Asian Development Bank, the Manila-based multilateral lender, recently launched its five-year country partnership strategy for Nepal, with focus on development of infrastructure, such as hydroelectric projects, roads and airports, to reduce the cost of production and trade, and attract private investment. The strategy, which will guide ADB’s operations in Nepal from 2020 to 2024, also aspires to provide equitable access to basic services through the federal system of governance and introduce reforms in public financial management of sub-national governments. It also intends to improve Nepal’s resilience to natural hazards, raise the quality of education, provide employment-oriented skills training and commercialise agriculture to raise rural incomes. Rupak D Sharma of The Himalayan Times met ADB’s Country Director for Nepal, Mukhtor Khamudkhanov, to discuss the new five-year strategy, ADB’s operations in Nepal and challenges in project implementation. Excerpts:

ADB recently introduced its Country Partnership Strategy for 2020-24. The latest strategy does not look very different from the previous one, apart from the part on support for sub-national governments. Do you agree?

I don’t agree with that. The current situation in Nepal is very different than in the past, as the country now has a more stable political environment. We can lend support to the government more effectively in this environment. Secondly, the country now has a federal system of government. Our strategy clearly mentions ADB’s operation would focus on adjusting to this new system. That’s why the country partnership strategy has laid down three major objectives. First is to improve infrastructure to support private sector-led growth. ADB used to focus on infrastructure development in the past, but this time we are trying to make sure the infrastructure we build spurs private sector-led growth. Second objective of the strategy is to improve access to devolved services, which is clearly linked to the new federal structure. And third is on environmental sustainability and resilience. This is very critical for Nepal, which is prone to different kinds of natural calamities. So these programmes are different from what we had in the past.

How much is ADB providing annually to the government to meet these objectives?

Overall, Nepal will receive an average of $500 million to $600 million per year in the five-year period. This means ADB will be investing around $2.5 billion to $3 billion in the next five years.

ADB’s investment portfolio in Nepal stood at $2.8 billion as of June 30. Has Nepal been able to use this financial support to generate outcomes envisaged by the ADB?

ADB’s investment portfolio in Nepal stood at over $2.9 billion as of October-end. This year we have committed another $358 million for four projects. Of this money, $195 million will be used to improve Mugling-Pokhara highway section; $50 million will be provided to an important programme on food safety and agriculture commercialisation; another $50 million will be used to improve the livelihoods and increase incomes of farmers; and $63 million will be disbursed as additional financing to manage floods and address pollution issues in Bagmati River. So, ADB actually has a big portfolio in Nepal. In 2018, ADB’s commitment to Nepal stood at a record $592 million. This is more than two times the loan we provided per year from 2013 to 2016, when annual average was $235 million. So, there has been substantial increase in lending to Nepal. ADB can increase lending to Nepal but the government must absorb these funds as well. That’s why it is important to increase disbursement because disbursement is proxy for project implementation. An increase in disbursement shows there is progress in project implementation.

Are you happy with the utilisation of funds?

So far, yes. We have good understanding with the government and we are working together. But we always try to encourage government to further improve disbursement because that is important to complete ongoing projects.

You’ve been in Nepal for more than two years. What do you think of Nepal’s development model?

After years of instability, Nepal now has more stable political environment and a stable government. This has opened a window of opportunity because a stable government helps in speeding up economic development and implementing reforms. Yes, there are challenges ahead, but, in my view, things are on track because the government’s objectives are clear. The main objective of the government is to achieve sustainable and inclusive economic growth to benefit the people of Nepal. It also intends to improve service delivery and attract more investment, particularly private sector investment, to enhance the quality of life.

You just talked about benefits of having a stable government. But this stability has not been able to remove roadblocks, such as inadequate capacity of the government, slow procurement process, weak performance of contractors and delay in land acquisition, which have been affecting project implementation for long. What is your take on this?

Yes, there are challenges with regards to staffing capacity of implementing agencies and environmental and social safeguards, such as land acquisition and forest clearance. Nepal needs to take a systemic approach to deal with some of the issues like social safeguards. And ADB is jointly working with the government, particularly in the area of capacity development, to expedite project implementation. We’re now paying more and more attention to project readiness to overcome initial delays that are impacting implementation of many projects. Greater project readiness would also improve disbursements. In 2017, disbursement stood at a historic high of over $275 million. Last year, disbursements fell to around $247 million but that is understandable because that was the first year of implementation of the federal system. This year, we’re actually looking forward to disbursing close to $300 million and break the previous record. As I told you earlier, higher disbursement shows progress in project implementation. One of the examples that I want to share is Gautam Buddha International Airport Project in Bhairahawa, which faced lots of delays in the beginning. But over the last one-and-ahalf years we have been able to achieve really good progress. And by March next year all works are expected to be completed. This would probably be the first national pride project to be completed.

But projects are still facing problems despite high disbursement. For example, Gautam Buddha International Airport faced problems from the contractor and in collection of construction materials like sand and stones. Don’t you think there are problems in project implementation as well?

There are no projects that do not face problems. The important thing is how you work together to overcome them. To avoid initial delays in project implementation, we now require at least 30 per cent project readiness. This means contracts should be ready to be awarded to contractors before projects are forwarded to the ADB’s board for approval. In some cases, we even require more than 30 per cent project readiness. But, of course, you are right that there are certain issues, like forest clearance and supply of aggregates, where systemic approach is required. We raised this issue during the recent tripartite review meeting with the government. It’s not easy to get rid of these problems and I would not say it is easier in some other countries. But it’s important to pay attention to these issues from the beginning to ensure smooth implementation of projects.

Let’s take another example of Melamchi Drinking Water Project. This project, which has been in the making for almost 20 years, has probably taught ADB a lot of lessons on challenges of working in Nepal. Even after all these years and fully being aware of pitfalls, the project has not been completed yet. Is it sheer bad luck or a result of systemic problems?

First of all, we all need to understand that Melamchi is not an easy project. This project has a water supply tunnel of 26 km, which is the longest in South Asia and even in Asia. It is difficult to build a tunnel of that length in mountains, where you do not know whether the rock is hard or soft. Of course, you get some estimates beforehand but they may not be enough. Then the (Italian) contractor that was implementing that project got into difficult financial situation not because of the project itself but because of the situation in its country. This was unfortunate. And it was not expected by anyone, not even by the contractor, I think. So, overall, I think we were able to learn some lessons from that experience. But the good news is that we hope the project to be completed next year. As you know, we have now restructured the procurement plan and hired new contractors. So, we expect things to move forward smoothly now.

Will the project meet the new deadline?

There is not much work left in the tunnel. But the important thing would be to check quality of work performed by previous contractors along the 26km tunnel before water is released. We are also building the second water treatment plant in Sundarijal, which will be completed next year. We have already built first water treatment plant through financial support of the Japan International Cooperation Agency. We also need to check the distribution network for water pressure before commissioning it. So, all these works would take time. But we are working together with the government and the implementing agency and hopefully by the end of next year we will be able to complete this project. I would also like to say that ADB has always been committed to this project despite all the difficulties and we are committed to completing it because we clearly understand how this project is important for the people of Kathmandu valley.

Many say Nepal is too dependent on development partners to build key infrastructure projects, as official development assistance covers over 60 per cent of public capital expenditure. Is this worrying?

Decades of underinvestment, especially in sectors like infrastructure, have affected Nepal. To attain sustainable and inclusive economic growth, Nepal must create enabling legal and regulatory environment. But that may not be enough. If you look at ADB’s portfolio, roughly about 72 per cent focuses on infrastructure, such as transport, energy, urban development and water supply. We also invest in agriculture, education and skills development, which are also critical areas. But going forward, it would be important to bring in private sector investment, both foreign and local, because at a certain stage you cannot rely a lot on development partners. However, private investment will not flow in unless there is proper infrastructure, because investors look for reliable electricity supply to run their manufacturing facilities, good transport network to move inputs and manufacture goods, and proper water supply. These services are not readily available in Nepal.

Lastly, what other infrastructure projects is ADB eyeing in Nepal?

ADB is financing or going to finance few transformative projects such as East-West Highway, which is really important for Nepal. Of the five sections on the 1,000-km highway, four will be financed by ADB. We have already received loan approval for two sections and works have already started on one. Another transformative project we will be supporting is the 630MW Dudhkoshi Hydropower Project, a reservoir-type hydro project. We will also support sectoral reforms. We have launched food safety and agriculture commercialisation project this year. Next year, we will be looking at air transport sector. We will provide $50 million loan to separate regulatory and operational functions of Civil Aviation Authority of Nepal and provide institutional support for air transport sector. We are also implementing reforms in water supply sector and are looking forward to launching a programme to improve access to devolved services by supporting sub-national governments.