The Nepali Private Sector and Infrastructure Investment

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The Nepali Private Sector and Infrastructure Investment

The meaningful participation of the country’s private sector in infrastructural development will only be possible when the government takes a whole new approach to resolve the pertinent issues.

--BY JAGDISH PRASAD AGRAWAL

The last two national budgets have seen a major shift in our strategy for sustainable development, with a quantum jump in the allocation for infrastructure development projects across the country. It is not that the development of infrastructures was neglected or ignored in the past but the recent years have witnessed a paradigm shift in the infrastructure development agenda. Particularly, the decision makers seem to have realised the need for an uninterrupted supply of funds to avoid time-delays. They also seem to have understood the importance of improving the technical parameters including design, using state-of-the-art technologies and assessing the economic/social viability of the project through quality detailed project reports for budgetary allocation.

These are very welcome changes to the thought-process and are in quite contrast to the earlier decisions taken at the whims and fancies of the politicians at every level of political hierarchy, resulting in major projects remaining incomplete even after two decades of efforts and pouring in of funds. If media reports are to be believed, there are numerous such projects which have been languishing incomplete for decades, denying the nation the projected benefits these projects were selected for. The problem of selecting projects unprofessionally without the backing of sound economic or social rationale and solely on political pressures continues even today, rather, it has further compounded with the political change and the introduction of federalism in the country.

However, a beginning seems to have been made to be more professional in selecting the projects without any pressure to bring in foreign direct investment and also to involve the private sector more substantially. Only professionalism in selecting the right projects can commercialise infrastructural investment which is absolutely necessary if the type of total investment and the private sectors’ contribution as envisaged by the National Planning Commission (NPC) is actually sought for.

What constitutes infrastructure in the development parlance?
The construction of roads, civil aviation, rail and waterways, telecommunication, information and broad-casting including electronic media are the core sectors for budgetary entitlements under infrastructure development. However, in addition to the above, urban development – the development of power, industrial parks, dryports, housing, hospitals, schools and colleges – is a major thrust area requiring massive investments for building infrastructural facilities. The NPC has estimated an outlay of approximately Rs 20 billion per year in infrastructure projects with approximately 37 percent contribution by the private sector to meet the sustainable development goals (SDGs) by 2030. 

A look into the past finds that during the decade-long period starting from FY 2064/65 to FY 2074/75, the infrastructural achievements, albeit in a certain sectors, seem to be promising but in others it is very dismal.

Infrastructural Progress
In this period, the total public spending in the sectors as listed in the accompanying table has averaged Rs 30 billion per annum. Private sector participation in telecommunication, information and broadcasting, power, hospitals, schools and colleges has been so promising that the overall performance has improved whereas the investment by the government in roads, airports, rail and water ways, industrial parts etc does not show encouraging results. The whopping jump to Rs 150 billion per year in allocation to infrastructural projects from the FY2074/75 signals a fresh wave of strategic thinking heralding a new era of investment similar to what was done to rebuild Europe post-World War II through the Marshall plan. Even such a high allocation seems to be inadequate against the backdrop of projected outlays needed to meet our set sustainable goals by 2030. Furthermore, if the inefficiencies in implementation and the corruption in spending are factored in, the fund requirement escalates to astronomical heights.

Therefore, though resource mobilization is a key agenda, there are many other associated issues which need to be addressed in order that the capital output ratio and the productivity thereof are enhanced. The achievement for the period starting from FY2064-65 to FY2074/75 with an outlay of approximately Rs 30 billion per year is not very encouraging in the government sector. It may also be the case that blindly pouring funds in any infrastructure project may contribute to GDP growth but not to the welfare of the people. The absence of a coherent complimentary approach to public spending in projects and the federalism and populism of today’s politics may further escalate the chaotic and ad-hoc nature of selecting and implementing them, thereby, rendering them counterproductive. Hence the need is to take a totally new approach based upon judicious selection, uninterrupted supply of adequate funds, emphasis on quality and timely execution, adhering to the latest futuristic technical parameters, and providing the optimum consumer satisfaction only will justify the jump in allocations.

Need for New Approach
A new approach to infrastructural funding has become a new necessity. The traditional approach so far has been that because of some inherent factors the infrastructural services are the monopoly domain of the public sector. These services involve high upfront costs, long payback period, bulky and lumpy investment and hence are very risky. They are characterised by the existence of varied types of externalities which make it very difficult for promoters to recoup investment and operational costs through the levy of charges. Consequently, the private sector has always been shy in looking at these investment opportunities especially when the government intervention is too high in the name of the welfare of the people. Therefore, so far the burden of infrastructure development has fallen on the weak and overloaded shoulders of the government. Though NPC has envisaged a 37 percent private participation in this sector, it is yet to rollout a conducive plan whereby the private sector is motivated to pour in funds.

There is an urgent need to supplement government investment in infrastructure by private capital flows - both domestic and foreign. Simultaneously, there is also a need to improve the performance of outlays by avoiding wasteful inefficiencies, stressing the importance of maintenance, and by controlling corruption which only will increase consumer satisfaction. To make this possible, commercial principles of investment and operation will have to be applied. Profits will have to be the ultimate motive. Risks will have to be reduced.

Competition will have to be encouraged by more and more services providers. These adjustments, along with a larger allocation, would call for a major shift in policy frameworks, legal reforms in existing laws, comparatively advantageous fresh legal enactments and institutional changes. But bringing about such changes requires a political will and a meticulous homework. Because of the many risks involved in the implementation of infrastructural projects, the possibility of raising commercial finance and resources is crucially dependent on the appropriate mitigation and management of risks. If the private sector participation in infrastructure development has to proceed substantially and sustainably, both the perception and the reality of risks need to be reduced. The onus for this lies on the government.

First and foremost in the direction of revamping the investment in infrastructural sector will be to critically examine all those projects on which decisions were taken long back but are languishing incomplete, for their relevancy and validity in today’s changed context. Many of these projects may have lost their usefulness or may require designing and reshaping them afresh. It is better to scrap them if they are not saleable in the market locally or globally or reshape them to suit today’s context. 

There has to be a cultural shift to a platform from which the public and the private sectors can work together as equal partners. If the dream of NPC to involve the private sector in infrastructure development projects to the extent projected has to be realised, it will have to embark upon an intensive campaign to change the mindset of the bureaucrats and the legislators to that of promotion rather than to that of control, to that of equal partners rather than that of client, to learn to work with them synergistically rather than dictating them. The role of the detailed project report, its quality authenticity and legality will go a long way not only to attract private sector but also to improve the productivity and the efficiency of the projects as the responsibility and accountability of each stake-holder will be transparently defined and will be enforceable by the rule of law.

We do have a sectoral policy framework for each infrastructure sector and long back we have legislated umbrella acts of BOOT and others also but these laws call for reform as they are not contemporary in terms of their advantage over similar laws elsewhere. The proof of the pudding will be in how much these laws gain the trust of the private investors, especially from outside in facilitating ease of executing these projects and minimising the risks.

We should recognise that there will be continued need for government support in most of the projects. Investing in infrastructure is risky during the construction period and in the initial years of a project before a clear income steam emerges. The government should, therefore, consciously use its scarce resources to take significant equity position which otherwise would not receive adequate funds and use this participation to motivate to crowd in commercial equity funds as well as debts from different sources. In this context, government guarantees play a significant role in assuring the private sector against not only the sovereign risks but also the risks of repayment.

Apart from the quality of DPR, the execution of the project in time requires a constant flow of funds, co-ordination among various agencies, the use of right technology and the competent specialised managerial manpower. Managerial efficiency is equally important for qualitative and quantitative performance. But the managerial aspect has so far been grossly undermined. Of course, the main reason for involving the private sector in infrastructure development projects is to bring in their skills in improving efficiency at the execution and delivery level. But it is equally important that the level of capability of the co-managers from the government side match theirs in skill and commitment so that a complimentary approach can be created for the benefit of the project. It is important that a detailed project report defines in it all types of various parameters adequately and transparently so that it is fully comprehensible to all stakeholders including the promoters. 

The reasons for shifting to infrastructure investment as core strategy lies in speedier growth and the welfare of the people. If Nepal has to retain its respectability among the comity of nations, it cannot afford to remain in the least developed nation status forever. It has to upgrade itself soon which Nepal has already committed to meeting certain goals by 2030. The infrastructural investment has that potential to speedup growth as it has multi-dimensional backward and forward linkages in terms of employment generation at all levels, boosting industrialization for construction material, skill enhancement and overall economic activity and its expansion. 

These accrued benefits will flow only if the policy framework for infrastructural investment is accompanied by the right procurement policy, human resource development and the application of labour laws in these enterprises in right earnest. International bidding and contracts should bring in investment, technology, skills and managerial competency but material inputs and unskilled workers should be indigenous only. The tie-up between local industries with the infrastructural project will not only boost investment in producing the right products but also will improve quality and cost so as to enable them to be exported.

Last but not the least, the culprit for lackadaisical approach of the private sector to these projects has been the rampant corruption associated with them at every step starting from conception to execution. This nexus inflates cost, allows time-delays, compromises technology, quality and design. Adhocism creeps in at every level of decision making and monitoring. Recent times have witnessed an awakening among the masses towards this malady. They have started realizing that these maladies deprive them of the benefits of these projects. Democracy and federalism have further compounded such deprivation. However, slowly and steadily, these malpractices are getting exposed, watch-dogs are being formed at consumer levels and there is a vociferous demand that the projects are conceived and implemented in a more transparent manner. This augurs well for the future.

Governments across the world are becoming more responsible and serious to tackle this issue and successes are becoming visible out of their efforts. Nepal also has to address this malady more seriously so that the resource crunch that it faces today may be eased not only by participation of the private sector but also the private equity funds available globally.

The author is the chairman of Nimbus Group.

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