Rewind: Nepal Infrastructure Summit 2019

Rewind: Nepal Infrastructure Summit 2019 

Nepal Infrastructure Summit (NIS) 2019, organised by CNI in coordination with Investment Board of Nepal (IBN) and Youth Community of Nepalese Contractors (YCNC) on 11th and 12th September 2019, was third in the series on the theme of ‘Resilient Infrastructure for Sustainable Development’. NIS 2019 was different from the last two series, it included interactions with chief ministers from all the seven provinces of Nepal and signing of an MOUs with provincial governments to set up a ‘Provincial Partnership Investors Forum (PPIF)’. The summit was joined by the chief guest, honourable Mr. Nanda Bahadur Pun, Vice President of Nepal; guests of honour, Dr Han Seung Soo, Former Prime Minister of Republic of Korea and H.E. Mr Raj Kumar Singh, Minister of the State (IC) of the Ministry of Power, New and Renewable Energy; and the Ministry of State Skills Development and Entrepreneurship, Government of India and other special guests like honourable Mr Raghubir Mahaseth, Minister of Physical Infrastructure and Transport, honourable Mr Binod Kumar Chaudhary, President Emeritus, CNI; Mr Jingdong Hua, Vice President of the World Bank; Mr Woochong Um, Director General of the Asian Development Bank, and Mr Hari Bhakta Sharma, Immediate Past President, CNI.

The opening plenary was chaired by Mr Satish Kumar More, President of CNI, who conveyed the objective of the summit i.e., to facilitate discourse on resilient infrastructure for sustainable development, and to attract large scale private investment in areas of Nepal’s core needs and strengths. Mr Birendra Raj Pandey, Vice President, CNI, briefed the audience about the summit while Mr Hari Bhakta Sharma, Immediate Past President, CNI, delved into the journey and accomplishment of the summit since its organisation in 2014. The plenary was then followed by the addresses from the Chief Guest, Vice President of Nepal, guests of honour, and other special guests.

As the theme suggested, NIS 2019 focused on the need to build resilient infrastructures given that Nepal is most vulnerable to climate change and geographical disasters. With rapidly growing population, and a changing climate increasing the frequency and intensity of natural hazards, the need to adapt and invest in resilience should be an urgent priority. To build resilient infrastructures conducive for achieving Sustainable Development Goals (SDGs), and realising the aim of becoming middleincome country by 2030, Nepal requires effective financing mechanism, right governance framework, public private partnership, efficient project implementation, and competent management.

Resilient infrastructures contribute to the wellbeing of people by providing them better health, education, and livelihood. Moreover, resilient infrastructures have potential to contribute towards key policy priorities, such as supporting the low-carbon transition, protecting biodiversity, addressing disparities across regions and cities, and promoting sustainable development and inclusive growth. However, due to lack of resilience, infrastructure disruptions are everyday concern undermining businesses, job creation, and economic development. A World Bank study ‘Lifelines-The Resilient Infrastructure Opportunity’ suggests that a disruption of infrastructure costs households and firms in low and middle-income countries at least USD 390 billion a year and Nepal is no exception. For instance, a devastating earthquake in 2015 and flooding in 2017 contributed to stagnating economic growth primarily due to disruptions in infrastructure. The current state of infrastructure in the country is far from satisfactory. As per the Global Competitiveness Report compiled by World Economic Forum, Nepal’s infrastructure score stood at 17 out of 100 which is significantly lower than other South Asian countries (India 51.4, Bangladesh 31.5, Pakistan 35.1). In this context, following points were highlighted by the keynote speakers during the summitResilient infrastructures contribute to the wellbeing of people by providing them better health, education, and livelihood. Moreover, resilient infrastructures have potential to contribute towards key policy priorities, such as supporting the low-carbon transition, protecting biodiversity, addressing disparities across regions and cities, and promoting sustainable development and inclusive growth. However, due to lack of resilience, infrastructure disruptions are everyday concern undermining businesses, job creation, and economic development. A World Bank study ‘Lifelines-The Resilient Infrastructure Opportunity’ suggests that a disruption of infrastructure costs households and firms in low and middle-income countries at least USD 390 billion a year and Nepal is no exception. For instance, a devastating earthquake in 2015 and flooding in 2017 contributed to stagnating economic growth primarily due to disruptions in infrastructure. The current state of infrastructure in the country is far from satisfactory. As per the Global Competitiveness Report compiled by World Economic Forum, Nepal’s infrastructure score stood at 17 out of 100 which is significantly lower than other South Asian countries (India 51.4, Bangladesh 31.5, Pakistan 35.1). In this context, following points were highlighted by the keynote speakers during the summit.

Setting Up the Context: The Infrastructure Outlook

As the discourse on infrastructure has transformed itself from economic development to sustainability, there is a growing importance of private sector. According to Mr Woo Chong Um, the private sector is required to contribute 50% of total investment need of the country which is around 0.5 billion USD per year. However, its participation is not satisfactory. Infrastructure development in Nepal is largely fulfilled by the government grants, with private sector participation limiting itself to energy and hydropower projects.

The government has initiated actions to create a conducive environment for the private sector with initiatives such as Public Private Partnership (PPP) Act and Nepal Infrastructure Bank (NIFRA). Separate regulations are in operation to regulate startups and facilitate investment with hedging rules in place and a clear provision for repatriation..

PPP is an important and effective tool for investment if used properly. For it to be effectively implemented, government must ensure proper allocation of risk between private and public sector, ensure access to long term finance, and develop bond markets in the conditions where we cannot solely depend on banks and Foreign Direct Investment (FDI).

Another area of improvement in infrastructure investment is project management. In Nepal, due to lack of proper plan, there is delay in project implementation. Therefore, the concept of the National Project Bank and Project Implementation Governance Framework should be implemented at the highest level to ensure timely completion.

Prof. Dr Pushpa Raj Kandel, Vice Chairman, NPC pointed out that Nepal needs up to 9.5% of GDP to be spent on infrastructure to achieve an annual growth of 7.5%. However, current level of infrastructure is much lower. We need an additional USD 2 billion each year if we are to make our infrastructures resilient. Therefore, the goal of the private sector should be to actively participate in project development with good quality and governance.

Infrastructure and Regional Connectivity

Nepal is among the 40 landlocked countries in the world where the cost of road transportation is typically higher. This makes it difficult for production to be competitive in the international market. Dr Swarnim Wagle, Former Vice Chairman, NPC highlighted that having a well-built transportation infrastructure is crucial. It lowers trade costs price volatility, integrates market, brings economies of scale, fosters externalities and spurs economic growth. However, Nepal is a country with the lowest road density in Southeast Asia with only about 40,000 km of adequate roads. The need of the hour, therefore, is high quality expressways and roads connecting Nepal with its neighbours.

Road connectivity is equally important from tourism perspective as we need to connect inaccessible but pristine areas of Nepal. Tourism can be used as a strategic lever to get Nepal out of the LDC status.

Connectivity for electricity transmission is crucial to manage imbalances in demand for electricity. Nepal has come up with a roadmap for energy sector wherein concerned authorities have identified several upcoming and additional projects that demand a production of 15000 MW by 2030. The plan is to utilize 10,000 MW for consumption while exporting the excess energy produced. However, the current peak load is less than 1500 MW, which means that an increase of more than 10 times of the current consumption is required. Cross Border Energy Trade has a substantial role in meeting this target. Since, both India and Bangladesh are expected to have electricity demand deficit, Nepal can supply the electricity to fill the deficit.

Mr Noritada Morita, Former Director-General of ADB highlighted that Nepal needs an investment between USD 29 billion and USD 48 billion from the period 2019 to 2030 to achieve SDGs. As the impacts of disasters are huge in Nepal causing 25% of capital expenditure loss every year, there is a need is to push for disaster resilient infrastructure through policy measures, financing mechanism, and risk information. Identifying the environmental impacts of projects by improving the capacity of institutions to conduct environmental and social.

impact assessments will help international funding agencies make an informed decision. This will also help building resilient infrastructures with an ability to withstand calamities in a disaster-prone country such as Nepal. Given that 25% of total capital expenditure, which is already less than 8% of total government expenditure, must be allocated every year in repairing and maintaining damaged infrastructure in Nepal, resilient infrastructures are the need of the hour that are not only cost effective but are sustainable for long term growth.

Infrastructure Development Policies and Financing

To incentivise more participation from the private sector, one window policy for investors must be implemented effectively. There is also a need to bring transformation around institutional partnership and mechanism to identify and implement invaluable new resources which requires active contract between 3 tiers or government. To be able to channel the huge amount of capital required, funds from public as well as private financial institutions must be mobilised. According to Mr Jingdong Hua, Vice President and Treasurer, The World Bank, public finance institutions such as Employers Provident Fund has more than USD 3 billion in assets that needs to be evaluated for investment in infrastructure. Similarly, BFIs are managing more than USD 30 billion of capital where the largest share goes to non-infrastructure sectors. Therefore, viable infrastructure projects have to be identified to attract investment from BFIs.

Delivering Infrastructure Projects

It is established that a country such as Nepal, having a very limited internal source of capital, needs to mobilise foreign direct investment in infrastructure. However, risk mitigation mechanisms need to be put in place to instil confidence in the investors. Prof. Dr Govinda Raj Pokharel, Former Vice Chair, NPC highlighted that for risk mitigation, currency risk mechanism and country rating would play an important role to increase the bankability of project finance model. Nepal should collaborate with international financial institutions in getting technical assistance for economic and policy reforms. For instance, assistance in moving up the World Bank’s Ease of Doing Business rank, a benchmark for assessing the investment climate for international investors, would help attract foreign capital.

 To be able to attract foreign investors, bankability of the projects also needs to be strengthened. Projects need to be viable to the needs of the country and be technical and financially feasible to implement. Reputation of the organisation should be considered when evaluating feasibility and design study of the projects. Project construction should be controlled while delay and cost overrun due to contractors must be brought to minimum. 

Timely completion of the projects has been a major challenge in Nepal particularly for international companies. There is a need to streamline procurement and other bureaucratic processes. Project management is an area that needs to be improved with a provision of planning mechanism before starting the projects. The concept of the national project bank, project implementation, and governance framework can be implemented for timely completion of the projects.

To improve the project planning and implementation, the government needs to be involved in front-end planning and efforts need to be made in streamlining planning processes. While the Public Procurement Act has already been amended multiple times, it still requires overcoming all the hurdles faced by the contractors. Nonetheless, new and innovative steps are being taken by the government to tackle the problems and to deliver infrastructure projects. For instance, new liability contracting provisions have been introduced for greater accountability from everyone involved. Recent projects funded by ADB on highways have this provision added in the contract.

Opportunities in Provinces

Nepal should take advantage of recent change in federal structure by drawing learnings from India to attract investment in infrastructure. Each province has its unique feature and needs to be identified through comparative studies that include local capacities, niche areas for investment, and financing needs. This practice would create competitive yet cooperative investment environment among provinces.

Given the various niches in each of the provinces, plans and strategies should be developed. To develop competitive federalism, a Competitive Federal Index can be developed in line with what is being implemented in Vietnam or India through Ease of Doing Business in States.

Honourable Krishna Bahadur Mahara, Former Speaker, House of Representatives pointed out that regular dialogue mechanisms with provinces is required to obtain feedback and suggestions at the local level. To address this, the formation of Provincial Investment Partnership Forum (PIPF) was announced that will ideate and expedite projects for each province.

Challenges in Infrastructure Development

Clear policy guidelines, choices in financing options, and investment-friendly bureaucracy are the foundations for infrastructure development. However, constraints in these aspects have clearly limited the amount of potential infrastructure investment in Nepal. Some specific challenges highlighted by the NIS 2019 are as follows:

• Lengthy approval process in licensing, construction, and operation of the projects

. • Multiple policies with overlapping authorities that conflict with sectoral infrastructure investment from both domestic and foreign investors

. • Risks due to political uncertainly with frequent changes in government authorities.

 • Risk due to unstable macroeconomic indicators such as changing inflation, interest rates and foreign exchange rates.

 • Limited financing options and lack of clear guidelines on raising capital for infrastructure projects

• Build, Own, Operate, Transfer (BOOT) model is the only available form of public private partnership

Key Takeaways and Way Forward

Nepal’s average economic growth in the past 20 years has hovered around 4% which is not satisfactory. While Nepal has met the technical criteria to graduate from UN-defined status of a least developed country (LDC), its ambition is to meet all the SDGs and become a lower middle-income country by 2030. If Nepal is to realise its ambition of achieving middle income status by 2030, it must achieve annual growth of around 7% consistently until then. Therefore, the need of the hour is to invest in resilient and sustainable infrastructure since infrastructure of low quality tends to deteriorate faster, making it costly to maintain and repair. The World Bank also emphasises the importance of 3 ‘I’s- Investment, Infrastructure, and Inclusion to take a major leap towards development. Therefore, NIS (2019) identified the priority sectors that will help in achieving sustainable economic growth.

Given the infrastructure requirement of the country, it is important to focus on certain key strategies. There needs to be rigorous institutional capacity building at federal, provincial, and local level. Formal, technical, and vocational trainings are required for new skills in developing and implementing resilient infrastructures. To foster the ecosystem of innovation and entrepreneurship, Government can launch a program called Start-up Nepal which is in line with India’s flagship Start-up India Program.

Large amount of infrastructure funding needs to be mobilised that can be obtained domestically through joint contribution from public and private sector including BFIs, government, and EPF and internationally through FDIs. The role of new institutions such as Nepal Infrastructure Bank can also be prominent in leveraging private investment. 

There should also be policy level changes to augment exposure of bank’s investment in nonenergy infrastructure sector by leveraging longterm and low-cost fixed lending. The creation of PIPF at the centre to enable private participation at province level needs to be expedited.

Developing project implementation and governance framework as well as Standard Operating Procedures (SOPs) is essential for effective and efficient project implementation, management, and monitoring. Timely completion of the projects has been a major challenge in Nepal particularly for international companies. There is a need to streamline procurement and other bureaucratic processes. Project management is an area that needs to be improved with a provision of planning mechanism before starting the projects. The concept of the National project bank, project implementation, and governance framework can be implemented for timely completion of the projects. Nepal should also take advantage of recent change in federal structure to attract more investment in infrastructure. Each province has its unique feature and needs to be identified through comparative studies that include local capacities, niche areas for investment, and financing needs. This practice would create competitive yet cooperative investment environment among provinces. Collaborative governance structure needs to be implemented to enable smooth functioning of 3 tiers of Government. Provincial governments can take inspiration from Provincial Competitive Index created by countries such as India and Vietnam to improve Ease of Doing Business Framework. Developing resilient infrastructures must be a priority that have potential to contribute towards adapting to climate change, protecting biodiversity, and promoting sustainable development and inclusive growth.

Note: This article is from Nepal Infrastructure Summit 2024