The government has made a mockery of federalism by centralizing the local units’ right to distribute royalty on natural resources. Meanwhile, lack of parity in distribution is inviting a frightening inequality between local units.
Bhim Gautam |CIJ, Nepal
Dolakha’s Tamakoshi Rural Municipality has netted Rs 42.4 million in the current fiscal year for royalty on natural resources. According to the Office of Auditor General, the local unit had received Rs 50.3 million and Rs 88.8 million in the last two fiscal years. Tamakoshi had received this many royalties because it is home to the 60MW Khimti hydropower project, whose Power Procurement Agreement was done in dollars. The Nepal Electricity Authority pays Rs 2 in royalty per unit if each unit of electricity is bought for Rs 20 or more.
While Tamakoshi has received millions in royalties, it has, however, received not a paisa from Baiteshwor hydropower, another project in Dolakha. Tamakoshi has allotted Rs 81 million budget for the current fiscal with Rs 54.3 million allotted for Baiteshwor alone.
Upper Tamakoshi Hydropower Project in Bigu Municipality of Dolakha. Photo source: Upper Tamakoshi Hydropower Project.
In Solukhumbu, of the total Rs 140 million in royalty for mountain climbing, the Khumbu Pasang Lhamu Rural Municipality has received Rs 95 million while Likhupike Rural Municipality has received only Rs 30.87. In the district, over Rs 80 million royalty is collected from permits to ascend Mount Everest alone. According to auditor general’s office, Khumbu’s neighboring rural municipalities Mahakulung, Dudhkoshi and Solu Dudhkunda have received Rs 5.9 million, Rs 3.5 million and Rs 8 million, respectively, in royalty, this fiscal year.
Subhashri Agni Cement, a company based in Shitganga Municipality in Arghakhanchi district, imports limestone from Pyuthan’s Naubahini and Dang’s Bangalachuli rural municipalities, which have received Rs 5.1 million and Rs 23.9 million, respectively, in royalty this fiscal. While transporting limestone to Arghakhanchi, a bus travels 75 km in Pyuthan and 55 km in Dang. But these two districts receive nothing for royalty.
These examples are enough to understand the inequality brought about by royalty distribution on natural resources. While one local unit disburses a hefty amount of budget, another one reels under financial shortage. According to inter-governmental financial management act, while distributing royalty on natural resource, the federal government receives 50 percent, while provincial and local levels receive 25 percent each. But the royalty is not being distributed proportionately which is only furthering inequality between the local units.
Before federalism was adopted, the local sovereign governance methodology 2056 BS had the provision that when it comes to electricity, 50 percent of royalty is allocated for the center, 12 percent to the concerned districts and the rest to other districts in the development region. When it comes to mountain climbing, however, 30 percent of royalty was to be distributed among the concerned districts.
Fifteen and a half billion in three years
The new provision has brought about disparity in royalty distribution on natural resources. In the fiscal year 2077/78, Parsa’s Dhobini Rural Municipality received the lowest Rs 464 royalty on natural resources while Tamakoshi received the highest Rs 53 million. In the preceding fiscal year, Khumbu Pasang Lhamu had received the highest Rs 115 million while Dhading’s Galchhi Rural Municipality received the lowest Rs 1250.
In the current fiscal year, under hydro power, Sindhupalchok’s Bhotekoshi Rural Municipality has received Rs 89.2 million while Baglung has received only Rs 7758. Under national forest category, Bara’s Nijgadh Municipality has received Rs 3.7 million while Humla’s Namkha has received Rs 17 only. Under preserved forest, Bharatpur Metropolitan has received Rs 1.9 million while Saptari’s Sapkoshi Municipality has received Rs 510. Under minerals, Palpa’s Nisdi has received Rs 45.4 million while Bhotekoshi has received only Rs 625.
In the last three years, a total of Rs 15 billion and 517.9 million has been distributed as royalty. According to natural resource and financial commission, Rs 5 billion and 720.9 million, Rs 4 billion and 866.2 million, and Rs 4 billion 922.7 million royalty has been distributed, respectively, in fiscal years 2075/76, 76/77, and 77/78. When one looks at data from three years, it becomes clear the disparity in royalty distribution between the rural municipalities. According to office of auditor’s general, the Khumbu Pasang Lhamu rural municipality, home to Mount Everest, has received Rs 221.4 million while Parsa’s Dhobini rural municipality only Rs 502. Dolakha’s Tamakoshi Rural Municipality, home to the 60 MW Khimti Project, has received Rs 119.8 million in the same period.
While some local units have received a hefty sum for natural resource royalty, many local units have had to put up with none. Of the 753 local units, 177 received no amount in fiscal year 2075/76 and 63 in 2077/78. In fiscal 75/76, under mountain climbing, 654 local units received zero amount, 651 under electricity, 249 under national forest, 641 under protected forest and 594 under minerals. Likewise, in fiscal 76/77, 650 local units received none of the amount under mountain climbing, 645 under hydropower, 641 under protected forest, and 601 under minerals. In fiscal 77/78, 667 local units received none under mountain climbing, 633 under electricity, 29 in national forest, 627 in conserved forest, and 690 under minerals. In the current fiscal year, however, all the local units have received royalty under national forest heading.
Weak provinces marginalized further
In economic terms, while Madhesh, Karnali and Sudurpaschim provinces are weak, they have received the least amount of royalty on natural resources. In the current fiscal year, Bagmati province received Rs 440.5 million in royalty on forest, hydropower, mountain climbing and mineral headings, while Karnali received merely Rs 9.9 million, which is about 82.6 million less than what Khumbu Pasang Lhamu rural municipality received alone. In the current fiscal, Madesh province received 21.5 million and Sudurpaschim received 40.2 million in royalty. Meanwhile, in the same period, Province 1 received 205.5 million, Gandaki Rs 251.8 million and Lumbini Rs 261 million. Madesh province has received none of the amount apart from national and protected forest headings.
Before the adoption of federalism, Madesh province’s eight district have received royalties on hydropower, according to electricity development department’s data. In the fiscal year 2072/73, eight districts had received 51 million in royalty. According to the department, of the 1.13 billion attained in that fiscal year, 50 percent was disbursed to local agencies. Of which, the Tarai’s local agencies received about nine percent. But of the total revenue accumulated this fiscal, Rs 2.26 billion, Madesh province received none of the amount.
Dr Bhogendra Jha, deputy chair of Madhesh Province’s policy and plan commission, says that the federal government has been “illiberal” when it comes to distributing royalty proportionately for sustainable development, which, according to Jha, is not in keeping with the motive of federalism. According to electricity development department, in fiscal year 2071/72, Bara, Sarlahi, Dhanusa and Mahottari have received Rs 9.746 million in royalty each while Saptari and Siraha Rs 442 thousand each. Rautahat has received Rs 10.48 million and Parsa Rs 663 thousand.
According to the department, a 10 MW solar project is already complete in Madhesh province while other projects totaling about 246 MW project is being constructed after attaining survey license. Likewise, multiple projects that total about 294 MW have asked for survey license. In Chaitra 2075 BS, the Investment Summit saw an agreement to advance the construction of a 500 MW solar project under Investment Board. While previously, solar project would get waivers as an alternative energy source, currently there’s no provision of royalty for solar power projects which are being constructed commercially. The proposed electricity bill mentions solar and other alternative energy projects, and if passed the bill would pave way for royalty collection from solar energy projects as well, says Sanjeev Dev, director general of Electricity Development Department.
The narrow framework of distribution
The method devised for royalty distribution collected under hydro power, mineral, forest and mountain climbing has put emphasis on geography, area and population. According to Finance Commission, under mountain climbing, geographical location, local unit concerned, affected location’s area and population are accorded 40 percent, 10 percent, 25 percent and 25 percent, respectively.
Mountaineering tents at the Everest Base Camp in Khumbu Pasanglamu Municipality, Solukhumbu. Photos: Himal Archive.
Likewise, under hydropower, geographical location is accorded 50 percent, while affected local unit’s area and population are each accorded 25 percent. Local unit that houses the electricity powerhouse and embankment will receive 80 percent and 20 percent royalties, respectively. Under national forest heading, location is allotted 20 percent, area of the forest 40, population of the local unit 20, population dependent on the forest 10 percent and participation on the forest’s conservation and sustainable management 10 percent. Under protected forest, buffer zones and conserved area’s location is allotted 10 percent, area of local unit housing the buffer zone and conserved area 40 percent, population 35 percent and participants on sustainable management 15 percent. This provision lends all the royalty to the concerned local unit only. Under mineral, however, geographical location is allotted 50 percent, affected area 30 percent and population 20 percent. Of this, royalty for the most mineral extracted area is given to local unit only. While Nisti Municipality in Palpa, where Hongsi Cement extracts the limestone, has received Rs 36 million in royalty in the current fiscal, Nawalparasi’s Binayi Tribeni Rural Municipality hasn’t received a single paisa.
Even though the intergovernmental finance management act has considered hydropower, forest, mines, and water as natural resource, royalty for water and other natural resource hasn’t been determined. Therefore, voices have been raised to collect royalty for water, which has been used for myriad commercial causes, too. Juddha Bahadur Gurung, member of finance commission, says that discussion has been ongoing to collect royalty under drinking water since it is considered a fundamental right in the constitution.
Kaski’s Machhapuchhre Rural Municipality, which sends drinking water to Pokhara, is demanding cost to conserve the source of water. Gurung says, “Other local units have also demanded amount to conserve sources of water.”
Sindhupalchok’s local representatives have formed a struggle committee demanding that since Melamchi’s water is being distributed in Kathmandu for certain fee, royalty be allotted to the areas where Melamchi Project’s source lies. Water indeed is being used lately not just for drinking purpose but also to construct inter-provincial diversion and for irrigation purpose. According to the commission, even though water is being used for rafting, bottling and other industrial purposes, there’s no provision of royalty yet.
According to Gurung, Nepal has a potential to produce 50,000-Terawatt electricity through solar power and 3000MW wind energy. Gurung further said that solar, wind and waste material will not only generate electricity but also molaisis and hudrogen, and the commission is discussing royalty provision for them.
Likewise, while 414 mountains are being listen as those with royalty-generation potential, only 83 are currently generating it. According to Tourism Department, even though provinces are local units are collecting taxes and other cost from mountains, that amount is not included in royalty yet. Until now, royalty is being distributed only for caravan route while no separate royalty is determined for tradition, culture and natural heritage.
Moreover, while Nepal’s forest areas have 118 herbs that could be sold, it is not included in the book keeping process. Former finance secretary, Suman Sharma, says that if royalty would expand if it could be generated from all kinds of natural resources.
Wobbling balance
According to Nepal Electricity Authority, taking a look at the completed projects’ estimated production, Run-of-river projects (RoR) can produce 5184079 units per MW while partial run-of-river projects can net 5753046 units per MW. Projects with water reservoir can net 298770 units per MW. Likewise, the PPA rate in case of RoR is Rs 5.88, PRoR Rs 6.30, and reservoir based Rs 11. According to Electricity Act 2049, electricity developers need to pay Rs 100 per KW in royalty for 15 years and 2 percent per unit. Likewise, after 15 years, the rate increases to Rs 1000 per KW and 10 percent per unit. To consider the existing framework of royalty distribution on hydro power, of the 25 percent royalty the local unit that has the powerhouse and embankment receives, the concerned municipality receives about 85 percent.
In Tamakoshi Rural Municipality, the 42.2 MW Khimti-2 project is under construction while 650 MW Tamakoshi 3 and 1700 MW Khimti are about to go into construction. As is mentioned on the Intergovernmental Finance Management Act, once all these three projects are completed, the Tamakoshi Rural Municipality will receive Rs820 million in royalty per year.
The 456MW Upper Tamakoshi, another project in Dolakha’s Bigu Rural Municipality, aims to produce 2281 GW electricity per year. The project’s reservoir and powerhouse are also in Bigu. If the production goes according to plan, Bigu would receive Rs 220 million in royalty per year. Not only that, multiple other projects totaling 275 MW that are either under construction or ready to are also in the same rural municipality. Once complete, all these projects combined would provide Bigu with over Rs 350 million.
According to data from Electricity Development Department, there are multiple projects, including the 900 MW Arun 3, under construction in Sankhuwasabha’s Makalu Rural Municipality, that together total 1050 MW, while other projects of total 150 MW are ready to go into construction. Of the estimated yearly royalty of Rs 450 million from Arun, Makalu Rural Municipality, which houses the project’s reservoir, will receive Rs 220 million. Makalu will receive Rs 230 million more from other projects under construction. Bigu, which has a population of 13204, can distribute an average of Rs 34000 per head to its population out of royalty. In Sankhuwasabha’s Bhotkhola Rural Municipality, there are multiple projects totaling 1668 MW, including the 1061 MW Upper Arun and 450 MW Kimathanka. Once complete, Bhotkhola will receive over Rs 1.1 billion. The local unit has a population of 6576 and if its royalty is distributed per head, then one person would get Rs 167000. The local unit also has plenty of mountain climbing potential.
Khumbu Pasang Lhamu Rural Municipality, which receives the most royalty under mountain climbing, has potential for hydroelectricity as well. The local unit has 33 mountains that are viable for climbing and from 18 mountains it receives Rs 95 million in royalty. Once climbing begins in three other mountains, there will be an added Rs 220 million in its funds.
The finance equity authority that doesn’t take royalty into account
The Natural Resource and Finance Commission was established for an equitable distribution of national resources. The commission refers the special subsidies, and financial equitability that the federal government provides to provincial and local governments and the provincial to local units. But this provision is incognizant of royalty that comes from natural resources. Bishal Chalise, an assistant professor at Tribhuvan University who is an expert on royalty, says, “While distributing royalties, it is necessary that the larger financial decentralization is taken into account.” Former assistant secretary at Ministry of Federal Affairs and Administration, Purushottam Nepal, says that because local units have not put their effort in royalty generation, it is not considered an internal revenue. Gurung, the member of the finance commission, too, says that royalty is lumped under the compensation heading.
Meanwhile, former secretary of the ministry, Suman Sharma, says that even though the special subsidy should have been distributed taking account of social and financial status of the local units, there has been political overreach. Kathmandu and Lalitpur have received a large sum of those subsidies. According to the commission, Kathmandu has received Rs 840 million while Lalitpur has received Rs 553 million. In constrast, Lalitpur’s Konjyosom Rural Municipality has received only 70 million. Mahabharat Rural Municipality, a remote local unit in Kavre, has received Rs 83 million. Tamakoshi has received Rs 135.3 million, and Baiteshwor Rs 137.4 million. But while Tamakoshi has received Rs 42.4 million in royalty in the current fiscal year, Baiteshwor has received not a single rupee. Chhabi Lama, chair of Baiteshwor, says that when there’s such a big difference between royalty generation in two neighboring local units, it will invite a problem. “This will obviously bring about a gaping hole in resource distribution,” he says.
While Jumla’s Chandannath Municipality has received Rs 150 million on the commission’s recommendation, Humla’s Namkha has received only Rs 73.4 million. In terms of area, Namkha is Nepal’s largest local unit, sprawling around 2411 square km. While much of that area is covered by forest, the local unit has received only Rs 17 in royalty this fiscal year. Bishnu Bahadur Tamang, the local unit chief, laments, “While we should have received a considerable budget, we are getting very less. The state shouldn’t have discriminated so much.”
Policy problems
Nepal, the former assistant secretary, says that the percentage of royalty distribution was determined randomly, adding that it is frustrating that the rules that came later were also made on ad hoc basis. Arguing that the problem has arisen because there’s no policy that provides benefit to all affected, he says, “This kind of unbalanced and unjust distribution will only invite altercations and inequality.”
Krishna Prasad Sapkota, ex-president of the Federation of District Development Committees, says that while the international practice puts the onus to natural resources distribution on local governments, Nepal hasn’t considered that yet. “Because the federal government is dominant on natural resource distribution, its local and provincial counterparts are being duped,” says Sapkota.
Dr Achyut Wagle, professor at Kathmandu University, says that the royalty distribution is not being done according to the spirit of federalism. According to him, the distribution should be progressive under federalism’s principles.
Ashok Byanju, chair of Nepal Municipality Association, says that since federalism has provided more responsibility to local units, royalty should have also went to local units more. “Because local units have to disburse services more, natural resource’s income should also go to the local units,” he says. “The government policy is not scientific.” Homnath Shrestha, chair of Rural Municipality Association, echoes Byanju and says that it is a wrong practice to centralize resource by the federal government.
Royalty distribution practice has not taken into account the affected areas. While more percentage is allotted for base camps and peak in mountain climbing, in trekking, no local unit is considered. In hydropower project, the access route and transmission line both are not being taken into account. In mineral section, only areas with limestone are included, while affected local units and industry areas are not. Take for instance, Hongshi Cement’s case. According to Finance Commission’s study, locals have been complaining that over 1000 trippers that play daily pollute the road section from Palpa’s Nisti to Nawalparasi’s Tribeni, and cause a traffic problem, and pollute agriculture produce on the sides of the roads. While cement entrepreneurs argue that once the duty fee is paid, the industries should be allowed to run without any obstruction. Tara Pokharel, vice chair of Cement Industry Association and managing director of Subhashree Agni Cement, the government should facilitate the operation of cement industries since their raw material is found in the hills while the factories are located in Tarai.
While electricity is generated in hills, transmission lines run in Tarai, but Madhes hasn’t received the royalty for that. Dr Wagle, the economist, says for an equitable distribution, there needs to be redefinition in many subjects. He sees the necessity for the mechanism of royalty distribution should be progressive while analysing the investment and benefit, the price series should be determined considering human resource, land and effect on local unit, etc, the benefit for upstream areas and downstream in hydropower generation, and for others, geographical location should be taken into account. He says, “The extraction of fibre from a 50 year old wood and extraction of riverbed material from river shouldn’t be analysed the same way.” Dr Hemraj Lamichhane, chair of Good Governance and Development Research Centre, says that there should be on spot research and data analysis before determining royalty.
While the new provision of royalty distribution has paved a way for those who construct infrastructure in rapid pace to get rich, it hasn’t encompassed other affected people and sectors. And this is likely to invite further kerfuffle in the future. Chalise, the assistant professor, says that while it is fair that royalty is provided more to those more affected, concern should also be paid to not increase inequality.
The Nepal Municipality Association has been arguing for reform and a scientific analysis of the percentage allocation of royalty distribution. Byanju, the chair, argues for a provision where the three tiers of the government receive 33 percent of total royalty each.
Experts say that royalty should be distributed taking into account the dependence on natural resources, effect and risk of disaster, etc. “Previously, while royalty was distributed under Development Areas, it would encompass a lot of districts, but now, while it seems the affected are taken into account, less affected shouldn’t be left behind,” says Krishna Prasad Sapkota, former chair of the Federation of District Development Committee.
Dr Shankar Sharma, former deputy chair National Planning Commission, admits that the new provision in royalty distribution was amended to address the concerns of areas with natural resources and those that are more at risk of loss. He says, “The policy was formulated paying sympathy to those whose land and resources are being plundered; the problem arose because there should have been two different commissions for revenue generation and natural resources, but there’s only one.”
The Finance Commission has informed that study is being carried out to include all those who are affected. Juddha Bahadur Gurung, a member, says that the commission has also started work to determine a ceiling for the maximum amount of royalty that a local unit can receive.
