The Asian Development Bank has approved loans and grants of $5.8 billion and technical assistance of $0.2 billion for Nepal since 1966. But Nepal has not been able to utilise a big portion of funds made available, with cumulative loan and grant disbursements standing at $3.6 billion. The Manila-based multilateral lender has long been saying weak governance has prevented Nepal from effectively utilising the development assistance. This has affected development of transformative projects, such as Melamchi Drinking Water, Gautam Buddha International Airport and Improvement of Tribhuvan International Airport, funded by the ADB. Now the country faces even bigger challenges as lack of capacity at the newly-formed sub-national governments are bound to create problems in project implementation. Rupak D Sharma of The Himalayan Times met Hun Kim, director general of ADB’s South Asia Department, on the sidelines of the multilateral lender’s 52nd annual general meeting in Fiji to discuss these issues. Excerpts:
In 2018, the ADB approved loans, grants and technical assistance of record $600 million for Nepal. But disbursements, excluding co-financing, stood at $246.7 million. Nepal is still lagging behind in utilising funds made available to it, isn’t it?
I would not say Nepal is lagging behind in credit disbursement. In fact, Nepal’s performance has improved a lot compared to that of four years ago. Today, Nepal’s performance is classified as average. One of the reasons for some slackness in credit disbursement is expansion of ADB’s portfolio in Nepal. A few years ago, the ADB was lending about $400 million per year to the government. That amount has now gone up to $600 million. Whenever the portfolio expands, disbursements initially fall before picking up. So, we hope credit disbursement to gather pace in the coming days.
Does this mean ADB is happy with the government’s fund absorptive capacity?
We cannot say Nepal’s performance is unsatisfactory anymore. But that does not mean the ADB is entirely happy with the government’s performance. The government must do more and continue to build on what it has achieved so far. And there is room for improvements because Nepal is now a politically stable country. Political stability helps build confidence and expedites decision-making process. The government should now capitalise on this by taking some tough decisions to drill in some discipline in project implementation. There seems to be some slackness on the government’s part because bureaucrats think credit provided by the ADB will remain there forever, which is not the case. Nepal should remember that hike in loan approval rate does not mean anything unless the approved credit is disbursed to build projects. So, Nepal can do a lot better in the coming days and we are positively optimistic.
Many were expecting credit disbursement to go up further because the ADB has changed its loan approval process. Nowadays, the ADB does not approve loans unless detailed project reports have been prepared and all the preparations to initiate procurement process have been made, isn’t it?
Yes, the ADB has changed its formula for loan approval. Nowadays, we do not approve loans unless detailed project reports and bid documents have been finalised. This means loans are approved only if projects are in the final stage of being awarded to contractors. We resorted to this measure because it takes almost a year to select contractors. But if projects are in the final phase of being awarded to contractors, we can expect credit disbursement to start within six months or so of loan approval. However, we started using the new formula only one or two years ago. So, you will have to wait for another few years to see the results. But again, the ADB cannot solely blame the government for the delays. Earlier, there was weakness on ADB’s side as well, as it was also focusing on small projects. I’m not saying the ADB should not build small projects, but there are other development partners who can take on that work. So, we have revised our policy in consultation with the Nepal government and started focusing on development of bigger and transformative projects.
You just said the ADB has started to focus on development of bigger, transformative projects in Nepal. But data do not say so. The ADB was involved in 51 projects across 18 ministries in the last fiscal year, making it one of the top five development partners to fragment aid. The Organisation for Economic Cooperation and Development has said that aid that comes in too many slices raises transaction cost, making projects and programmes ineffective. What is your take on this?
Maybe the number you mentioned also includes projects that have received ADB’s technical assistance. The technical assistance is offered in the form of grants. But the number of projects being built with ADB’s loan is not that high. Over the years, the ADB has started to consolidate its work in Nepal by focusing on bigger projects. So, we have fewer projects in Nepal that are critical for the country’s overall development.
During a press conference, ADB President Takehiko Nakao had said the multilateral lender would focus on smaller projects as well. Does that mean the ADB is changing its strategy?
I think that policy does not apply to Nepal. The ADB president was talking about frontier markets. The ADB will continue to fund big projects in Nepal, as there are other development partners who can finance smaller projects. But there are other countries in Asia and the Pacific where the ADB needs to invest in smaller projects and we cannot ignore them.
How does the ADB intend to work in Nepal’s new federal setup?
There are around seven or eight ongoing projects funded by the ADB in Nepal with some provincial element. But the central government has said the rules of the game won’t change for those projects until they are complete. Going forward, we are ready to work with the governments at every level. However, we will not approve projects at provincial or local levels unless the capacity of sub-national governments has been enhanced.
There is a huge capacity gap at provincial and local levels, as many provincial and local politicians and bureaucrats are inexperienced. How does the ADB intend to overcome this challenge?
Policy and capacity gaps are natural when power and authority are devolved to sub-national governments. The ADB has dealt with these constraints in India and Pakistan. So, we are experienced in resolving these issues. Nepal needs some time to build capacity and we are working with the government to address this issue.
But problems may also crop up when the ADB has to work with multiple provinces or local levels. In the new setup, local and provincial projects fall under the jurisdiction of their governments and the central government may not be able to intervene as in the past. How do you intend to coordinate development efforts if interest of local and provincial governments clashes?
ADB projects are built in partnership. So, when we design a project, we look into all the aspects, such as fund flow mechanism, implementation agencies and so on. We don’t finalise projects unless we get assurance that they are doable. In many countries, we also ask the government to set up powerful steering committees to ensure effective coordination. So, we have experience in dealing with these issues. That said, there is no silver bullet. We have to deal with problems as they crop up and the ADB is ready to do that in Nepal.
How can the government be of greater assistance to the ADB?
Earlier, many were not sure in which direction Nepal would move. That has now come to an end as Nepal has a strong and a stable government. Political stability is crucial for economic development and the government should not miss this opportunity. The government should also empower project chiefs so that they can take decisions on their own and guarantee discipline in project implementation so that loans are disbursed in a timely manner.
But sometimes problems also crop up from contractor’s side, isn’t it? Take the example of Melamchi Drinking Water Project, in which the contractor abandoned the project. Do you want to comment on this issue?
I wouldn’t say the Italian contractor hired to build the Melamchi Drinking Water Project totally failed to deliver. One of the crucial components of the project was to excavate 26km tunnel and the contractor was able to complete that major work. It is unfortunate it couldn’t complete the entire work because of financial problems it faced in its home country. One big task that is left to do in the project is related to head works. It will take some time to complete this work. But we can divert the water to Kathmandu Valley for now even without completing this work. So, the government must say how to proceed ahead.
Lastly, the private sector arm of the ADB is not very active in Nepal. Since the Nepali private sector is facing problems in getting credit from banks because of shortage of funds that could be disbursed as loans, wouldn’t it be the right time to scale up private sector operations?
The Private Sector Operations Department of ADB recently approved a loan for Upper Trishuli-1 Hydroelectric Project. We are working on a new country partnership strategy for Nepal, covering 2020 to 2024, and it will contain programmes on private sector operations as well. I also want to highlight that ADB’s Private Sector Operations Department is expanding rapidly and Nepal will definitely benefit from it.
A version of this article appears in print on May 14, 2019 of The Himalayan Times.