Tax, Electricity and the State

April 9, 2014

The World Bank

I've been in Nepal since January helping out with the implementation of a household survey. Throughout February and March, we asked people in two districts – Jhapa, in the south-east of the country on the Indian border, and Tibetan-bordering Sindhupalchok to the north – about their livelihoods, the various taxes they pay, and their relationships with state governance. As part of this research, we've also been carrying out a number of more in-depth qualitative interviews.

When asked about the kinds of taxes that most affect their livelihoods on a day-to-day basis, one of the things that struck me about people's responses was the frequency with which electricity bills were mentioned. At first, I couldn't quite understand why this was coming up so much: that's not atax, I thought, it's simply a payment made in exchange for a service. In my mind, I began to discount these responses, passing them off as information that missed the points we were trying to get at.
My assumptions were misplaced.

Nepal suffers from an extremely limited and irregular supply of electricity. Anyone who has spent any time here is well aware of this fact. Most parts of the country experience extended bouts of 'loadshedding' throughout the day, often lasting several hours at a time. There are a couple of ways people deal with this. You can either sit it out and endure the disconnectedness / darkness, perhaps with the aid of a candle or two. You can leach some power of a small battery, which is enough to light up some bulbs and basic equipment. Or you can invest in a generator (usually diesel powered, more expensive) or inverter (run off a DC source, such as a car battery or solar panel, and cheaper) and enjoy a continued flow of electricity. (Of course, you can always get a phone app to help you keep on top of the blackout schedule!).
Many businesses take the third option (as do many households: just under 25% of the 1,000 or so households interviewed as part of our survey owned a generator or inverter). This is an obvious response to the problem of loadshedding, but it comes at a price. A generator will often cost several hundred US dollars – already a sizeable dent in the wallet, especially if business isn't particularly booming. But running the thing isn't cheap either: the per unit cost of power produced by diesel generators is roughly 35 NPRs, or about 35 US cents (compared to an 8 NPR equivalent for hydropower sources). Inverters are less expensive to run, but an annual bill for a restaurant in Kathmandu is still well over the $100 mark.
For our survey in Jhapa, we based ourselves in a cheap hotel in the commercial town of Birtamod. Using tablets to conduct each interview meant that having a steady supply of electricity was vital. Ordinarily, Chandra – the hotel manager – would simply sit the loadshedding out when it arrived; most guests had no urgent need for it and, besides, they could always tap into the wifi of some nearby restaurant. For us, however, he made an exception, kindly agreeing to switch the generator on for the essential purpose of charging. At the end of our 10 day stay, we reimbursed his additional generator costs: 15,000 NPR, or about $150.
This is clearly not an insignificant sum, and the example serves to illustrate how costly running a generator during periods of loadshedding can be for small and medium sized businesses. (This is to say nothing of the significant environmental expense of producing power by burning off diesel). Once the costs of investing in private electricity became clear to me, the reasoning behind people's citing of electricity bills as a major tax burden started falling into place.
It is not just that electricity is expensive, but rather – as my ODI colleagues Andrew Scott and Prachi Seth have pointed out – that its availability is often regarded as a public good. Multiple informal conversations with people in Jhapa and Sindhupalchok (as well as Kathmandu) suggest that the capacity to provide reliable electricity is seen as a core function of the state. This is particularly pronounced amongst those trying to run a business. A regular power supply is one of the basics of firm operation, as perhaps illustrated no more explicitly than by the World Bank's widely referenced Doing Business rankings, which use access to electricity as a key measure of business constraints (incidentally, electricity comes out as the 'number one constraint' for businesses in violent areas).
While there are certainly several other, markedly less 'formal' or technical barriers to economic activity – plug alert: a separate research project of ours is currently exploring these issues in Afghanistan and Uganda – the importance of something as basic as electricity to people's livelihoods, to national economies and to perceptions of the state should not be underestimated. Indeed, the World Bank's 2011 Word Development Report on conflict highlighted the role that a functioning power supply can play in early post-conflict recovery and development: one example from Liberia discussed how a 100-day plan that included the restoration of electricity to certain areas of Monrovia was designed to'help restore confidence in the state and jumpstart recovery in economic activity and basic services'.
So, in a sense, it is hardly surprising that people view an irregular supply of electricity as a failure of government, and the cost of having to invest in a private electricity source as a form of taxation. We – as students or researchers, practitioners or policy makers – may not initially see it as such, particularly when so much of the current global discussion around tax and development is concerned with the efficiency of formal tax regimes (and the question of whether poor people should be taxed more!). The anthropologist Carolyn Nordstrom might refer to this as an example of a 'vanishing point' – a part of the economy where the normative (what should be) intersects with reality (what actually is), and which subsequently goes unseen, uncounted, unaddressed. But from the perspective of individuals living in weak economic environments and under fragile systems of state governance, bad electricity becomes as much a tax on their livelihoods as do regulated extractions on their incomes or the licenses required to set up a business in the first place.

Tags: electricity, governance, nepal, private sector, public sector, south asia, taxe
Posted in Asia, Infrastructure, Energy