‘The government didn’t do its homework before the investment summit’

Mar 27, 2019-

The KP Sharma Oli government is all set to host the investment summit later this week, showcasing dozens of projects to hundreds of international investors. Nepal opened up its economy to private and foreign investments in the early 1990s, when the Nepali Congress-led government adopted economic liberalisation.

Ram Sharan Mahat, former finance minister, was one of the key players to lead the first generation reforms during that time as the vice-chairman of the National Planning Commission. This week, the Post’s Mukul Humagain caught up with Mahat to talk about the investment summit, reforms in the foreign direct investment, the state of the economy and the Oli administration’s performance. Excerpts:

We hear you’re working on a new book. What can you tell us about it?

The new book is essentially about political economy of contemporary Nepal and will cover the post-2005 period. It will dwell on the various aspects of contemporary politics, including the present constitution and the debate over socialism.

By socialism, I’m referring to the socialism in the present context, not in the classical sense people often interpret it. Socialism in the present world is fiscal redistribution—you generate wealth and income by promoting entrepreneurship, by attracting investment and by encouraging market forces. And when the state treasury is full, you can spend the resources for social justice.

Socialism is also a catchword for the Oli government, which has been launching social security schemes. The government’s defence in having these programmes is that they are following what the constitution has said.  How do you view it?

Our constitution clearly says that socialism will be achieved through democratic norms and values, including the people’s competitive multi-party democratic system, civil liberties, fundamental rights, periodic elections, free press and independent judiciary.

Socialism is basically uplifting the living condition of the poor through sustainable development, poverty alleviation and social justice. The actions of the current government may be socialist in nature, but whether the country can immediately afford it is the key issue. In principle the schemes are not bad, but they should not just be for publicity.

There are also questions about whether they can be fully implemented, and whether small and medium enterprises (SMEs) can afford it. I hear that many SMEs are yet to register in the social security scheme due to financial burden. The real issue here is strengthening Nepal’s economic capabilities. For this, you have to promote investments and expand economic opportunities.

That means, given the state of our economy, this government could have waited for some time to launch these schemes?

I cannot say whether or not it was the right time to launch these schemes. But whenever you launch mega-schemes, you must do enough preparation to ensure their efficiency and sustainability. It would be counterproductive to do something that is beyond the capacity of a government.

Prosperity and stability were the main planks of this government. Do you think the government has done enough in this regard?

Are we talking about prosperity for the ruling elite or for all Nepalis? This government is only focused on increasing perks and privileges for those in power, from the president to the prime minister. Prosperity cannot be attained immediately. It takes time—time to raise the capability of state, expand economic opportunities, create business friendly atmosphere.

The real problem at the moment is the poor quality of governance. The civil service has been excessively politicised as appointments are being made based on party affiliations and personal connections. I don’t see this vision and quality in this government, which is harping on slogans and publicity with little substance.

You are among the few leaders who have had some apprehension towards federalism, especially on the economic side of things. How do you see it now, a year after the implementation of federalism?

The apprehension I had about federalism is starting to become true. I had said a federal structure is a complicated political system in terms of financial sustainability and requires careful handling. The conflict among the three-tier governments over authority and power itself shows how difficult the management of federalism is. While we have seven provincial and 753 local governments fully empowered, we’re yet to work on strengthening their institutional capacity. The laws are not all ready, leading to confrontation between federal and provincial government, especially over the authority to handle law and order and taxation.

The necessity of bringing efficiency in government spending is not present, as corruption has reached to the local level due to weak governance. The development spendings of all provincial governments has been around 10 percent in the first eight months. This shows the poor institutional capacity to deliver, which calls for strengthening institutional capacity, both at the local and provincial levels.

We have an economist at the helm of the ministry you once led, but our economy is grappling with a number of issues. Do you have anything to say about that?

I don’t want to comment on an individual, but just having an economist run the entire finance ministry is not sufficient. You need the right vision and approach, which I am not seeing from this government.

The government has failed to create an environment for investments, which can be gauged by the fact that the stock market is on a bearish run and the banking sector is grappling with a liquidity crisis. When the annual budget was presented, I had said then that the government has started raising internal loans which will limit the credit flow to the private sector.

But we cannot entirely blame the finance minister for the poor state of development expenditure. It’s a systemic defect of our system, as we do not have ready-to-implement projects, mainly due to lack of preparatory work. There is also a tendency to announce new projects every year, mostly due to political pressure. Since these projects are not ready for implementation, huge resources meant for them generally go unused.

This year, there are additional problems. Hundreds of projects that had been started in the past by the federal government based on a multi-year contract have been halted after the formation of the three-tier government. These projects have neither been handed over to provincial or local governments nor is the federal government taking charge to execute them. So the projects are just sitting in limbo. This is one reason for this year’s poor capital expenditure.

Given the poor state of national priority projects as well as infrastructure projects, a new act is being brought to govern them. Is this the correct prescription? Considering, one of the things the act also does is it empowers the prime minister to award mega projects directly.

The new act will not address the challenges we’re witnessing in the development projects. Empowering the prime minister is the not right idea. Even without the act, the prime minister as the executive head can always give strong instructions.

Concentrating all power to the Prime Minister’s Office does not mean project execution will move in faster pace. Successful rulers are those who delegate authority—not concentrate it. The job of the prime minister is to provide leadership, monitor and instruct, but if he gets involved in operational issues,

the work may actually slow down because the prime minister won’t have time for it.

The provision of awarding the project directly is also not a good idea. I suspect this act is being brought to justify the government’s decision of awarding the Budhi Gandaki Hydropower Project to a certain company in a non-transparent way. There must be a global competitive bidding process that needs to be followed while awarding mega contracts and projects. This would not only reduce the cost but also ensure that the

project is implemented within the deadline.

As the finance minister, you were always against distributive policies. Do you see prudency in this government?

I don’t see this government following the principle of fiscal prudence. What we’re seeing is unproductive and hi-flying talks and initiatives. In the past year alone, this government doled out Rs2 billion through cabinet decisions on individuals and foreign travels. The government announced the expansion of the President’s Office, construction of a new building inside Baluwatar and a state guest house in Pulchowk. These are all wasteful expenditures. When you have five-star hotels in town, what is the need for such state guest houses at the state’s expense?

Take another example: the railway projects that this government is boosting. There has been no cost benefit analysis to find out whether the project is economically beneficial, but the government has announced it as a priority project. Why do we need railway projects with such huge capital costs when we have already highways connecting Kathmandu to the northern and southern borders? We’re already constructing the north-south corridor highway and the upgradation of Rasuwagadhi-Galchhi road is also ongoing. Is there any economic justification for having such huge rail project connecting China in the north and India in the South?

If the same resources are available, my priority would have been on constructing an all-weather motorable road to all local levels which would open huge economic opportunities across the country.

You’re essentially suggesting that railway connectivity projects should not be the immediate priority?

I agree connectivity is very important, but yes, railway connectivity should not be the immediate priority. They could be a priority in the long run, maybe after 25 to 30 years. But even then, it must be justified based on future cargo traffic and future trade. Once we make an investment, the return from it must justify that investment.

Why are China and India then positive on these railway projects? After Nepal signed the MoU with China for the Kerung-Kathmandu Railway project, India also came forward for the Kathmandu-Raxaul Railway project.

When Nepal itself seeks assistance for cross-border railway connectivity, our friendly neighbours cannot say ‘no’, for political reasons. The Indian authorities came forward in response to the agreement with China. But there are still questions over the financing modality of these projects. Will these assistance be grant only or loan? What will be the conditions attached to them? These issues need a careful study.

There is growing apprehension towards possible debt trap related to projects under China’s Belt and Road Initiative. Is the debt trap simply a fear pushed by the western block or is there some truth to it?

If we want to avoid debt trap, economically viable projects with reasonable rate of returns must be selected. We cannot take debt which is beyond the capacity of the country. For example, the cost of the Kathmandu-Kerung Rail Project is said to be around $3 billion, which is 10 percent of Nepal’s total GDP. As of now, the cumulative foreign loan of Nepal is around $4 billion. That’s why the country’s capacity must be taken into account before moving ahead with this type of mega projects and mega loans.

I am a supporter of the Belt and Road Initiative; however, you must be selective in choosing projects based on their socio-economic justification. You can’t select expensive projects just for political advantage.

 When we want financial support under the initiative, my preference would be loans from Asian Infrastructure Investment Bank, which gives loans after techno-economic appraisal because it is a financial institution. If we have to take assistance from Exim Bank, you have to be very selective because such support is attached with conditions. Such loans should be taken for bankable projects that have a good rate of returns which will make it easy to pay back the loan.

Let’s talk about the mega event taking place later this week. Do you think the investment summit will make an impact at a time when the government is looking for huge resources for development endeavours?

Before hosting a summit like this, the government should do plenty of homework, not rush like the current government has done by expediting the amendment of laws days ahead of the summit. While I have not gone through these new acts, I’ve heard there are questionable provisions in them, such as the expansion of the negative list and barring of FDI in the agriculture sector.

The agriculture sector has huge potential in Nepal, especially for high value crops, aromatic plants and herbs. If we can connect our

agriculture sector with the global market, Nepal can hugely benefit from it. But just domestic skills and knowledge is not enough—we need foreign investments. We import billions of dairy products, but the dairy industry has also been placed on the negative list.

The timing of the summit is particularly questionable because both domestic and foreign investors are apprehensive about the investment climate. I don’t think the investment environment has improved in Nepal in recent years because the number of multinational companies have been facing trouble for multiple reasons.

The foreign direct investment inflow in Nepal has been relatively moderate. Why do you think Nepal has not been able to attract large scale FDI, say a billion dollars in a single year?

It is not that large scale FDI has never come to Nepal. But I agree that Nepal can attract much more foreign investments than what it is currently receiving. The decade-long insurgency, political instability and prolonged transition also contributed to the low FDI inflow. When you have a government change every year, the quality of governance suffers.

But having a government in place for five years also does not mean we have political stability. And political stability alone will not guarantee the growth in FDI inflow. It depends on how good the administration, its governance and the quality of service delivery are.

Published: 27-03-2019 12:35

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