Dr. Swarnim Wagle is a member of National Planning Commission (NPC) - an apex policy-making body for the Government of Nepal. This is his second stint at the NPC. A graduate of three of the world’s top universities, including Harvard, Dr. Wagle was working at the World Bank in Washington DC when he was requested by the then Government to return home to serve in public office three years ago.
A pragmatic economist with broad international experience, Dr. Wagle shared his views on Nepal’s economic development with IBN Dispatch .
You have closely observed international investment trends in the development of infrastructure. How is the situation in Nepal?
We fare very poorly. The World Economic Forum has ranked us as having the worst physical infrastructure in Asia. Among 138 countries assessed globally, we stand at 130th. This is abysmal for three reasons. First, the overall investment envelope, both from the public and private sectors, is grossly insufficient. Second, whatever we spend is mis-prioritized, mis-allocated and mis-spent. Third, our core sectors of comparative advantage are all amenable to massive investments in infrastructure, such as connectivity, tourism, energy and modern tradable services, yet they remain unexploited relative to potential.
Among these sectors, there is some excitement now on energy. Prolonged power cuts have ended. In 1990, we had less than 250 MW of installed capacity. In two years, we will more than double the existing capacity of about 900MW to over 2000MW, with a significant share accounted for by private producers.
On physical connectivity, there is much to lament, despite having identified an impressive portfolio (as Projects of National Pride) of North-South and East-West highways that can really unite this country economically. Three additional international airports are also being built which will help us become part of regional and international markets, but progress is slow, and we need a “war room” mentality to expedite them. For example, the long-stalled Kathmandu-Tarai expressway, which will be transformative in reducing trading costs and in unifying Nepali economy, is finally going ahead.
Unlike in the energy sector, we have not been very welcoming of the private sector in the connectivity agenda. This needs to change. Similarly, while the primacy of the public sector will remain in other infrastructure areas, such as irrigation, drinking water and sanitation, there ought to be greater space for private or PPP projects in ICT and tourism. We have leapfrogged in these areas, but still need to do more. The number of telephones we had in 1990 in the entire country was about 71,000; today, Nepalis carry 28 million cellphones. In tourism, after two decades of slow growth, major investments are now flowing in. We need to diversify both in terms of the products we sell and the markets we serve. For example, we have sold Nepal cheap; and we still have not realized that the big spenders in large numbers live within a short haul flight from Kathmandu.
The 14th plan has set target to achieve average 7.2 percent growth. Similarly, targets to graduate from Least Developed Country status by 2022 and become a middle-income country status by 2030 are also with us. Can we meet these targets?
I believe all these targets are conditionally achievable. This fiscal year, our economy is expected to have grown by over 7%. But this was almost a one-off statistical windfall – growth last year was at zero percent, so we had a narrow base; electricity problems were managed well; trade flows normalized; remittance inflows continued to fuel demand for services; and we had very good monsoons that lifted agricultural production. To have a high and sustained economic growth rate for at least a decade, we cannot always rely on a one-off set of events. We need painful economic reforms that form a credible basis for large investment inflows. This has to begin with capital formation in the infrastructure sector. But alongside reforms and resources, we need to overhaul the way we manage projects too.
Going forward, we have some reasons to be optimistic. The recent local level elections, for example, fill a twenty-year political vacuum. This will expedite public spending at the local level, and relieve the federal government to focus on initiatives that are longer term and large-scale in scope.
As for LDC graduation, we are on track to meet two of the three criteria set by the UN in two consecutive triennial reviews. So, purely on technical grounds, we will probably graduate on the strength of two non-income criteria. But the government is keenly aware that a meaningful graduation to developing country status requires much higher per capita income. We fear that graduation propelled on non-income criteria alone is vulnerable to reversal. This is where the 2030 milestone of becoming a middle-income nation becomes ever more salient. Because 2030 is also a year to meet the Sustainable Development Goals, our hope is that an economically dynamic country will pave the way for enhanced MDG-plus attainment of goals in the social and environmental sectors too.
What are the key bottlenecks for project implementation in Nepal?
Let me single out five generic constraints. First is the lack of preparedness. Most projects are initiated even without a detailed project report (DPR). We tend to kick the can down the road -- complex issues are often left to be solved later when the project has already commenced. Financial incentives are not designed to be unambiguous and non-discretionary. Second, we have persistent difficulties procuring land and securing forest clearances. We need to adopt a flexible compensation modality and complete Environmental Impact Assessments within a few weeks. Third is our chronic deficit in capacity to draft and honor contracts. Fourth, it is the ready unavailability of construction materials. We are yet to strike a healthy trade-off between vital construction needs and legitimate commitments to protect our pristine environment. In the absence of a consensus, we are prone to swinging to the extremes. Fifth constraint is personnel management and performance monitoring. Ensuring steady leadership and management, punishing bad performers and rewarding competence is a standard practice elsewhere. But because we have politicized staffing, procurement and contracting, we have a long way to go to meet international professional benchmarks.
What would be your message to those investors to showcase Nepal as a lucrative investment destination?
Three of our advantages are unique. Investing in sources of energy that are one hundred percent clean; Nepal’s varied beauty forms a perfect bedrock for a distinct set of services; and our location in Asia, not just between China and India, but also places from Dubai to Denpasar are within easy reach. Global investors are always looking for an edge. Nepal’s clean energy and exotic location gives them a premium. Tourism is still a virgin territory for investment as we have not exploited corridors other than Kathmandu-Pokhara-Chitwan. We need to diversify destinations, attract higher-spending and longer-term tourists. We need to think in terms of marketing our landscape, not just traditional budget tourism.
But, Nepal should not give up on manufacturing yet. Although we can’t compete directly with countries like India, China, Vietnam and Bangladesh for mass manufacturing, Nepal can be a producer for niche goods, amenable to being parts of regional production networks. The Tarai is a natural candidate for this. In other regions, we need to promote products with high-value-to-weight ratios. FDI has been seen to transform economies, foremost through manufacturing.
How far are we in utilizing Foreign Direct Investment for economic prosperity?
Our record is sub-optimal, explainable in part by the lack of economic reforms, but also our political difficulties of the past 20 years. We need FDI to meet our financing constraints for large-scale projects, to bring us up to speed with technologies and management practices that are state of the art, and to link us with foreign markets through new network conduits that accompany FDI. Despite tremendous potential, we have been able to attract only about USD 50-60 million in annual FDI which is negligible, relative to the size of our 25 billion dollar economy. If we can ramp up average FDI flows to about USD 1 billion, year after year, we can nudge our economy in significant new ways. If post-conflict Rwanda is attracting FDI flows worth 4%-5% of GDP, why can’t Nepal? I think the letters of intent (LoIs) signed at the recently-held Nepal Investment Summit signal these lofty possibilities. We need to seize these opportunities with a pro-active follow-up and a willingness to deal with large investors on a case-by-case basis. I have seen how targeting of “anchor” investors can lead to a surge in FDI. You can look at what Intel’s arrival did to Costa Rica or Vietnam, for example.
We heard you recently went to observe the Arun 3 Hydropower development project site in Sankhuwasabha? What is your observation of the progress in the field?
I was encouraged to see substantial progress being made deep in the heart of remote Sankhuwasabha. As we all know, Arun 3 resembles a missed opportunity for Nepal when it got cancelled 20 years ago as a result of a combined myopia of the World Bank, one of our political parties and a few NGOs. Everyone now realize their folly, and this project enjoys massive political and popular support. The project developer is planning to award contracts for construction of project structures by September with the aim of completing the project within five years. However, two issues are still not resolved. One is forest clearance in the buffer zone of the Makalu Barun national park, and the other is disputed compensation to land owners of a section of the access road to the powerhouse. I am told the cabinet will resolve both issues soon. The Koshi Highway, which not only provides access for this particular project, but will eventually link Biratnagar with Kimathanka (and India with China) needs a major upgrade. Soon, there will be heavy vehicular traffic there, and the quality needs to be much higher. Overall, I came away hopeful that this project will eventually yield multiplier effects of international proportions. It carries with it immense symbolism, and all our hopes of a rapidly transformed Nepal by exploiting some of our innate advantages in clean energy, quality tourism, and connectivity (road, air, energy grid).