Nepal's success or failure hinges on how effectively the governments at all levels can deliver public services, which demands proper fiscal and investment management. Mukti Subedi and Bishal K Chalise write that the national framework for public financial management, particularly in the context of transition to federalism, is non-existent

Chalise, Bishal K

Subedi, Mukti

LSE Research Online

Do	more	with	less:	managing	public	investment	infederal	NepalNepal’s	success	or	failure	hinges	on	how	effectively	the	governments	at	all	levels	candeliver	public	services,	which	demands	proper	fiscal	and	investmentmanagement.	Mukti	Subedi	and	Bishal	K	Chalise	write	that	the	national	framework	forpublic	financial	management,	particularly	in	the	context	of	transition	to	federalism,	is	non-existent.Two	years	ago,	Nepal	adopted	a	new	constitution	which	was	a	culmination	of	a	decade-long	peace	process	followingthe	end	of	the	Nepali	Civil	War.	The	Constitution	restructures	the	country	into	‘federal	democratic	republic’	fromunitary-monarchical	regime.	Hence,	instead	of	one	monolithic	central	government,	Nepal	now	has	three-tiered	—753local,	7	provincial	and	a	federal-level	—	of	governments,	all	drawing	their	autonomous	state	power	from	theconstitution.	Moreover,	the	country	also	witnessed	a	landmark	election.	With	the	election	of	thousands	ofrepresentatives:	35,038	at	the	local	level,	550	at	provincial	level	and	335	at	federal	level,	in	which	a	third	of	whomwere	women	elected.One	notable	feature	of	the	election	campaigns	was	rhetoric	of	‘economic	development	and	prosperity’.	Thisprominently	featured	in	election	manifestos	of	political	parties	of	all	sizes	and	political	inclinations.	The	electionmanifestos	list	out	ambitious	infrastructure	projects	for	all	three	levels	of	governments	from	building	hydropowerplants	to	highways	and	airports	to	cross-border	railways	connecting	neighboring	countries.While	the	plan	may	have	rightly	captured	the	‘mood’	and	aspiration	of	the	public	for	rapid	economic	progress,	therehas	been	no	systematic	assessment	of	the	investment	need	of	the	country.	Additionally,	national	framework	forpublic	financial	management,	particularly	in	the	context	of	transition	to	federalism,	is	non-existent.Inefficient	and	low	public	expenditureNepal’s	public	financial	management	is	characterised	by	low	investment.	For	the	period	of	2007-2015,	for	instance,average	investment	to	GDP	ratio	was	meagre	4.5	per	cent.	This	is	far	less	when	compared	even	to	low-incomecountries	(9.5	per	cent)	or	other	South-Asian	countries	(7.1	per	cent).	This	level	of	investment	is	simply	inadequate	toachieve	the	rate	of	sustainable	economic	growth	needed	to	attain	the	prosperity	so	vocally	promised	by	country’spolitical	leaders.However,	the	problem	not	only	lies	in	the	inadequate	levels	of	new	investment	but	also	the	management	of	existingpublic	investment.	The	Capital-Output	ratio	which	measures	the	output	or	income	required	to	form	additional	unit	ofcapital	is	very	high.	The	country’s	14th	periodic	plan	estimates	the	ratio	to	stand	at	5.2	on	average.	The	measure	formajor	infrastructure	sectors	like	road	and	hydropower	stands	at	29	and	9	respectively.	Average	capital	expenditure	inpast	decade	remained	below	75	per	cent	of	allocation.	This	is	very	unusual	phenomenon	for	the	least	developedcountry	like	Nepal	that	envisions	to	become	middle-income	country	by	2030.Issue	of	onerous	geographical	terrain	aside,	this	alarmingly	high	capital	formation	ratio	indicates	the	severeinefficiency	of	public	investment	management.	Time	and	cost	overrun	of	infrastructure	projects	are	commonphenomenon.	For	example,	Melamchi	Water	Supply	project	to	provide	drinking	water	to	Kathmandu	Valley	thatstarted	in	year	1997	is	still	two	years	(hopefully)	away	from	completion.South Asia @ LSE: Do more with less: managing public investment in federal Nepal Page 1 of 3		Date originally posted: 2018-02-22Permalink: http://blogs.lse.ac.uk/southasia/2018/02/22/do-more-with-less-managing-public-investment-in-federal-nepal/Blog homepage: http://blogs.lse.ac.uk/southasia/Annapurna	region,	Nepal.	Image	credit:	Flickr/Jeanne	Menjoulet/	CC	BY	2.0A	report	from	the	World	Bank	estimates	average	completion	time	for	energy	road,	and	irrigation	projects	to	be	9,	12and	16	years	respectively.	The	longest	running	project	is	‘under-construction’	for	38	years.The	low	level	of	capital	expenditure	and	causes	of	underlying	inefficiencies	can	be	traced	to	outdated	methodsof	centralised	planning	and	decision	making,	bureaucratic	incompetency	and	widespread	corruption.	Yet,	moreworryingly,	this	public	investment	management	menace	is	a	political	choice.There	is	ever	growing	tendency	of	government	in	power	to	make	populist	investment	decisions	to	score	short-termpolitical	gains.	Projects	are	selected	not	for	economic	return	supported	by	socio-environmental	feasibility	but	to	keepthe	respective	constituency	happy	or	to	benefit	coterie	of	cronies.	Consequently,	large	number	of	small-scale	projectswith	low	capital	formation	value	get	preference	over	large-scale	undertakings.Moreover,	there	is	strong	liking	for	writing	distributive	budget	in	form	of,	say,	social	security	cash	hand-outs.	This,combined	with	fiscal	indiscipline,	has	resulted	in	rapidly	growing	recurrent	expenditures	while	capital	investmentsremain	low	and	unexpended.Federal	context	The	picture	is	still	fuzzy	on	how	the	problem	of	management	of	public	investment	manifest	itself	in	federalsettings	with	three	levels	of	governments	after	adoption	of	the	new	constitution.	Such	expansion	of	governmentstructure	is	likely	to	create	some		resource	crunch,	although	issue	is	unlikely	to	create	any	kind	of	fiscal	crisis	assome	have	claimed.	Yet	there	is	more	pertinent	challenge	of	preventing	‘trickledown	ofcorruption’	and		decentralisation	of	fiscal	indiscipline	that	now	exists	at	central	level.It	is	important	to	note	here	that	local	governments	under	the	new	constitution	have	legislative	powers	to	write	lawsand	regulation,	design	policies	and	programmes,	allocate	and	monitor	budget,	and	issue	licenses	and	contracts.This	means,	instead	of	being	administrative	extension	of	central	government,	these	local	units	enjoy	considerableautonomy.Such	autonomy	creates	heterogeneity	of	local	government	jurisdiction,	making	it	very	difficult	to	design,	enforce	andmonitor	standards	in	effective	budget	constraints.	For	instance,	limits	to	borrowing	from	the	Centre.	In	the	absencesof	robust	accountability	framework	to	check	actions	of	local	governments,	risk	of	fiscal	anarchy	runs	deep.	If	some	ofthe	early	decisions	made	by	local	government	officials	are	any	indication	of	their	future	actions,	the	risk	is	real.For	example,	within	few	days	of	holding	office,	local	officials	decided	to	increase	the	amount	of	social	securitytransfer,	which	was	seen	as	‘political	publicity	stunt.’	Similarly,	others	were	indulging	in	seeminglyunnecessary	foreign	travel	with	public	money	or	charging	hefty	sum	as	meeting	allowances.	The	list	goes	on.South Asia @ LSE: Do more with less: managing public investment in federal Nepal Page 2 of 3		Date originally posted: 2018-02-22Permalink: http://blogs.lse.ac.uk/southasia/2018/02/22/do-more-with-less-managing-public-investment-in-federal-nepal/Blog homepage: http://blogs.lse.ac.uk/southasia/The	second	type	of	risk	is	related	to	‘inter-temporal	common	pool’	problem,	which	refers	to	the	tendency	ofpolicymakers	to	make	decision	today	regarding	use	of	common	pool	resources	that	might	have	negativeconsequences	tomorrow.	Take	for	instance,	many	local	governments	are	considering	natural	resources	—	like	riversand,	boulders,	and	so	on	—	as	major	revenue	sources.	In	order	to	run	deficit	budget,	they	are	issuing	permits	toextract	such	resources	in	an	unsustainable	manner.	Such	myopic	decisions	will	result	in	imbalanced	resourcemanagement	and	investment	planning	and	consequently,	a	massive	environmental	catastrophe.Way	ForwardFederalism	in	Nepal	has	come	with	greater	promises	but	also	abounds	with	uncertainty.	The	success	and	failure	ofnational	and	regional	governments	hinges	on	how	effectively	they	can	deliver	public	services,	which	demands	properfiscal	and	investment	management	founded	upon	proper	check-and-balance	framework	at	local	level.In	order	to	do	more	with	the	available	resources,	all	three-tiers	of	governments	should	pay	serious	attention	toeffective	public	investment	management.	Going	forward,	Nepal	needs	to	create	a	concerted	national	framework	ofpublic	investment	management	that	links	and	checks	fiscal	behavior	of	different	governmental	units	while	keepingintact	their	autonomy	in	decision	making.At	the	implementation	level,	elected	politicians	and	bureaucrats	with	technical	expertise	need	to	work	together	toappraise,	select,	implement	and	evaluate	projects	(particularly	in	infrastructure	projects).	The	government	needs	tobuild	institutional	capacity	and	make	prudent	financial	management	division	in	using	whatever	limited	resource	thecountry	has	at	its	disposal.	Otherwise,	federalism	would	be	blamed	for	not	fulfilling	Nepali	dream	of	peace,	economicdevelopment	and	prosperity.This	article	gives	the	views	of	the	author,	and	not	the	position	of	the	South	Asia	@	LSE	blog,	nor	of	the	LondonSchool	of	Economics.	Please	read	our	comments	policy	before	posting.About	The	AuthorsMukti	Subedi	is	Officer	at	Ministry	of	Federal	Affairs	and	Local	Development,	Nepal.			Bishal	K.	Chalise	works	as	Research	and	Program	Officer	at	Niti	Foundation,	a	policy	researchinstitute	based	in	Kathmandu.	South Asia @ LSE: Do more with less: managing public investment in federal Nepal Page 3 of 3		Date originally posted: 2018-02-22Permalink: http://blogs.lse.ac.uk/southasia/2018/02/22/do-more-with-less-managing-public-investment-in-federal-nepal/Blog homepage: http://blogs.lse.ac.uk/southasia/

Do more with less: managing public investment in federal Nepal

http://eprints.lse.ac.uk/88818/1/southasia-2018-02-22-do-more-with-less-managing-public-investment-in.pdf

Do more with less: managing public investment in federal Nepal

Abstract

Similar works

Full text

Available Versions

LSE Research Online