- Exploratory framework
- Strategic Vision
- Value Proposition
- Competitive Environment
- Policy and Regulatory Enablers
- Speakers Video
The Nepal Infrastructure Summit 2014, organised by the Infrastructure Committee within the Confederation of Nepalese Industries' (CNI) and its partners, was successful in many ways, including: high attendance, a fantastic keynote speech, excellent speakers and panellists who knew their subject, well facilitated dialogue sessions, a great venue for networking and the presence of young participants. Importantly, participants said that they would sign up and pay for a similar event again. Yet, before the next Summit is held it is important to demonstrate progress on the ideas shared at the 2014 Summit and move from Agenda to Action. CNI acknowledges that a clear set of actions must be identified, around which a structured discourse can be built that leads to results. This short report responds to this need by identifying critical bottlenecks to investment in infrastructure and recommends critical actions that CNI, along with its partners, can focus on before, and after, the next Summit. Each of the recommendations will help to improve the climate for private investment in infrastructure in Nepal. The recommendations will also help to shape the context, content and structure of the next Summit. On 25th April 2015 a major earthquake struck Nepal. The initial earthquake, and subsequent after shocks, caused major damage to property and businesses across central Nepal and claimed over 8,700 lives. The impact upon infrastructure was significant, with a total amount identified for recovery in the Post Disaster Needs Assessment of 743 (USD millions), or 18% of total recovery needs, across the 14 most affected districts. This was divided amongst the following types of infrastructure:
- Electricity 186 (USD millions) 25% of total infrastructure recovery needs
- Communications 49 (USD millions) 7% of total infrastructure recovery needs
- Community Infrastructure 45 (USD millions) 6% of total infrastructure recovery needs
- Transport 282 (USD millions) 38% of total infrastructure recovery needs
- Water and Sanitation 181 (USD millions) 24% of total infrastructure recovery needs
Speakers and participants at the Nepal Investment Summit 2014 confirmed that Nepal desperately needs to upgrade its infrastructure and institutions that support infrastructure development and investment. They identified a need for:
- Stronger mechanisms for the private sector to work with GoN.
- Better mechanisms for allowing private investment and financing of highways, railways, airports, urban infrastructure and transmission lines.
- A more transparent approval process for foreign direct investment.
- Better mechanisms for technology transfer for increasing productivity and efficiency.
- Better implementation of policy and regulations, which is inefficient and often uncertain.
- Streamlining of the bureaucratic decision-making and procurement process, along with betterbplanning, prioritizing and categorizing of infrastructure projects, with more meaningful consultations from the private sector.
- Promotion of healthy competition among private sector players involved in infrastructure development.
GoN must establish a clear vision for the infrastructure needs of the country beyond the 2022 vision and ensure that plans, strategies and policies prepared by line ministries and departments are aligned. Strategic Plan and Vision Perhaps the most critical component of an attractive investment climate is a clear and bold vision set by the GoN of what infrastructure projects are needed, why they are needed, when they are needed, and how they will be delivered. This is required to ensure that a clear role for the private sector is created, that major investments from the private sector are prioritised, and major projects are aligned to deliver maximum benefits for the economy and society. Investors can also be targeted and attracted at critical times to increase efficiency of promotional efforts and permitting processes. The responsibility for creating a strategic vision and plan for infrastructure projects at a national level has been designated to the National Planning Commission (NPC). The present organization and function of the NPC is based on decisions of the GoN in 1993, while its roles and functions are stated in the Financial Administration Regulations (1999). The NPC creates development plans under the directives of National Development Council (NDC), facilitates the implementation of development policies and programs, provides guidelines and policy targets on forming new budgets to the Ministry of Finance and other line ministries, and also hosts a forum for co-ordination of policy with the private sector through the Policy Dialogue Committee. The NPC developed a national vision for Nepal in 2014 to graduate from the Least Development Country status by 2022 and set investment targets that are needed in the agricultural, industrial and service sectors to raise Nepali's income, human condition and vulnerability. However, it has become clear from talking to various commentators that despite the efforts of NPC to create an aligned and a consistent approach to national development, especially for infrastructure, one major issue is fragmentation of line ministries and misalignment of strategies and plans. NPC creates the current three-year interim plans for the country as well as identifying the national priority projects. Yet, so far delivery remains a problem for projects of national significance with most considered to be underperforming and face low rates of budget disbursement. NPC must establish a clear vision and bring ministries together to create a collective plan and strategy to achieve that vision. The development of a coordinated 2030 vision should address such issues. At a municipal level there is also a need for alignment of vision and communication between ministries and implementing agencies. For example, the Kathmandu Valley Development Association (KVDA), established by the KVDA Act 2012, should lead the coordination of local bodies for development activities in the Kathmandu valley. However, it has been unable to bring together the different agendas set by different ministries and development partners. In an attempt to resolve the need for better urban transport solutions to meet the demands of an ever growing urban population, feasibility studies have been prepared for various transport models, e.g. rapid transit systems and cable cars, but commentators claim little thought is given to which of these projects is most important for the local people and economy. At present, Japan International Cooperation Agency (JICA) is creating an urban master-plan for the city, Asian Development Bank (ADB) is working with the government to improve waste water management, while KVDA has just prepared its 20 year strategy. Clearly, the activities must be aligned to avoid duplication of efforts and resources. There is a genuine concern that the ad-hoc nature of the planning process allows projects at a national and a local level to be promoted based on individual or political interest. As a basic principle, all major infrastructure projects should be assessed on their contribution to the national and local economy and society and must support national goals and growth. Projects should also be managed with the post-conflict situation in mind to demonstrate peace building, to balance past poverty, and address underlying social discriminations. Clear and consistent criteria for project approval could include, amongst other things:
- Number of jobs created
- Percentage of royalty going into local economy (into schools, health posts, etc.)
- Capacity of project to improve local environmental conditions
- Capacity of project to improve services to locals
- Cost effectiveness
- Resilience to natural disaster (as a community asset and resource at a time of need)
Private sector must clearly communicate its capabilities and capacities in investing in and developing large infrastructure projects. Equitable Risk Allocation There are major risks associated with investing in Greenfield infrastructure projects and it is natural that these are set at an acceptable level to match the respective returns, expectations, and capabilities. The following points should be considered in order to find an appropriate mechanism for balancing risk and creating value.
- In Nepal, if a contractor defaults on an infrastructure project then the lender becomes disproportionately liable and is unsecure.
- Nepali law does not adequately address financial models for limited-recourse financing. Laws such as the Insolvency Act, 2067 and clauses in the BAFIA act relating to liquidation are insufficient to address this issue. Amendments to the Banks and Financial Institutions Act (BAFIA) are needed to allow for limited-recourse financing, especially regarding collateral requirements. For example, signed PPAs can be used in non-recourse financing as security. This issue is especially troubling for international lenders who look for laws on limited recourse financing where lenders have rights to intervene in projects should developers fail.
- Nepali banks are also limited for project financing because of the NRB directive related toSingle Obliger Limit and Credit Concentration. The directive restricts a bank fromconcentrating too much of its portfolio on a single project. The clause is meant to maintainstability in the financial sector, but has limited local investment into infrastructure projects.
- There are issues regarding how to secure movable property that could be resolved with asecure transaction law. The Secured Transaction Act of 2006 controls how loans are secured against movable assets. However, its implementation only began in mid 2014, andwill need to be strengthened. The implementation is supported by the Credit InformationBureau of Nepal (CIBN) which can act as a secure transaction registry.
- Foreign lenders cannot take immovable assets as collateral without taking approval of theCabinet. The Loan and Guarantee Act, which covers this issue, is almost 50 years old andneeds amendments, or replacement, to include foreign lending provisions.
- Foreign currency risk and trade agreements sought in dollars for greater security andcertainty.
Private and public sector must promote competition and establish competitive practices. Competitive Procurement Process The public procurement system in Nepal has to encourage more competition among private sector participants. Public offices as well as private firms lament on the lengthy procurement processes. Not only do these processes erode confidence in Public Enterprises (PE), but also in the contractors and suppliers who sell their goods/services. Improving the procurement process requires effort from both ! 9! the public and the private sector. Yet, there are initiatives that the private sector can also take to complement the policy changes the government has undertaken. The government has introduced changes to the Public Procurement Act 2007 (amended). However, commentators still believe there is more room for improvement. A new legal provision, Ordinance 2015, has been included in the Act that allows PEs to fast track procurement decisions, encouraging PEs to become more efficient and competitive. New provisions in the Act seek to remove the incentive for ultra low bidding by requiring contractors to provide additional performance guarantee on top of the existing guarantee, should the bid amount be lower than 85 percent of the project's estimated cost. These initiatives are positive steps, yet the procurement process needs to be strengthened further Financial and technical bids must be assessed separately, and the e-bidding process has to be amended to account for differing procurement rules for different donors. The private sector can take a lead in supporting bidding processes by supporting mechanisms to promote competition and quality. Competitive Private Sector The private sector must do a better job at building, operating and maintaining infrastructure projects than the public sector. It should be more efficient, innovative and demonstrate that it is capable of delivering complex projects. Firms must be able to signal their capabilities appropriately. Concurrently, the government needs better mechanisms to filter and recognise/reward firms that do higher quality work. Such mechanisms can take the form of higher performance guarantees, delayed payments, or a more transparent platform for bidding. Excuses for poor quality projects should not only fall to the government. The private sector must improve their professional standards. This relates to understanding and valuing contracts. It also means adopting global standards of accountability and transparency in performance and operations. Companies must also promote good employee rights based on meritocracy, along with good practices of corporate governance. Doing so allows the local private sector to satisfy foreign due diligence requirements for more investment, partnerships, etc. A spirit of innovation and competition for delivering quality should be sought amongst firms. Technical ability and professionalism should be promoted through awards. CNI should enforce strong standards of corporate governance amongst its members and promote the adoption of international standards of accounting. Members should voluntarily adopt guidelines for participating in infrastructure projects, similar to the OECD Principles for Private Sector Participation in Infrastructure.
GoN must make policy changes to create a more efficient and attractive investment climate and provide clarity and certainty to investors on key processes in the investment in and development of infrastructure projects. Clear Permitting Processes More accountability and clarity is needed regarding the approval processes for investment, setting up a business and any other form of licencing for investments. The issue of threshold remains a concern for the one window policy, as the Investment Board of Nepal (IBN) deals with mega infrastructure projects and Industrial Promotion Board deal with all others. This implies medium size projects may not get the attention they deserve. ! 10! There are changes in the short term that can mitigate major limitations of the IBN to facilitate progress of large infrastructure projects: ! IBN needs to be strengthened with full paid staff, including a dedicated legal team, and should not rely on consultants. ! IBN is treated as an outsider by other ministries and needs to graduate from its role of only recommending projects to government bodies. ! Granting of the investment license has to be done by DOI, as IBN does not have the authority to provide a license. ! There is no provision or ability to fast track projects which IBN promotes or recommends for license. ! Project Development Agreement (PDA) is not bankable since it is only a general agreement. An amended PDA must be developed for each specific project and this is where the specific risks and issues really start to arise. IBN has therefore not been very effective in its goal of bringing investment as it has only secured two general PDAs. The Investment Board Act will have to be amended to give IBN more influence and capacity. Yet, the IBN must also improve its transparency and speed of delivery. Completing the EIA is often a slow and cumbersome process that is overly bureaucratic and intensive. As a result, private sector developers and investors often see the EIA as a burden, rather than as a tool to futureproof a project/investment. The specific process related challenges include: • Lack of trained and qualified staff within the line ministries capable of dealing with the large number of EIA submissions • Approval is required in different departments and line ministries creating a delay to the process as files move from one department to another, where personnel review the same documents. • Key data sets used to assess project feasibility and design (e.g. water, soil etc) may not be consistent or may be difficult to retrieve from departments. Poor connectivity and coordination between ministries and access to information and public data are major issues that confuse potential investors on key processes. At worst, some commentators have criticised ministries and secretaries for not considering important projects as their core functions. Human capacity of civil servants is another reason for poor communication between government departments and poor progress of infrastructure projects. Civil servants are frequently moved between departments and not provided with sufficient support and learning; there is a lack of institutional learning capacity. Civil servants are, therefore, unable to adequately deal with a diverse set of project stakeholders, such as developers, investors, promoters, etc. GoN Ministries e.g. water, geology etc. should be encouraged to review mechanisms for holding and sharing of public data with interested private sector investors. The government did introduce a provision of signing work performance contracts between secretaries of ministries and project chiefs. However, these provisions were not implemented sufficiently, and ministers and secretaries have not made project chiefs nor contractors any more accountable for delivering projects. The NPC also launched a program to train about 400 civil servants from the Ministry of Energy, Ministry of Finance, Ministry of Industry, Ministry of Commerce and Supplies, and the Ministry of Physical Infrastructure and Transport, especially those that dealt with the private sector, to enhance their capacity in encouraging investments. The program also intended to include private sector employees but it never went ahead. Ease of Land Assembly and Construction Project developers, development partners, and government officials claim that land acquisition is a major issue hindering progress in major infrastructure projects. Land assembly needs to be easy for large Greenfield projects. However, local communities are often seen as an obstacle instead of a partner. Developers and government officials claim that locals hike land prices to exorbitant amounts upon discovering that their land is to be part of a lucrative project. The government is making efforts to resolve disputes arising from land assembly, yet competing claims over land and jurisdiction remains a major hurdle. The Land Acquisition, Rehabilitation, and Resettlement Policy for the Development Projects Policy has recently been endorsed by the cabinet to ease land assembly. The new policy specifies that even if 75% of owners of land to be acquired approve the compensation then it would be considered approved by all affected people. The new policy also specifies that the price of land will be based on the price maintained whenever the government issues a land acquisition notice for a project. A land compensation committee, headed by the chief district officer (CDO), and including affected people, survey office, land revenue office, project chief and expert will determine the price of land to be acquired. Efficient Financial and Operational Regulations Nepal has well-drafted and clear laws on tax but the problem remains a lack of compliance. At worst this is seen in cases of proven tax avoidance. For example, forty percent of registered corporate income tax payers in the last fiscal year did not file tax returns, while thirty one percent of firms registered under VAT did not make the filing (according to the Inland Revenue Department). Commentators suggest that the private sector is discouraged from paying taxes because of poor disbursement rate of the central and local government. According to NRB estimates for last year, the government has nearly Rs. 100 billion unspent in the treasury. As a consequence, the private sector may not keep accurate accounts and may exaggerate debt/equity ratios or losses to avoid taxes. If there is more trust and compliance with the local tax laws then it is likely that companies will be more accountable and transparent. The GoN has to introduce better mechanisms for tax collection and revenue disbursement that creates incentives for private sector and civil society to pay taxes and demand services. Clearer institutional arrangements are also necessary, especially when dealing with foreign investment. The Department of Industry (DOI) was for a long time a one window for all foreign investors. Yet, the DOI has only been able to provide recommendations. Foreign investors are required to visit the Department of Immigration for visa purposes, the Ministry of Environment for conducting Environmental Impact Assessments (EIA), and the Department of Revenue/Customs for obtaining incentives or exemptions. Furthermore, DOI focuses mostly on equity foreign investment, and its consideration of foreign debt as foreign investment is not quite clear. The Investment Board of Nepal does claim to be a one-window facility for large foreign investors, yet larger investors also face issues similar to smaller investors going through DOI. Stronger and consistent regulation across all major financial classes is also required. The banking and financial institutions are fairly regulated due to the autonomy that NRB maintains as a separate body. However, the Financial Sector Assessment Program (FSAP) of the World Bank and IMF (in 2013) claimed that lack of sufficient skilled staff members and inadequate IT infrastructure hampers the supervisory capacity of the NRB. These inherent weaknesses mean that regulation of BFIs is still compliance based, rather than risk-based. A report of the assessment is not available to the public. Regulation of securities and insurance products, on the other hand, is even weaker because their regulating bodies (SEBON and the Insurance Board) enjoy a lower level of autonomy than the NRB. Other traditional investment structures widely available in most mature economies and already seen in the local market, such as pension funds and private equity, are not regulated at all, and need to be.
Underscoring all these initiatives, from both the government and the private sector, is trust. A history of contractors that default, claiming fluctuations in materials pricing, inflation, labour or skill shortage, and poor professional standards, accountability or transparency has led to a poor reputation of the private sector. Similarly, the low rate of government disbursement for infrastructure related projects has led to major hold ups for major projects, especially for roads, creating a similar feeling of inefficiency and lack of urgency. A respect for the role each party plays in developing infrastructure projects is required along with recognition of quality and competition. All parties must commit to undertake initiatives to increase trust between one another and demonstrate commitments for the long term. The Summit itself will be a useful tool to bring interested groups together and build trust.