Accelerating Public Capital Investment to Reduce Nepal's Infrastructure Deficit

A girl carrying vegetables to sell at the vegetable market in a rural area.
A girl carrying vegetables to sell at the vegetable market in a rural area.

By Chandan Sapkota

Public capital spending has been persistently weak in Nepal, and raising the amount and quality of capital expenditure required to close the infrastructure deficit is one of the country’s most pressing challenges.

Public capital spending has been persistently weak in Nepal, with both planned and actual spending languishing far below what is needed to close the infrastructure deficit, estimated to be between 8.2% and 11.8% of GDP per year until 2020. Raising the amount and quality of capital expenditure is one of the country’s most pressing challenges. Accelerated capital spending is needed to scale up infrastructure investments, create business opportunities, and lower the cost of doing business. This will help attract private investments, which are critical for Nepal to attain higher economic growth that is both sustainable and inclusive.

Source: Global Competitiveness Report 2014-2015, World Economic Forum.

In its provision and quality of infrastructure, Nepal is rated as one of the least competitive countries in the world, ranked 132 of 147 (see Figure 1). Disaggregating aspects of infrastructure, Nepal’s ranking on the quality of electricity supply is no. 136, on air transport infrastructure no. 129, and on roads no. 115. These low rankings indicate that Nepal needs high and more productive investment to foster innovation, make the economy more competitive, and enhance the efficiency of markets for goods, labor, and finance. Gross fixed capital investment has to be raised to at least 30% of GDP from the current 22% to support higher economic growth. At present, gross fixed capital investment is lower than the average for least developed countries, South Asia, and middle-income countries (Figure 2). Higher public capital spending is crucial, as it is the catalyst for private capital investment. Furthermore, higher public capital investment means higher disbursements for projects.

Source: author, based on WDI data

Capital spending comprises government spending on land, buildings, furniture and fittings, civil works, vehicles, plant and machineries, and other elements. The average planned capital expenditure in Nepal over the past 4 years was 5.6% of GDP, but actual spending averaged just 3.3% (Figure 3). Given Nepal’s huge infrastructure financing needs, budgeted capital spending is insufficient in itself to bridge the infrastructure deficit in such critical sectors as energy, transport, water supply and sanitation, irrigation, and telecommunications. The government’s recent commitment to meet certain infrastructure needs by developing public–private partnerships is an encouraging sign that the gap can be closed. A worrying observation, though, is that project spending has averaged only 71% of budgeted allocations in the past decade, indicating that the government is unable to fully disburse allocated funds on time. Actual capital spending has improved slightly lately, but it still largely remains below 75% of the planned capital spending.

Note: Years are fiscal years ending 15 July of that year. Changed report system to Government Finance Statistics (GFS) 2001 in FY 2012. In FY 2011, actual reporting was done based on GFS 2001, but budget allocation was done based on earlier GFS. Source: Ministry of Finance; ADB estimates

Efficient budget execution, critical for higher capital spending, has been hampered by bureaucratic hassles over project approval and by such structural issues as the limited capacity of line ministries to prepare a pipeline of projects ready to be implemented. Projects included in the budget despite lack of readiness has left large sums of money unspent at the end of each fiscal year. A project will face many problems in execution if it is launched without detailed design, clarity about land acquisition, project offices properly established and staffed with the required personnel, and detailed procurement plans. Further, delays affecting government ministries’ project approval and budget release, and inherent weaknesses in procurement, weak capacity of contractors and inefficient construction management have hobbled implementation. Finally, political interference and frequent staff turnover—which both weaken project planning and implementation capacity—are further obstacles to the desired acceleration of capital spending.

The government in Kathmandu recently took a number of decisions to tackle these challenges. It resolved to abolish or shorten some of the processes required for project approval at the National Planning Commission, require the advance submission of procurement plans for projects seeking approval, and provide better mechanisms for planning and monitoring projects to troubleshoot in a more effective and timely way critical issues that slow project implementation. The government is amending the existing Public Procurement Act to remove procedural hurdles for accelerated project implementation. Essential to boosting the quality and quantity of capital spending are prudent public finance management, better interministerial coordination, the elimination of political interference, better qualified staff and lower turnover of for project offices, careful planning and preparation, timely and efficient procurement, sound construction management and more diligent project monitoring.