Print Edition - 2014-11-12 | MONEY
The great infrastructure drive
Nov 11, 2014-
While the much-talked-about power trade agreement (PTA) with India has opened a new avenue in power trade, the power development agreement (PDA) of Upper Karnali Hydropower Project has given much-needed confidence to foreign investors.
If things go as planned, one more PDA (on Arun III) will be signed, possibly during the upcoming Saarc Summit. After the completion of the financial closure, 140MW Tanahun Hydropower Project is all set to enter the construction phase. New multilateral banks—China-backed Asian Infrastructure Investment Bank (AIIB), and the proposed SAARC Infrastructure Bank—could be new funding sources for the country’s infrastructure development.
The government is preparing to invest half of the $1 billion line of credit pledged by India in the 600MW Budhi Gandaki Hydroelectric Project and other irrigation and road projects. This is expected to change the face of the country’s infrastructure.
The government has selected three Indian companies for request for proposal (RFP) for the Kathmandu-Tarai Fast Track, while Rs 9-billion Nepal-India cross-border petroleum pipeline through cooperation between Nepal and India has made headway.
In the tourism sector, a contractor has been shortlisted for the upgradation of Gaut-am Buddha Airport in Bhair-ahawa to a regional international airport. The government has also asked soft loans from China Exim Bank to construct a regional international airport in Pokhara.
These developments suggest the country is heading towards a great transformation in infrastructure, which has so far remained poor and one of the biggest bottlenecks in economic development. “There has been promising development in the infrastructure sector lately, and it has the potential to transform the country’s fortune,” said Shankar Sharma, former vice-chairman of National Planning Commission.
Confederation of Nepalese Industries (CNI) Senior Vice-president Hari Bhakta Sharma said industrialists were the first to feel heat of infrastructure bottleneck. “Now, as normal life has also been affected due to power outages, the government is under pressure to ease the situation,” he said. “As a result, infrastructure has got new focus from all stakeholders.”
As the 13th Plan (2013-16) aims to graduate the country to the developing country status by 2022 from the current least developed country status, there is a need for an investment of Rs 9,696.76 billion (at constant price) and an average economic growth of 9.2 percent, according to NPC. A World Bank report states Nepal faces a funding gap of $13-18 billion in infrastructure between 2011 and 2020.
Given this context, the government has given top priority to infrastructure, with the sector getting 48 percent of the total budget for this fiscal year. In the new “Development Cooperation Policy 2014” the government has focused on attracting foreign aid for infrastructure, especially physical infrastructure.
Donors have also prioritised the sector. In the World Bank’s new Country Partnership Strategy for Nepal 2014-2018), it has focused on two pillar strategy—first, financing to infrastructure including in hydropower, transport connectivity and business environment, and second, investment to agriculture productivity, health care, skill development and social protection.
The Asian Development Bank has eyed transport, energy, water, and other basic public services such as education and skills development.
In line with the policy changes, both the global lenders have come up with a plan to invest in the hydropower sector of Nepal. The World Bank has pledged aid to Kabeli, while ADB has pledged funding to Tanahun hydropower project.
Nepali private sector leaders have also realised the business potential in infrastructure. There are already many hydropower projects being developed by the private sector, while other potential investment areas being transport, agriculture, tourism and urban development infrastructure, among others.
CNI’s Shama said both the government and the private sector have realised they have to take the responsibility to remove the infrastructure bottleneck. “There is more room for attracting investment from the private sector through policy reforms and confidence building measures,” he said.
The opening of the new funding avenues has made the government optimistic. International Finance Corporation (IFC) and ADB have already got approval from the government to raise funds by issuing Nepali rupee bonds. They plan to raise around $1 billion in the next seven years.
South Asian nations are expected to sign a Saarc Energy Framework Agreement during the upcoming Saarc summit, enabling power trade across the region.
The opportunities, however, come with many challenges. And the biggest one: Unfavourable political and policy environment. CNI’s Sharma said whether the new constitution would be promulgated is a matter of big concern to foreign investors. He, however, said that increased domestic private sector investment would eventually attract foreign investment.
“In many cases, political parties have obstructed development projects in the name of locals,” said former NPC vice-chairman Sharma.
“The political parties should not have different stance on development when they are in power and when they are not.”
On the other hand, the government does not have enough big ready-to-go projects. This is why it took more than three months for the government to identify projects, in which $1 billion line of credit pledged by India would be invested.
In order to develop projects under the public private partnership (PPP), there is Build, Own, Operate and Transfer (BOOT) Act, but only a few projects have been developed under the model.
Tulasi Sitaula, secretary at the Ministry of Physical Infrastructure and Transport, said the BOOT Act has provisioned a lengthy procedure of clearance. There is no policy as such for PPP. The government is now in the process of introducing a new Act on PPP, which, according to Sitaula, will cut the procedural delay.
Land acquisition issue is another area where infrastructure projects are facing problems. “The problem is much serious in donor-funded projects,” said Sitaula.
As a result of compensation dispute, transmission lines such as Khimti-Dhalkebar, Thankot-Chapagaun-Bhaktapur Tranmission, and Kabeli corridor, among others, are moving at snail’s pace.
Sharma said the government can neither acquire land on time, nor it can enforce the existing land acquisition Act. This has encouraged those obstructing infrastructure projects.
Contract-related problems are also delaying projects. For example, work on postal roads has almost stalled after the contractor ran away.
“There is trend of a single contractor occupying many projects at a time,” Sitaula said. “Also, the contractors do not implement projects immediately after receiving the advance payment.”
Melamchi Drinking Water Project, and all four hydropower projects being developed by NEA—Upper Trishuli A, Rahughat, Chameliya and Kulekhani III—faced contractor-related problems, pushing up costs and completion time.
The government, in the budget for this fiscal year, has announced a number of reform measures to help early implementation of infrastructure projects. The new Land acquisition Act, Amendment to Public Procurement Act, New Foreign Investment and Technology Transfer Act and Policy, and new Electricity Act, among others, have been planned.
According to government sources, the new land acquisition Act would enable the government to acquire the land at market rates.
The amendment to the Public Procurement Act would end the practice of the awarding contracts to the lowest bidder without considering other areas.
Major Infrastructure Projects
Major Infrastructure Projects
(under-construction and planned)
- Upper Karnali Hydropower Project
- Arun III Hydropower Project
- Pancheshwar Multipurpose Project
- Budhi Gandaki Hydropower Project
- Upper Tamakoshi
- Kulekhani III
- Upper Trishuli IIIA
- Tanahun Hydropower Project
- Sanjen Lower Hydropower Project
- Sanjen Upper Hydropower Project
- Rasuwagadhi Hydropower Project
- Gautam Buddha Airport upgradation
- Pokhara Regional International Airport
- Sheraton Kathmandu
- Kathmandu-Tarai Fast Track
- Kathmandu-Hetauda Tunnel Highway
- North-South Corridor Roads
- Nepal-India Petroleum Pipeline Project
Published: 12-11-2014 09:49