NEPAL: 3 “Is” for GrowthInvestment, Infrastructure and Inclusion

Articulating a vision for Nepal’s development and implementing it

Nepal’s main development challenge is to boost growth

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Average growth remained broadly flat since 1995 with structural transformation in reverse. It will take higher and better growth to achieve Nepal’s ambitious goals

To reach middle income status by 2020, Nepal would need to grow at least 7 percent per year.

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 20270

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GNI per capita under various growth assumptions

with 4.5 percent with 7 percent

Redefining the growth model will be key

Potential for a virtuous circle

Reduced risk of conflict & strong investment climate

INCLUSION

INFRASTRUCTURE

INVESTMENT

Investment for Structural transformation Technology upgrading Knowledge spillovers Infrastructure development

Infrastructure for Electricity: to power households and firms and

generate FOREX revenues Transport Connectivity: to unlock Nepal internally

and externally and expand the reach of markets and services

Inclusion to Make poverty history Allow individuals and households to realize their

full productive potential (mobility /protection) Achieve a more harmonious and stable society

To rekindle faster and sustained growth and make poverty history will require focus on 3 “Is”

• Unlock Nepal’s hydro-potential

• Expand connectivity within Nepal and with its neighbors

• Improve the investment climate• Streamline public financial

management• Strengthen the financial sector

• Boost agricultural productivity and diversity• Expand the opportunity set of all Nepali

• Enhance the poverty impact of social protection programs• Prepare for decentralization

Building blocks

Investment

Infrastructure

Inclusion

Policy Agenda: Investment

The first I: increasing private and public investment

1) Create a conducive investment climate

2) Streamline PFM to boost K spending

3) Increase financial sector stability & efficiency

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Nepal: Savings and investment (%GDP)

Total GFCF Gross domestic savings Gross national savings

Improving the environment is key for private investment• Improve A2F

• Alleviate regulatory burden for domestic and foreign investors

• Reduce non-wage labor costs and improve monitoring

• Incentivize production for exports (subsidies and trade finance)

• Attract FDI

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Average number of days lost due to labor issues in Nepal(2009 vs. 2013)

days lost due to trade union actiondays lost due to civil unrestdays lost due to employee abstenteeism

21% 19%

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' Obstacles to export activity in Nepal (2013)

Types of license No. issued / year

Total Processing days

Mean processing

days

RangeProcessing

days

Business and Tax Registration Licenses 103,895 957,948 9 2 to 120

Conditional/ Restrictive Licenses 40,615 932,675 23 1 to 180

Pre Operational Approval 22,523 599,855 27 1 to 390

All Enterprise licenses 167,033 2,490,478 15 1 to 390

Better PFM is needed to leverage fiscal space for impact

Boost budget execution• Reform the budget process in depth (with focus on “how”)• Front load capital project preparation • Enforce ceilings and limit virements• Strengthen local contracting, implementation, supervision

Strengthen accountability• Scale up TSA system into

Financial Management Information System (FMIS).

• Strengthen audit institutions and practices

• Enhance accountability of local governments

Develop a vision for PFM reform• Using insights from PEFA• Including competency audit

and capacity building

74%86%

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Access to banking services in Nepal (2009 vs. 2013)

% of firms withchecking/savingsaccount

% of firms with line ofcredit/loan from fin.Institution

Expand the efficiency and reach of the financial sector:• Restructure state control banks that distort the market

• Rebalance policy priorities from development toward stability in the context of a holistic A2F strategy

• Incentivize (rather than mandate) credit expansion through better credit information and collateral registries • Enforce enhanced transparency in disclosure of effective costs of financial services

A strong and stable financial sector is a necessary foundation

Capacity for financial supervision and crisis management :• Legislation: NRBA Amendments; DCGT;

BAFIA Amendments• Capacity building: strengthen FSMD to

function in the context of a financial crisis

Implement AML and CTF regulations• Build capacity of DMLI and Special Courts

The second I: boost infrastructure

Focus investment on…

INFRASTRUCTURE

The BIG two

Electricity Transport

Policy Agenda: Infrastructure

Investment needs per year by sector 2011-2020(Source: World Bank 2014)

Sector Average share of GDP, in %

Electricity 3.3 - 4.5

Transport 2.3 - 3.5

Water & sanitation 1.1 - 1.6

Irrigation 1.0 - 1.5

Telecom 0.3 - 0.4

Solid Waste 0.2 - 0.3

Total 8.2 - 11.8

Unlocking Nepal’s hydro potential can change the game

China India Pakistan Srilanka Bangladesh Nepal Asian average

2942

644457 445

27993

806

Per capita Electricity Consumption in kWh

Develop Right of Way (ROW) policies for transmission:• ROW policies for NEA in line with legislation• Corporate Social Responsibility policy

Restore NEA’s financial health• Tariff reform• Corporate development plan (technical and

financial)• Loss reduction master plan and settlement of dues,

restructuring government loans, capitalization etc.

Provide Guarantees for private sector• Power Development Agreement (PDA) template for

reasonable coverage of country risks• Partial Risk Guarantees from multilateral banks

Expanding connectivity can boost growth and inclusion

Option 1: Prithivi Highway

≈ 152 km / 4 hours detour

≈ US$ 30 in extra fuel for heavy truck

Birganj – Nepal’s busiest border crossing with India

Option 2: Tribhuvan Highway

Mountainous and not passable for freight vehicles

Landslides often render impassable in rainy season

Proposed “Fast Track”

Improve Efficiency of Spending on Transport

• Maintenance of assets >> new constructions with monitoring mechanisms for maintenance grants

• Capacity of implementing agencies and no ‘mandate overlaps’

• Pinnacle institution to manage urban transport in Kathmandu

• Criteria for investment selection and insulation from politics

• PPPs as a vehicle for enhancing efficiency rather than funding

Focus on Transformational and Forward Looking

Interventions

• “Fast track” project through• stabilizing the project environment

for implementation• technical fundamentals to avoid

delays and cost overruns • updated cost and traffic

projections for funding strategy

• Quality of public transport

• Pedestrian infrastructure in Kathmandu valley

The third I: calibrating growth for inclusiveness

A Strategy “tailored” to Nepal

Agriculture

Equal Opportunities Effective protectionDecentralization

More (productive) Jobs

Legitimacy & Political Stability

Leverage resilience stemming from

community governance

Public Service Delivery

INFRASTRUCTURE

Policy Agenda: Inclusion

Boosting agriculture productivity and diversity would expand output with maximum impact on poverty

Diversify crop production• Identify and support non-traditional high value

production targeted to the export market

Boost Productivity• Identify and acquire improved agriculture

technologies from abroad• Irrigation infrastructure development and

management• Review fertilizer subsidies

Promote Agribusiness• Encourage private sector participation in seed

production• Refocus government’s role on regulation and

facilitation

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Expanding the opportunities set of Nepalis would allow all to realize their full potential

Promote access to jobs - skills development• Develop a skills development program with a focus on the informal sector and migrants

Address inequalities in access to health and education • Develop a strategy for expanding the coverage of poverty-targeted scholarships• Consolidate existing programs for access to basic health and make them poverty-targeted

Improve quality, including through leveraging the private sector• Ensure that NASA is institutionalized and learning outcomes are monitored systematically• Improve the accountability of decentralized health and education delivery systems• Establish a contracting/purchasing capacity at MoH• Pilot performance-based management and results-based financing of health facilities

Smarter social protection can free household savings for investment and help those left behind

Introduce safety net coverage for specific risks/vulnerabilities • Conduct vulnerabilities/risks assessment and adequacy of existing programs to address them

Limit proliferation of SP programs• Finalize preparation of the SP policy framework • Restrain the creation of new SP schemes

Strengthen the core administrative systems• Roll-out the management information system in

MOFALD to other districts/programs• Scale-up cashless payment methods• Strengthen grievance redress mechanisms for SP

programs

Poverty Rate

GiniCoefficient

Current 25.2% 0.328

In absence of social insurance programs 26.6% 0.329

In absence of social assistance (cash transfer + scholarships) programs

25.7% 0.330

In absence of cash transfer programs 25.6% 0.330

In absence of scholarship programs 25.3% 0.329

A plan is needed for federalism to realize the promise of more and better services

Sequenced phase-in of reforms• Establish the provincial and local units within which the governments will be formed • Develop a timeline and criteria for the transfer of responsibilities and powers• Provide local governments with substantial discretion to determine tax rates and bases• Enforce limitations on subnational government (hiring, spending) for an interim timeframe to

allow them to build their management capacity

Institutional Structure• Create a high level entity with substantial power and political support to facilitate reforms• Create a strong finance commission capable of conducting financial analysis and manage intergovernmental transfers

Prepare transfer of functions and administrative control• Carry-out detailed functional unbundling and mapping across

levels of government• Compile data on immediate financing costs

Prepare transfer of functions and administrative control• Establish a Public Service Management Board to develop common standards

• Unlock Nepal’s hydro-potential

• Expand connectivity within Nepal and with its neighbors

1. Prepare a corporate development plan for NEA2. Provide government guarantees3. Formulate a transmission ROW policy

4. Prioritize maintenance of transport assets over new constructions 5. Codify criteria for transport investment selection 6. Get the fast-track project back “on track”

• Strengthen the financial sector

• Improve the investment climate

• Streamline public financial management

1. Accelerate the enactment of the NRB Amendments Bill and new DCGT Bill2. Build FSMD capacity 3. Develop an overall strategy toward access to finance

4. Streamline licensing 5. Review the Bonus Act 6. Revamp the export subsidy 7. Revamp the budget calendar8. Front load project approval 9. Develop national norms and rates for project costing

• Boost agricultural productivity and diversity• Expand the opportunity set of all Nepali• Streamline social protection programs• Prepare for decentralization

1. Acquire improved agricultural technologies from abroad 2. Encourage private sector participation in input production3. Develop value chains in niche high value crops for export

4. Expand the coverage of scholarships and make them poverty targeted 5. Institutionalize NASA and monitor learning outcomes6. Establish a contracting / purchasing capacity at MoHP

7. Consolidate social protection programs

8. Create a Finance Commission with strong powers and analytical capacity

Policy Priorities

Investment

Infrastructure

Inclusion

INVESTMENT

INFRASTRUCTURE

INCLUSION

Strong link to Investment & Inclusiveness. Quality infrastructure is central to individual welfare, job creation & poverty reduction through better health, education & public service provision.

Improve Investment Climate• Alleviate Regulatory Burden• Offer Foreign Investors Easier Access to Nepal• Reduce Non-wage Costs of Labor• Incentivize Production for ExportsStreamline PFM• PFM Reform for Better Accountability & Oversight• Strengthen Budget ExecutionStrengthen Financial Sector• Legislation for Financial Sector Crisis Management & Effective Safety Net• Expand the Reach of Financial Sector

Unlock Nepal’s Hydro Power Potential• Restore NEA’s Financial Health• Provide Guarantees for Private Sector• Develop ROW Policies for TransmissionExpand Connectivity• Focus on Transformational – Forward Looking

Interventions• Improve Efficiency of Spending on Transport to

Maximize Every Rupee SpentBoost Agriculture Productivity & Diversity• Improve Governance• Promote Agriculture Diversification & AgribusinessExpanding Opportunities in Health & Education• Better Targeting to Reach the Un- and Underserved • Improve Quality• Provide Skills Development for Job Access• Refocus Public Sector Role in Health Service & Leverage the Private Sector

Better Strategic Use of Existing ResourcesStreamline Social Protection System• Improve the fiscal affordability and efficiency of SP expenditures• Consolidate existing social protection programs• Pro-poor Targeting & Improve Benefit LevelsPreparing for Decentralization• Create Institutional Structure to Steer the Process and Balance Competing

Institutional Interests• Administrative & Financial Functions Transfer Preparedness• Careful Federalization of Public Service• Sequence Phase-in of Reforms

Conclusion: The 3 Is for Growth

ANNEXES

Shifts in output composition

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Gross Value-Added as % of GDP

Industry Agriculture Services

Industry looses momentum after 1996

The opportunity cost of current growth

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Nepal Bangladesh India Pakistan

BD income per capita is $200 higher

China’s success: an investment story

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Foreign direct investment, net inflows (BoP, current US$) right axis

Portfolio equity, net inflows (BoP, current US$) right axis

GCF above 40% of GDP

Infrastructure investment low

Data from multiyear plans linearly interpolated to get annual investments.

Gaps in education attainment

Large inequities remain at post-primary

• Does the proposed framework make sense? Did we miss anything?

• How do you think Nepal can achieve growth at 7%?• What would it take to develop Nepal’s hydro-potential?

• What are the areas of consensus and difference

across party lines on the issues we covered? • What are specific areas in which the WB could add

value through analytical and/or advocacy work?• How can we engage with you going forward?

Questions

&

Discussion

Questions for discussion