Issues and prospects in developing resilient infrastructure in Nepal

Nepal has the potential to generate a significant amount of clean energy by mobilizing investments and developing access roads, transmission lines, and hydromechanical infrastructure.

Dr Govinda Raj Pokharel

  • Read Time 6 min.

In the 21st century, the prosperity of a nation or society depends on the seamless movement of goods, people, money, and knowledge. To achieve this, better infrastructure is crucial, as it reduces the cost of production. The United Nations has adopted sustainable development goals (SDGs) that specifically aim to build resilient and inclusive infrastructure, fostering innovations in its development to enhance livelihoods. The SDGs also target the upgrade of all infrastructures for sustainability. Human beings, in their pursuit of economic activities, require infrastructure for travel, residence, and the transportation of products, services, and essentials. The movement of people and goods relies on hardware infrastructure, and the efficiency of this movement can be further increased through the application of software, including technology, policy, politics, attitude, and awareness. The movement of knowledge and money is facilitated through political decisions, creating the necessary mechanisms, environments, and institutions.

In some countries in South Asia, the total cost of some products includes a 30 percent transportation charge due to poor infrastructure. Nepal faces similar challenges, leading to a high unit cost of production. Nepal requires improvements in electricity, roads, airways, telecom, settlements, and water infrastructures, which are key inputs for production. These improvements can help reduce transaction costs, facilitate mobility, and enhance overall sector productivity. With better and seamless infrastructure, Nepal can make its products and services competitive and connect to the global value chain. 

An annual average investment of more than USD 12 billion is needed for Nepal to achieve SDG goals in water and sanitation, energy, transport, tourism, industry, housing, and urban development sector infrastructures. In addition to the growing demand for private sector infrastructure facilities, federalism is driving massive infrastructure construction and creating a policy environment to attract more investment. A few years ago, the PPP (Public Private Partnerships) Act was promulgated, giving the Investment Board of Nepal more authority. Many policies are being synchronized to create a more favorable environment for private investment in infrastructure to meet the growing demands.

Digitization and Information and Communication Technology (ICT) infrastructure can transform the way we handle various processes, increasing productivity and efficiency. Similarly, Nepal has the potential to generate a significant amount of clean energy by mobilizing investments and developing access roads, transmission lines, and hydromechanical infrastructure. In addition to funding from commercial banks for various infrastructures, Nepal also has access to private and concessional funding from multilateral banks, bilateral banks, Exim banks, and other emerging financial institutions for infrastructure development. This indicates that Nepal has ample opportunities to develop and mobilize investment in infrastructure for economic development, provided that we improve our policy environment and build the capacity of both government institutions and the private sector.

However, Nepal has been developing infrastructure by utilizing scarce resources. To optimize resource allocation, Nepal needs specific strategies for infrastructure development. The National Planning Commission has established criteria for large infrastructure projects, with the first being the strategic case. The rationale for any project development must address why the change is necessary. Is it for inclusive development, enhancing growth, promoting national unity, or a combination of these factors? Projects must also provide justifications for their developmental impact, particularly for large-scale infrastructure projects aimed at socio-economic development. What are the anticipated economic outcomes, job creation potential, and the social, cultural, and environmental value the project would bring to the public? These questions should be thoroughly addressed to ensure effective and efficient use of scarce resources.

Similarly, significant projects must justify their financial cases as well. Questions such as affordability, the availability of resources for investment, the role of the private sector, and the likelihood of attracting Foreign Direct Investment (FDI) need careful consideration. New projects incorporating advanced technology must also pass technical due diligence, addressing whether all technologies are known, tested, and available. It is essential to evaluate if Nepal can maintain and sustainably operate the project in the long run. If the government is the sole implementer, questions arise about the efficiency of project execution, monitoring, and evaluation by government institutions alone. Alternatively, if the private sector is involved or the project is implemented through Public-Private Partnership (PPP) modalities, it is crucial to ensure effective collaboration. There is a need to assess whether there are adequate rules, regulations, and legal provisions for innovative financing and delivery mechanisms. By addressing these questions, we can optimize the use of scarce resources in large infrastructure projects.

Despite the enormous potential for infrastructure development contributing to the economic transformation of our country, several challenges plague both planned and ongoing infrastructure projects. One critical issue is the prolonged and complex process of environmental impact assessment (EIA) and its approval. This extended approval timeline results from a combination of factors, including a lack of capacity and conflicts of interest. The delays in the approval process not only demotivate investors but also escalate project costs. In some instances, resources are allocated, and decisions are made for bidding before completing the environmental clearance processes. An embedded issue exacerbating project delays is the time-consuming and costly process of obtaining forest clearances. This can render projects less financially viable. Many mega and medium infrastructure projects face delays and increased costs due to the inadequate enforcement of land acquisition policies. Private contractors and developers often find themselves compelled to pay exorbitant sums in compensation, leading to losses in the construction business. Addressing these issues is crucial for streamlining infrastructure projects and making them more attractive to investors. 

The government still lacks clear guidelines and policies for benefit-sharing with local beneficiaries, leading to ambiguity in benefit-sharing modalities. This lack of clarity has resulted in conflicts at project sites, consuming significant time and resources. In many cases, developers and contractors are left to resolve these conflicts. The absence of clear guidelines for benefit-sharing has not only led to disputes but has also added to the time and resources spent on project management. Moreover, the lack of availability of construction materials further exacerbates project delays and inflates costs. Studies indicate that over 50 percent of projects are adversely affected by delays in procuring aggregates and other materials. Conflicts with local residents, complications created by government agencies, and a lack of governance in monitoring the mining, transportation, and storage of local materials unnecessarily increase costs. The unexpected rise in the prices of local construction materials also demotivates contractors, as their profit margins become less attractive, hindering the timely completion of assignments.  

Regular disasters such as earthquakes, floods, and landslides are inflicting significant costs on our infrastructure. These events are driving up the unit cost of our infrastructure. There needs to be a policy and perspective change in designing, costing, and building the capacity of the private sector and developers. Also, there should be a shift towards insuring these infrastructures to ensure the effective utilization of scarce resources in developing resilient infrastructure.

Lack of capacity within the government system, such as in contract management and quality control, is impeding the efficiency and cost-effectiveness of infrastructure projects. The government has not allocated its budget to build the capacity of contractors, and despite numerous mega projects, Nepali contractors still lack the ability to complete assignments within specified periods. 

Another challenge is the shortage of skilled workers and professional human resources locally. Collaborative efforts among government agencies, academic and vocational training institutions, and private developers are necessary to introduce on-the-job training and internships to enhance the capacity of human resources. Despite government planning, many non-engineering infrastructure projects are still being undertaken. Private sectors have not been consistently engaged with local and provincial governments to upgrade their capacity. The lack of regular interaction and collaboration with experts and government agencies has resulted in issues such as proper planning, capacity building, governance, project finance, and timely payments not receiving adequate attention for resolution. Many local governments still initiate haphazard and non-engineered construction of infrastructure projects due to a shortage of human resources and the absence of strict policies. These unplanned and non-engineering activities are inefficiently allocating scarce resources and promoting bad governance.

Many projects are initiated without ensured funding, leading to numerous challenges, and contractors often face delays in receiving timely payments. This situation results in construction delays and cost overruns. There are issues related to unclear construction modalities, especially in public-private partnership projects. In modalities like BOOT (Build, Own, Operate, Transfer) and EPC (Engineering, Procurement, Construction), legal complexities have led to the challenges, and only hydropower projects seem to have achieved success under these modalities. Private sectors are not sufficiently motivated due to the lack of a better, transparent, and safe law and order environment. The construction sector faces issues related to the lack of inter-ministry coordination, hindering facilitation and decision-making processes. To ensure sustainable infrastructure sector development, the government needs to collaborate with all stakeholders to resolve these issues. Despite these challenges, Nepal has immense potential for infrastructure development, and it can still attract many private investors to meet the growing demands and contribute to the overall socio-economic transformation of the country. Resolving these issues is crucial for creating an environment conducive to successful and efficient infrastructure development.

[Dr Govinda Raj Pokharel is a former Vice Chair of National Planning Commission. This article was initially published in a souvenir of the Federation of Contractors’ Association of Nepal.]