Nepal | May 27, 2020

“Projects in Nepal are not structured properly”

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The Himalayan Times
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Though it is said that the decade-long political transition in the country led to tepid business and investment growth in Nepal in the past, the country has not been able to draw notable investment (both domestic and foreign) though the political transition has ended and a new two-thirds majority government, which is said to be more powerful and stable, has been formed. The Himalayan Times caught up with Moazzam A Mekan, head of Public-Private Partnership, South Asia, of the International Finance Corporation to know about the investment scenario in Nepal and other issues related to project development and execution. Excerpts:

Photo Courtesy: KPMG

How do you see the investment scenario in Nepal?

In Nepal, the needs are tremendous in sectors ranging from infrastructure to housing, water and connectivity. From this perspective, it is essential that Nepal draws as much investment as possible. This investment gap can be filled only through two ways — either the government has its own money, meaning that it manages budgetary resources itself or gets credits and grants from development partners for investment, or else it largely mobilises private sector investment.
Nepal has been able to successfully draw investment in the hydropower sector. As per my knowledge, the country has recently managed to get some investment in the hydropower sector even from the private sector. Thus, the need of the hour is to deepen private sector investment by encouraging and facilitating private players. Nepal has an opportunity to export energy to support its trade. Thus, the government should think of how much investment can be brought in the hydropower and other different potential sectors in the country. Tourism is another sector where Nepal should invest. Investment in hotels, airports, education and health are necessary to boost Nepal’s growth and development. Investment challenges that Nepal is facing are quite similar to the challenges being faced by other countries. There is always a mismatch between a country’s needs and available resources to address those needs.

Though challenges are common among different countries, others have been able to cope with them and managed to draw necessary investment. Why is Nepal lagging behind?

This has to be answered by the government. It should identify existing challenges and possible remedies to address them. But I can say that if projects are prepared properly and given to investors, they will certainly make investment. Private sector organisations are not charitable firms. Thus, there needs to be profitability in projects. The risk allocation needs to be managed in a way which is encouraging
to the private sector. There are various ways to address business and investment challenges. It is up to the government how it manages to encourage mega
investments in the country.

Nepal is promoting public-private-partnership modality in project development in recent years. However, even this has failed in some major projects, including construction of tunnels. As an expert on PPP, what is your view on this?

PPP is a way to procure new assets by the government and mobilise the private sector in investment. PPP modality also goes beyond private sector mobilisation in development as it seeks assurance that the investment from the private sector is efficiently used. It requires government to think about the procurement and projects slightly differently. One of the challenges that we face in PPP modality across the world is the capacity of the government in understanding how the PPP modality works. It requires knowing how the private sector works, what are the requirements of the private sector, and resources allocation between the public and private sector. However, not all projects can be done on PPP modality. There are some projects where intense focus of the government is required. Any project which does not remunerate or does not generate income, like education projects, should be handled by the government itself.

As Nepal is more dependent on tourism for its growth, the government should improve the quality of travel in the country by improving the quality of roads, airports and developing other necessary connectivity accordingly. The government always has limited resources. Thus, private sector investment in infrastructure development is inevitable. Even when looking at the global scenario, private sector is increasingly investing in airport projects. Nepal should focus on monetising projects and luring private sector investment. The private sector can share the revenue generated through such projects with the government. The most important thing in PPP is strong commitment from the government, making somebody responsible for the delivery of projects. It also requires change in mindset of development stakeholders. When you are doing a PPP project it means that you are going against the traditional way of procurement and the approach of development. But people and government do not try taking risks and switching to a new development modality. They are willing to go with the traditional project development and execution method they know. This is the problem in many countries and a setback to PPP promotion.

It is said that private sector in Nepal is still not in a position to take up mega infrastructure projects while the government has limited resources. How can this financing gap be filled?

There is lot of money in the world. Probably, Nepali businesses are not quite ready to take some risks. Nepal should think of possible ways to mobilise money from India, UK, Germany and other countries for its development and growth. If Nepal structures the project properly and ensures good returns, investors will certainly come to Nepal. I don’t think money is the constraint for Nepal and its development.

As per the government, foreign investment in the country has been generating 25 per cent profits on average against global average investment profit of 10 per cent. Yet, investors are reluctant to come to Nepal. Why is it so?

As I said earlier, projects in Nepal are not structured and prepared properly. I think the return could be 25 per cent here in Nepal. But encouraging investors is also related to how you structure a project and the other transactions involved in the project development. Despite a good rate of return, investors will not come to Nepal if they see that they might lose all their money due to some other factors. It is also equally important how a country allocates the risk between the public and private sector. If the private sector is not ready to take risks while the government asks them to take risks, they will not come regardless of how much money you give. Going back to the history of infrastructure, a majority of infrastructure projects were built by the private sector, including railways and power plants in India. Why was the private sector investing in infrastructure then? I think they can do it today, even in Nepal in hydropower and other sectors. An investor sitting in Europe can invest around the world. But the question is why should investors invest in Nepal? The government has to give investors a reason to invest in Nepal. Even big Nepali corporate houses today are investing abroad.

What do you have to say on the current regulatory framework related to business and investment in Nepal?

The government is seen improving existing regulatory framework to promote business and investment. The focus needs to be on improving legal frameworks. However, good legal framework is not the only thing that investors take into consideration while investing. A lot of countries have failed to draw investments despite having good regulatory structures.

A version of this article appears in print on September 17, 2019 of The Himalayan Times.

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