Keynote address by Ashok Lavasa, ADB Vice President for Private Sector Operations and Public–Private Partnerships, at the Nepal Infrastructure Summit (NIS) 2022, 8 September 2022
Distinguished Guests, Ladies and Gentlemen. Greetings all! I am delighted to be with you here to speak on today’s topic “Infrastructure for Growth.” I would like to acknowledge and thank the organizers of this Summit, the Confederation of Nepalese Industries, for hosting the fourth edition of this forum, which will not only allow participants to showcase investment opportunities, but also promote knowledge sharing. The theme of today’s session is very relevant and timely. The COVID-19 pandemic has highlighted underinvestment in public health and related infrastructure in many countries in developing Asia. ADB estimated that the Asian economy could suffer between $1.7 trillion and $2.5 trillion in losses as a result of the COVID-19 pandemic. It was estimated that global employment decline would be between 158 million and 242 million jobs, with Asia and the Pacific comprising 70% of total employment losses. In Nepal, fiscal and monetary stimulus and eased COVID-19 lockdowns enabled the economy to rebound in fiscal 2021. Latest official estimates show that Nepal’s economy grew by 5.8% in FY2022. This estimate is underpinned by an ongoing vaccination campaign that has fostered a gradual normalization in economic activity and a steady path to higher growth supported by accommodative macroeconomic policies.
On the positive side, the Asia and the Pacific region is now on the path of recovery with lower case counts and rising vaccination rates. However, we need to be mindful that there are other global events that are affecting efforts to return to stable growth, including the ongoing conflict in Ukraine and its effect on fuel and food prices, PRC’s zero-COVID strategy which has had a severe effect on the global supply chain, and the continuing challenges due to climate change which leads to uncertainty in people’s lives and livelihoods.
Nepal is one of the world’s most climate vulnerable populations. Nepal’s agriculture sector, which employs around two-thirds of the labor force and contributes to roughly one-fourth of the country’s GDP, is particularly vulnerable, affecting both farmers and agribusinesses. German Watch’s Global Climate Risk Index 2021 ranked Nepal 10th in the global list of most vulnerable countries to climate change between 2000-2019. In October 2021, ADB elevated its ambition to deliver climate financing to its developing member countries to $100 billion from 2019-2030. This ambition includes support for the climate agenda in climate vulnerable countries such as Nepal through measures such as: (i) new avenues for climate mitigation, (ii) a scale-up of transformative adaptation projects, (iii) support for a green, resilient, and inclusive recovery from COVID-19, and (iv) support to advance reforms in developing member countries through policy-based lending. My colleague, Warren Evans, will talk about some of the broader climate related issues relating to infrastructure development shortly.
According to ADB research, developing Asia will need to invest $1.7 trillion per year in infrastructure until 2030 to maintain its growth momentum, tackle poverty, and respond to climate change. The economies of many developing member countries have been severely impacted by the pandemic leading to a deficit on the revenue side. At the same time government expenditures have gone up as funds were increasingly diverted to fight the immediate impacts of COVID-19 particularly in health and social programs. This has left less fiscal space for governments to fund the development of much needed public infrastructure and services. Governments emerging from the COVID-19 pandemic are waking up to constrained budgets and limited fiscal space to fund the development of much needed public infrastructure and services. Nepal's public debt increased by 35.5% in FY2019/20 amid mounting expenditures to mitigate COVID-19 and falling tax revenues due to slowdown in economic activities. In this constrained environment, the government is looking towards the private sector and public-private partnerships (PPPs) as a viable alternative procurement option to bring in private sector expertise, know-how and capital.
Nepal is no exception to this approach, and ADB is very supportive of the clear and comprehensive 5-year Strategic Plan which has been prepared by Investment Board of Nepal (IBN) to improve the enabling framework for much greater private sector participation. IBN has set ambitious goals in their latest Strategic Plan to manage PPP projects of at least USD 6 billion over the next 5 years. However, until there is a workable enabling environment that support well-prepared and well-structured PPP projects with fair risk allocation, the private sector will not come in. In Nepal, the ongoing liquidity constraints and the balance-of-payment concerns have heightened the risks for private businesses.
While PPPs are gaining a solid foothold, it is also true that there are a lot of impediments and challenges. Although each country has its specific context and issues, the following three key areas can broadly make PPPs even more effective.
First, if you want PPPs to have a transformational role and not just a transactional one, creating “enabling environment” is indispensable to attract private investment. PPPs create risks, which cannot be ignored. Governments with good track records of PPPs have typically taken measures such as (i) development of solid legal, regulatory and risk management frameworks, (ii) strengthening the government’s project development function and capacity with a strong focus on value for money, and (iii) ensuring integrity and transparency in the procurement process.
Second, more PPPs can be implemented if governments deepen their knowledge and capacity, particularly in project preparation. It is important to select the right projects to pursue, and to manage fair and transparent bidding. Capacity building programs are one way to address this issue and another important approach includes creating dedicated project development funds such as ADB’s Asia Pacific Project Preparation Facility, which can focus on preparing and structuring bankable PPP projects for private investment.
Third, local and regional capital markets need to be deeper and broader to channel Asia’s large savings to infrastructure investment. It is also essential to strengthen the expertise of local banks in project finance. This is a technical skill and important as most PPPs are financed on a standalone basis. For example, ADB supported the Bangladesh Government to tackle traffic congestion and improve road safety through a modern four-lane Dhaka Bypass Expressway via PPP and mobilized long-term local currency financing through a sovereign loan to the Bangladesh Infrastructure Finance Fund Limited (BIFFL).
Upstream PPP support
Governments must provide critical support in establishing the right policy and regulatory frameworks for capital mobilization at scale, thereby creating an enabling environment for public-private partnerships to thrive. The Office of Public-Private Partnership (OPPP) at ADB has worked together with many governments and regulatory bodies in helping create policy and regulatory frameworks to increase investment opportunities. In Nepal, significant steps have already been made in enacting a PPP regulatory framework and various PPP guidance documents. ADB is now working with IBN to discuss ways in which ADB (OPPP) can provide upstream support through PPP capacity building and PPP project pipeline development. A transparent regulatory environment will assure private investors and reduce uncertainty. Improving coordination between government agencies is critical to ensure that the country’s growth strategy is uniformly captured into national economic planning. Nepal’s approach to ensure participation of subnational governments is a step in the right direction.
To facilitate a higher degree of private sector investment, governments must identify investment opportunities and develop public-private partnership (PPP) structures and adequate risk-sharing mechanisms to absorb demand shocks. Again, ADB (OPPP) has supported governments and the public sector undertakings in project development and structuring efforts which have then been partnered with the private sector for development. This has led to successfully bidding out to the private sector some large projects such as in Cambodia (National Solar Park), Uzbekistan (Sherabad Solar Project) and Bangladesh (Dhaka Bypass). There should also be use of long-term contracts and defined key performance indicators to create the optimal risk allocation and to enhance the private investors’ confidence in the long-term sustainability of their investments. Additionally, embracing digital transformation agenda is required to leapfrog development. The pandemic has mainstreamed the use of technology in many facets of daily life. The adoption of digital technology can improve Nepal’s connectivity and close the digital divide.
Midstream PPP support
ADB also offers midstream PPP support in the form of transaction advisory services which meets the critical need for a trusted advisor who can assist in bringing investable projects to the market. The Office of Public-Private Partnership is seeing increasing demand for its advisory services as governments build back better. Synergies between the public and private sector are a crucial factor in determining the success of any public-private partnership. ADB provides project preparation and advisory services in preparing bankable projects that can attract private capital. ADB supports our governments at every step through the planning, identification, design and structure, bidding, selection, and monitoring of projects. ADB also advises our governments to ensure that the design of the infrastructure projects are climate resilient and sustainable. Some notable examples in the region include the Bangladesh Dhaka Bypass and the Rampura-Amulia-Demra Toll road that achieved commercial closure early this year.
Role of private sector in infrastructure development
Support for private sector development, public-private partnerships and nonsovereign operations are an important agenda for ADB, in relation to infrastructure development in Nepal. Greater private sector participation is essential to mobilize resources, introduce innovation and technology, bring better management, and most importantly, ensure sustainable development results. There are two main ways in which multilateral banks can augment the role of the private sector: (1) by assisting governments in creating conditions for appropriate market-oriented growth, and (2) by crowding in private capital flows. Obtaining a sovereign credit rating for the country is important, as it will pave the path for mobilizing commercial capital from the international market.
In addition to financial assistance, ADB also has a robust safeguards policy which aims to help countries address environmental and social risks in development projects and to minimize and mitigate, if not avoid, adverse project impacts on people and the environment. ADB’s environmental safeguards aim to ensure the environmental soundness and sustainability of projects, and to support the integration of environmental considerations into the project cycle. The safeguards policy requires borrowers to identify project impacts and assess their significance, to examine alternatives, and to prepare, implement, and monitor environmental management plans. It also requires borrowers to consult people likely to be affected by the project and disclose relevant information in a timely manner. Similarly, ADB’s social safeguards requires borrowers to conduct meaningful consultations with affected parties and to ensure that adverse social impacts are prevented or mitigated.
In the past, ADB has provided technical and financial assistance to support sustainable infrastructure projects in Nepal. ADB will continue to explore private sector operations for long-term lending for infrastructure development, such as electricity generation from hydropower and other renewable sources. ADB’s nonsovereign operations will explore ways to scale up business models and technology solutions to increase their impacts, focusing on gender equity, inclusive finance, and climate change adaptation, in line with defined government priorities. ADB will also endeavor to diversify into other segments of infrastructure such as high-quality telecommunications services, clean and affordable transportation, urban infrastructure and services, and tourism infrastructure.
In closing, I would like to commend the steps taken by the government to promote investment in Nepal and the Asian Development Bank is committed to continuing to assist Nepal in attracting private sector investment by developing the enabling environment as well as by building internal capacity. Thank you very much for listening ladies and gentlemen.