Efficient construction management is critical to control time, cost, and quality of infrastructure works
Over the past decade, Nepal has seen steady progress in key socio-economic indicators, as demonstrated by the sharp reduction in absolute poverty from 42% in 1996 to 25% in 2011 and the improvement in other social indicators such as in education.
On the other hand, Nepal’s per capita gross domestic product (GDP)was just $714 in FY2014, one of the lowest in South Asia, and the average annual GDP growth rate has remained modest at 4.1% over the past decade. Moreover, the growth pattern is unstable, given agricultural output depends on uncertain rainfall. Growth is also too low to absorb the over 500,000 new laborerscoming into the job market each year. The country needs dynamic growth engines–industries that can add much higher value and provide jobs, such as high-value agro-products, competitive manufacturing, and service sectors like tourism and information communications and technology.
Igniting Growth and Role of Infrastructure.The Nepalese economy needs to grow over 9% annually to graduate from the least developed country category by 2022 in its income criteria. This requires much higher investment. At present, the country’s gross capital formation, a proxy of investment, is only 20–21% of GDP, with 4.0-4.5% coming from the public sector, and the rest from the private sector. The overall rate needs to be raised to at least 30-35%, as in other faster-growing countries in Asia. This calls for substantially enhancing public investments in quality infrastructureattracting private capital where possible, and (ii) private investments in competitiveindustries. In Nepal, boosting the latter is contingenton the former.
Third edition of 'Prospects for North Bengal - Investments in S...
Recent growth diagnostic studies from several agencies including ADB have identified infrastructure bottlenecks as one of the most critical binding constraints in Nepal. Foremost is a chronic power shortage. Nearly60% of enterprises consider long load-shedding hours as the biggest challenge to doing business. Generating electricity on an individual basis is very expensive, raising operational costs. Transport costsare also highdue to Nepal’s low-density and low-quality road networks. Urban infrastructure lags far behind the rapid pace of migrationto Nepal’s cities, meaning many live without basic amenities and the environment becomes degraded.
Needs, Challenges and Opportunities.In short,Nepal needs massive infrastructure investments to attract much-needed private investment and to ignitehigh growth. The country needs to invest 8–12% of GDP annually in infrastructure to close the infrastructure deficit within a decade. Yet the government’s capital budget expenditure has only been about 3.3% of GDP in recent years. This is not only due to the low level of allocation but also to low expenditure capacity;Only about 80% of the annual capital budget allocation is utilized. On the other hand, the country’s fiscal condition is robust, with a sound budgetary balance, so there is ample fiscal space to augment infrastructure investments. How to do this and what are the critical constraints?
Pathways for Enhancing Infrastructure Investments.In our viewthere are several key areas to address:
(i) Planning and Budgeting: First, the country’s infrastructure executing agencies need to build a much larger stock of feasible and investment-ready project proposals backed by credible sector investment plans, strategies and policies that set out effective ways to open the infrastructure bottlenecks.
At present, there is a shortage of project proposals, in part due to a lack of experienced personnel. Sector strategies and investment plans need to be prepared or updated. Likewise, the country’s budgetary process also constrains timely execution, given frequent delays in budget approval,and lengthy steps required to release funds. These budgetary and subsequent procurement steps often take more than half of fiscal year, leaving limited timeto execute the actual works. A positive move to address this is a new fiscal responsibility act which the government is preparing to enforce timely budget approval and release, along with more streamlined procedures. The recent announcement that multi-year constructioncontracts can be extended will also help as will the advance starting ofprocurement in parallel with budget approval processes.
(ii) Implementation: Project implementation also faces challenges at each stepof the way, from procurement, to land acquisition, and contract management.There is significant roomfor improvement here.While Nepal has a reasonable procurement act, it could be implemented more efficiently. For example, limiting segregation of works into smaller packages and encouraging larger-sized multi-year contracts that are more efficient would help. Streamlining the approval process and delegating authority to project management would also cut procurement times. Bidding documents also need to be more watertight with more stringent evaluation of bidders’ proposalsto preventirregular practices (for which introduction of e-procurement will help), and to prevent entry of inexperienced, poorly performing, or over-committed bidders. In this context, the role of Public Procurement Monitoring Office is also important. The office should maintain an accurate data base on procurements, contracts, contract progress, and the performance of contractors and consultants.
Issues such as right of way, land acquisition, and forest clearance often delay projects such as transmission lines and roads. Executing agencies are not adequately equipped to deal with these issues, meaning surveying, planning and local coordination needs to be outsourced.The government has recently approved a revised resettlement policy to address informal settlements and right of way issues and is preparing standardized land valuation guidelines to smooth consultations with affected people. A high-level committee will also be set up to oversee land acquisition for large-scale projects. All this will be helpful.
Likewise, efficient construction management is critical to control the time, cost, and quality of infrastructure works. Despite having annual turnover of NRs116 billion, local contractors’ capacities are still growing and their performance is still developing along with it. Partnerships between foreign and local contractors could helpimprove implementation of largerprojects,with foreign firms providing and transferring technical and managerial knowhow while the local firms handlethe local issues. Such win-win partnershipsare yet to emerge, unfortunately.
Lastly more stringent contract management and enforcement are needed on the part of the executing agencies. This includes confirming credible work plans and enforcing timely mobilization of personnel and equipment; controlling unauthorized changes in site managers and subcontracting; and actively applying termination and other penalty clauses. Given the shortage of supervision personnel, engaging supervision consultants is also necessary in many executing agencies. This is not a panacea since the experienceand incentives of consultants also matter, requiring a goodperformance monitoring system.The executing agencies themselves also need to build sufficient capacity to manage consultants and contractors.
(iii) Private Capital: The third issue needed to enhance infrastructure investment is to attract private capital. Nepal has a vast hydropower potential that could be tapped by private investment. There is also potential in airport, highways, solid waste management, agriculture markets, travel and tourism, health, and education. However, tapping this potential requires effective partnershipsbetween public and private sectors,including public financing given the relatively high commercial and other risks and the limited affordability of users. The government,with the assistance of ADB,is draftinga public-private partnership (PPP) policy and act, and establishing a PPP center that will provide support, guidelines and instruments to prepare and implement PPP projects in priority sectors. This couldbe followed by preparing sector level PPP strategies and implementing demonstration projects.
(iv) Human Resources: Finally, to attract greater investment in infrastructure, the importance of building much higher human resources and capacity cannot be overstated. All institutions in the infrastructure sector government executing agencies, consultants, and contractors, have too few people qualified ininvestment planning and project preparation, procurement,contract execution, supervision, and management, or on social and environment issues.Building these capabilities is crucial. Effective strategy would be called for to envision appropriate institutional structures to manage the processes, and build personnel and capacities within these institutions.
Exemplary Project Experience.While ADB projects have faced some of the implementation challenges outlined here, some have performed particularly well. Among them isthe Second Small Towns Water Supply and Sanitation Sector Project. The $45 million grant project, approved in September 2009,is being implemented in 21 towns. Each subproject was prepared by building ownership of beneficiaries who formed Water Users and Sanitation Committees and agreed to monitor work quality while sharing 50% of the capital and 100% of the operational cost. The civil works are supervised by consultants, whose performance is itself closely monitored by the executing agency and water user committees.
The local ownership of these projects meant most of the 21 civil work contracts are being implemented on time. The executing agency also established the 15-year Small Towns Water and Sanitation Investment Plan which also helped. The key factors behind the success includethestable and capable leadership of the Project Director; a robust planning process with active participation of all beneficiaries; clear implementation procedures and guidelines; and,lastly, effective performance monitoring systems for contractors and consultants.
Melamchi and Associated Projects.Extending such good practices and performance to other projects is a high priority for ADB, particularly in flagship projects such as the Melamchi tunnel and associated water supply systems which have a total ongoing investment of around $500 million. The Nepal government and ADB are working hard to complete the main works including the Melamchi water tunnel by September 2016. Construction has resumed on the tunnel with the engagement of an Italian contractor by the executing agency. Civil works onthe associated facilities have also been initiated to meet the completion target.
The civil work for the tunnel, which are the most challenging, has reached close to a full-swing stage with the mobilization of foreign and local experts and modern equipment by the contractor, whereas they are supervised by Finnish consultants following the standard international contract management rules. Certainly, critical challenges still remain, given the technical complexity of the projectarising from the uncertain and fragile geology.Stringent detailed design is needed forthe headwork structure (addressingthe risk of landslides)as well as on the tunnel structure to ensure they remain safe and efficient perpetually. As in other infrastructure projects, unavailability of construction aggregates also affected the progress in 2014.
Effectively coping with these challenges requires adaptive approach to address emerging issues encountered during the execution by devising and taking appropriate countermeasures.It has also required strong mutual trust between the executing agency, the consultants, and the contractors to cope with new technical challenges in a timely manner. Similarly, good progress on the water trunk line and distribution network has required intensive cooperation with a variety of other agencies such as road, electricity, and municipal administrations and other stakeholders. With this in mind, we are optimistic that the Melamchi and related works will be ready to deliver clean water on schedule to the people of the Kathmandu Valley.
Towards High Growth with Good Infrastructure and Private Investments. Nepal has seen major milestones in the power sector lately, such as the signing of the Power Trade Agreement with India, and project development agreements for large-scale hydropower projects with Indian private investors. The government is also working on a range of economic reforms, including new and revised legislationaimed at scaling up infrastructure investment and attracting private sector investors.
We are hopeful that such reforms and agreements will substantially enhance investment in Nepal’s infrastructure, leading to a transformation in the economy and much faster growth in coming years. ADB is committed to support these goals with an increasing focus on large-scale, growth-inducing infrastructure investments alongside other development partners exploring cofinancing opportunities as well.Recently initiatedprojects along this line include work on Tribhuvan and Gautam Buddha international airports, the 140-megawatt Tanahu hydropowerplant,andmajor transmission lines along the key Kaligandaki, Marsyangdi, and Trishuli corridors. ADB sees more key projects in Nepal’s future and hope many will increasingly be financed by private as well as public investors.
Country Director of ADB’s Nepal Resident Mission
