Nepal Purbadhar

बिहिबार, माघ १२, २०७९
Thursday, January 26, 2023

बिहिबार, माघ १२, २०७९
Thursday, January 26, 2023

Nepal’s infrastructure development and low participation of the private sector

Basic infrastructure projects have not yet been developed in Nepal as this sector is still not on high priority of the government. Ninety percent of the infrastructure sector is in the hands of the government. The condition of the infrastructure has become pathetic because the government reserve authority to develop and maintain such structures. The budget allocated for this sector has not been spent sufficiently. Since only limited areas are allowed, the participation of the private sector in infrastructure development has not been complete. The private sector has not yet been able to enter the construction of road infrastructure. All small and big road infrastructure projects are being built by the government itself.

The participation of the private sector in road infrastructure can be seen, but it is being done as a contractor rather than as an investor.  However, The private sector has overtaken the government in power generation in about 3 decades since it entered the development of the energy sector. A lot of work in urban development has been done by the private sector. The development and control of big cities are still being done by the government. When it comes to drinking water and sanitation, the government has been doing it from below. 

The participation of the private sector in road infrastructure can be seen, but it is being done as a contractor rather than as an investor.  However, The private sector has overtaken the government in power generation in about 3 decades since it entered the development of the energy sector. A lot of work in urban development has been done by the private sector.

The government has invested itself and established industrial parks and special economic zones (SEZs) for the industrial sector promotion. Basic infrastructure such as transport, energy, urban development, drinking water, and sanitation, along with these 4 main ones, information and communication technology also comes into it. Compared to other sectors, the development of information technology has taken a big leap.

Problems in the infrastructure sector

There is a problem that the infrastructure projects cannot be built and the projects that have already been built are delayed due to the lack of capacity of our government’s system to work. That’s why the situation of infrastructure development in our country is not good. Since there is no basic infrastructure required for this, the cost of doing business is becoming expensive and our ability to compete is also decreasing. If we look at the situation till now, the slow pace of our development is due to a lack of good infrastructure. 

State of infrastructure development in neighboring countries

In India, the government and the private sector are working together in the field of road infrastructure construction. The private sector is also operating rail lines there. The private sector railway station is built and operated at its own expense. Talking about other neighboring countries, in Sri Lanka and Bangladesh, the responsibility of infrastructure development is gradually going to the private sector.

Does the infrastructure sector need to be ‘deregulated’ or not? Who will build the infrastructure? First of all, its area should be determined. The work done by the government and the private sector had to be separated. The private sector has to look at the return and work. The government should create an environment that ensures return on investment to bring the private sector into infrastructure development. If the invested infrastructure sector is not profitable, the government should provide Viability Gap Funding (VGF).

What is the capacity of the Nepali private sector in building large infrastructure projects?

The capacity of the private sector has not been assessed as it has not yet entered into the development of large projects in other sectors. However, in terms of capital investment within the country, Nepali investors and entrepreneurs have not yet developed the ability to bear that much risk. 

On the other hand, Nepali Bank does not have the capital for long-term investment projects. Although, the government should give access to infrastructure development work that can be done by the private sector. With the entry of the private sector, the capacity of the government also increases. Thus, the government should also encourage the private sector to invest in good and profitable infrastructure to upgrade its capacity. For this, the government should make policy. The old policies should also be praised and moved forward.

An environment should be created to make the investment in other projects of basic development that need to be developed profitable, but it does not seem to be working. The Public Private Partnership (PPP) model is considered suitable for raising investment in the infrastructure sector.

With the entry of the private sector, the capacity of the government also increases. Thus, the government should also encourage the private sector to invest in good and profitable infrastructure to upgrade its capacity. For this, the government should make policy. The old policies should also be praised and moved forward.

When investing in an infrastructure project in the PPP model, it means sharing the risk. Prior to this, in the third investment conference held in 2019, the then finance minister Yuvraj Khatiwada stated that the government does not have the capacity to bear the investment risk of PPP model infrastructure projects. He said that the government considered the private sector as a big pillar and called for investments to increase the participation of the private sector in the construction of infrastructure projects. This is a contradiction. The private sector does not have the capacity to invest in large long-term infrastructure projects. 

Shipping costs increased when Birgunj port came under construction

Talking about the transport infrastructure, currently, the train operating towards Nepal is only in Birgunj dry port. Including the establishment of Birganj dry port, the monopoly of Container Corporation of India in Calcutta and Visakhapatnam has been broken. Ultimately, its positive effect will be on the improvement of the country’s economy. Therefore, now our government and the private sector must separate the investment sector as a matter of policy. The investment in infrastructure projects should also be specified. Which project is necessary for the welfare of the country? Looking at that, a project bank should be created.

Government’s responsibility

In terms of time, the private sector builds infrastructure projects quickly, while the government’s pace is somewhat slower. For this, before giving the project, a decision can be reached by discussing the returns to be received by the private sector and bearing the investment risk. By doing this, it is possible to complete the infrastructure project within the stipulated cost and time. This work cannot be done by the private sector alone. The ability to raise resources from Nepali banks and financial institutions alone is not enough. Another thing is risk-bearing. The government should make policy provisions to ensure return on investment, compensate in case of project problems, and allow foreigners to repatriate the profits earned here.

The private sector alone cannot take the risk of big projects and invest. However, if the government manages financial resources and transfers the risk, the private sector will always be ready for investment. Currently, no matter how many infrastructure projects are being brought forward by the Investment Board, the government is not transferring the risk of investment in these projects. From here, the role of the investment board is only to give the project to the investors who ensure the bank’s investment, prepare the detailed study report (DPR) of the project and force them to proceed with the construction. In some projects, the government itself has set the condition of non-investment share. This increases the cost of the project and reduces the share of the investor’s profit.

The private sector alone cannot take the risk of big projects and invest. However, if the government manages financial resources and transfers the risk, the private sector will always be ready for investment.

 If the Birgunj dry port is being operated by Pricing Logistics, the government has stipulated that it should pay 50 percent of the profit received from it in case of traffic exceeding the amount mentioned in the contract. Such provisions discourage investors.

It seems that investors are discouraged by the fact that the responsibility of the government is to ensure the percentage of the private sector through competition. Why should the government seek a share of the profits? Instead, we should start creating an environment in which more investors will come to this sector. By doing this, investors are encouraged and it gives positive results.

Negative thinking toward profit

Our government system (system) does not want to take risks for infrastructure project development work. We are also lagging behind in infrastructure development with the mentality that if the private sector is allowed to make projects, it will benefit. In the past those who allowed the construction of that project with foreign investment, it is not right to come and criticize them today. Instead, it is necessary to learn from the shortcomings of the past and move forward. The political instability of the country is also disrupting the development of infrastructure projects. We are falling behind due to problems such as change of government in a short period of time, projects advanced by one government are not supported by the other government. Therefore, rather than saying that the private sector is profit-oriented, it is important to understand that the private sector is working. It is necessary to bring about a change in thinking. Even though every meeting of the Investment Board is chaired by the Prime Minister, the Investment Board has not taken risks in any project to date. This thinking needs to change.

 Infrastructure Conference and its purpose

 The Confederation of Nepalese Industries (CNI) is organizing the fourth infrastructure conference on September 8th and 9th. The main theme of this time is ‘Infrastructure Development for Prosperity’ and the aim is to circulate the message that the next stage of development cannot be reached without infrastructure development through higher investment.

We are making arrangements to narrate success stories from experts involved in these projects. We believe that Nepal can also take inspiration from this in the development of big projects. We expect around 700 people to participate in the conference. The private sector will also showcase its projects on the occasion.

 (Based on a conversation with Ashish Garg, Chairman  who is chairman of the Infrastructure Committee of CNI) 

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