Infrastructure Finance Strategies for Sustainable Development in Nepal

Abstract

Infrastructure gaps present a significant challenge for Nepal’s short and longer term development goals. To provide a comprehensive picture of the required investments, the study reviews the period plans, development reports, and updated data from the Ministry of Finance. It also assesses the available resources in the economy, as well as the financing strategies, to fund the infrastructure deficit through domestic and international resources.

In doing so, the study reveals that Nepal has to invest between 8 to 12 percent of GDP until 2020, well over a billion dollar annually, to adequately develop its infrastructure. To meet such burgeoning financial requirement the government has been increasing its budget and expenditure over time. However, this study finds the evidence that jerry-built capital investment can make public spending suboptimal and that project selection and implementation need to be improved.

While assessing the fiscal space in the economy, the study notices that the government has still room to undertake more productive infrastructure investments although fiscal deficits are likely in the coming years. The study also discusses the tax incentives provided to the infrastructure sector, in particular for the hydropower sector, and points that these kinds of tax expenditures have eroded the revenue base of the country.

The study then analyses the current level of private sector participation in Nepal infrastructure development and sketches the current PPP policy process. Subsequently, the study reviews the bank, capital market, and institutional investor capacity to further finance infrastructure projects. Such review shows that apart from the maturity mismatch and lack of capacity to assess the infrastructure projects, the regulatory norms also restricts these institutions to provide long-term project finance. The study also examines the role of state-owned enterprises in infrastructure development as well as the state policy in this area.

Following this in-depth analysis, the study proposes six financing strategies for infrastructure development in Nepal. It first recommends mobilizing the available domestic resource up to the regulatory limit, then suggests filling part of the gap through further private sector involvement. It also identifies measures to improve public expenditure efficiency by enhancing project prioritization, making the most of the infrastructure assets and streamlining infrastructure project delivery. It also considers ways to mobilize the growing climate finance-related sources of funds as well as the possibility of establishing intermediary institutions for local and urban infrastructure financing. The study also highlights the scope for increasing Non-Tax revenues as another means to free resources for infrastructure development.

Given the amount required, the study concludes by recognizing that all these strategies will have to be considered as none of them can tackle the Nepal infrastructure challenges on its own.

Keywords: Infrastructure, Economic Development, Finance, Nepal