Tulasi Prasad Sitaula is National Coordinator of the Office of Millennium Challenge Nepal (OMCN), which has been mobilizing the more than USD 630 million received from the Millennium Challenge Corporation (MCC) of the US government and Government of Nepal for the development of the energy and transport sectors. Sitaula, a former secretary of the Government of Nepal, was previously involved in policymaking and the implementation of transport infrastructure. Sitaula talked to IBN Dispatch about the key bottlenecks in infrastructure development and the significance of MCC funding for the development of energy and transport infrastructures in Nepal.
You have worked in infrastructure development at both the policy-making and implementation levels for a long time in the Government of Nepal. What is your assessment of the overall development of infrastructure in the country?
We fare very low in Nepal in terms of the overall delivery of infrastructure. However, satisfactory progress has been made over the last ten years in some sectors, such as energy and transport. The significance of these sectors has also grown with anticipation of the new federal set up. However, despite progress in road infrastructure, we have failed to maintain quality.
Bureaucracy is blamed for the poor performance in infrastructure development. What is your take on this?
Poor quality has marred road infrastructure in Nepal. However, quality has been maintained in the construction of bridges and hydropower structures, due to the use of sophisticated technology. Most of the roads constructed in the past were narrow and of poor quality, which is a major cause of accidents. The reality is that the government’s policy has focused on increasing the number of road rather than upgrading their quality. This has resulted in poor road infrastructure.
The government has been constructing new road structures and maintaining existing roads through private sector contractors, as practised worldwide. But, our private sector has failed to deliver quality infrastructure on par with expectations. Private contractors are only concerned with minimizing their costs, rather than maintaining quality in line with international standards. Even the officials who are responsible for the monitoring of construction work have ignored their responsibilities. Over the last few years, the number of contractors has gone up and construction work increased. But, the quality of domestic contractors has not increased commensurately, leading to poor quality construction, cost overruns and delays. This is a major challenge in the delivery of sustainable infrastructure.
In your opinion, which modality for the financing of infrastructure is appropriate for Nepal?
The public-private partnership (PPP) modality cannot work without government support in certain sectors. PPP is not feasible for superhighways, for at least another decade, because the existing number of vehicles plying roads is insufficient. Road tolls alone fund the construction and maintenance costs for such roads. Without Viability Gap Funding (VGF) – a kind of economic incentive from the government – private investment in road infrastructure will not be feasible. At the same time, giving financial incentives to private companies is likely to draw flake from the public. The public will ask why the government is providing cash incentives to private companies.
However, there are ways to make such projects feasible. We can learn from India about how to make expressway projects attractive for the private sector. For example, the Indian government provided land for the Jamuna Expressway, which links Agra with Delhi, for 30 years, in place of VGF, as the toll fee was not sufficient to cover the costs of constructing the road and ensure a profit for the developer. As the PPP model is all about risk sharing, the government must offer incentives to lure the private sector into infrastructure development. We need to come up with a new PPP Act to pave the way for more private sector involvement in infrastructure. India has made significant inroads in implementing infrastructure projects under PPP over the last two decades. In the beginning, the government had to provide incentives to private developers of expressways until the number of vehicles reached a level sufficient to recover their costs. We will need to continue support for at least the next 10 years for highways and 20 years for railways.
How can we attract more FDI into Nepal?
We need to immediately reform the laws governing PPP. We are currently overseeing the implementation of projects under the PPP model through the BOOT Act. The new PPP Act should focus on attracting private sector actors to develop infrastructure by offering incentives, which will help end the crisis of confidence between the government and developers. Also, a conducive environment is crucial for foreign investors, who are more sensitive about the security of their investment than domestic investors. We need to build up a favourable investment climate with lucrative incentives and establish project banks that offer potential for investing in different sectors in the country. Our PPP policy has also envisaged setting up a PPP Cell and Project Appraisal Cell to facilitate foreign investors. In the beginning, India offered VGF worth around 40% of the total investment to lure investors. Now, India is in a position to collect royalties from investors from the projects supported by the government.
You are the National Coordinator of OMCN, which is supporting hydropower and road transport in Nepal. What is the significance of MCC funding in Nepal?
In 2014, MCC conducted a study named ‘Nepal Growth Diagnostic’, which identified four key constraints on economic development in Nepal: a) policy implementation instability, b) shortage of electricity, b) high transport costs due to poor road infrastructure, and c) poor industrial relations and rigid labour regulations. Of these constraints, the MCC flagged energy and transport as a high priority, as the prospects for investment and impact are very high in both sectors. In both sectors, energy become the top priority for the MCC. At the same time, Nepal is witnessing significant growth in the number of electricity projects. However, the pace of construction of high-voltage transmission lines is very slow.
The Government of Nepal has decided to accept around NPR 51 billion from the MCC for projects. The MCC plans to develop a 300 km long 400KV transmission line for Lapsiphedi-Damauli, Hetauda-Galchhi, Damauli-Sunawal to link up with the cross-border transmission line in India. Under the transmission line project, three substations will be constructed to regulate the power trade between India and Nepal. The MCC is also supporting capacity enhancement programmes for officials working at energy-related offices, such as the Ministry of Energy, Department of Energy Development, and Water and Energy Commission Secretariat.
Of the total MCC budget (USD 630 million), around 75% is earmarked for the energy sector alone. The transportation sector is the second highest priority sector. The MCC is planning to establish a standard for maintaining and upgrading strategic roads. Five highways – the Mechi highway, Koshi highway, Sagarmatha highway, Hetauda-Bhaise-Bhimphedi highway, and Ameliya-Tulasipur highway – have been selected for piloting with MCC support. The MCC will also enhance the capacity of the Department of Roads and Road Board of Nepal to carry out maintenance work in a systematic and planned way.
Funds from the MCC must be spent within five years, with no provision for extending project implementation. So, MCC projects are planned and designed to be completed within the stipulated time and budget. The MCC wants to eliminate challenges in implementing projects in the energy and transport sectors by setting an exemplary model that can be replicated by others.
The US government has provided a huge amount, worth NPR 51 billion, through the MCC for use in the energy and transport sectors for the next five years, at a time when bilateral assistance is generally decreasing. This programme will bring significant progress and set an example in the energy and transport sectors, if we use the fund properly.
The MCC’s key funding is in transmission line development, at a time when the expansion of transmission lines is facing major challenges due to difficulties in acquiring land. How does the MCC deal with this problem?
You are right. We have acknowledged that land acquisition is the principal challenge in the process of expanding transmission lines. This is for three main reasons: a) lack of effective public consultations to address people’s concerns, b) insufficient compensation for land, and c) lack of a proper resettlement plan for affected people.
The OMCN is well aware of these challenges and has given high priority to stakeholder engagement to address the public’s concerns, including providing sufficient compensation and proper planning for the resettlement of affected people. We are following the Performance Standards of the International Finance Corporation (IFC) for stakeholder engagement, compensation determination and the resettlement of affected people.