The country sorely lacks infrastructure which is key to higher growth trajectory and to ensure smooth delivery of public services. Against this backdrop, the government has prioritised physical and digital infrastructure to exploit growth potential and achieve its goal of graduating to middle-income country by 2030.
Physical infrastructure – mainly connectivity and energy – are critical and have been identified as major constraints to growth. There is an urgent need to develop major infrastructure like energy, road connectivity, transport infrastructure, irrigation, water supply, information and technology, among others. Some regional common infrastructures like roads, railways and cross-border electricity transmission lines are given priority as they bring down the cost of international trade and enhance economic cooperation at the regional level.
The new periodic plan, 15th five-year plan (2019/20 -2023/24) has targeted completion of few crucial infrastructure projects within stipulated timeframes. The 15th plan has targeted to complete 17 mega projects within 2023/24 namely: Sikta, Babai, Ranijamara-Kulariya Irrigation Project; Bheri Babai Multi Purpose Project; Gautam Buddha and Pokhara Regional Airports; Nijgadh International Airport; Kathmandu-Tarai Fast Track; Mid-Hill Highway; Postal Highway; Koshi, Kaligandaki and Karnali North-South Corridor; Melamchi Water Supply Project; Upper Tamakoshi Hydel Project; Robust Transmission Highway and develop Lumbini region as per its masterplan. The government has announced completing Upper Tamakoshi Hydel Project, Melamchi Water Supply Project and Gautam Buddha international Airport by 2019/20.
The country’s emergence from the conflict and devastating earthquake has been facing crippling challenges in public service delivery such as electricity supply, drinking water, road connectivity, supply of food and drugs to remote areas. The living standards of the people in remote parts of the country has not improved.The recent Human Development Index (HDI) unveiled by the United Nations Development Program shows that Nepal slipped five spots from 144 to 149 among 189 countries of the world in terms of human development.
Infrastructure projects initiated by the government are often delayed and even the quality has been compromised. According to Shankar Sharma, former Vice President of the National Planning Commission, it takes on average 11 years for the completion of development projects in Nepal.
“Robust connectivity, regular energy supply, irrigation and ICT development should be given top priority to unleash Nepal’s growth potential and uplift the living standards of the people.” Dr. Sharma told Business 360.
“Infrastructure development will create low-hanging fruits for the business community, they will expand economic activities. Similarly, the small medium enterprise will get an opportunity to be integrated in the value chain.” Dr. Sharma laid emphasis on time-bound execution of the development projects to ensure development dividend among the people, saying that and that it is the aspiration of the people taking part in political changes to expect development and a better life.
Infrastructure financing is a key challenge being faced by the country since long. It is reported that country must invest $13 billion to $18 billion within the next 10 years to bridge the yawning infrastructure gap or infrastructure bottleneck. As per World Bank’s 2010 estimates, the country needs to invest nearly 12% of its GDP annually for a decade to bridge the infrastructure gap. From 1975 to 2009, the country’s investment in infrastructure remained very low at mere 5% of the gross domestic product.
In recent years, government has been allocating around $3 billion every year for infrastructure development, yet it is insufficient. The government’s allocation in the fiscal budget for development of infrastructure has increased to around 13% of the GDP now but the resources have not been utilised properly and efficiently, and quality of works are often questionable. High allocation for infrastructure projects should go hand in hand with effective utilisation of resources but lack of project handling capacity has been an obstacle to deliver desired results. Some critical infrastructure projects like 456 MW Upper Tamakoshi Hydroelectric Project, Melamchi Water Supply Project, Gautam Buddha International Airport have missed deadlines set by the government several times. “The situation of lack of commitment and accountability by project implementation units and leadership must be improved for the timely execution of development projects,” said Laxman Aryal, Secretary of the National Planning Commission.
Apart from government financing, the government has plans to mobilise funds from the public for infrastructure development which means the government will issue shares of such projects in the market. This has been initiated so far in energy projects. The government has targeted to develop 3500 MW hydel electricity from this model under a program titled, ‘Nepal’s Water Resources, People’s Investment’.
The government has also been seeking support from development partners for East-West Railway. Finance Minister Yubaraj Khatiwada has shared that he has approached three multilateral banks: Asian Development Bank, World Bank and the Asian Infrastructure Development Bank to get support. The government has also started dialogue with China to develop the Trans-Himalaya Railway connectivity under Chinese government’s Belt and Road Initiative (BRI).
The recent developments in infrastructure financing is called blended finance which offers the possibility to scale up commercial financing for developing countries and to channel such financing toward investments with development impact.
Lending capacity of banks has been increased. A mandatory rule of the Nepal Rastra Bank is to issue 25% of total loan to productive sector and 15% to agriculture and energy. By the end of fiscal 2019-20, independent power producers’ will contribute around 1000 MW of electricity to the national grid whereas the Nepal Electricity Authority will have a total of 624 MW capacity. The government has been also encouraging the private sector in infrastructure development by introducing the instrument of viability gap funding (VGF).
Most importantly, the government has invited foreign investors to invest under public private partnership model in infrastructure projects. According to Maha Prasad Adhikari, CEO of the Investment Board Nepal (IBN), investors who participated in the Investment Summit last month have expressed interest to invest in 31 projects worth $ 25 billion, mostly in infrastructure projects.
The government with the support of the World Bank has completed widening of the Mugling-Narayangadh section of the Prithvi Highway. Similarly, widening of East-West Highway has been initiated with support of ADB and the World Bank. The cross-border transmission line (Butwal-Gorakhpur) and 300 km high capacity 400 kV transmission line (Hetauda-Galchhi-Damauli-Sunwal (Indian border) will be developed with the support of US government’s Millennium Challenge Corporation.