Experts stress the need to fill infrastructure investment gapGovernment inefficiency and low productivity blamed for the failure to increase capital expenditure.
Nepal has set its sights on becoming a middle-income country and achieving the Sustainable Development Goals by 2030. However, multiple reports have pointed out that the current level of investment in infrastructure is far from enough to meet these targets.
Speaking at the Kantipur Economic Summit 2020 on Thursday, experts cited multiple factors—including government inefficiency, policies, processes and ways of setting and executing priority projects—that Nepal needed to correct to meet the infrastructural needs and attract large-scale private and foreign investments.
According to Swarnim Wagle, former vice-chairman of the National Planning Commission, the country is more focused on small-scale projects and lacks a massive infrastructure plan incorporating project selection and a portfolio system.
“At the same time, annual investment requirement is around Rs260 billion in the energy sector, Rs155 billion in road infrastructure, and Rs460 billion in transportation, aviation and industry,” said Wagle. “To bridge the gap by attracting investments in the sector, the country must introduce bond, blended and remittance financing.”
As per a 2019 World Bank report, Nepal’s investment needs average 10-15 percent of the gross domestic product annually over the next decade as the country aspires to graduate from the least developed country status by 2022 and towards a middle-income country by 2030.
“Nepal is also among the fastest growing urban populations, and while local governments under the federal set-up are primarily responsible for public service delivery, the urban sector faces a paradoxical case of insufficient capital expenditure to meet demand on the one hand and low capital spending on the other,” said the World Bank.
Figures show that government spending on development projects reached 4.41 percent of the allocated budget as of the first quarter of the current fiscal year, recording slower expenditure compared to the same period last year.
Former finance minister Ram Sharan Mahat said that the government’s inefficiency and poor factor productivity were the reasons behind the country's failure to increase capital expenditure and attract and use investments in the capital sector.
“Capital spending currently stands at a mere 7 percent of the total gross domestic product, and that points to government inefficiency resulting in time and cost overruns in infrastructure projects,” said Mahat. “Nepal’s factor productivity is the lowest compared to other South Asian countries, and without correcting that by building infrastructure projects with greater efficiency, we cannot attract investment as required.”
Experts also say that the country needs to correct its ways of arbitrarily distributing resources for ineffective schemes, and setting and executing priority projects, besides blocking leakages and wastage of the infrastructure budget.
“Roadways including the Kathmandu-Tarai Fast Track, Postal Highway, Mid-Hill Highway and at least three economic corridors connecting northern and southern border points are our priority, not railways,” said Rameshore Khanal, former finance secretary. “Although there are roads linking one place with another, there are no proper industrial roads to haul raw materials, and this has increased the cost of production.”
Khanal cited bad intent, poor human resource management, capital leakages and wastages for the widening gap in infrastructure development.
According to Bishnu Rimal, chief advisor to the prime minister, the infrastructure gap is a result of being process-oriented and not result-oriented.
“There are misappropriations and policy-level and political obstructions in infrastructure projects, and we are heavily focused on processes and lack business plans while executing projects” said Rimal. “To increase capital expenditure, the government has amended the Public Procurement Act. It should have been done earlier; but we always tried to find ways through multiple guidelines, and it led to a lack of coordination between the ministries. But this has been corrected.”
A recent report by the US Department of State also highlights the institutional and procedural impediments which it says are expected to dissuade all but the most risk-tolerant investors. “While Nepal has established some investment-friendly laws and regulations, significant investment barriers remain," states the report.
As per the report, there are some welcome provisions in several newly enacted laws including the Foreign Investment and Technology Transfer Act, Industrial Enterprise Act and Special Economic Zone Act intended to attract increased foreign investment. However, questions have been raised over the implementation of such reforms, given the government’s past record of making lofty announcements without actually delivering on them.
Businessmen say that the implementation of the reforms and projects showcased during the Investment Summit 2019 is not positive but is marred by a poor working style and outdated mentality of the bureaucracy and politicians.
“At a time when direct investment has fallen from Rs17 billion to Rs11 billion, we organised an investment summit prioritising infrastructure on a grand scale, but the implementation of reforms announced during the summit is not positive,” said Nepali business tycoon Binod Chaudhary. “There are many investor-friendly laws, provisions and initiatives, but what about the working style and mentality of the bureaucracy and politicians?”