the increasing interdependence among regions, cooperation with neighbouring countries and organisations is an essential future activity for SAARC.

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