At a time when the country requires around $13 to 18 billion by 2020 to bridge the investment gap in infrastructure, the government’s abrupt announcement to build the Kathmandu-Nijgadh fast-track project on its own while negotiations were ongoing with an Indian company is likely to discourage private and foreign investors in the days ahead.

Three weeks ago, the Nepali Congress President, Sher Bahadur Deuba, argued at Parliament that such naïve decisions would send a wrong message to potential foreign investors, especially when talks with the Indian company were at their final stage and a case pending at the Supreme Court. Prime Minister KP Oli refuted such claims by declaring that the country was capable of executing the project, both in terms of technology and resources.

Learning from others

As the government continues to fall behind in its spending capacity and infrastructure development, it is widely believed that Nepal lacks the institutional ability and technical expertise to develop such large-scale projects. “The government cannot handle such big projects since Nepal does not have the experience. The most appropriate way out would be to seek international expertise with the tender process,” said Sujeev Shakya, an economic analyst. Although Nepal envisages large infrastructure projects every year, its capital spending capacity was only 22 percent this fiscal year. Considering Nepal’s shortcomings, development financing through foreign investment is seen as indispensable for meeting the requirements for large infrastructure projects such as the fast-track. “We should be looking at it purely through commercial eyes. Otherwise, investors will just run away from Nepal,” Shakya added.

Vietnam and Ivory Coast, two countries now considered relatively stable both economically and politically following decades of unrest, plan to invest around $50 billion in infrastructure projects through the public-private partnership model within 2016-2020. Investments of billions of dollars in rebuilding roads and railways in Ivory Coast resulted in an estimated nine percent growth in 2015. Vietnam, whose growth has been among the highest in South Asia in recent years, also announced last year that it would create favourable conditions to encourage more private and foreign investors, since it heavily relied on state coffers for developing infrastructure and such projects were said to be more prone to corruption. “We should learn from such nations. Our politicians and bureaucrats visit such countries to take stock of development activities but that’s about it,” said Shakya.

 Strategically important 

The erstwhile Sushil Koirala-led government, through an international tender bidding process, gave the responsibility of a detailed project report to an Indian company—Infrastructure Leasing and Financial Services private limited (IL & FS). However, the final nitty-gritty of the project was stalled after the Supreme Court stayed the process of awarding it to the Indian consortium. The project was negotiated under the BOOT model, in which the private company would construct the road and generate revenue for a certain period of time before handing it over to the government.

As per the initial negotiations with the Indian developer, the estimated cost of the project was $1.18 billion—Nepal government chipping in $150 million, IL & FS investing $200 million, using the $750 million offered by India as soft loan and raising the rest of the amount through the market as loan. Projections suggest that the Indian company will likely make around $20 million per year for 25 years, after which the track would be handed over to the Nepal government. The World Bank in 2014 had estimated that the cost of the project could reach up to $1.30 billion. After widespread criticism of the deal, the final round of negotiations was left.

Some quarters have also dismissed Deuba’s insistence on handing over the project to the Indian company, as IL & FS’s local representative happens to be his brother-in-law. Surya Raj Acharya, an infrastructure development expert, pointed to the need for caution about foreign investment in projects that are for domestic consumption and not of “a commercial nature”. “And since the company does not have to invest any money at all as per the financial structuring of the project in the PPP model prepared by the previous government, there is no relevance of foreign investment in this project. It is all our money,” he said.  

However, no notable homework has been done on the modality the government wishes to undertake while financing the project or give the negotiations with the Indian company a logical conclusion, apart from announcing that funds would be allotted to the project for the next fiscal year in the budget.

The 79-km track is seen as a strategically important route to connect the Capital with the Tarai region, and significantly the major border trading point in Birgunj. The road will reduce the travel distance to the Tarai by around 200 kilometres and four hours. Construction of a second international airport in Nijgadh is also under way. Religious tourists arriving in Nijgadh will reach Janakpur in an hour and Lumbini in four hours.

Populist budget

Critics say that the prime minister’s overly ambitious plan is an attempt to portray himself as an ultra-nationalist force to gain some quick publicity. The populist budget presented by the UML government this week has announced an increase in government officials’ salaries by 25 percent. It has doubled the allowance for senior citizens, widows and marginalised groups, and added another Rs15 million to the Constituency Development Fund (CDF), to be spent at the discretion of the lawmakers. Economists believe such provisions could create further inflationary pressure if the increments are not adjusted in proportion to the current rate of inflation, ultimately hitting the poor the hardest.

 In the recent 14th periodic plan laid out by the government for 2016-19, it plans to invest Rs2.39 trillion, but private sector contribution is put at a reduced 53.5 percent. Private sector investment has remained over 70 percent in recent years. Public sector investment is planned to be at 40.6 percent, a significant rise of 31 percent from the 13th plan. “If the government’s investment is used in much-criticised programmes like the CDF rather than in large infrastructures, it will be a wastage,” said economist Keshav Acharya. 

With the government opting to keep the Indian company that was in negotiations to build the fast-track stranded and indicating that it plans to reduce the proportion of private sector investment in the next three years, it will have to put in some extra effort to regain the confidence of both domestic and foreign investors if it wants Nepal to graduate to a developing country by 2022.

Ghimire is a desk editor with The Kathmandu Post