Energy Cooperation in South Asia

In This Issue

Integrating Stakeholders in Energy CooperationDr Mahendra P. Lama

Gas Pipelines and Regional CooperationMohammad Ramzan Ali

India: Energy ScenarioD. N. Raina

Pakistan’s Future Energy NeedsFahd Ali

Bangladesh: Natural Gas ExportMonzur Hossain

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

Small and Medium Enterprises in PakistanIqbal Mustafa and Farrukh M. Khan

Sri Lanka: Cost of the Ethnic Conflict Krishna Chaitanya

Local Government in BangladeshPranab Kumar Panday

Food Security in South Asia Suresh Babu

Documents

i) Bhurban Declaration: Evolving South Asian FraternityMay 15-20, 2005, Islamabad-Bhurbhan

ii) A Vision for South AsiaDr Akmal Hussain

iii) SAFMA’s South Asian Parliament:Security Recommendations

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

Contents

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EditorImtiaz Alam

Executive Editor Zebunnisa Burki

Consulting Editors

BangladeshEnayetullah Khan

IndiaK. K. Katyal

NepalYubaraj Ghimire

PakistanI. A. Rehman

Sri LankaSharmini Boyle

Publisher Free Media Foundation

FacilitatorSouth Asian Free Media

Association (SAFMA)

Designed byDESIGN 8

PrinterQaumi Press

Editor’s PostE-mail:

journal@southasianmedia.net

Address09-Lower Ground,

Eden Heights, Jail Road, Lahore, Pakistan.

Tel: 92-42-5879251; 5879253 Fax: 92-42-5879254

Website :www.southasianmedia.net

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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 geo-strategically 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

i ii

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

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.

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.

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.

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

Integrating Stakeholders in Energy Cooperation

Gas Pipelines and Regional Cooperation

Nepal: Thermal Energy for Export

India: Energy Scenario

iv

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.

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.

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.

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.

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

Pakistan’s Future Energy Needs

Bangladesh: Natural Gas Export

WTO and Poultry Industry in India

Small and Medium Enterprises in Pakistan

v 6

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.

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.

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.

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.

Sri Lanka: Cost of the Ethnic Conflict

Local Government in Bangladesh

Food Security in South Asia

Integrating Stakeholders in Energy Cooperation

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.

lSegregation of the regulatory functions from the government and vesting them in

an independent regulatory commissionlUnbundling various activities from a vertically integrated unit to distinct and

separate units based on functionslCorporatisation of various units lTariff and pricing reformslPrivate sector participationlCross-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.

Scope for Energy CooperationRegionalism, 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 1regionalism and multi-lateralism . Regional cooperation has brought about significant

transformations in some of the region's strategic options, political actions, economic 2orientation and development gains .

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

8

country.

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 cross-

border power trade emerges.

Energy Cooperation: Regional InitiativesA 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.

9 10

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.

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

Cross-border energy trade could lead to:

i) effective utilisation of natural resources, ii) increase in reliability of power supply, iii) economy in operation and mutual support during contingencies, iv) 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 3procreate modalities for a substantive and lasting interaction .

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)

There already exists a considerable network of inter-connections among the

South Asian countries. India's Power Grid Corporation has worked out the inter-

connections 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 inter-

connecting 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 tradeii) 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-BhutanIn 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 4kingdom's GDP . 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.

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

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 Norway, Sweden, Finland and Denmark North American Electric Reliability Council (NERC)

United States and Canada.

Southern African Power Pool (SAPP),

South Africa, Lesotho, Mozambique, Namibia, Malawi, Zimbabwe and Zambia

The Commission of Regional Power Integration (CIER)

Jordan, Bahrain, Tunisia, Algeria, Saudi Arabia, Syria, Libya, Egypt, Morocco, Mauritania, Yemen, Iraq, Lebanon, Palestine, Dubai and Qatar.

South America, power trading

Argentina, Paraguay and Uruguay. Central America

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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 5India has recorded almost six-fold increase during the last eight years (Table 2) .

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 6development policy that opened power development by private producers .

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 7offered a price of 2.25 cents . It is mainly on this ground the negotiations broke off.

Table 2 Exchange of Power between India and Nepal

1993 1994 1995 1996 1997 1998 1999 2000 2001 Bulk energy sale to India (GWH) 46.1 50.5 39.5 87.0 100.2 67.4 64.2 95.0 126.0 Bulk energy purchase from India (GWH)

82.2 102.8 113.8 73.0 154.0 210.3 232.4 232.2 226.5

Revenue from bulk sale to India ( Rs million)

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

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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 8couple of weeks’ . 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 sub-

station 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 9cooperation in South Asia .

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 ProjectsThe Government of India (GoI) and the Government of Sri Lanka (GoSL) signed a

10Memorandum of Understanding to build a bridge across the Palk Strait in July 2002 .

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

Table 3 Nepal : West Seti (Western Nepal) Project Offer for Export to India Year 2001-07 06-12 11-17 16-22 21-27 25-31 1 Saleable Energy MUs) 3000 3000 3000 3000 3000 3000 2 Exchange Rate Rs/US$) 66.82 89.42 119.66 160.13 214.30 270.54 3 Rate / Unit a. US$ b. Equivalent Rs [3a x 2]

0.07 4.68

0.07 6.26

0.07 8.38

0.07 11.21

0.07 15.00

0.07 18.94

4 Total Payment (Rs million) [(3b. x 1)/10]

14031.9

18777.9

25129.0

33628.3

45002.2

56814.3

Discounting Factor 1.00 0.567 0.322 0.183 0.104 0.066 5 Present Value (Rs) a. Total Payment [4 x 5] b. Unit Rate [3b x 5]

1403.19 4.68

1065.51 3.55

809.09 2.70

614.38 2.05

466.52 1.56

374.30 1.25

6 Levellised Tariff for 25 years

7.514

Source: Power Trading Corporati on of India, 2001

13 14

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 11from disasters .’

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 12connects to the Sri Lankan national grid at Anuradhapura . 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 SAARC-

RPTC can maintain and disseminate information on plant structures, avoidable cost

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 13wheeling charges .

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

15

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 techno-

economic 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 14guarantees by multilateral institutions . 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 15Corporation's (IOC) planning to sell petroleum products in Sri Lanka . Any of these

pipelines, if laid, could change the energy as well as the economic picture of the entire

region.

16

If political apprehensions are set aside, there are strong possibilities and

scope for bringing gas from Bangladesh through pipeline. A number of feasibility 16studies have been done in this regard including by UNOCAL , 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 17considered to be the most viable and profitable . 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 18the estimates of gas reserves vary sharply .

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 19possible gas in place was estimated to be in the range of 4.14 TCF to 11.84 TCF . 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 20supply which militates against export of gas from the current reserves’ .

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 21natural gas into the country .

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 22facility to India . 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

17 18

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.

lFull-fledged preparatory techno-economic work.lIntergovernmental agreement.lInformed public opinion.lPromotion of international commercial and financial interest in the proposed

projects.

ConclusionSouth 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

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 South-

West Pacific Studies, School for International Studies, Jawaharlal Nehru University,

New Delhi)

End Notes1. 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)2. Ali M. El-Agraa, Regional Integration: Experience, Theory and Measurement, (London:

Macmillan, 1999)3. 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, 2004.4. Selected Economic Indicators, Royal Monetary Authority of Bhutan, September 2000,

Thimphu and Kuensel, January 2004.5. Fiscal Year 2002/03- A Year in Review, Nepal Electricity Authority, Kathmandu, August

2003.6. 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. 7. 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, 1999.8. 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

19

Power Trade in South Asia’, South Asian Survey, New Delhi, September-December 2000.9. 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. 10. 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, 2003.11. 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 ).12. 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 abandoned13. Mahendra P. Lama, ‘Energy Cooperation in South Asia: Opportunities, Strategies and

Modalities’, (Dhaka: CPD-CASAC, 2004)14. Mahendra P. Lama and Rasul Bakhs Rais, ‘Pipelines and Powergrid for Peace’, Occasional

Paper, (Mumbai: ICPI and London: Kings College, 2001)15. ‘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 2004.16. 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.17. 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.18. 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, 4-

6 April 2001.19. Report of the Committee for Gas Demand Projections and Determination of Recoverable

20

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.

21 22

Gas Pipelines and Regional Cooperation

Mohammad Ramzan Ali

IntroductionRich 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 producer-

consumer 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 EUBefore 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

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 intra-

regional 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 1trade policies.

Energy in South AsiaMajor 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 2world's energy demand increased from 2.4 per cent in 1987 to 4 per cent in 1998 . 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 3region .

According to SSGC calculations, Pakistan would face a shortfall of 350-

mmcfd 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 4unit of GDP is amongst the highest . 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

24

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 13trans-regional economic cooperation . 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 PrioritiesIndia'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 14by 2025 . 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-to-

people reconciliation is to be expanded, and more stress is laid on economic realities, 15most disputes can be resolved peaceably in the changed climate’ .

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 RegionalismThe 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

23

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 6the next 50 years . 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 9for both countries . 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 10the terms of its trade .

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 11objectives . 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 12Myanmar and Thailand, Asia will get an interlinking gas system .

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

25 26

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, Russia-

India, 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 16place .

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 17(SAFTA) is not thwarted and the trade basket is diversified . 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.

Economic and Commercial ComplementaritiesRegional 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 18pipeline project would be an outstanding example of regional cooperation .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 19Aiyar told a regional energy conference . 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

28

most of all, to the advantage of India, whose energy demands, both in oil and gas, are 20expected to double by 2020 .

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 21like a trade corridor to the landlocked Nepal and Bhutan .

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 22formation of a techno-economic working committee.

(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 23production deals in Libya, Iran and Central Asia . 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 region-

wise 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 Notes1. 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 2005.2. <http://www.terina.org/energy.htm>.

27

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 AlternativesUltimately 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,

29

3. ibid.4. ibid.5. <http://www.terina.org/prog/abs1.htm>.6. ibid.7. Nadeem Malik, ‘Pakistan wants Iran gas with or without India’, The News, Islamabad, 10

January, 2005.8. ‘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,

2005.9. ibid.10. 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.11. B Muralidhar Reddy, ‘From World Bank to vote bank’, The News, 12 September 2004.12. Based on discussions and interviews with journalists and researchers working on the

theme.13. <http://www.bitpipe.com/data/detail>.14. <http://www.gasandoil.com, Op.cit.>.15. ibid.16. Manmohan Singh's speech at Third India-Asean Business Summit 19 October 2004, New

Delhi. See http://www.embassyofindia.com/IndiaNewsNovember2004/page4.htmlIbid.17. ‘Indo-Pak trade may touch $ 10 b by 2010 Assocham’, The Hindu, 5 January 2005.18. ‘Gas pipeline: bilateral or trilateral?’, Dawn, 7 January, 2005.19. ‘India calls for Asian oil market’, Dawn, 7 January, 2005.20. ‘India to launch pipeline diplomacy’, The Nation, 7 February 2005.21. ibid.22. ibid.23. ibid.

30

Nepal: Thermal Energy for Export

Dr Upendra Gautam and Ajoy Karki

BackgroundNepal 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

32

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.

ChallengesOne 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 Rupee-

NRs. 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 1: Hydropower projects identified for development in the near future

S.N. Hydropower Project Installed Capacity

(MW)

Average Annual Energy (GWh)

Remarks

1. Kabeli A 30 164 Feasibility study completed 2. Chameliya 30 196 Feasibility study completed 3. Lower Modi 19 123 Feasibility study completed 4. Upper Modi-A 42 285 Feasibility study completed 5. Rahughat 27 165 Feasibility study completed 6. Upper Marsyngdi A 50 340 Feasibility study completed 7. Budhi Ganga 20 106 Feasibility study completed 8. Hewa Khola 10 67 Feasibility study completed 9. Likhu-4 44 270 Feasibility study completed 10. Khimti-2 27 157 Pre-feasibility study

completed 11. Upper Seti 122 592 Storage type, Feasibility

study completed 12. Madi Ishaneswar 86 355 Storage type, Feasibility

study completed 13. Upper Tamakoshi 250 1568 Feasibility study- Phase 1

completed 14. Tamur -Mewa 101 489 Feasibility study completed 15. Dudh Koshi -1 300 1702 Feasibility study completed

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

Table 2: Domestic electricity tariff in Nepal and Delhi, India

Tariff, NRs./kWh (IRs./kWh)

Monthly Energy Consumption (kWh)

Nepal Delhi, India Remarks

0-20 4.00 2.10 (1.31) 21-100 7.30 2.10 (1.31) 101 -200 7.30 2.53 (1.58) 201 250 7.30 5.04 (3.15) 251-400 9.90 5.04 (3.15) Over 400 9.90 6.05 (3.78)

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.

31

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 hydro-

power 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 PlanThe 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

33 34

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 India-

China 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 ForwardThe 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

36

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:

lMelting of the Himalayan snow in Nepal and China resulting in Glacial Lake

Outburst Floods (GLOF).lReduction 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:

lThe trade in energy will help China and India reduce their oil imports.lThe sharing of CDM benefits the countries along with a reduction in pollution

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.lThe 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.

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.

35

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.

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).

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

37 38

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

40

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 DependenceIt 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.

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 ExchangeOil 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 SectorIn 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 sectorGeneration and availability

Table 1:Consumption, Production and Imports of Commercial Fuels Sl. Item Units 1980-81 1990-91 1995-96 2000-01 2001- 02

1. Coal/Lignite consumption mtoe 58.5 108.2 140.7 169.1 181.9 2. Coal Imports mtoe 0.2 4.0 9.0 11.0 12 3. Dependency of Coal % 0.3 % 2.8 % 4.4 % 7.0 % 6.7 %

4. Oil Product Consumption mt 31 68.2 77.3 98.6 99.2 5. Oil Imports as Crude Products mt 7 26.1 49.8 83.4 85.7 6. Oil imports Dependency % 23 38 64 85 86 7. Consumption of Natural Gas (All

domestic) mtoe

0.2

10

16

25

27

8. Electricity Consumption (All domestic)

mtoe 5.0 6.0 8.0 8.0 9.0

9. Total fuel imports as % of total Consumption in toe terms.

%

8

16

24

24

31

India: Energy ScenarioD. N. Raina

IntroductionIndia'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 ConsumptionThe 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 ResourcesIndia 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

41 42

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.

OwnershipOf 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.

ForecastThe 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 reformsThe 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

were based on a two-pronged approach – 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 2003After 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:

lConsolidate the laws relating to generation, transmission, distribution, trading

and use of electricity.lPromote competition in the industry.lProtect the interests of consumers and to provide for reach of electricity to all

areas.lRationalise electricity tariffs.lEnsure introduction of transparent policies regarding subsidies.

The Electricity Act, 2003 contains several far-reaching reforms. Some of them are

listed below:lGeneration de-licensed.lCaptive generation liberalisedlDistributed generation encouraged.lOpen Access on Transmission lines.lOpen Access in Distribution.lTrading in powerlRemoval of exclusivity in Distribution license.lState Government shall establish a State Load Despatch Centre (SLDC).lState Load Despatch Centre shall not engage in the business of trading.lState Government may notify the Board or a Government company as the State

Transmission Utility (STU).lSTU shall not engage in the business of trading.

Other Energy ResourcesThe 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:

CoalCoal 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

44

Non-conventional energy resourcesThe 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.

Outlook for Energy Demand and SupplyLong-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

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 --

Table 3: Region -wise Distribution of Hydroelectric Potential Region Energy Potential

(TWH) Capacity Potential at 60 % Load Factor (MW) Percentage

Developed Northern 225.0 30155 14.3 Western 31.4 5679 31.9 Southern 61.8 10763 49.2 Eastern 239.3 31857 1.0

43

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

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.

PetroleumKnown 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 powerThe 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 potentialThe 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.

45 46

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:

Vision 2020The 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 5: Estimated Energy Demand in 2006-07, 2011-12

Primary Fuel Unit Demand (in Original Units) Demand (MTOE)

2006-07 2011-12 2006-07 2011-12 Coal mt 460.50 620.00 190.00 254.93 Lignite mt 57.79 81.84 15.51 22.05 Oil Mt 134.50 172.47 144.58* 185.40* Natural Gas BCM 47.45 64.00 42.70 57.60 Hydro Power BKwh 158.08 215.66 12.73 18.54 Nuclear Power BKwh 23.15 54.74 6.04 14.16 Wind Power BKwh 4.00 11.62 0.35 1.00 Total Commercial Energy 408.02 544.23 Non-Commercial Energy 151.30 170.25 Total Energy Demand 559.32 714.48

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.

Table 6: Regional Distribution of Commercial Energy Resources Region Coal (bt) Lignite (bt) Crude Oil (mt) Natural Gas

(BCM) Hydro BKwh

Northern 1.06 2.51 0.03 0.0 225.00 Western 56.90 1.87 519.47 516.42 31.40 Southern 15.46 30.38 45.84 80.94 61.80 Eastern 146.67 0 2.19 0.29 42.50 North-Eastern 0.89 0 166.17 152.00 239.30 Total 220.98 34.76 733.70 749.65 600.00

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

Table 7: Forecast for Energy Consumption 2020

Sl.No. Fuel Coal Oil Products

Electricity

Units mt mt Billion Kwh 1. Business As Usual Scenario Forecast 688 245 1551 2. Best Case Scenario Forecast 538 195 1363

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

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:

CoalOf 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.

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 MethaneRecently, 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.

Table 8: Achieved & Required Growth Rate of Commercial Energy

Growth Rate Required Rate Resource 1960-61 to

1980-81 1980-81 to

2001-02 2001-02 to

2006-07 2006-07 to

2011-12 Coal 3.5 5.1 4.5 6.1 Lignite - 8.5 18.2 7.2 Electricity - 7.8 6.7 6.2

48

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)

47

Oil and gasThe 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:

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.

ConclusionA 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

Table 9: Crude Oil/Natural Gas Production in Tenth Plan Resource 2002-03 2003-04 2004-05 2005-06 2006-07

Crude Oil Million tones 33.08 33.22 34.63 34.48 33.97 Natural Gas Mmscmd 86.56 90.54 103.84 101.99 103.08

mmscmd: million standard cubic meters per day.

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

55

50

45

40

35

30

25 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

90-91

49 50

Pakistan’s Future Energy NeedsFahd Ali

IntroductionPakistan'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 1five years is estimated to be 7-8 per cent . 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% 2respectively . 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 3capita consumption in Pakistan is 14 MBTU . 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 2: Per Capita Availability in TOE

0.34

0.32

0.3

0.28

0.26

0.24

0.22

0.2 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

90-91

Pakistan’s Energy SectorThe energy sector in Pakistan consists of the following:

lPower lGas lOillCoal

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.

Energy ConsumptionAccording to the latest economic survey, in the past 14 years -- from 1990-99 to 2003-

04 -- 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.

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

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

Sector Natural Gas Consumption Power sector 35.4% Fertilizer 23.4% Industrial 18.9% Household 17.6% Commercial 2.8% Cement 1.5%

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

52

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 5.Pakistan can generate 100000 MW of electricity for the next 30 years 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 6of ‘Underground Coal Gasification’ .

Natural GasNatural 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 7.natural gas is a suitable substitute for imported foreign oil 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 8countries. The following options are being considered :

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.

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 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 9dams’ . 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.

51

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.

Future Energy Forecasts 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.

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 4next 25 years as proposed in ESAP .

Table 3: Energy Mix Plan (MTOE)

Energy Mix Plan Projections Current Short Term Medium Term Long Term

2004 2010 2015 2020 2025 2030

Total (MTOE) 50.5 79.39 120.18 177.35 255.37 361.31

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%

Figure 4: Sector wise share of electricity consumption for 2004-05 (source: Economic Survery 2004-05)

Year

2005-06

2006-07

2007-08

2008-09

2009-10

Domestic

7,199

7,585

8,127

8,783

9,531

Commercial

1,216

1,251

1,312

1,354

1,408

Agriculture

1,763

1,820

1,893

1,979

2,079

Industrial

5,891

6,481

7,252

8,181

9,267

Other

1,035

1,086

1,159

1,243

1,341

Total

15,500

16,600

17,900

19,600

21,500Souce: Planning Commission

Table 2: Sector Wise Power Demand (2005-10)

53 54

Large hydel power generation projects have a number of issues associated 10with them, such as resettlement and environmental issues. According to Khan , 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 11required, which is 7 MAF more than the current inflows into the sea . 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.

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

Name of Project Installed Capacity (MW) Commissioning Date Neelum Jehlum, AJK 960 June 2010 Doyian, NA 425 June 2015 Kalabag 2400 Postponed until consensus is

reached among all concerned Kohala Jehlum, AJK 740 June 2010 Munda Dam, NWFP 600 Dec 2015 Suki Kinari 652 Dec 2015 Karrang, NWFP 454 Dec 2020 Tarbela 15 -16, NWFP 960 Dec 2008 Spath Gah, NWFP 851 Dec 2015 Basha, NA 3600 Dec 2012 Dasu (Indus) NA 2712 Dec 2015 Pathan (Indus) NA 1172 Dec 2015 Thakot (Indus) 1043 Dec 2015 Bungi (Indus) 1500 Dec 2015 Chor Nallah 1500 Dec 2020 Total 19569

Source: 2002 Power Generation Policy)

For example, the government intends to spend Rs. 2025 billion on the resettlement 12issues of Kalabagh Dam by constructing 20 model and 27 extended villages . 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 13CHASNUPP-1, will cost Rs. 52 billion or approximately US$ 900 million including a

14Chinese loan of Rs. 150 million . 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.

NuclearRenewableHydel

Coal

Gas

Oil

Fig. 5

56

Power Demand and Firm Supply Position

1464213831

13071

15483

16548

20584

19080

17689

1505515055150551509115072

1436615046 15082

0

5000

10000

15000

20000

25000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Year

Meg

aw

att

s

Demand (MW)

Firm Supply (MW)

Figure 8: Electricity Demand - Supply Curve of Pakistan (Indicative) Source: Private Power Infrastructure Board

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.

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

Targets SI #

Benchmark 2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

Addition During MTDF

1 Installed Capacity (MW) 20289 20753 22594 22594 24899 27389 7880

hydro 6459 6540 7021 7021 7476 7719 1260

gas 5940 6230 7130 7130 8630 10620 4680

oil 6400 6400 6560 6560 6560 6560 160

coal 150 150 150 150 600 1050 900

Nuclear 462 462 462 462 462 462 0

Renewable 180 480 480 680 880 880

Growth Rate % 2.3 5.6 5.6 10.2 10 6.2

2 Maximum Demand (MW) 14621 15511 17904 17904 19534 21462 21426

Growth Rate % 3.4 6.1 8.3 8.3 9.1 9.7 7.9

55

15Figures 5, 6 and 7 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

DemandImport-4

Import-3Import-2Import-1Imported Oil

Supply

Fig. 6

Fig. 7

57 58

ConclusionDevelopment 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:

lThe 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. lPrivate and public partnership in exploration of oil, gas and coal reserves in the

country to meet energy demandslRenewed 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. lThe 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.

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

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 Notes1. Pakistan Economic Survey 2004-05, Chapter 15, Energy, Government of Pakistan ,

Finance Division, Economic Adviser's Wing, Islamabad, Pakistan2. Data obtained from ‘National Energy Needs’, presentation to Pakistan Development Forum

by Secretary, Planning and Development Division, 26-04-2005. H t t p : / / s i t e r e s o u r c e s . w o r l d b a n k . o r g / P A K I S T A N E X T N / R e s o u r c e s / 2 9 3 0 5 1 -

1114424648263/Session-VII-Energy.pdf 3. MBTU = Million British Thermal Units4. ibid, 25. ‘Pakistan Coal Power Generation Potential’, June 2004, Private Power Infrastructure

Board.6. ibid, 57. Pakistan, Country Analysis Briefs, EIA, Department of Energy , Government of United

States of America, http://www.eia.doe.gov/emeu/cabs/akistan.html 8. Niaz A. Naik, ‘Energy Scenarios in South Asia’, Nuclearisation of South Asia, UNESCO,

LNCV & USPID, 20-22 May 1999.9. ibid, 210. 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).11. ibid, 10.12. ibid, 10.13. Assuming a conversion rate of Rs. 58 to 1 US Dollar.14. Hussain Ahmad (Engr.) Siddiqui, ‘N-Power Generation needs least priority’, Dawn

Economic and Business Review, June 27 - July 3, page 5.15. ibid, 2.

60

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 1would all be exhausted by the year 2011 or thereabouts . 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 2participation in gas production and supply to the domestic market .

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 3makers are outlined below :

lState 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. lPolitical 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. lFormer 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

59

Bangladesh: Natural Gas ExportMonzur 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 As Declared By Petrobangla1: Gas in Place And Reserve Of Different Gas Fields

Reserve Estimated by Sl. No

Fields Year of Discovery Company Year

GIIP (proven + probable)

Recoverable (proven + probable)

Cumulative Production (Dec. 2000)

Net Recoverable

A. Producing 1. Bakhrabad 1969 IKM 1992 1432 867 586.568 280.432 2. Habiganj 1963 IKM 1992 3669 1895 818.315 1076.685 3 Kailashtilia 1962 KM 1992 3657 2529 231.820 2297.180 4 Rashidpur 1960 IKM 1992 2242 1309 194.920 1114.080 5. Sylhet 1955 HHS 1986 444 266 166.084 99.916 6 Titas 1962 IKM 1992 4138 2100 1783.400 316.600 7. Narsingdi 1990 IKM 1992 194 126 29.205 96.795 8 Meghna 1990 IKM 1992 159 104 23.278 80.722 9 Sangu 1996 Cairn/Shell 1997 1031 848 91.026 756.974 10 Saidanadi 1996 Bapex 1996 200 140 14.816 125.184 11. Jalalabad 1989 Unocal/PB 2000 1195 815 52.298 762.702 12 Beanibazar 1981 IKM 1992 243 167 4.681 162.319 Sub-total A 18604 11166 3996.411 7169.589 B. Non-Producing 13. Begumganj 1977 Welldrill 1991 25 15 0 15 14 Fenchuganj 1988 Bapex 1988 350 210 0 210 15 Kutubdia 1977 Welldrill 1991 780 468 0 468 16 Shahbazpur 1995 Bapex 1995 514 333 0 333 17 Semutang 1969 HHS 1991 164 98 0 98 18 Bibiyana 1998 Unocal 2000 3150 2401 0 2401 19 Moulavibgazar 1999 Unocal 2000 500 400 0 400 Sub-total B 5483 3925 0 3925 Sub-total (A+B) 240087 15091 3996.4 11094.59 C. Production Suspended 20 Chattak 1959 Niko/Bapex 1998 447 268 27 241.5 21 Kamta 1981 Niko/Bapex 1998 33 23 21.1 1.9 22 Feni 1981 Niko/Bapex 1998 178 125 40 85.49 Subtotal C 658 416 87.11 328.89

24745 15507 4083.52 11423.48 Grand Total (A +B+ C) in BCF Grand Total (A +B+ C) in Tcf 24.745 15.507 4.08 11.42

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

61 62

expressed the fear that the security and sovereignty of the country might be

jeopardised if the pipeline was installed to export gas. lOpposing 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'. lActing managing director of Unocal Bangladesh Limited, James R. Stone, said

Bangladesh has huge gas reserve potential. ‘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 Bangladesh’, 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.lLeader 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:

lIs gas export unavoidable?lDo we have enough gas to export?lWhat is the domestic demand?lDo we need to explore all reserves?lWhat would be the benefit of export earnings?lWhat is the world's energy scenario?

Estimated Gas ReservesTable-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.

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.

Gas Demand in Bangladesh and ProjectionsThe 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.

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 4important underlying assumptions include :

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 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).

Table Different Studies2: Summary Of Giip, Reserve And Resource Potential Of

Name of the Study GIIP (TCF)

Reserve (TCF)

Field Growth (TCF)

Resource Potential (TCF)

IKMa 15.65 9.04 - -

Petrobangla 24.745 15.51 - -

BUETb 24.4 - - -

Shell - 18 5-6 20-40

Unocal - 16.1 12.8c 13.2d (50%)

Petrobangla-USGS - - - 32.1 (50%)

HCU-NPD 28.79 e 20.44 2.03f 41.6 (50%)

64

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 DilemmaThere 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 Bangladesh’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

63

Export of GasPetrobangla 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.

5A US study 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 6export proceeds, and/or Dutch Disease . 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

66

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.

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.

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

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. ConclusionThe export of natural gas of Bangladesh brings out some issues.

lIf Bangladesh does not export, it will not be able to pay the IOCs.lIf 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.lIf 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

Model 1

(B)FDI of IOCs

(C) Payment by GoB to IOCs

cost recovery and profit (limitations of GoB)

(A)Gas remain unexploited

(D)Alternative source of payment: Export

(F) Retard economic

growth

(E) Gas reserve will finish within short period

Model-1 Shows no alternatives for Bangladesh

Model 2

Power generation and

other gas oriented industries

Gas remain unexploited

Export of manufactured product

(e.g. electricity, fertilizer etc.)

Accelerate economic

growth

Long-term payment

by GoB to IOCs cost recovery and

profit (FDI)

FurtherInvestment

Export

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

65

68

No. 24.l , October 18, 2002.lMichael Du Pont, Foreign Direct Investment in Transitional Economies, A case study of

China and Poland, (McMillan Press Ltd., 2000)lNasiruddin M. Kamal, ‘The tricky business of gas exploration’, The Daily Star, December

13, 2002.

The Financial Express

67

recover IOCs cost as well as helping the country move toward sustainable

economic development.lIf 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.

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

N a t i o n a l G r a d u a t e I n s t i t u t e f o r P o l i c y S t u d i e s ( G R I P S ) ,

Tokyo and may be contacted at:

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 Notes1 Optimising Use of Bangladesh's Gas Resources, Report # 14, Center for Policy Dialogue

(CPD), October 1999.2 Nasiruddin M. Kamal, ‘The tricky business of gas exploration’, The Daily Star, December

13, 20023 The Financial Express, October 18, 20024 An Exploratory Review of Bangladesh Gas Sector: Latest Evidence and Areas of Further

Research, The National Bureau of Asian Research, 2001.5 United States Geographical Survey (USGS)-Petrobangla joint study6 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.a. Based on 8 gas fieldsb. Based on producing gas fields of Petrobangla c. Includes reservoir management, 3D, thin bed and compressiond. Based of 30 selected prospects of 6 PSC blocks e. Re-estimated four fields, rest Petrobangla figuresf. Includes compression only

BibliographylAllen V. Kneese, Natural Resource Economics, Edward Elgar, USA, 1995. lAlfredo Eric Calcagno and Eric Calcagno, The Sustainability of Development (pp. 289-

310), G-24 The Developing Countries in the International Financial System, Central Bank

of Venezuela, (London: LYNNE RIENNER Publishers, 1999)lAnnual Report, Bangladesh Bank, 2000-2001.lAn Exploratory Review of Bangladesh Gas Sector: Latest Evidence and Areas of Further

Research, The National Bureau of Asian Research, 2001.lBoard of Investment (BOI), Bangladesh.lReport No. 14, Center for Policy Dialogue (CPD), Bangladesh, (October 1999) and Report

scqjk313@ybb.ne.jp)

69 70

WTO and Poultry Industry in India

Dr Rajesh Mehta, R. G. Nambiar and Sujit Ray

Prior to the 1990s’ 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'.

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. Indian Poultry IndustryIntroductionAmong 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).

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.

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.

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.

Figure: 1.1 Poultry Meat Production in India,1961-2004

0 200,000 400,000

600,000 800,000

1,000,000 1,200,000 1,400,000

1,600,000 1,800,000 2,000,000

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Years

Mt

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

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

Production 1991 2002

Total Egg Production (million) 22743 39092

Per Capita Egg Consumption (No) 25 39

Per Capita Poultry Meat Consumption (Kg) - 0.76

Source: Poultry Times of India, various issues; Dept. of Animal Husbandry, GOI

Table 1.2: Market shares of various meats in Indian Meat Production, 1978-2000 (Percentage share based on Quantity)

Beef and Veal

Buffalo meat

Mutton Lamb

Goat Meat Pork Meat Poultry Meat

1978 34 34 6 12 10 4

1990 34 28 5 11 10 9

1995 32 31 4 10 10 11

2000 31 30 5 10 12 12 Source: FAO Production Year Book FAOSTAT Website

72

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 1of 30 per cent . 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.

2There has also been a decline in the peak tariff 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

71

Significance for the national economyRecent 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 India’s

relative position in world production and trade of poultry products.

Problems faced by the poultry industryThe 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

Table 1.3: Egg Production in Indian States, 2001-02

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

State Production (lakh nos.)

State Production (lakh nos.)

Andaman & Nicobar 470 Madhya Pradesh 15454 Andhra Pradesh 63160 Maharashtra 32488 Arunachal Pradesh 403 Manipur 873 Assam 5577 Meghalaya 975 Bihar 15656 Mizoram 340 Chandigarh 336 Nagaland 544 Dadra & Nagar Haveli 67 Orissa 11725 Daman & Diu 34 Pondicherry 101 Delhi 806 Punjab 33461 Goa 1176 Rajasthan 5913 Gujarat 6921 Sikkim 202 Haryana 11661 Tamil Nadu 36989 Himachal Pradesh 873 Tripura 739 Jammu & kashmir 4872 Uttar Pradesh 9978 Karnataka 23248 West Bengal 30572 Kerala 24659 Lakshadweep 67

Table 1.4: Status of Indias Poultry Industry in World

World poultry meat production1 (2004) 78225231 Mt

Indias poultry meat production (2004) 1715000 Mt

Indias share in world production (2004) 2.19 percent

World poultry meat exports2(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)

73 74

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 3WTO .

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 ‘restricted

items’ 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. 4All other products of the poultry sector attracted a tariff rate of 35 per cent 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 5is 35 per cent, if the government wants to accord the same level of protection to all . 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 6sector : 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

7close to 35 per cent , 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.

Table 2.1: Indias Imports Subject to QRs, 1995 -2004

Year

Number of Lines, which are Free

(as per cent of total number of lines*) Apr.1995 56.00 Apr.1997 65.80 Apr.1998 70.20 Apr.2000 86.41 Apr.2001 onwards 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.

76

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 bindingsIn the Uruguay Round negotiations, India had agreed to bind (and reduce) tariff rates for

83373 commodities at 6-digit level or commodity sub-groups of 6-digit HS level . The 9bound commodities account for around 65 per cent of India's total tariff lines . 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 10beginning from March 1995 to March 2004 . However, the bound rates for a number of

agriculture commodities are low and, in a few cases, even zero, the range varying 11between 0 and 55 percent . 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

75

Table 2.2: : INDIA: MFN Tariffs and UR Bound Rates for Poultry Products

Harmonized System (Commodity Groups) India's Tariff Rate b ( per cent)

HS Codea HS Description 1999/00 2001/02 2004/05

UR Final

Bound

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 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

35 35 30 150

0408.19 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 based on

these products

40 100 100 150

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 Uruguay round 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

77 78

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 barriersThe 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 ‘standard code’, 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:lto base their SPS regulations on international standards, guidelines and

recommendations

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 12partners, because the latter have not recognised India's food safety standards .

State Supported Measures in Select CountriesAs 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 countriesAn 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$

to play a full part in the activities of international organisations like the CODEX,

80

Table 3.1: Total aggregate Measurem

ent of Support (A

MS

) and Product S

pecific Dom

estic Support of poultry products, by select m

ember countries, as

notified to WTO

1995

1996 1997

1998 1999 M

ember

Currency

Base

Period Total A

MS

com

mitm

ent level

Current

Total/ product A

MS

Total AM

S

comm

itment

level

Current

Total/ P

roduct A

MS

Total AM

S

comm

itment

level

Current

Total/ P

roduct A

MS

Total AM

S

comm

itment

level

Current

Total/ product A

MS

Total AM

S

comm

itment

level

Current

Total/ product A

MS

A

ustralia-Total $A m

illion

570.16 151.72

550.5 144.19

530.84 131.62

511.18 119.71

491.52

Eggs

$A million

62.5

B

razil-Total U

S$ '000

1039125.79

295032.98 1025012.39

363284.3 1010898.98

306844.7 996785.58

982672.17

C

anada-Total C

an$ million

5197

777 5017

618.7 4838

522.1 4659

4480

C

hicken C

an$ million

1.7

1

2.3

0.8

Turkey

Can$ m

illion 0.1

0.0

0.0

Eggs

Can$ m

illion 0.2

0.0

0.0

Cyprus-Total

�C m

illion

57.6

36.5 56.8

35.5 56.1

25.5 55.3

21.8 54.5

Livestock P

rod. �C

million

17.9

11.4

8.7

8.9

8.5

E

ggs �C

million

1.7

1.4

1.6

0.7

Poultry M

eat �C

million

1.7

7.3

7.3

4.3

EC

-Total E

CU

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 S

wine

� billion

604.5

323.3

291.8

285.8

E

ggs � 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

P

oultry Meat

W billion

0.35

E

ggs W

billion

0.24

Philippines-Total

Mill P

esos 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

U

nited States

Total U

S$ m

illion

23083.14 6213.86

22287.17 5897.66

21491.2 6238.4

20695.2

19899.3

Product specific dom

estic support includes: (i) market price support (S

upporting Table DS

:5), (ii) non-exem

pt direct payment (S

upporting Table DS

:6); (iii) other products-specific support

(Supporting Ta

ble DS

:7) and (iv) any support measure via. the equivalent m

easure of support methodology (S

upporting Table DS

:8), as reported to WTO

. B

lank cell means that figures are not reported to W

TO.

Source: W

TO, D

omestic S

upport: Background P

aper by The Secretariat, C

omm

ittee on Agriculture, G

/AG

/NE

/S/1, 13 A

pril 2000.

79

1329,000 in 1995 -- a figure that is several times the per capita income of developing

countries like India.

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, non-

exempt direct payment, and other product-specific support. An examination of this data

shows the following:

lBoth 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.lFor the Philippines and Thailand, AMS is found to have increased over time.lIt 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. lAlthough 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).

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 countriesOut 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.

81 82

Tab

le 3

.2:

Pro

du

ct s

pec

ific

do

mes

tic

sup

po

rt:

mar

ket

pri

ce s

up

po

rt f

or

po

ult

ry p

rod

uct

s, s

elec

t co

un

trie

s/co

mm

od

itie

s

Cou

ntry

D

escr

iptio

n of

P

roud

ct

Cal

ende

r/

Mar

ketti

ng

Year

Mea

sure

Sup

port

App

lied

Adm

inis

tere

d P

rice

Ext

erna

l Ref

eren

ce

Pric

e E

ligib

le P

rodu

ctio

n A

ssoc

iate

d F

ees

levi

s To

tal M

arke

t Pric

e S

uppo

rt P

rice

Rat

io

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)=

{(6)

-(5)

}*(7

)-(8

)}

(10)

= (5

)/(6

)

U

nit

Pric

e U

nit

Pric

e U

nit

Am

ount

U

nit

Am

ount

U

nit

Am

ount

Sw

itzer

land

P

oultr

y 19

97 P

rice

Sup

port

SW

F/t

3997

SW

F/t

673

000

tonn

es

44

M

ill. S

w F

/t 14

6.3

5.94

US

$/t1

27

54.0

8

463.

72

10

0.81

Egg

s in

She

ll 19

97 P

rice

Sup

port

SW

F/t

4383

SW

F/t

928

000

tonn

es

40

0

Mill

. Sw

F/t

138.

2 4.

72

U

S $

/t 30

20.0

5

639.

43

95

.22

P

rice

Sta

bilis

atio

n `0

00 Y

/t 38

5*

`000

Y/t

152*

* 00

0 Y

/t 12

88**

* B

ill. Y

en

14.3

Bill

. Yen

28

5.8

2.53

Ja

pan

Mea

t of S

win

e B

egin

ning

A

pril

1997

U

S $

/t2

3.18

2081

2

1.25

6302

2

Bill

US

$ 2.

3628

399

Egg

s

Apr

il 19

97 P

aym

ent r

elat

es

B

ill. Y

en

1.6@

Pric

e (I

SK

)

Icel

andc

P

oultr

y M

eat

1998

Pay

men

t rel

ates

IS

K/t

374

61

2644

Mill

. IS

K

822.

2 6.

13

Pric

e (I

SK

) U

S $

/3

5.27

0723

5

0.85

9663

5

Mill

. US

$ 11

.587

1361

Egg

19

98 P

aym

ent r

elat

es

ISK

/t 22

4

27

19

53

26

00 M

ill. I

SK

38

1.6

8.30

P

rice

(IS

K)

US

$/t

3.15

6797

0.38

0506

8

Mill

. US

$ 5.

3778

2914

Pou

ltry

Mea

t 19

97 P

aym

ent r

elat

es

ISK

/t 41

7.71

115.

82

21

2.5

52

49 M

ill. I

SK

63

6.3

3.61

P

rice

(IS

K)

US

$/4

t 5.

8870

536

1.

6323

252

M

ill. U

S$

8.96

7781

94

E

gg

1997

Pay

men

t rel

ates

IS

K/t

220.

5

51.7

2113

2497

Mill

. IS

K

354.

2 4.

26

Pric

e (I

SK

) U

S $

/ t

3.10

7647

2

0.72

8641

1

Mill

. US

$ 4.

9919

6663

Can

ada

Chi

cken

F

isca

l 199

6 P

rovi

ncia

l Dire

ct

M

ill C

$

2.3b

Pay

men

t

C

hick

en

Fis

cal 1

997

Pro

vinc

ial D

irect

Mill

C $

0.

6b

P

aym

ent

Sou

rce

of D

ata:

Diff

eren

t cou

ntry

No

tifi

cati

on

s re

latin

g to

Dom

estic

Sup

port

, sub

mitt

ed to

WTO

. S

tand

ards

sta

biliz

atio

n pr

ice,

**

Slu

iceg

ate

Pric

e in

EC

, ***

Tota

l Pro

duct

ion

(MA

FF

Sta

tistic

s), @

: Non

-exe

mpt

Dire

ct P

aym

ent ,

b:

Pro

vinc

ial M

inis

trie

s of

Agr

icul

ture

, c: A

vg. E

xcha

nge

Rat

e: IS

DR

=IS

K 9

8.94

. 1:

SW

F/U

S$

(199

7)=

1.45

13, 2

: Yen

/US

$=12

0.99

, 3: I

SK

/US

$ (1

998)

= 70

.958

, 4: I

SK

/US

$ (1

997)

= 70

.904

, 5: C

$/US

$ (1

996)

= 1.

3635

, 6: C

$/U

S$

(199

7)=

1.38

46

Table 3.3: E

xpo

rt sub

sidy o

f po

ultry p

rod

ucts fo

r Select C

ou

ntries n

otified

to W

TO

Year C

ou

ntry

Pro

du

ct P

eriod

Type o

f C

om

mitm

ent

/Ou

tlay

Actu

al Ou

tlay o

r Co

mm

itted

Un

its 1995

1996 1997

1998 1999

Au

stralia: Co

mm

itmen

t mad

e for 5 p

rod

ucts, exclu

din

g P

ou

ltry Pro

du

cts C

omm

itted U

$ 4805171

4687011

4568851 4450691

4332531 B

udgetary Outlay

Actual

U$

0 0

0 0

C

omm

itted Tonnes

96566

95195 93824

92453 91082

Brazil

Poultry M

eat C

alander

Volum

e Outlay

Actual

Tonnes

0 0

0 0

C

anad

a: Co

mm

itmen

t mad

e for 11 p

rod

ucts, exclu

din

g P

ou

ltry Pro

du

cts

C

omm

itted M

io EC

U

136.3 127.2

118

108.9 99.8

Marketing Year

Budgetary O

utlay A

ctual M

io EC

U

115.9

73 76.1

89.7

Com

mitted

Tonnes

434500 404700

375100 345400

315600

Poultry M

eat

1 July-30 June V

olume O

utlay A

ctual Tonnes

418100

401400 393700

343400

Com

mitted

Mio E

CU

60.7

57.3 53.9

50.5 47.1

Marketing Year

Budgetary O

utlay A

ctual M

io EC

U

12.9 6.9

13 17.3

C

omm

itted Tonnes

126100

120600 115200

109700

104200

Eu

rop

ean C

om

missio

n

Eggs

1 July-30 June V

olume O

utlay A

ctual Tonnes

95100

67900 103800

114200

K

orea: N

o red

uctio

n co

mm

itmen

t mad

e in W

TO, b

ut rep

orted

to W

TO it h

as no

t given

expo

rt sub

sidy to

po

ultry secto

r du

ring

1995-98 P

hilip

pin

es: No

redu

ction

com

mitm

ent in

WTO

, bu

r repo

rted to

WTO

it has n

ot g

iven exp

ort sub

sidy to

any secto

r inclu

din

g p

ou

ltry C

omm

itted U

S$

21377402 20012887

18648372 17283857

15919342 Year from

Oct.1

Budget O

utlay A

ctual U

S$

5153000 0

862500 1399762

C

omm

itted Tonnes

34196

32955 31715

30475 29235

Poultry M

eat

Year from

July 1 V

olume O

utlay A

ctual Tonnes

22250

0 0

3546

Com

mitted

US

$ 7587922

6391233 5194545

3997856 2801167

Year from

O

ct. 1 B

udget Outlay

Actual

US

$ 0

0

Com

mitted

Dozen

30261813 25593371

20924929 16256487

11588045

Eggs(dozen)

Year from

July 1 V

olume O

utlay A

ctual D

ozen 7565500

0 0

0

US

A

Th

ailand

: No

redu

ction

com

mitm

ent m

ade in

WTO

bu

t it has g

iven E

xpo

rt sub

sidy to

egg

and

oth

er sectors; A

mo

un

t of exp

ort su

bsid

y => U

S$

15.24* 6.24*

4.53**

* F

or eggs and rice ** for manioc pellet. N

ote: Blank cell m

eans that figures not available. S

ource of Data: W

TO, E

xport Subsidies: B

ackground Paper by the S

ecretariat, Com

mittee on A

griculture, Special S

ession, G/A

/NG

/S/5, 11 M

ay 2000.

tariff rate for those basic products where minimum access was less than a proportion of 14 domestic consumption in the base year . 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 15opted for tariff-quota on 1371 lines (or commodities).

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 16imports , 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 2000-

3000 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

Table 3.5: Number of Tariff Quotas by Member -countries, committed in WTO, 1999

Country No. of Lines ( or commodities)

Country No. of Lines ( or commodities)

Australia 2 Mexico 11

Barbados 36 Morocco 16

Brazil 2 New Zealand 3

Bulgaria 73 Nicaragua 9

Canada 21 Norway 232

Colombia 67 Panama 19

Costa Rica 27 Philippines 14

Czech Republic 24 Poland 109

Ecuador 14 Romania 12

El Salvador 11 Slovakia 24

EC-15 87 Slovenia 20

Guatemala 22 South Africa 53

Hungary 70 Switzerland 28

Iceland 90 Thailand 23

Indonesia 2 Tunisia 13

Israel 12 United States 54

Japan 20 Venezuela 61

TOTAL 1368

84

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:

lBudgetary 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. lThe 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.

Tariff quotaAs 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

Table 3.4: Actual Export Subsidy per unit of Select Poultry Products in Select Countries Country Product Unit 1995 1996 1997 1998

ECU/tonne 277.21 181.86 193.29 261.21 Poultry Meat US $/tonne 362.61 230.60 219.22 295.17

Mill. ECU/Tonne 135.65 101.62 125.24 151.49

European Commission

Egg US $/tonne 177.44 128.85 142.04 171.18

Poultry Meat US $/tonne 231.60 0/0 * 394.74 US

Eggs US $/tonne ** 0/0 N.R. 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 Source of Data: Same as Table IV.3

83

85

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.

ConclusionlThe Indian poultry industry has recorded extraordinary growth during the last two

decades. Demand for poultry products has also been found to be steeply rising.lThe 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. lAn important characteristic of poultry industry is its oligopolistic structure a few

large companies dominate the international market. lThere 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.lTrade 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.lA 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

Table 3.6: Pr Number of Tariff Quotas by Product Category, 1999incipal Tariff Quota Administration Methods-

Product Categories => Administrative Method

CE

Ce

rea

ls

OI

Oils

ee

ds

SG

Su

ga

r

DA

Da

iry

ME

Me

at*

EG

Eg

gs

**

BV

Be

ve

rag

e

FV

F

ruit

&

veg

.

TB

Tob

acco

FI

F

ibre

s

CO

C

off

ee,

tea,

etc

.

OA

Oth

er ALL

Applied tariffs 106 72 22 54 88 7 9 211 7 7 21 38 642

First-come, first served 18 13 13 16 26 - 11 26 1 7 14 2 147

Licences on demand 66 28 8 47 77 11 11 62 3 2 14 8 337

Auctioning 3 - 3 18 18 2 2 10 - - - - 56

Historical importers 11 2 3 13 23 - 2 17 1 1 2 - 75

State trading 7 3 1 2 - - - 6 1 - 1 - 21

Producer groups 1 3 - - - - - 3 - - 1 1 9

Other - - - 10 4 - - 1 - - - - 15

Mixed methods 4 3 1 21 9 1 - 13 - 1 3 4 60

Non specified 1 - - - - - - 5 - - - - 6

TOTAL 217 124 51 181 245 21 35 354 13 18 56 53 1368

* 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

important instruments adopted by these countries are:

i) Production subsidies, ii) Export subsidies,iii) Non-tariff measures,iv) Special safeguard protection, andv) Tariff quota.

lIndia 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.lWhat 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.lAlready 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:lThe 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.lA 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.lAn 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).lIndia 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.lThe 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 Notes1. Chicken cut-ups (HS 020713 and 020714) and some preparations (i.e. HS 16023 and

86

88

Small and Medium Enterprises in PakistanIqbal 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. the creation of a conducive and enabling regulatory environment; 2. development of industrial clusters; 3. 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 1for growth and investment in the country .

SMEsThere 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

160239), attract a duty of 100 per cent basic customs duty.2. Not for some commodities which have mega tariff.3. 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, 2000.4. Except for four tariff lines, whose tariff rate is 100 per cent see Table II.3 for details.5. It has been noticed that the tariff-equivalence of a large number of items of poultry

products is significantly higher than 35 per cent.6. 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).7. In 2004-05, tariff rates were reduced from 35 per cent to 30 per cent.8. India defines custom tariff rates at 6-digit HS level.9. Out of 5112 lines for which tariff rates are defined.10. In some items the phasing-out period is 6 years. 11. Except for a few types of juices (at 85 per cent) and a commodity, i.e. hop cone (75 per

cent).12. India is exporting Egg powder to select countries, including Germany, against a temporary

permit.13. Cited in W. Bello, and A. Kwa, ‘The GATT Agreement on Agriculture and Food Security:

The Philippines Case’, 1998.14. Average for 1986-88 for most of the countries.15. For details see WTO, Tariff Quota Administration Methods and Tariff Quota Fill,

Committee on Agriculture, G/AG/NG/S/8, 26 May 2000.16. Around 3 to 5 per cent.

9089

Global SME ScenarioSMEs 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).

81%

63%63% 60%

57%

35%0%

20%

40%

60%

80%

100%

Japan India S. Korea Indonesia USA Pakistan*

SME Share in Total Employment

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

58%

42%

53%

47%

50%

50%

40%

60%

10%

90%

40%

60%

0%

20%

40%

60%

80%

100%

Italy USA Russia

GDP Contribution of SMEs

SME Contribution to GDP Others than SMEs

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

Table 1: Various Institutional Definitions 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

Punjab Small Industries Corporation

Fixed investment. up to Rs. 20 million excluding land and building

N/A

Economic Importance of SMEs in Pakistan 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.

The ILOSMEDA study titled: Creating a Conducive Business Environment for

MSMEs in Pakistan, estimates the share of SMEs in the total employment of labour 3force of Pakistan to be about 35 per cent . 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 4equipment .

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 5cent) .

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

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

Table 3: Share of Key SME Sub sectors in Pakistan

Sub-sectors Percentage Share

Cotton Weaving 13%

Other Textiles 6%

Metal Products 7%

Carpets 4%

Art Silk 5%

Grain Milling 16%

Jewelry 4%

Wood & Furniture 10%

Others 35%

Source: Economic Survey of Pakistan, 2003-04

92

Employment Distribution in PakistanThe 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.

6According to the Census of Manufacturing Industries (CMI) 1995-96 , 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 7persons , with a share of 23 per cent of the total employment in the informal non-

agricultural 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.

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

‘undocumented economy’ 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 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

Table 5: Distribution of Estimated MSME GDP by Sector

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).

91

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.

Employment StatisticsWide 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 Employment35.9

Agriculture 16.96Rural 16.4Urban 0.6

Non-Agriculture 18.94Rural 8.8

Urban 10.2

Formal 6.1Rural 2.4Urban 3.7

Informal 12.8Rural 6.4Urban 6.4

NonManufacturing

5.5

Manufacturing 0.6*

NonManufacturing

9.8Manufacturing 3

*: CMI 1995-96

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).

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.

93 94

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.

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.

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/ DFIs’.

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 issuesFiscal 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.

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 13enterprises to maintain books of account 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

96

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 17international competitiveness markedly declined over the past few years . 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 18productivity, however, in Pakistan is 46 per cent higher than Bangladesh .

InfrastructureBasic 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 190.50.6 million a year for the whole country. A review 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.

GlobalisationOf the many impacts of globalisation, the following two are of particular interest to

SMEs:

lAcceleration in the pace of growth of world tradelHigh 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

95

Labour issues14Labour laws and regulations in Pakistan 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 constraintsA typical SME in Pakistan caters to the domestic private sector and their activities are

15mostly concentrated in specific regions. Only 8 per cent SMEs are exporters 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 orderThe 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 16security. One in four SMEs consider law and order to be a severe problem .

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

97 98

standards have become more sophisticated and exacting. Competitive advantage is

now determined by several non-price parameters such as quality, health and safety,

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 financelIn addition to SME friendly Prudential Regulations, following steps are required

for increasing their access to formal financial sources: lEstablishment of support infrastructure to improve coverage of credit

information to facilitate quick and reliable loan processing mechanismlImprove access to risk capital by revising tax regulations for risk capital investorslDeepen supply and marketing channel financing to small clients of corporate

entities through partial credit guarantee. lSupport 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.lSMEDA 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.

ConclusionAs 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

Enhance export readiness of SMEs through enabling policy measures and an

100

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.14. 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.15. World Bank SME Policy Note 2001. The results of SMEDA-World Bank Investment

Climate Survey 2003 also confirm this finding.16. The survey was conducted for Investment Climate Survey of Pakistan (2003), published by

the World Bank Group. 17. 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.18. Investment Climate Survey of Pakistan (2003), published by the World Bank Group.19. World Bank Development Policy Review (2002).20. 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.

99

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).

End Notes1. 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’.2. Enterprises exporting up to US$2.5 Million a year are considered Small by the State Bank

of Pakistan and Export Promotion Bureau. 3. Creating a Conducive Policy Environment for Micro, Small & Medium-Sized Enterprises in

Pakistan. ILO/SMEDA, SEED Working Paper No.29. (Geneva, 2002). 4. Economic Survey of Pakistan, 2003-045. Economic Survey of Pakistan, 2003-046. 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.7. 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.8. 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.9. 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.10. F. Bari, A. Cheema and Ehsan-ul-Haque, Barriers to SME Growth in Pakistan: An

Analysis of Constraints, June 2003.11. 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.12. The 56% figure is an addition of the three tax related responses: High taxes 28%, High

Sales tax16% and high Income Tax Rate 12%13. 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

101 102

104

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 Effectsi. 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

103

Sri Lanka: Cost of the Ethnic Conflict Krishna Chaitanya

IntroductionSince 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).

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 Effectsi. 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.

Table 1: Ethnic Composition of Sri Lanka Population Group Proportion 1981

Sinhalese 74.0% Sri Lankan Tamil 12.7% Indian Tamil 5.5% Sri Lankan Muslims 7.0% Burghers 0.3%

105 106

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.

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.’

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.

(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

Table 2: Post conflict & pre conflict time economic growth

Years Annual Average GDP growth rate

1. 1983-2002 (20 years of civil war) 4.35 % 2. 1963-1982 (20 years prior to war) 4.55 %

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

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

Defence BudgetThe breakdown of Sri Lanka's defence budget into recurrent and capital expenditures

from 1991 to 2001 is provided in Table 3.

According to the above table, 80 per cent of the defence budget during 1991-

2001 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.

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.’

Table 4: Budget deficits & Expenditure on Defence, 1982-2002 selected years (Rs. in Millions)

items 1982 1983 1985 1988 1990 1993 1994 1995 1996 1997 1998 1999 2000 20011. Government Expenditure

33,531 39,637 55,234 74,535 99,814 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

2. Budget Deficit as a % of GDP

17.4 13.3 11.7 15.7 9.9 8.4 9.9 8.4 7.8 7.9 9.2 7.5 9.9 10.9

3. Total Defence Expenditure

1,117 1,754 5,612 10,722 14,602 20,782

25,527

34,971

46,285

45,968

57,146

54,233

77,154 68,514

4. GDP (market prices) 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

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

Source: Central Bank of Sri Lanka, Various Issues

Year

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

Recurrent Expenditure

12,609 (81%)

15,627 (87%)

17,627 (85%)

21,989 (86%)

25,815 (74%)

33,117 (72%)

35,094 (76%)

45,314 (79%)

44,632 (82%)

57,841 (75%)

52,537(77%)

Capital Expenditure

3,054 (19%)

2,369 (13%)

3,105 (15%)

3,538 (14%)

9,156 (26%)

13,168 (28%)

10,874 (24%)

11,832 (21%)

9,601 (18%)

19,313 (25%)

15,977 (23%)

Total Expenditure

15,663

17,996

20,782

25,527

34,971

46,285

45,968

57,146

54,233

77,154

68,514

108

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.’

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.

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 higher-

value-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: lAn educated and skilled labour force. lAn efficient and fair legal system.lAn adequate transportation system and other infrastructure facilities. lA strong anti-monopoly policy.lA sound macroeconomic policy and lGovernment policies.

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

Table 6: Various studies on Economic costs of internal conflict on Sri Lanka

Author (s) Year of publication

Period of Study 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,

3. Harris 1997, 1999 1983-1992 88% of GDP of 1982 Increase of govt. milex less growth based on Harrod-Domar 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.

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

107

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 ExpenditureThe 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.

(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 ExpenditureHeavy military expenditure has a negative impact on the growth of the economy.

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

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

High Military expenditure

Low Economic Growth

Reduces investments

Defence Exp

Social Exp

(i) Education

(ii) Health

(iii) Poverty

(iv) R&R

1991

11.2

11.2

3.5

2.4

5.3

1992

12.0

13.0

5.4

3.1

4.5

1993

10.9

9.9

4.3

1.9

3.7

1994

12.9

12.8

4.5

2.6

5.7

1995

14.3

12.7

3.5

5.2

2.0

2.0

1996

17.7

13.5

4.2

5.0

3.2

1.1

1997

16.8

12.6

4.2

4.7

3.0

0.69

1998

16.9

12.0

4.7

4.0

2.5

0.80

1999

16.4

12.7

5.0

4.8

2.6

0.27

2000

17.0

9.8

3.8

3.9

2.0

0.14

2001

14.2

9.3

2.6

3.8

2.4

0.47

Fig. 1.

109 110

Incentives to Attract FDIGovernments generally use some form of marketing techniques to attract FDI into the

country. The most common type of incentives used by many nations include:

lDirect Cash grants (capital grants).lSubsidies on land and building purchases.lInterest subsidies.lTariff protection.lExemption of imports and export duties.lExemption or Lower rates of income taxes, dividend and capital gain taxes.lGuarantee for profit and capital repatriation.

Minimum Incentives ModelThis 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.

ExplanationRequired 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.

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

Year FDI inflows 1992 122.6 1993 194.5 1994 166.4 1995 56.0 1996 119.9 1997 430.1 1998 193.4 1999 176.4 2000 173.0 2001 171.1 2002 241.5

Source: adb.org

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 well-

designed 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

High GDP

Increase in per Capita Income

Increase in Purchasing power

Greater Market Opportunity

Attract FDI into the country

Fig. 2. High growth leading to investments

112

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.

?S. Kelegama, 'Sri Lankan 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.

?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

111

parlance with Government and would suggest government the required

suggestions with respect to investments.g) 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.

ConclusionIn 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

?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

N. Arunatilake, S. Jayasuriya, and S. Kelegama, ‘The economic cost of the war in Sri Lanka’,

113 114

Local Government in BangladeshPranab Kumar Panday

IntroductionBangladesh 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.

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.

The ProblemLocal 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

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.

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:

1) 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?

Local GovernmentIn 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. 1In South Asia, local government is widely known as local self-government .

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,

116

Decentralisation in BangladeshBritish periodDecentralisation in Bangladesh began even before the country's liberation in 1971. The

British colonial administration established local governments through the Local Self-

Government 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).

Pakistan periodReforms 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.

3Figure-1 (Existing Structure of Local Government in Bangladesh )

Ministry of Local Government,

Rural Development and Co-operatives

Rural Urban

Zila Parishad (64)

Thana/Upazilla Parishad (460)

Union Parishad (4449)

Gram Sarkar

City Corporation (6)

Pourashava (193)

115

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.

Brief BackgroundThe 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 2introduced 'Choukidary Panchayet' 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), four-

tier 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.

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:

117 118

Bangladesh periodAs 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 self-

governing 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

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 mini-

government 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.

120

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 functionsTraditionally, 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 4the national government. For example the UP 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 relationsIn 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

119

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 four-

tier 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 patron-

client 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, ‘self-

governing’ 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

121 122

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 mobilisationLocal government bodies have been chronically resource poor in Bangladesh. The LG

regulations empowered them to mobilise resources from local sources through 5 6assessment and levy of taxes, leasing of local Hats and Bazaars , 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 capacityInstitutional 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

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 transparencyAccountability 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.

ConclusionIn 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 Notes1. 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.

124

Ltd, 1996) lPhilip 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.lMustapha Mujeri and Lisa Singh, ‘Case Study on the Impact of Decentralization:

Bangladesh’,1997. (Retrieved from http://www.fao.org/sd/pub).lMukta Barta (A widely circulated Bengali national daily newspaper), 31st March, 1990.lH. R. T. Rahman and M.M. Khan, ‘Decentralization and Access: Theoretical Framework

and Bangladesh Experience’, Asian Profile, vol. 25, no. 6, December 1997.lJoel Samoff, ‘Decentralization: The Politics of Interventionism’, Development and

Change, 1990,21, 2, pp.513-530.lKamal Siddiqui, Local Government in Bangladesh, National Institute of Local

Government, Dhaka, 1994.lH. Tinker, The Foundations of Local Self-Government in India, Pakistan and Burma,

(New Delhi: Laluani Publishing House, 1967)lLocal Government in Bangladesh: An Agenda for Governance, United Nations

Department for Development Support and Management Services (UNDDSMS), New York,

1996.lKirsten 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/).

123

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. UP stands for Union Parishad.5. Hats is the Bengali name if big markets which generally sits one or two times in a week in a

village.6. Bazar is the Bengali name of small daily market which are generally seen in the village

level in Bangladesh.

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Implementation in Developing Countries, (Beverly Hills, 1983) pp. 9-35.lL. H. Chowdhury, Local Government and its Reorganization in Bangladesh, Dhaka,

National Institute of Public Administration (NIPA), 1987.lM. Clark and J. D. Stewart, Choices for Local Government for the 1990's and Beyond,

(London: Longman, 1991)lConstitution of People's Republic of Bangladesh, As modified up to 1996, Government of

Bangladesh.lCabinet Resolution on Renaming the Upazilla (in Bengali), (Dhaka: Cabinet Division,

Government of Bangladesh (GOB), 1992)lG. Hossain, ‘General Zia's BNP: Political Mobilization and Support Base’, E. Ahmed (ed.),

Society and Politics in Bangladesh, (Dhaka: Academic Publishers, 1989).lMujibul Huq, et al., ‘Policy Brief on “Administrative Reform and Local Government’, CPD

Task Force Report, Centre for Policy Dialogue, Dhaka, 2001.lA. Hussain, A. E. Sarker and M. Rahman, 'Governance in Bangladesh: An Analytical

Review', Theoretical Perspective, 1994, p. 1.1lNelson 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.lMohammad Mohabbat Khan, ‘Urban Local Governance in Bangladesh: An Overview’,

Journal of Administration and Diplomacy, vol.4, January-June, 1996lZarina 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. lZarina 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. lZarina Rahman Khan, ‘Decentralized Planning and Financing of Rural Development in

Bangladesh’, Regional Development Dialogue 20, no. 2, 2000a, pp.43-57.lZ. R. Khan, 'Decentralized Governance: Trials and Triumphs', Raunaq Jahan (ed.),

Bangladesh: Promise and Performance, (Dhaka: University Press Limited, 2000b)lD. King and G. Stoker (eds.), Rethinking Local Democracy, (London: Macmillan Press

Alochona

www.magazine.alochona.org/

125 126

Food Security in South Asia Suresh Babu

IntroductionAchieving 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.

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.

Status of Food ProductionThe 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).

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.

Figure 2. Monitoring Progress in Human Development across South Asi a

-2

0

2

4

6

8

Bangladesh India Nepal Pakistan Sri Lanka

19

97

19

98

19

99

20

00

20

01

20

02

Figure 1. Economic Growth in South Asia

Source: World Development Indicators, 2004

19

97

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00

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02

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00

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01

20

02

Source: Human Development Report, 2004

0

0.10.2

0.30.4

0.50.6

0.70.8

0.9

Banglades

hIn

dia

Sri

Lank

a

Nepal

Pakist

an

Thaila

nd

Kenya

19

85

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90

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95

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128

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

Figure 4. Percent of People below Poverty Line in South Asia

Source: World Development Indicators, 2004

36

28

20

28

32

25

34.4

42

33.7

0

5

10

15

20

25

30

35

40

45

Bangladesh India Nepal Pakistan Sri Lanka

% below poverty 1990s % below poverty 1995-2000

Table 2. Comparative Performance in Poverty Reduction

Region Living on less than $1 a day

Total population 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

127

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.

Figure 3. Share of Agriculture in GDP

Source: World Development Indicators, 2004

0

10

20

30

40

50

Ban

glades

hIn

dia

Nep

al

Pakis

tan

Sri

Lanka

19

97

19

98

19

99

20

00

20

01

20

02

Country Food Production

Food Exports Food Imports

Food Balance

Bangladesh 26,924 1.6 2,827 -4, 601

India 1,74,655 9,490 56 23,826

Nepal 5,839 11 39 57

Pakistan 24,936 2,966 288 3,818

Sri Lanka 1,938 9.8 1,307 252

Figures in thousand metric tones for 2002Source: FAO, 2004

19

97

19

98

19

99

20

00

20

01

20

02

19

97

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98

19

99

20

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01

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97

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98

19

99

20

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20

01

20

02

19

97

19

98

19

99

20

00

20

01

20

02

Table 1: Food Security in South Asia (1000 tonnes)

129 130

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.

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 5. Prevalence of Child Malnutrition in South Asia

Weight for age, as % of children below 5 years Source: World Development Indicators, 2004

4853

48

38

33

0

10

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40

50

60

Ba

ng

lad

es

h

Ind

ia

Ne

pa

l

Pa

kis

tan

Sri

La

nk

a

Figure 6. Prevalence of Undernourishment in South Asia

Figures are % of population

Source: World Development Report, World Bank, 2002

0

5

10

15

20

25

30

35

40

Bangladesh India Nepal Pakistan Sri Lanka

1990-92 1998-2000

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 under-

nutrition 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).

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 SecurityThe 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.

Figure 7. Percentage Reduction in Undernourishment between 1990-2000

Source: Economist, 2004

16

31.3

25

33.3

34

0 10 20 30 40

India

China

Kenya

Indonesia

Malawi

132

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.

131

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 SecurityThe 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

133 134

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.

ConclusionDuring 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)

Bibliographyl

Bangladesh’, in Economic Reforms and Food Security in South Asia, S. Babu and A. Gulati

(eds.), New York: Haworth Press, 2005)lS. 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)lS. C. Babu, 2003. ‘Social Safety Nets for Poverty Reduction in South Asia – Global lExperiences in Sri Lankan’, Journal of Agricultural Economics, 2003, 5 (1): pp. 1-8.lS. 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,

A. Ahmed, and C. del Nino, ‘Feeding Minds While Fighting Hunger: Food for Education in

IFPRI, 2005.lS. 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) lP. 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)lThe Economist, Economic and Financial Indicators, London, December 2004. lFAO, Statistical Databases, 2004. http://faostat.fao.org/faostat/collections?version=ext&hasbulk=0&subset=agriculture. Accessed

01/10/2005lHuman Development Report, 2004, Human Development Institute, UNDP, New York.lY. 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)lL. Smith and L. Haddad, ‘Explaining Child Malnutrition in Developing Countries: lA Cross-country Analysis’, IFPRI Research Report, (Washington, DC: IFPRI, 2000).lWorld Bank, 2004, World Development Indicators, Washington, DC.lWorld Bank, 2002, World Development Report, Washington, DC.

136

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

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 big-

one. A new paradigm of equitable partnership must evolve to reshape our all-

sided relations.

7. Welcoming the current peace process between India and Pakistan with its two-

fold 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

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

Bhurban Declaration: Evolving South Asian Fraternity

SAFMA’s South Asian ParliamentMay 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. 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

135

137 138

weapons powers to promote global non-proliferation and effective nuclear

disarmament.

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.

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:

The agreement on (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.

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 macro-

economic 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

1. South Asian Free Trade Area South Asian Free Trade Area

2. South Asian Customs, Tariffs and Monetary Union

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.

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.

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.

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.

Given a low rate of investment to GDP ratio, South Asia must create attractive

environment for investment in high value-added manufacturing lines and trans-

regional 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.

3. Water Sharing and Management

4. South Asian Energy Grid

5. South Asian Development Bank

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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.

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.

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.

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.

8. South Asian Human Security

9. South Asian Parliament

10. South Asian Human Rights Code

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6. Addressing LDCs' Concerns

7. South Asian Cooperative Security

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.

We resolve to get out of the straitjacket of enmity, overcome obsession with over-

demanding 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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11. People to People Contact

12. South Asian Information Society

13. Culture and Tourism

14. On Nepal

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 policy-

makers, 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. All-

country visas may be granted at separate South Asian counters on arrival at the

airports and on all border-crossings.

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 under-

reported. Given the rising numbers of South Asian Cyber citizenry, there is an urgent

need to upgrade, integrate and facilitate cyber connectivity and accessibility.

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.

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.

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.

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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) 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

143

A Vision for South AsiaDr Akmal Hussain

Presented at: SAFMA's South Asian Parliament, May 15-20, 2005

South Asia can lead the WorldSouth 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 PolicyThe 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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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 inter-

dependent 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 ActionsSouth 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. Energy Cooperation within South Asia2. Increased Investment for Accelerating Economic Growth3. 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 1Pakistan the recent proposal by Mr. Mani Shankar Aiyar 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 projectsThe key joint venture projects that can be undertaken to increase investment and

growth in the region are as follows:

(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 FoundationA 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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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.

ConclusionIf 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 Notes1. 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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2(c) SAARC Health Foundation3In South Asia as much as 43 per cent of the population lives in absolute poverty .

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 4poverty . 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 5criterion . 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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SAFMA’s South Asian ParliamentSecurity Recommendations

IntroductionThe 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 Threats6. 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

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.8. 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.9. 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 Security10. 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 Conflicts15. 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 Cooperation18. Many countries of the region are increasingly being called upon to undertake

151

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 Charter21. 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.