VOL. 27, NO. 6, September 21, 2007 (Ashwin 04 2064 B.S.)

By Sudheer Shrestha

Despite grim, divisive and conflict prone political scenario, an encouraging sign of development has taken place in Nepal . On September 17, 2007, amidst the sad news of violence in Kapilvastu and apart from customary news in relation to gloomy political schism between the reigning parties, an encouraging news of signing of a Memorandum of Understanding (MoU) between a Private Equity Group of Nepal led by Mr. Prithvi Bahadur Pande, International Finance Corporation (IFC), The Asian Development Bank, India's Infrastructure Development Finance Company, Germany's DEG-KfW BANKENGRUPPE and a consor­tium of ten Nepali banks and financial institutions to establish an Infrastructure Development Bank in Nepal came out.

The development of infrastructure facilities until recently was considered as a venture to be developed and provided only by the state or state entities. However, the whole concept is changing with instances of infrastructures development by private parties or in public private participation in many countries. Infrastructures may be developed also as a by-product by private companies as in the case of 90 miles long King Coal Highway in West Virginia in US which is contemplated to build by excess materials extracted during the process of digging the coal mine.

In this modality, private party alone, or in collaboration with public sector, the private party assumes substantial financial, technical and operational risk in the design, financing, building and operation of a project. Many countries have promulgated separate laws for such private involvement. Nepal has also recently promulgated an Act Relating to Private Investment in Infrastructure Construction and Operation, 2006. The Act largely embodies the model provisions developed by various organizations working in the sector of Public-Private Partnership. The Act has identified road, tunnel-ways, bridge, hospital, irrigation canal, power generation house, power transmission line, trolley bus, tramway, dry port, waterways etc. as possible areas of private or public-private participation in investment and operation. Such involvement is recognized by way of Build and Transfer (BT), Build Operate and Transfer (BOT), Build Own Operate and Transfer (BOOT), Build, Transfer and Operate (BTO), Lease Operate and Transfer (LOT), Lease, Build, Operate and Transfer (LBOT), Develop Operate and Transfer (DOT) models. The list is not exclusionary and the law is accommodative to other forms of private involvement as well, such as, Build Lease and Transfer (BLT), Contract Add and Operate (CAO), Rehabilitate Operate and Transfer (ROT), Rehabilitate Own and Operate (ROO), Lease Renovate Operate and Transfer (LROT) etc. The Act empowers the government to act by way of bidding or direct negotiation.

As the law is already in existence, the endeavours made to establish Infrastructure Bank seems very inspiring. However irrespective of these promises, there are many challenges yet to be met and fought by the promoters working for the development of Nepal. The Act in isolation is not a consolation for the inflow of capital and technology for the growth of infrastructure. The Rules under the Act is yet to be formulated, which, inter alia, needs to clarify rules for establishing the tariff levels. A serious thought needs to be given to clarify whether Rate of Return Regulation/ Cost of Service method, or Performance based Regulation, or Price Cap method, or competitive bidding or marginal cost based price will be adopted. The Act prohibits the nationalization of projects but is silent on requisition made for short terms.

Nepal is in the brink of constitutional transition. The present Constitution has envisaged for a federal state. The division of powers and natural resources is very significant in such political structure which in turn affects the infrastructure projects. One can easily envision the level of efforts and hard work required in bringing together these multilateral, foreign and local institutions for establishing the proposed Bank. This evidently looks like a very daunting task. However, the politicians have not yet worked and reached to consensus on how the natural resources will be distributed and controlled between the centre and the federal units to provide efficient infrastructure facilities to the people. Similarly, the politicians have not even given a thought on how the taxation powers between centre and federal units will be exercised. Apparently, they are busy claiming their share in appointments of university officials, envoys and bureaucrats. The recent amendments to Income Tax Act ensures for the continuance of tax concessions mentioned in that Act for the entire period of contract of construction and operation of infrastructure project as agreed with the government. However, ironically, no special concession or exemption is provided for such Project or, Infrastructure Capital Company as the proposed Bank, or Infrastructure Capital Fund. The provision is insufficient in itself to motivate the investments. However, this amended Act will also soon become obsolete in pursuance to the election of Constituent Assembly and adoption of new Constitution.

Analogous to the constitutional hurdle there are other laws that needs to be reviewed and corrected.

Though a smaller bench of the Supreme Court in one case has ruled that the project specific employees need not be made permanent employee of the company, the present labour law provides in black and white for such appointment. The truth is that it does not allow the flexibility to different types of employment contracts. The abiding to Stamp Duty Act may be very costly in the light of huge amounts that may be involved in contracts and share transfers related with infrastructure projects. The judicial system is lethargic. The dispute resolution mechanism through arbitration has also not been efficient due to weak enforcement provisions. Each day of delay in infrastructure projects may cause loss of millions of rupees. As such, a separate dispute resolution forum specifically meant for infrastructure projects needs to be established. Property acquisition laws need to be more precise and clearer. As the infrastructure projects need huge financial injection, the present debenture issuing law that ties such issuance with paid-up capital also need to be minutely reviewed. On the other side adequate legal framework is also needed to bring balance between the capital injectors whereby a class does not remain "Lenders" with all the securities and the small debenture-holders "Investors" with all the perils. Where the banks (in proper sense) are involved in infrastructure projects the related recovery laws also need to be revised. The present law is not sufficient to enforce security interest such as right to collect the tariff, or operate, maintain or manage the infrastructure facility, or the assignment thereof as the license or concession is specifically granted to the project company. As in case of telecom, the government also needs to establish an independent sector specific regulator before opening any infrastructure sector for private participation.

IFC is one of the participants of the proposed Bank. IFC’s experience of more than 40 years in assisting the development of infrastructure in various countries is that the existence of an adequate legal framework is the main catalyst for the promotion of private investment in any country. How effectively such experience can be leveraged depends wholly on the legal ambience set out by the country. But unfortunately, the laws in Nepal are inadequate, obscure and ambiguous. Side by side, even with the fulfilment of the proper and adequate statutes relating to development of infrastructure projects, there is a huge need for political motivation and political will in support of these larger than life projects. The Government policy regarding these issues should seriously reciprocate the existing law and regulations for the easy attainment of these projects, which may be in the pipeline. The pious intentions of the parties involved in establishment of the proposed Bank will be fulfilled only if the political leadership honestly starts to think upon these issues which will be a real contribution to new Nepal and not merely a lip service. It is also necessary for politicians to see the natural resources as commodity, and opportunities from them objectively, rather than to exploit sentiments of the people if they really intend to provide humane facilities to Nepalese people. But this definitely does not mean that they shall have to be pliant against the national interest.

(The writer is a corporate lawyer in Kusum Law Firm)