25Nov2022

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Tag: Infrastructure investment

OP-EDs and Columns

Nepal Needs to Invest in Climate-Resilient Infrastructure

– ANUSHA Basnet

The opinion piece originally appeared in the 2022 November Issue of New Business Age Magazine. Please read the original article here.

As a developing country in the global south, Nepal is one of the most vulnerable countries to climate change. Various reports have shown that it is often the lower-income countries that are at greater risk due to climate change as they have a lower capacity to adapt to the changes. While Nepal only contributes 0.027% of global greenhouse emissions, it is positioned high on the list of countries most vulnerable to the impact of climate change.

According to a report from the Asian Development Bank (ADB), Nepal could lose up to 2.2% of its annual GDP by 2050 due to the impact of climate change. The country has already begun to see the devastating effects of climate change like decreasing agricultural output, change in crop rotation, change in rainfall patterns leading to an increase in frequency of natural disasters including droughts, floods and landslides resulting in great loss of lives and properties. As a result, the government has been acting to ensure that the negative effects of climate change are minimised. The country is part of the Paris Climate Agreement and the government has been working to meet the Sustainable Development Goals by 2030. Investing in climate-resilient infrastructures is a major step that can be taken by the government to tackle this problem. Multilateral agencies such as the World Bank and the ADB have also been providing financial backing to the country for adaptation to climate change.

Climate-resilient infrastructure includes infrastructure that has been designed and built to prepare and adapt to the changing climate conditions. With climate-resilient infrastructure, the danger of risks emanating from climate-related disasters is reduced. It is important to note that building climate-resilient infrastructures will not completely stop the impact of climate change, but it will greatly mitigate the risks posed by climate change. In terms of impact from climate change, the rise in average temperature causing heat waves, the change in rainfall patterns leading to droughts, floods, and rainfall, and the threats of glacier lake outbursts are the few major threats that Nepal currently faces. The current and future infrastructures being built in the country should take these factors into account and build infrastructure that can minimise the damage caused by these threats. It is especially important for climate resiliency to be taken into account while developing new infrastructure projects because the government has been increasing investment in the infrastructure sector with an aim to accelerate the economic growth of the country.

Major infrastructure projects such as Nagdhunga tunnel, Sikta Irrigation Project and West Seti hydropower project are all under construction or are slated to start construction soon. If climate change effects are not taken into account for these projects, then the investment made into these projects may end up going to waste. Thus, factors such as the increase in temperature, the water level at river sources, and glacial movements should all be taken into account before starting these mega projects.

Climate resilience also includes the maintenance of the existing infrastructure so that they are less vulnerable to the impacts of climate change. Floods and landslides have been causing extensive damage to different infrastructure in the country. While rebuilding these damaged infrastructure, climate resilience should be taken into account. Some things that can be done include building proper drainage systems to decrease the impact of flooding, rebuilding roads that can withstand higher temperatures, and rebuilding residential buildings with adequate ventilation to combat the effects of rising temperatures. Building infrastructures that can support the growing population of urban areas including roads, proper drainage systems, and waste management systems was a major topic of discussion at the recently held Nepal Infrastructure Summit 2022.

As rising temperatures and subsequent droughts will increase the demand for water for irrigation and drinking purposes, reservoirs should be built to address these problems. The government should also increase the monitoring of the current infrastructure systems so that required maintenance can be done on time. The government and the private sector are also eyeing green hydrogen as an alternative to petroleum products and chemical fertilisers.

Multilateral partners have been providing support to Nepal for building infrastructures that are climate resilient. Recently, Nepal and the World Bank signed a concessional financing agreement for $100 million for Green, Resilient, and Inclusive Development (GRID) with an aim to support the sustainable and productive use of natural capital and resilience of urban and rural areas. Two further instalments of funds are slated to be available through this agreement. Asian Development Bank has also provided financial support to the government for tackling climate change. Last month, the bank provided $70 million in loans to improve livelihood and climate resilience of 30,000 horticulture farmers across five provinces. During his visit to Nepal in March 2022, ADB’s Director General for South Asia Kenichi Yokoyama mentioned that the bank would maintain financial support amounting to $500- 600 million per year for the next three years for supporting the government’s aim of achieving sustainable growth.

Although the government has taken steps to create climate-resilient infrastructure in the country much is yet to be done especially in regards to management of the climate resiliency of the existing infrastructure. In addition to focusing on the climate-resiliency of newer infrastructure projects, the government needs to create solution-oriented policies that can minimise the negative impact of climate change on existing infrastructure. Further, instead of just taking loans from the development partners, the government needs to find other sources of funding as the burden of paying the debt is ultimately passed on to citizens impacted by climate change.

The concept of climate reparations could be applied here. The concept is a call for money to be paid by Global North to Global South to address the historical and current contributions made by Global North to cause climate change. Thus, the Nepal government could evoke this concept to request the development partners to provide grants instead of loans to combat the negative impact of climate change. Mobilising domestic funding through implementation of green financing can also be another option of raising funds.

Research Commentaries

NRC0012 – Enabling Factors for Public-Private Partnership in Infrastructure in Nepal

Enabling Factors for Public-Private Partnership in Infrastructure in Nepal

Nirnaya Bhatta

Synopsis

The fanfare with which the Third Nepal Infrastructure Summit was organized during 11-12 September indicates a realization that public infrastructural goods unequivocally contribute to national development. Public-private partnership is gradually being considered as the modality of choice to implement large infrastructure projects in Nepal, as evidenced by the recently passed Public Private Partnership and Investment Act, 2018. Although, it is essential to understand the state of the enabling conditions that in are in place currently that could either contribute or hinder effective public-private partnership in infrastructure in Nepal. The EIU Infrascope Index that measures a country’s capacity to implement PPPs in infrastructure is a good reference point in this regard. This RC draws lessons from common literature on the subject that Nepal could consider in terms of improving its enabling environment to implement PPPs in infrastructure.

PPP in Infrastructure in Nepal

There is an increasing consensus across political parties, the civil service, the private sector and the donor agencies that Nepal needs to urgently make strides in its infrastructure development. Further, to operationalize implementation of infrastructure projects, for the right reasons, Public-private partnership (PPP) is gradually being considered as the right modality to achieve these ends. After all, developing nations such as Brazil, China, India, Malaysia and Indonesia, to name a few, have managed to upgrade national infrastructure through the effective applications of PPP arrangements.

Any development in promoting PPPs in infrastructure in Nepal must be lauded. Consider the direct relationship between investments spending and raise in gross domestic product (GDP). For instance, “the International Monetary Fund estimates that an increase of 1% in investment spending raises gross domestic product (GDP) by approximately 0.4% in the same year and by 1.5% in 4 years after the increase” (IMF, 2014).

The increased importance given to PPP in Nepal is further attested by its importance underlined during the Nepal Infrastructure Summit held last week, which comes after a month of the first India Nepal Logistics Summit. Further, the Federal Parliament passed the Public Private Partnership and Investment Act, 2018, which only demonstrates there is a growing realization among major policy stakeholders that Nepal needs better infrastructure as a start to also support the tourism, education as well as industrialization.

It is useful to closely look at the enabling as well as disabling conditions in Nepal that would affect implementation of PPPs in infrastructure. For instance, how willing is the private sector in Nepal and foreign investors to invest in Nepali infrastructure? And more important, how capacitated is the Nepali public sector to bring relevant parties on board? Considering the low number of PPPs in infrastructure in Nepal, as compared to most of Asia, it does seem like Nepal still needs to get some fundamental factors in place. Although, the new PPPI, 2018 Act that seeks to establish a PPP Unit within the Investment Board, Nepal, is exclusively mandated to oversee PPP infrastructural undertakings.

Infrastructure Ranking of Developing Asian Economies, 2017–2018

Source: World Economic Forum. 2017. Global Competitiveness Report 2017–2018

Why PPP in infrastructure?

The World Bank defines PPP as “a long-term contract between a private party and a government entity, for providing a public asset or service, in which the private party bears significant risk and management responsibility, and remuneration is linked to performance” (World Bank, 2018). There may not be a better way to cover the infrastructure gap than public and private sector working alongside each other. PPPs “have been an effective conduit to channel private capital and funds to address a broader development agenda” (Deep, Kim, & Lee, 2019).

The increasing preference of availing PPP is easily understood, as “Lee et al. (2018) projected that doubling PPP investment from 0.5% of GDP in 2015 to 1% generate additional 0.1 percentage points to GDP growth per capita across Asia and the Pacific” (Deep, Kim, & Lee, 2019).

Further, while the public sector has the capacity to be the guarantor and can mobilize the state apparatus, the private sector provides readily available capital, operational efficiency, innovation in project implementation, and managerial and technical skills. Most importantly, the public sector could afford to consider the welfare implications of projects proposed under PPP.

The Infrascope Index provides an immediate reference point for evaluation:

The Economist Intelligence Unit (EIU) provides a very handy and insightful tool known as the Infrascope Index which Nepali policy makers can immediately consider using as a guide to improve the countries enabling environment. The Infrascope index is a benchmarking tool that assesses a country’s implementation capacity to execute key infrastructure sectors through PPP in transport, electricity, water and solid waste management. Hence, it allows policy makers to quickly identify major hindrances “unlock the power of PPPs and support the broader development agenda”.

Unfortunately, Nepal is not included in the index as of now. Although, on the bright side, the index exclusively studies countries where the American agency Millennium Challenge Corporation (MCC) works in. As Nepal is one of the beneficiaries of MCC, it is likely that Nepal will be considered in this index after MCC’s projects start the construction of “313-kilometre-long 400 kVA high-voltage transmission lines and three high-capacity substations, including building 1,039 transmission line towers across the alignment, and build different road projects with a total length of 305 kilometres.” (The Himalayan Times, 2019)

Does Nepal’s public sector have the capacity to effectively implement PPPs?

While it is useful to explore if the public sector of Nepal is adequately competent to implement effective PPPs, it is also fair to question whether the private sector is. An excellent report by Asian Development Bank, that compares PPP in infrastructure across Asian economies states that, “Among major factors supporting PPP implementation, the following features are critical: coherent policy, public sector capacity to manage PPP appropriately, public sector willingness to have mutual relation with private partners, and leadership” (Deep, Kim, & Lee, 2019). The challenges to apply PPP in a large scale pertains to it is a complex system; requires specific and sufficient knowledge of financing structure, risks allocation, contract management, and disputes resolution; and the transaction process usually takes a long time to conclude” (Zen, 2018).

In Nepal, investments in the infrastructure sector are often misunderstood to mean merely construction. The actual work continues after construction has concluded, including how the infrastructure is managed and maintained, and identifying different collaborative mechanisms that would engage the private and public sector together. This points to the extraordinary role that the public sector needs to play as the private sector could not be expected to take primarily take the role of a custodian.

As per the index, the following indicators can be used to evaluate Nepal’s readiness and capacity to implement PPPs in infrastructure into five components:

  • Enabling laws and regulations
  • The institutional framework
  • Operational maturity
  • Investment and business climate
  • Financing facilities for infrastructure projects

Policy Implications

Considering that the public and private sector have usually functioned in silos in Nepal, an environment of mitigating suspicion between the two needs to be created. While the public sector needs to regard the private sector as an equal partner in any PPP-based project; the private sector needs to take advantage of the fact that the public sector can indeed leverage massive resources, not limited to economic, but also the state apparatus to implement projects run under PPP. Huge profits can thus be generated.

Finally, the public sector should be under no delusion that PPPs will get off the ground by merely passing legal instruments and organizing glamorous summits. Traditionally, the public sector has been reactive in terms of putting relevant policies in place to address any issue, so when it comes to PPPs, it should be at the vanguard of initiating and ensuring all stakeholders are brought together. After all, the mandate to ensure welfare of a country is with the public sector, and not necessarily with the private sector that is not compelled to consider welfare implications.

References

  1. Deep, A., Kim, J., & Lee, M. (2019). Realizing The Potential Of Public–Private Partnerships To Advance Asia’s Infrastructure Development. Manila: Adb.
  2. IMF. (2014). World Economic Outlook: October 2914: Legacies, Clouds, Uncertainties. Washington, DC.
  3. The Himalayan Times. (2019, August 08). MCA-Nepal projects to start from June 2020. Retrieved from The Himalayan Times: https://thehimalayantimes.com/business/mca-nepal-projects-to-start-from-june-2020/
  4. World Bank. (2018, 02 06). What are Public Private Partnerships? Retrieved from Wolrd Bank PPP LRC: https://ppp.worldbank.org/public-private-partnership/overview/what-are-public-private-partnerships
  5. Zen, F. (2018). PUBLIC–PRIVATE PARTNERSHIP DEVELOPMENT IN SOUTHEAST ASIA. Manila : ADB
Research Commentaries

NRC0006 – Key Aspects of India-Nepal Logistics Summit 2019

Key Aspects of India-Nepal Logistics Summit 2019

Nirnaya Bhatta

Synopsis

Last month (on July 28th), for the very first time, India-Nepal Logistics Summit was held in Kathmandu, Nepal. Co-organized by Federation of Nepalese Chamber of Commerce & Industries (FNCCI) – the custodian and largest private sector organization in Nepal, the Summit was an expression of the need felt by Nepal’s business community to integrate logistically local businesses into the global supply chain. The theme of the Summit was ‘Transforming Logistics Landscape’. While the Summit is a progressive step forward, it is too quick to judge if merely holding such an event will transform the country’s logistics landscape. This commentary first examines Nepal’s existing logistics landscape and its place in the world by referring to the highly comprehensive Logistics Performance Index. Since the Summit is between India and Nepal, a further examination is also made on the existing state of trade-related logistics between the two countries.

Background

The India Nepal Logistics Summit was jointly organized by FNCCI and Maritime Gateway, a media house based in Hyderabad, India. While the Summit was inaugurated by the Nepali Prime Minister, Mr. KP Sharma Oli, absence of his Indian counterpart – Mr. Narendra Modi – demonstrated that the event was an expression of Nepali rather than the Indian aspiration to improve its logistics landscape. Further, PM Modi’s written statement fell short of directly referring to the Summit by name and rather had a generic tone to it. It wrote, ‘India will always stand by Nepal in its quest for all-round growth. Emphasis will be on completion of connectivity projects outlined in the past.’

“Transforming Logistics Landscape”

The theme of the Summit was ‘Transforming Logistics Landscape’. Before commenting on the theme itself, it will be necessary to closely look at Nepal’s current logistics landscape first. To that end, there may not be a better reference than the Logistics Performance Index (LPI) that ranks 164 countries based on six comprehensive indicators. The LPI states that the logistics pertains to ‘how efficiently supply chains connect firms to markets.’ For Nepal, it would mean how well-connected Nepali firms are with the global supply chain and the markets abroad.

Now, let us explore the phrase used for this year’s theme word-by-word. The “Logistics landscape” comprises of the entire gambit of physical infrastructure, human capacity at the custom points, transportation endowment as well as agreements that are in place with the transit countries. While, “transformation” is defined by most dictionaries as extensive changes in the current scenario. To really transform Nepal’s logistical landscape, billions of dollars investment and an all-encompassing national plan would be required as ‘logistics is not just about connecting infrastructure but encompasses regulation of services, sustainability, and resilience, or trade facilitation.

Figure I: The six indicators on which the LPI rankings are based (Competing to Connect 2018)

 

Figure II: Nepal’s comparative rankings in the LPI (Data: World Bank)

Figure II compares Nepal performance in logistics with India, China, Germany, the South Asian and East Asian region, and finally low-income countries. These comparisons help in providing a perspective on where Nepal stands in terms of its logistics landscape.

The first column titled LPI is the aggregated scores, which is the weighted average of the country scores on the six key dimensions based on which the ranks are determined. In 2018, Nepal ranked 121 out of 167 countries that were ranked, while India stood at 42 and China at 27. South Asia, on the whole does not fare too well and is almost at par with Nepal on almost all the indicators. I have also compared South Asia with the most economically vibrant region in Asia, i.e. Southeast Asia. All countries and regions are then juxtaposed with Germany, which ranks 1st in the LPI and scores close to 5 on all indicators (a score of 5 denotes best possible performance in any given indicator).

Nepal-India Logistics Landscape

For very obvious reasons, India warrants special mentions when discussing Nepal’s logistics landscape. The economist Paul Collier observes that neighbors matter more when a country is landlocked. While comparing two landlocked countries, he writes- ‘Why is Uganda poor when Switzerland is rich? It is indeed partly that Switzerland’s access to the sea depends upon German and Italian infrastructure, whereas Uganda’s access to the sea depends upon Kenyan infrastructure.’ In 2018, while Germany ranked first in the LPI, while Kenya ranked 63. As an extension to this logic, the extent of access Nepal gets to the world depends on India’s performance in general infrastructure and how well the former negotiates to get access to the Indian infrastructure.

“If you are coastal, you serve the world; if you are landlocked, you serve your neighbors,” Colliers further contends. He also suggests, no matter how far or near a landlocked country is situated from the closest shore of the neighbor; the cost of exporting is usually very high. The coastal country’s expenditure on transport infrastructure determines the transport cost for a landlocked country. “If you are landlocked with poor transport links to the coast that are beyond your control, it is very difficult to integrate into global markets for any product that requires a lot of transport, so forget manufacturing- which to date has been the most reliable driver of rapid development”. This means, if the coastal neighbor has extremely efficient transportation system, it is favorable for its landlocked neighboring country.

Maybe it is too quick to judge if such Summits will ‘Transform Logistics Landscape’. Some points to consider why:

The Summit is clearly an expression of Nepal’s needs rather than India’s in terms of wanting to improve its logistics landscape. Hence, there is a clear asymmetry in terms of interests expressed between Nepal and India. Take for instance, from the Indian side the highest-ranking official was the Indian Ambassador to Nepal, accompanied by the Special Secretary (Logistics), Ministry of Commerce and Industry. This asymmetry necessitates Nepal to continually take initiation even when India may not proportionally reciprocate.

While the speakers and representatives from both the countries did focus on the need to improve connectivity, there was no mention of what potentially could be traded. What can Nepal possibly export is another discussion that has also come to be associated with the China-Nepal railway projects. With billions of dollars in investment, while China would inundate Nepali market with its exports, but how would Nepal take advantage of its access to Chinese markets in terms of exports? If the costs of exporting these goods come at a prohibitive cost, it hardly makes economic sense to go ahead with such projects. The discussion about improving Nepal’s industrial productivity should go hand in hand with improving its logistics infrastructure. The implication is, if trade is limited, investors will hardly find it attractive to finance in logistics infrastructure.

Key Implications
  1. On the whole, the Summit is a positive initiative. It indicates that Nepali entities other than the Government are willing to take initiative and bring the government on board eventually. Although, it needs to be considered that logistics is closely tied with the general infrastructure of a country, more than just improvement of physical connectivity. Meaning, without the Nepal Government spearheading it, there is less scope for wide-spread improvement in the logistics landscape, as the task would entail involvement of numerous ministries, central and the provincial governments.
  2. While it is laudable that organizers such as the FNCCI did initiate this important Summit, it was hard to come across any coherent plan that integrates Nepal and India’s logistics landscape- neither reflected in the presentations made by the speakers from the Indian side nor FNCCI or Government authorities. What one can find after reading these presentations and other provided documents is, they are all based on individual opinions (which does not amount to much in terms of making things happen on the ground). Nothing substantial or concrete were brought on the table, especially in terms of G2G collaboration between India and Nepal.
References
  1. Arvis, J., Ojala, L., Wiederer, C., Shepherd, B., Raj, A., Dairabayeva, K., & Kiiski, T. (2018). Connecting to compete 2018 : Trade logistics in the global economy. ().World Bank, Washington, DC. Retrieved from http://documents.worldbank.org/curated/en/576061531492034646/pdf/128355-WP-P164390-PUBLIC-LPIfullreportwithcover.pdf
  2. Collier, P. (2008). The bottom billion: Why the poorest countries are failing and what can be done about it. New York: Oxford University Press.
  3. World Bank. (2019, Aug 08). Logistics Performance Index. Retrieved from https://lpi.worldbank.org/

Contributor’s Note: All the presentations, key messages, other program and proceedings can be found here.

Research Commentaries

NRC0002 – Nepal’s Leverage as a Founding Member of AIIB

Nepal’s Leverage as a Founding Member of AIIB

Nirnaya Bhatta

Synopsis

Following the decision in May 2019 to co-finance $90 million in the Upper Trisuli I Hydropower Project, the Asian Infrastructure Investment Bank (AIIB) started its official engagements with Nepal. The country has found yet another avenue to seek loans to fund its infrastructural financing needs. Despite much excitement about Nepal being a founding member of AIIB, how effectively it will be able to leverage the new China-led Multilateral Development Bank (MDB) to finance its massive infrastructure needs is up for discussion. This depends on concerted efforts put in to understand the newly-formed MDB by the recipient countries such as Nepal that hold minuscule voting rights in the institution. To that end, this commentary will identify Nepal’s place in AIIB, its governance structure, other approved projects, shareholder and voting powers, its collaboration with other major MDBs, Nepal’s shares and voting rights, and the recently approved project for Nepal.

Introduction

Nepal enjoys the status of being one of the founding members of the Asian Infrastructure Investment Bank (AIIB), which it does not with any other Multilateral Development Banks (MDBs) that have engaged with the country for many decades. Although, by the virtue of merely being a founding member of the newly-formed MDB hardly amounts to anything substantial unless Nepali policymakers closely acquaint themselves with it – especially on operational and administrative issues. It is laudable that over the years Nepali policymakers and political leaders have intensified efforts in wooing donors and investors, but it is also equally critical to understand them- their motivations, development philosophies, and the nature of engagement with other recipient nations.

The AIIB’s Board of Directors approved a loan of up to $90 million for the 216-megawatt Upper Trisuli 1 Hydropower Project. The project is expected to cost $647.4 million, and the rest of it will be co-financed by Asian Development Bank (ADB), International Finance Corporation (IFC) and a Korean Consortium. Given that AIIB has made multiple lending in its member countries (see Annex III), it is reasonable to believe that there is more scope in terms of future financing beyond the Upper Trisuli 1 Hydropower Project. Plus, investments in Nepal’s hydropower project is almost always desirable, given that the poor performance of the energy sector is widely recognized as a major constraint to economic growth.

The Asian Infrastructure Investment Bank

The AIIB was launched in October 2014 and boasted 97 approved members in April 2019. The AIIB owes its origins to the demand emanating from Asia’s massive infrastructure gap on the one hand, and the steady economic and political clout wielded by the People’s Republic of China (PRC). As a China-initiated MDB, the AIIB symbolises China’s increased ambition and role in the global affairs – especially those pertaining to the infrastructure development. To the surprise of many, European countries including the UK, Germany, France and Italy became members of the institution. Their decision may have been informed as they foresaw the inevitable influence that a China-led MDB would command in the close future in the global development arena.

Membership

AIIB comprises of regional and non-regional members. The following contributor generated map identifies AIIB’s regional and non-regional members:

Figure 1: AIIB’s Regional and Non-Regional Members (Data Source: AIIB)

Shareholders and voting rights

The AIIB’s authorized capital stock is US$100 billion, which is divided into shares valued at USD100, 000 each (Articles of Agreement). Meaning, each share is equivalent to USD100, 000. Regional members will hold 75% of total subscribed capital stock, while non-regional members will hold the rest. Nepal’s two neighboring countries China and India are the largest shareholders with 30.34% and 8.54% respectively of the total shares issued, while holding 26.06% and 7.51% voting rights (Articles of Agreement). Nepal holds a share of 0.08 percent (809 share units) and 0.33% voting rights. For a comparative perspective, take these numbers: China, India, and Russia hold 300,398, 86,267, 67,956 votes respectively (AIIB).

Selected AIIB Members’ Voting Rights in Percentage (Data Source: AIIB)

Nepal in AIIB

Nepal became one of the 57 prospective founding members of the AIIB by signing the Article of Agreement on 29 June 2015.

Although, what does it really mean for Nepal in terms of decision making in AIIB? Does it mean it is now in a better position to leverage more loans? It should be noted that a meager 600 votes are allotted to each founding member. In total, Nepal has been allocated 3839 votes- of 809 votes are based on the share purchases (worth USD80.9 million), basic votes of 2430 provided to each member, and 600 for being a founding member.

An American politician Michael Enzi remarked, “If you are not at the table, you are on the menu.” Despite the status that comes with being a founding member, it is unlikely that countries like Nepal (with negligible voting rights) will have an influence on major decisions at the institution. Hence, how Nepal fares in this institution may depend on the country’s concerted effort at understanding how the institution functions. While the Board of Governors consist a member from Nepal, they will at least be cognizant of the major decisions taken at the annual meetings. The following are the reasons why Government of Nepal needs to be ‘on top of things’ when it comes to any issue pertaining to AIIB:

  • To be legally on the safe side: To clearly understand the legal implications of being a member and a borrower. There may be conditions attached to specific projects that Nepal would rather be better off avoiding.
  • To avoid unnecessary politicization of infrastructure projects in Nepal: Once the Government of Nepal is well versed with the nitty-gritties associated with the MDB, it will be able to run more accurate and effective public discourses on the projects financed by AIIB. This will help avoid politicization of projects by opposing political parties. There has been disappointing wrangling among succeeding governments in Nepal recently with regard to awarding hydropower projects to its two mighty neighbors. Engaging in such public discourses will also encourage transparency and invite lesser political interventions.
  • Financial opportunities beyond Upper Trisuli I Hydropower Project: It may be useful to study the publicly available data on the 40 or so approved projects costing USD 8.03 billion by AIIB and identify the type of projects that possibly matches with Nepal’s infrastructural needs. Projects that are often financed are related with water resource management, energy, transport, telecom, landslide and disaster mitigation projects etc. Plus, it is also useful to be on the lookout for possible co-financiers because AIIB has not undertaken projects that require too big a financing. Detailed information is available on proposed and profiled projects (find link here). It is useful to note that AIIB has financed projects in the same country multiple times (Refer to Annex III). Indicating, that there may be a possibility of getting multiple projects financed in the country.
AIIB in Nepal

As it is typical of AIIB-financed projects, they are co-lending in Nepal too. As a new agency, it is understandable that they would seek to avoid major risks that come with lending considerable sums of money to nations like Nepal.

The total project cost of the Upper Trisuli I Hydropower Project is USD647.4 million, of which USD90 million will be loaned by AIIB. Not limited to just co-financing with other MDBs such as the ADB, IFC and a Korean Consortium in Nepal, AIIB will also adhere to the IFC’s Policy on Environmental and Social Sustainability (IFC Policy) and Performance Standards on Environmental and Social Sustainability (IFC PSs) (2012). Designated as Category A by AIIB, “The project is likely to have significant adverse environmental and social impacts that are irreversible, cumulative, diverse or unprecedented” (AIIB 2019).

Implications
  1. Smoother operations for an MBD in Nepal. The two largest shareholders in AIIB are China and India. This will likely deter adventurism by either party in the development sector in Nepal, as it happened recently with Budhi Gandaki Hydropower Project.
  2. Scope for growth: Recently, AIIB raised USD2.5 billion through its debut global stock in a matter of just a week time. This exhibits its immense capacity to raise finances and consequently potential for growth. Today, its authorized capital stock is less than that of the World Bank and Asian Development Bank and is not at par with such MDBs that have an institutional experience- in terms of research, network, and reputation- of more than 50 years. Nonetheless, AIIB will continue growing in terms of its financing capacity, and as mentioned earlier Nepal should be on the lookout for more funding shortly.
  3. With further diversification of MDBs in Nepal, it would foster competitiveness among them, especially with the entry of an institution led by emerging countries. While it is premature to exactly understand the implication of AIIB’s entry into Nepal, the Bank’s infrastructure-driven-economic-development model will indeed propel Nepal’s infrastructure forward on the whole.
Bibliography
  1. ADB. (2019, March 21 ). ADB and AIIB Presidents Discuss Strategic and Operational Issues. Retrieved from ADB : https://www.adb.org/news/adb-and-aiib-presidents-discuss-strategic-and-operational-issues
  2. AIIB. (2015, June 29). 50 Countries Sign the Articles of Agreement for the Asian Infrastructure Investment Bank. Retrieved from AIIB: https://www.aiib.org/en/news-events/news/2015/20150629_001.html
  3. AIIB. (2016, January 16). AIIB Turns 3, Reflects on Startup Growth. Retrieved from AIIB : https://www.aiib.org/en/news-events/news/2019/20190116_001.html
  4. AIIB. (2018). The green imperative: developing interconnected low-carbon power networks in AsiaThe EIU. Retrieved from AIIB: https://www.aiib.org/en/news-events/asian-infrastructure-finance/articles/a03-green-imperative.html
  5. AIIB. (2019, June 10). AIIB Approves First Investment in Nepal. Retrieved from AIIB : https://www.aiib.org/en/news-events/news/2019/20190610_001.html
  6. AIIB. (2019). Introduction . Retrieved from https://www.aiib.org/en/about-aiib/index.html
  7. Reuters, Agence France-Presse. (2015). China to hold 30 per cent stake in AIIB and 26 per cent voting rights. Retrieved from South China Morning Post: https://www.scmp.com/news/china/policies-politics/article/1829095/founding-nations-attend-signing-ceremony-china-led

ANNEX I
Governance Structure

In an excellent comparative study of governance structures of major MDBs, Johns Hopins Professor Natalie Lichtenstein concludes, AIIB follows multilateral development banks (MDBs) such as the World Bank, Asian Development Bank, European Bank for Reconstruction and Development and Inter-American Development Bank in its governance structure (Board of Governors, Board of Directors and President)”.

For the extended organogram, visit AIIB

Important note: The Board of Directors consists of 12 Directors, and under each Director’s purview exists a constituency comprising a number of member countries. For instance, under the Director represented by the Philippines, the countries Bangladesh, Malaysia, Maldives, Nepal, and Thailand have been clustered (Article of Agreement).

Annex II

AIIB on social, labor and environmental guidelines

For parties who are skeptical of a China-led MDB complying with international social, labour and environmental standards, it should be consoling that AIIB has explicitly laid down legally binding guidelines to observe international standards (see AIIB Environmental and Social Framework). Furthermore, most of the approved projects AIIB is financing are co-financed by other MDBs such the World Bank, ADB, JICA, and the governments of recipient countries. There are very few stand-alone projects that the AIIB has undertaken (look at figure 03). Take for instance, as of now, AIIB and ADB have co-financed 5 projects: Bangladesh, Georgia, India, and Pakistan, and Myanmar. Further, in March 2019, AIIB and ADB also signed a Cofinancing Framework Agreement, ‘that will guide overall co-financing arrangements between the two institutions going forward, including regular meetings to discuss co-financing matters’ (ADB, 2019). Meaning, it can be expected that there will be collaboration between the AIIB and ADB wherever there is a convergence of strategic interests.

Hence, it is unlikely that AIIB financed projects will flout international standards on labor, environmental and social concerns given the multi-institutional collaboration they usually undertake. AIIB is also committed to a green imperative that aims at ‘Developing interconnected low-carbon power networks in Asia’, which demonstrates their commitment to environment and the climate (AIIB, 2018).

Annex III
AIIB Approved Projects in 2018 and 2019

 

Country Approval DateSector Project Loans

M$

Co-financers
Nepal May 21, 2019EnergyUpper Trisuli I Hydropower Project90.0ADB, IFC, Korea Consortium
Sri Lanka April 04, 2019Urban housingColombo Urban Regeneration Project200.0Government of Sri Lanka and Private Partner
Sri Lanka April 04, 2019 energyOtherReduction of Landslide Vulnerability by Mitigation Measures (RLVMM) Project80.0Government of Sri Lanka
Lao PDR April 04, 2019TransportNational Road 13 Improvement and Maintenance Project40.0Government of Laos, NDF and IDA
Bangladesh Mar 26, 2019EnergyPower System Upgrade and Expansion Project120.0Government of Bangladesh and Power Grid Corporation of Bangladesh

 

India Dec 07, 2018WaterAndhra Pradesh Urban Water Supply and Septage Management Improvement Project400.00Government of Andhra Pradesh, Andhra Pradesh Urban Finance Infrastructure and Development Corporation
Indonesia Dec 07, 2018Multi-sectorMandalika Urban and Tourism Infrastructure Project248.39Government of Indonesia
Turkey Sep 28, 2018FinanceTSKB Sustainable Energy and Infrastructure On-lending Facility200.0Sole finance by AIIB
Egypt Sep 28, 2018WaterSustainable Rural Sanitation Services Program300.0World Bank
India Sep 28, 2018TransportAndhra Pradesh Rural Roads Project455.0Government of Andhra Pradesh
Indonesia June 24, 2018WaterStrategic Irrigation Modernization and Urgent Rehabilitation Project250.0World Bank
Turkey June 24, 2018EnergyTuz Golu Gar Storage Expansion Project600.0World Bank, Islamic Development Bank, BOTAS and commercial loans

 

IndiaJune 24, 2018FinanceNational Investment and Infrastructure Fund100.0World Bank, Islamic Development Bank, BOTAS and commercial loans

 

India April 11, 2018TransportMadhya Pradesh Rural Connectivity Project140.0World Bank
BangladeshFeb 09, 2018EnergyBangladesh Bhola IPP60.0Sole finance by AIIB

Table 1: AIIB Approved Projects in 2018 and 2019 (Source: AIIB)

Research Commentaries

NRC0001 – The Quad : To Join or Not?

Quad and Nepal: To Join Or Not?

Santosh Sharma Poudel

Synopsis

Foreign Minister Pradeep Gyawali’s discussion of Nepal’s potential participation in US-led Quad has ignited a debate in Nepal. The US invited Nepal to play a ‘central role’ in the Quad. FM Gyawali has denied that Nepal gave a positive nod to the US offer, and that Nepal practices the principle of non-alignment. However, a debate has raged on regarding Nepal’s potential role in Quad and its impact on Nepal-China relations especially in the context of Nepal’s involvement in BRI.

What is Quad?

Quad is an informal dialogue forum involving India, Japan, the US, and Australia. It is a strategic partnership, and not an alliance, that involves the four major maritime democratic powers of the Indo-Pacific region. It’s aims to keep free, open and inclusive Indo-Pacific, and preserve and promote the rules-based order in the region. In a recent meeting between the senior officials of the Quad in Bangkok on 31st May 2019, discussions were also held on encouraging transparent, principle-based investment on quality infrastructure, a not-so-subtle reference to the processes of China-led AIIB.

The initial concept of the Quad was laid out in the exploratory meeting in Manila, in 2007, at the proposal of Japan’s Prime Minister Shinzo Abe, who advocated ‘value-based’ foreign policy. The discussions cooled off after 2008. With the increasing competition between China and the US and the launch of Belt and Road Initiative by China, the Quad has come to the fore again in connection to the US’s Indo-Pacific strategy.

Indian PM Modi, during the ShangriLa Dialogue, said that Indo-Pacific is a natural region. The selection of Mr. S. Jaishankar, who was involved in initial discussions and the current revival of the Quad, as the Foreign Minister of India has also helped the cause of the Quad.

The participating states claim that it is not targeted against any country. However, it should be noted that all four countries share major concerns regarding the rise of China and its role in the Indo-Pacific. A report by (the) Congressional Research Service also indicates that the Quad was a response to China’s increasing economic, military and diplomatic strength. A senior defense analyst analysis at RAND writes that the Quad can be an effective forum to push against Beijing’s excessiveness. Given the geo-strategic location of Nepal vis-à-vis China, it is not difficult to understand the American invitation. Japanese foreign minister Taro Kono also suggested that Nepal join the Quad during his visit to Nepal in January 2019.

Whether Quad is strategic or value-based, it is clear that it has an eye on the rise of China, and most Chinese see it as American attempt to contain Chinese activities in Indo-Pacific and provide an alternative to China’s Belt and Road Initiative.

Nepal’s foreign policy practice

The Article 51 (m) of the Nepalese constitution states that Nepal is to conduct independent foreign policy based on the Charter of the UN and non-alignment among others. This is to say that Nepal should not ally with one country against the other.

Since coming to power in 2018, Prime Minister KP Oli has shown great interest in Nepalese foreign policy. He has continued to promote strong links with China and visited several countries, trying to raise Nepalese profile. With the end of political instability and transition, Nepal has made some assertive moves in foreign policy.

In this context, the Foreign Minister Pradeep Gyawali visited the US and met with US Secretary of State Michael Pompeo at the latter’s invitation on 18th December 2018. This was the first meeting at the foreign ministerial level between the two countries in 16 years. During the meeting, Mr. Pompeo invited Nepal to join the Quad, and play a central role in a free, open and prosperous Indo-Pacific. They also discussed Nepal’s $500 million Millennium Challenge Corporation compact that Nepal signed in 2017. It aims at boosting Nepal’s investment in electricity and transportation infrastructure.

Nepali dilemma

Nepal is one of the least developed countries with a GDP per capita of about $1000. In 2018, Nepal ranked 109 out of 140 economies in the Global Competitiveness Index with a ranking of 117 in infrastructure. This gives a clear indication of the need to develop infrastructure in Nepal if Nepal is to make any significant and sustained economic development. In order to mitigate the infrastructure bottleneck, ESCAP estimates that Nepal needs to spend 8-12% of GDP in infrastructure. That amounts to $2-3 billion a year. With the internal revenue of roughly $10 billion and the current expenditure of more than $8 billion, Nepal has huge infrastructure investment gap. Nepal needs external resources to bridge that gap.

Yet, some analysts have raised concerns regarding Nepal’s participation in the Quad. Some have pointed at the strategic nature of the Quad and argued that Nepal should not and cannot participate in any ‘alliance’. Others have raised that Nepal’s participation in a rival grouping to Belt and Road Initiative (to which Nepal is a signatory) could raise concerns in China. It is understandable given the massive interest in China and Nepal to improve connectivity between the two. However, both of these are misguided concerns.

First, while Nepal has a lot to gain from BRI, the country should not put all (its) eggs in one basket. Instead, it is in Nepal’s interest to have a healthy competition among the major powers for their influence in Nepal/the country. This will increase Nepal’s leverage and leadership as well as keep the powers on their toes.

Second, Quad and other multilateral cooperation mechanisms are not exclusive. Nepal can draw lessons from India in this respect. Despite being a major part of Quad, India is also actively promoting cooperation with China and Russia at the same time. Hence, China promoted BRI and the US-promoted Quad need not necessarily be mutually exclusive. Rather, ‘connectivity’ is the common theme on both.

Third, it is judicious of the government to say that Nepal will not be a part of any strategic alliance, but the Quad is not an alliance. Hence, Nepal being an active member of the Non-Aligned Movement or the guiding principle of Nepalese foreign policy as mentioned in the constitution is not incompatible with potential Nepalese participation in the Quad.

Therefore, the debate should be whether Nepal should join the Quad based on the potential benefits and costs, not if Nepal can join the Quad.

Implications for Nepal

There was no mention of the topic of Quad at the Press Briefing note of the Nepali Foreign Minister on the USA visit. Given the concerns of critics, the hesitancy of MOFA to include the topic in the press release is understandable. However, this reflects the face of Nepalese foreign policy-making mechanism. First, this shows the lack of confidence among Nepalese decision-makers regarding how external stakeholders will react to Nepal’s potential participation on the Quad despite Nepal being a sovereign country.

Second, the plans to discuss or participate in the initiative (FM Gyawali insists that Nepal has not committed to participate yet) was not discussed enough with various domestic and international stakeholders. Some stakeholders such as China were not taken into confidence in advance.

Third, it shows that Nepalese foreign policy-making is still tactical than principled. If not, FM Gyawali would have confidently mentioned after the meeting with Mr. Pompeo that Nepal discussed the Quad based on Nepal’s strategic interest and open regionalism.

Way forward

The fact that Nepal has been invited to join the Quad is an indication of Nepal’s geostrategic location and hints at the increased global profile of Nepal. This represents a foreign policy success for Nepal, though a minor one. It’s too early to analyze the benefits and costs of joining the Quad, especially because the Quad itself is taking shape, but it’s a good sign for Nepal. It offers the potential for much-needed investment in infrastructure and diversifies the source of investment.

To avoid potential negative impacts, Nepal should take a principled stand and abide by the constitution and the policy of ‘amity with all, enmity with none’. We should make sure we are not pressed into taking ‘sides’. Nepal should also strengthen its institutional capacity so that the undue influence of external powers brought about by increased investment in infrastructure can be negated. Additionally, transparent and robust discussion nationally on any foreign policy issue would help raise awareness and bring all stakeholders on the same page. That way, next time the FM discusses some proposals from a foreign country, he will be less hesitant to discuss that in public.

References
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