Countries and Regions

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p. 10 of 20 BACK | NEXT I. Country Performance Assessment II. Country Operational Strategy III. Sector Strategies A. Agriculture B. Infrastructure C. Social Infrastructure and Environment D. Governance Dimensions of ADB Operations F. Gender Dimensions of ADB Operations G. Private Sector Development IV. Regional Cooperation V. Donor Activities and Aid Coordination VI. Cofinancing and Catalyzing External Resources VII. ADB’s Operational Program VIII. Economic and Sector Work Program IX. Local Cost Financing

Country Assistance Plans - Nepal : III. Sector Strategies

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B. Infrastructure

1. Energy

56. The strategy in the energy sector is to finance power transmission, distribution and rural electrification (the latter in support of the APP strategy for promoting economic growth and poverty reduction). A loan for Rural Electrification, Distribution and Transmission to be executed by the Nepal Electricity Authority (NEA) was approved in 1999, and ADB has emphasized to the Government the need to fulfill the conditions for loan effectiveness, particularly concerning the financial viability of the NEA. Although substantial assistance has been provided to NEA in the past, it still suffers from high technical and nontechnical losses and its financial situation is not sustainable. The commercialization of NEA is critical to improving the efficiency and financial sustainability of the sector. Priorities include reduction in high nontechnical losses; and implementation of NEA's commercialization strategy including strengthening of management capabilities, pursuing public-private partnership in generation and distribution, and ensuring increased autonomy for NEA. Compliance with the financial covenants of ADB loans is a prerequisite for sustainability, commercial viability, and future ADB assistance. Modalities will be sought for more effective and efficient delivery of electricity in rural areas through cooperatives or similar entities.

57. Consistent with the 1999 COS, ADB will work with the Government and other donors to formulate a well-defined institutional, policy, and legal framework for private sector participation in hydropower development, and in developing modalities for effective public/private partnership, including possible restructuring of NEA. An ADTA project is planned in 2000 to support Efficiency Improvements and Restructuring of the Power Sector. A Rural Renewable Energy PPTA is provided in 2001, and a Rural Electrification II Project TA is included in the 2002 program. ADB has informed the Government that the TA program would only be processed if the Rural Electrification, Distribution and Transmission Project is made effective in 2000.

2. Transport

58. ADB's strategic objectives in the transport sector are to (i) continue to improve the existing core network, (ii) ensure adequate funding for operation and maintenance of existing transport facilities, (iii) support subregional linkages (iv) institutional strengthening, and (v) promote private sector participation (including the civil aviation subsector). These objectives will contribute to achieving the sectoral goal of promoting economic growth and thereby alleviating poverty.

59. Road transport along the east-west highway in the country provides the only connection between the eastern and western parts of the country and to the international trade route through India via Calcutta. The recently completed PPTA for the Fourth Road Improvement Project¹⁸ (loan for 2001) includes proposed investments to improve the existing road network including vital segments of the east-west highway that will facilitate transport and trade across the border with Nepal's most important trading partner, India. This Project will also introduce a road maintenance fund to provide adequate provision for operation and maintenance, to protect the existing asset base. These efforts will be continued in the Fifth Road Improvement Project, for which a PPTA will be prepared in 2003. A PPTA on subregional road connection proposed for 2002 will prepare a project improving road trade and transport links with adjacent countries. Two ADTAs in 2001 will assist in the institutional strengthening of the Department of Roads, and the Civil Aviation Authority of Nepal. The Civil Aviation Authority of Nepal was established under the ongoing Tribhuvan International Airport Improvement Project¹⁹, to focus on introducing greater commercialization in the sector. These projects and ADB's involvement in the road subsector will be subject to the performance of the ongoing road project, on the capacity of the Department of Roads and the reactivation of the previous delegation of authority to the Director General, Department of Roads, for contract variation approvals. ADB will generally only support road improvement; any proposed new road construction will have to be justified, including the introduction of cost recovery measures.

3. Finance and Industry

60. The Government has emphasized the need for financial sector development as one of its policy priorities to stimulate economic growth, but has yet to introduce specific reforms in the sector. ADB's policy dialogue with the Government has focused on streamlining legislation and regulatory responsibilities, removing existing distortions, and building the management and oversight capacity of regulatory agencies and information providers. Key agencies for initial interventions in corporate governance include the Securities Board, the Company Registrar, and the Institute for Chartered Accountants of Nepal. Policy discussion has emphasized raising the level of transparency and information disclosure through improved accounting and auditing standards. For the financial sector, ADB will coordinate with the World Bank and International Monetary Fund on strengthening the Central Bank's capacity to regulate nonbank financial institutions. Reform of the large state-owned development banks is envisaged for a later stage of the process once an appropriate regulatory environment is established. Reform of the Agricultural Development Bank of Nepal will be considered in the broader context of rural finance reform, which will take as its institutional focus the commercialization and financial viability of the Agricultural Development Bank of Nepal and the Rural Microfinance Development Center. ADB's intervention in the financial sector will focus on promoting an effective financial system in support of economic growth and poverty reduction, on broadening access to financial services both in urban and rural areas, and on supporting private sector development.

61. As part of the task of improving corporate and financial governance, a loan is proposed in 2000, and would be supported by a cluster of five ADTAs and PPTA²⁰ for Institutional Support for Corporate and Financial Governance to be implemented over a three year period. Each of the five TAs will focus on specific aspects of the reform program, including accounting, regulation, legal reforms, information technology, and rural finance. In addition, a 2000 ADTA will help to reform company and insolvency laws as a foundation for further reforms in the sector²¹. The processing of the reform program is being closely coordinated with the International Monetary Fund and World Bank programs in the Nepal Rastra Bank (the Central Bank) and with government-owned commercial banks. A follow-up cluster TA to provide further institutional support for the long-term assistance program for corporate and financial governance is planned for 2003.

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