Capital expenditure has always been a problem in Nepal. Every year, the government struggles to spend enough for capital formation, faces public criticism and vows to fix the problems next year. But every fiscal year, the cycle repeats.

Capital expenditure, or capital expenses (also called CAPEX), is a type of government spending (or investment) on goods and services intended to create future benefits, such as infrastructure investment in transport, health and research. Capital expenditure supports the economy and it’s prudent use, beginning with the fiscal year and continuing throughout, can help achieve healthy economic growth. But over the years, capital spending is slow in the initial months, with most expenses made in the last quarter of the fiscal year in a rush to meet spending targets. This often raises questions over the effectiveness of services and quality of output.

What is capital expenditure?

The government spends money under three headings—recurrent expenditure, capital expenditure and expense on financial management. Recurrent expenditure refers to administrative costs, including operation grants, capital grants and costs for ongoing projects.

Capital expenditure involves expenses made in infrastructure development, construction and other sectors that help generate real capital in the country. The government’s capital budget includes funds allocated for the purposes of executing civil works and purchasing land, buildings, furniture, vehicles, plants, and machinery. In a country like Nepal, where infrastructure is very poor, low capital spending creates a binding constraint on economic growth, delaying the improvement of people's living standards.

Successful implementation of the budget is an important tool to address the expectations of the people. Besides, it also ensures liquidity in the banking sector, generates employment opportunities for the people, and acts as an indicator of the efficiency of the state.

How is capital expenditure allocated?

Recurrent expenses account for a large proportion of every year’s budget. In the fiscal year 2018-19, the government allocated Rs313.90 billion for the development of infrastructure, which was only 24 percent of a budget worth Rs1.31 trillion. While the share of capital funds is already low, the government's failure to effectively utilise the allocation holds back essential development works. Capital expense is one of the main factors that determines the economic growth rate. As the government has made high economic growth its priority, it is imperative to reduce the growing burden of recurrent expenses to make more funds available for capital expenditure. The government needs to spend at least 8-12 percent of its gross domestic income on public infrastructure, says economist Chandan Sapkota.

How low is the spending?

Statistics show that over the past five years, the government has been spending 72 percent of the capital budget on average, which displays the state’s inability to use funds allocated under the prescribed headings.

In the fiscal year 2018-19, the government spent 73.4 percent of the development budget, which was Rs230.4 billion out of the allocated Rs313.99 billion, according to the Financial Comptroller General Office.

Capital expenditure in the first quarter of the last fiscal year stood at 5.5 percent. It rose to 17.68 percent by mid-January, first half of the fiscal year, and then reached 57 percent with just one week left for the fiscal year to conclude. This shows that around 16.4 percent was spent in the last week of the fiscal year.

Why is slow capital expenditure an issue?

The country’s private sector is attempting to inject capital into the economy, but the government still plays a lead role in investing in infrastructure and public utility goods. So, slow and inadequate capital expenses impede development activities. This not only hampers job creation, but also affects peoples’ incomes.

Furthermore, last hour exhaustion of the capital budget also leads to poor quality construction work. Short-lived roads, bridges and other infrastructure waste the state’s resources and put the lives of people at risk.

Capital expense is also considered the main source of liquidity in the banks. Timely spending helps circulate cash in banks and according to bankers, the crunch of loanable funds in the financial sector for the past few years was an outcome of inadequate capital spending.

What causes rushed spending at the tail end of the fiscal year?

This situation arises from the government bodies’ need to spend allocated funds within the fiscal deadline. When the fiscal year ends, which is generally the spending deadline, the particular budget freezes. Often, the Ministry of Finance allocates a budget to agencies based on their spending capacity in the previous fiscal year. This prompts agencies to spend their allocated budget by any means so that they do not receive a reduced budget the next year.

Delays in awarding contracts as well as a high level of corruption at the bureaucratic level have also been blamed for rushed spending. Damodar Regmi, former coordinator of the Public Expenditure and Financial Accountability Secretariat, said that in the first quadrimester, government bodies are busy devising plans and preparing for procurements.

“As government officials undergo transfers mainly in this period, it impedes necessary preparations. As a result, the process extends until the third quadrimester, which is supposedly the peak time for field work,” said Regmi, who now heads the Public Finance Management Training Centre.

According to Regmi, the government exerts pressure on agencies to speed up spending, primarily in the second half of the year. Also, late submission of bills, settlement of flaws in documentation, and political pressure to spend in certain areas are among the reasons for a large amount of resources being spent at the final hour, said Regmi.

What problems do the implementing agencies face?

Officials at the Ministry of Finance say the problems lie with the line ministries, who fail to develop project specifications for their subordinate agencies. Poor preparation in terms of project design, lengthy process in awarding contracts, and the negligence of contractors after bagging the project also have to do with ongoing problems.

Rameshwor Khanal, an economist and former finance secretary, said that slow capital spending is due to the government’s apathy towards controlling corruption and flaws in project management.

“Although a number of laws, including the Public Procurement Act, have been revised, many government officials seek commissions while awarding project contracts and technical manpower sees frequent transfers for undue benefits,” he said.

According to Khanal, capital expenditure has always been slow, also due to the lack of a working modality and human resource at sub-national governments and delays in payment to contractors.

As per economist Sapkota, chronically low capital spending is also the result of structural weaknesses in project preparation and implementation, low project readiness, bureaucratic hassles in approving and re-approving projects, poor project management and contractor capacity, high fiduciary risk in project implementation at sub-national level and political intervention both at planning and operational levels.

The Public Expenditure Review Commission of the Finance Ministry, led by economist Dilli Raj Khanal, in a report submitted to the ministry in January last year, also pointed out various flaws like implementing projects without proper planning and preparations, disregarding government standards, and inappropriately prioritising projects as the major reasons for the delays in the completion of development projects and poor utilisation of capital expenditure.

Has the presence of provincial and local governments been helpful?

Sub-national governments have been empowered to make their own decisions, but there is confusion over their jurisdiction. A lack of officials at local governments has also been a major hurdle while carrying out development works.

Implementing the norms of the constitution, the federal government, through the 2018-19 budget, had started handing over some key development projects to the provinces. But in December last year, the government took back control of the projects, citing poor performance. The government made the decision after donor agencies began to point out high variations in projects after they were handed over to provincial governments.

What are the government’s plans for the current fiscal year?

According to Regmi, the government is all set to implement the system of performance contract from this year.

“In this system, each government agency will be required to track units under its jurisdiction. It also needs to prepare a business plan, tender document, and specifications for necessary logistics before announcing a public bid,” he said.

The government is also asking implementing agencies to formulate a procurement plan for all projects between mid-July and mid-August. Training local governments and other stakeholders to prepare procurement plans and tender documents is among the measures that the government has devised to allow for reasonable capital spending right from the first quarter of this fiscal year, according to Regmi.