Reap what you sow

  • Saarc Kathmandu Summit provides lessons on capital expenditure that must be replicated through the fiscal year
Reap what you sow

Dec 18, 2014-

The 18th Saarc Summit in Kathmandu was a success in multiple ways. Apart from strengthening trust among the heads of state and government of the Saarc member countries, the Kathmandu Summit resulted in an important agreement on energy cooperation and a strong commitment to finalise two more agreements on railways and motor vehicle movement within three months.

For Nepal, the Summit provided an opportune moment to realise two things that have been long sought after—agreements in areas of security, agriculture, tourism, medicine, youth exchange, urban development, vehicular movement, and hydropower development between Nepal and India; and a facelift of select parts of Kathmandu, including infrastructural transformation. Of the 12 agreements/Memorandums of Understanding (MoUs) signed with India, most were possible because of the proactive role played by the team of Indian Prime Minister Narendra Modi, who has accorded high priority to neighbouring countries.

When there’s a will

The most fascinating aspect during the Summit was the select infrastructural transformation in Kathmandu, which started three months prior to the Summit. In less than one quarter, the main arterial road linking Tribhuvan International Airport to major hotels and public spaces was transformed. The rapid facelift was highlighted in mainstream and social media, where the government was commended for fast-paced work that delivered tangible results. Importantly, it provided some hope to a section of the Nepali population that had lost its faith in the political class, the government, and the bureaucracy. Even more fascinating was the fact that the infrastructure work—upgrading the road, installing solar lights, and constructing pavements, paintings, and greenery—of this scale happened in less than four months, compared to the years wasted in planning, consultancy, cost variations, corruption, and bureaucratic indecision.

This provides an important lesson that needs to be replicated throughout the fiscal year and across the country, especially in projects that have high capital expenditure components. The entire political leadership, coalition government ministers, the ministries they are in-charge of, and the bureaucracy focused on one task—ensuring that the required infrastructure works are finished prior to the Summit. The Ministry of Physical Infrastructure and Transport worked in tandem with the Nepal Electricity Authority to upgrade the roads and install solar lights, respectively. Similarly, the Kathmandu Valley Development Authority, Home Ministry, Ministry of Urban Development, Kath-mandu Metropolitan City Office, Prime Minister’s Office, Ministry of Finance, and National Planning Commission provided necessary support. Coordination among these institutions led to timely spending (most likely more capital spending than initially allocated for the Saarc Summit), stimulation of local economies, and more jobs for unskilled and semi-skilled workers.

Imagine how infrastructure would be transformed throughout the country if the government and bureaucracy continued with the same energy in fully spending the entire capital budget allocated for the fiscal year 2014/15? For comparison, while total spending (both capital and recurrent) for the Saarc Summit was below Rs 3 billion, the total capital budget for the fiscal year 2014/15, as announced in Finance Minister Ram Sharan Mahat’s budget speech, is Rs 116.8 billion. Nepal faces a unique ‘capacity paradox’: it has sufficient capacity to fund basic infrastructure, as indicated by the low fiscal deficit it runs every year (even a surplus in the fiscal year 2012/13), but it simply cannot spend its funds, especially the capital budget. The average capital expenditure absorption rate (the difference between planned and actual capital expenditure) was about 71 percent in the last decade. Absorption capacity is primarily determined by the skills mastered by the bureaucracy over time, the state of infrastructure, and the quality of institutions. In the case of the Saarc Summit, all three determining factors were in sync with each other, resulting in higher capital spending than budgeted and in turn, transforming infrastructure in select parts of Kathmandu.

Spend it all

Higher capital spending is needed to build physical infrastructure such as roads, hydropower, sewerage, drinking water, irrigation canals, and to acquire land for development purposes—all vital to not only create temporary job opportunities, but also to ‘crowd in’ private investments in both infrastructure and associated service activities. Unfortunately, cumulative capital spending over July 16 to December 1 of the current fiscal year reached just 6.7 percent of total planned capital spending, around the same level achieved in the corresponding period of the last fiscal year. This indicates that even though select areas of Kathmandu saw higher and accelerated capital spending, the overall spending pattern in other parts of the country hasn’t changed much. It is highly likely that the pattern of capital spending will be the same as in the previous year, irrespective of a timely full budget—in the fiscal year 2013/14, about 60 percent of capital spending happened in the last three months.

The time is right to strengthen the tenuous harmonisation and consistency among the political class, institutions, and the bureaucracy, and replicate the brief success in transforming infrastructure in select parts of Kathmandu to the rest of the country. This should eventually enable the government to allocate as well as spend its capital budget to the tune of eight percent to 12 percent of the GDP annually, as required to close the infrastructure deficit, propel economic growth beyond nine percent annually from the existing sub-five percent rate, generate enough employment opportunities to retain a part of the 1,500 migrants who legally leave the country each day for work overseas, and boost per capita income.

A national drive with an urgency to increase both the volume and quality of public capital spending could hold the key to accelerated infrastructure development in Nepal. This would require coordinated action on a number of bureaucratic fronts, including project planning in terms of readiness, project approvals, budget sanctioning, procurement, contract and consultant management, and monitoring and evaluation. The political class and constitutional bodies (such as the Commission for the Investigation of Abuse of Authority) need to judiciously provide a helping hand.

Shakya holds an MA in Economics from Tribhuvan University

Published: 19-12-2014 09:25

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