Strengthening infrastructure governance in Nepal

The need for huge investment to reduce the infrastructure deficit in Nepal is well-known. ‘Infrastructure financing’ has become a dominant narrative in country’s development agenda as the country is takes a gamut of initiatives to mobilise scarce domestic and international resources. However, discussions around the potential savings that could arise from more efficient practices in infrastructure project building and delivery are almost non-existent. This article aims at kick-starting a debate by arguing that improving operational efficiencies in the project selection and management alone can save millions of dollars while improving the quality of infrastructure and shortening project timelines.

The World Bank (2014) estimates that Nepal needs to invest as much as 12 percent of GDP in infrastructure, just to maintain the current rate of GDP growth. This level of investment, which is highest in the South Asian region, shows the massive infrastructure gap. To its credit, the Government of Nepal is taking multifaceted approaches to fulfil the demand. The most prominent among these are formulating the Public Private Partnership (PPP) Policy in 2015 as well as drafting of PPP Act, reforming tax laws, and more recently co-organising theNepal Infrastructure summit, and Nepal Investment Summitsimultaneously in 2017. These measures are imperative to bring foreign and domestic infrastructure investment into the country.

However, much of the development narrative focuses on the financing aspect infrastructure building. The amount of investment has become the sole metric to evaluate the infrastructure development while public discussion on the quality of such development is very limited. In fact, the governance of infrastructure development is largely overlooked. Questions around infrastructure selection and prioritisation criterion, evidence-based project planning, and streamlining project building and operations etc. are not explored.  As a result, we are missing opportunities to make most out of our limited resources.

We need a holistic infrastructure governance framework. In this regards, the recently published report on ‘Infrastructure Finance Strategies for Sustainable Development in Nepal’ (available in the National Planning Commission website), an in-depth study of infrastructure financing strategies for sustainable development, authored by Ashutosh M Dixith as identified three potential sources of public expenditure efficiencies. They highlight robust ways to reduce the cost involved in infrastructure projects and improve overall infrastructure governance. The report draws insights from a study published by McKinsey and Company, which reveals globally successful practices of increasing infrastructure productivity.

The first stepping stone of sound infrastructure governance is to improve project prioritisation in order to optimise the infrastructure portfolio. Reports have shown that eliminating poor performing contracts and selection of improved alternatives could save up to 15-35 per cent of new capital spending. In Nepal’s case, even if the country saves 10 percent of capital expenditure, which amounts to NRS 8 billion, the amount would provide sufficient cushioning to finance large scale infrastructure projects.

Achieving these efficient outcomes demands three key components: 1) identify projects with clear purpose, 2) evaluate projects using improved cost-benefit analysis, and 3) prioritise projects at portfolio level.The government must select projects with clear purpose based on socio-economic priorities. Also, while evaluating the projects, metrics must consider long-term economic, social and environmental effects. It is better to select and prioritise the projects by conducting a cost-benefit analysis which includes social factors such as time saved by commuters, or reducing mortalities, injuries, and noise. The results should then be validated by cross referencing with similar past projects. The infrastructure prioritisation framework recently developed by the World Bank can help improve the infrastructure planning and decision-making process by incorporating financial, economic, social and political factors into project prioritisation. Finally, there should be a system to check project performance relative to predictions. The report also advises there should be a strong database to aid decision making, for which the study recommends maintenance of infrastructure balance sheet

In Nepal, important infrastructure projects have been suffering from implementation delays. For instance, 13 years after the government agreed to the construction, the Melamchi Drinking Project is still work in progress. Upon completion it will supposedly distribute 400 million litres of water daily – a figure which is often questioned. The project started with public private and donor partnership has suffered significant delays and escalating administrative and operational costs. The McKinsey and Company study highlights that to save government has to adopt sophisticated procurement, and streamline permit approvals and land acquisition to reduce bottlenecks.

The third is better utilisation of existing infrastructure assets. This is important given Nepal’s limited ability to mobilise domestic resources for infrastructure. Adding more roads, constructing hydropower dams and fitting pipelines will not resolve problems if the existing infrastructure is not properly maintained. Nepal should move away from the build, neglect, and rebuild mentality and implement adequate an infrastructure management system together with appropriate financing framework. We should take smart infrastructure utilisation management approach. Take the elimination of power cuts for example a recent success in this area. Nepal used to experience up to 11 hours of load shedding, but now the country enjoys almost 24 hours’ electricity supply which in the real sense is the result of better utilisation and demand management of existing infrastructure. On contrary, the valley road expansion project has proved poor value for money as traffic congestion has not reduced. Instead, the deployment of information technology in establishing intelligent transport system (ITS) for roads would enable the utilisation of the existing road capacity to double or even triple.

Moreover, the opportunity by making most of the infrastructure assets like power and water systems lies in reducing non-technical losses such as electricity leakage and distribution losses. In Nepal, electricity leakage was 25 percent in 2016, the 4thhighest leakage rate in the world. On the other side, in water supply system, non-revenue water, unmetered supplies, stands at 18 percent. This avenue is worth taking seriously as reducing the losses can cost significantly less than what it cost to build a utility infrastructure project.

The above discussion amply suggests an urgent need to have a national level infrastructure governance framework. Such framework would not only help in effective utilisation of the already constraint resources, but also create conducive environment for private investment in infrastructure both domestic and foreign. The efficiency would not only generate much needed saving, and ensure the timely completion of the project, but also send positive message to the investors.

( This article was co-written with Ashutosh Mani Dixit and first published in LSE South Asia Blog here. Image credit: Axel Drainville CC BY-NC 2.0) 

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AIIB to unlock South Asia economic potential

South Asia’s economic potential has long been constrained by low levels of economic integration. Despite being closely linked geographically, culturally and historically, intra-regional trade is very low. A major problem has, of course, been political difficulties within and between South Asian countries. But an important, and overlooked, barrier to greater economic integration is the poor quality and inadequate investment in infrastructure in the region. The newly established Asian Infrastructure Investment Bank (AIIB) can play a pivotal role in fixing this problem.

For a long time, infrastructure bottlenecks have been recognised as a barrier to regional trade and economic integration. Access to infrastructure in South Asian countries is limited and the quality of available infrastructure is also poor. In Bangladesh, for example, only 39 per cent of the rural population has access to road transportation. India has the second largest road and rail network in the world, but half of these roads are not paved and cannot be used in all seasons. Despite huge potential in electricity generation, people in the region consume less than 655 kilowatts per capita in intermittent electricity supply in 2012, which is less than one fifth of that in East Asia.

The situation for cross-border infrastructure is even less encouraging. A telephone call from Nepal to India is more expensive than calling to the United States or Europe. Cargo trucks waiting 3–5 days at the border for clearance from customs is normal. Despite sharing a nearly 3000 kilometre-long land border, shipping between India and Pakistan has to go via Dubai. As a result, the cost of trading across borders in South Asia is prohibitively high.

According to the World Bank, South Asia has nearly US$2.6 trillion in shared GDP. While overall trade flows are growing, intra-regional trade among countries is still less than 5 per cent of total trade. This is far less than that within ASEAN (25 per cent) or NAFTA (58 per cent).

Despite this, investment in in-country and cross-border infrastructure has been inadequate over the years. This has created a huge infrastructure investment gap in the region with supply trailing far below demand.

It is estimated that South Asian countries need to invest around 7.6 per cent of GDP in infrastructure per year if they are to achieve economic growth of 7.5 per cent. This amounts to an annual capital investment of US$88 billion in new investment and in maintaining existing capital stock. Currently, actual average investment in infrastructure is around US$28 billion per annum — the lowest in the world, excepting sub-Saharan Africa.

The South Asian Association for Regional Cooperation (SAARC) — which is comprised of Afghanistan, Bhutan, Bangladesh, India, Pakistan, Maldives, Nepal and Sri Lanka — made an attempt to narrow the investment gap recently. For a decade, SAARC negotiated a free-trade agreement called the South Asian Free Trade Agreement (SAFTA). Coming into effect in 2006, SAFTA aims to facilitate the ‘development of communication systems and transport infrastructure’ to facilitate intra-regional trade. Still, the pace of infrastructural reform envisioned by the agreement has been slow.

Other similar initiatives include the establishment of the South Asian Development Fund (SADF) in 1996. Later reworked as the SAARC Development Fund (SDF), its aim is to act as an umbrella funding mechanism for all regional development projects, including infrastructure. But with capital of only US$300 million, the SDF has been unable to go beyond funding some social projects. The idea of setting-up a South Asian Development Bank (SDB), led by India, has also been proposed to provide low-cost funding to member countries for infrastructure projects. But this idea has never taken-off.

There have been some unilateral efforts to improve infrastructure. India, for example, has pledged to invest US$138 billion in railways alone in the next five years. It has also been experimenting with the creation of a ‘National Investment in Infrastructure Fund’.

On the bilateral front, projects like the Central Asia–South Asia Electricity Transmission Project, the Nepal–India Regional Trade and Transport Project, and the Bangladesh–Bhutan–India–Nepal (BBIN) initiatives are currently underway with support from multilateral organisations like the World Bank and the Asian Development Bank (ADB). Still, there are no major cross-country highway or railway projects currently underway.

With this backdrop, the creation of the AIIB has come at the right time. The bank was established with an explicit objective to provide financing for developmental infrastructure like roads, railways, sea and airports, and power generation plants to facilitate greater economic integration in the Asia Pacific.

Although US$100 billion in paid-up capital may not look like much in comparison to the investment demand, the AIIB can play a key role in complementing the work of traditional multilateral lenders like the ADB and the International Finance Corporation.

The AIIB is also expected to have a longer term investment horizon, recognising the fact that returns to infrastructure spending in developing countries can be slow and sometimes low. If the AIIB can also shorten the loan assessment and approval procedures, South Asia could see an investment boom.

The involvement of the AIIB in South Asia will be welcome news for the region. Six out of the eight countries in South Asia (the exceptions are Afghanistan and Bhutan) are founding members of the Bank. India, which was recently elected as a member of the board of the bank, is also likely to prefer the AIIB — with its multi-nation oversight — rather than a situation where China acts alone in what India considers its backyard. With mutual trust and support, the AIIB can help South Asia realise its shared dream of greater economic prosperity.

( This article was first published on East Asia Forum here.)