Interview

"HMG's reform program has moved slowly"

Dr. Sultan Hafeez Rahman, a Bangladeshi national and the Country Director of Asian Development Bank in Nepal since August 2003, shares his assessment of the issues facing the Nepali economy and the private sector here. Excerpts of an interview:

How changed is the situation now in donor assistance to Nepal after the recently concluded Nepal Development Forum meeting?

There is no change in the commitment of the donors to assist Nepal. However, there was a lot of concern about the ongoing conflict and the political situation of the country since development requires a peaceful environment. We look forward to the time when these problems will be resolved and development assistance can effectively deliver services to the country. So, our main concern now is that political stability and peace be restored as soon as possible.

Corruption has featured as one of the main concerns in development administration in Nepal. How do you see the achievements in corruption control since the anti corruption laws were amended in 2002?

We are in constant dialogue with the government on this issue. We support the Government’s Governance Reform Program, one component of which is to strengthen anticorruption measures. Without a strong anticorruption body, one that is able to closely monitor the situation and able to enforce the law, it is going to be very difficult to get the development benefits intended. As far as ADB is concerned, we have a very stringent Anticorruption Policy with zero tolerance towards corruption. Any complaint we receive on such matters is investigated and actions taken based on the facts.

What sort of changes are being introduced in the strategy of ADB in assisting Nepal in the context of the ongoing political and security situation?

We are currently preparing a new assistance strategy for Nepal. This strategy is focused on supporting development in a time of conflict. We are very concerned that social and economic development activities must continue in Nepal to reduce the suffering of the people. The Government is looking at various modalities by which the delivery mechanisms of development assistance can reach the people more directly. But if this perilous situation of the country deteriorates further or lingers it would be very difficult to execute development programs.

The LDCs, including Nepal, have been justifying incomplete achievements in policy reforms by using a number of pretexts. The standard practice of the donors has been to rate the progress as excellent if the conditions for the assistance are reasonably complied in the initial stage. What changes are being contemplated in this practice by ADB to address this malaise?

We are carrying out dialogue with the concerned authorities. We are supporting many of the Government’s reform programs through our assistance. There are some areas where difficulties arise due to weak institutional capacity. Problems have arisen also due to slow decision-making process. The Government finds it difficult to keep to the time table of the reform they have committed to. This problem is, however, not unique to Nepal. But we must acknowledge that even under the difficult conditions faced by the country the Government has implemented important reforms. We are encouraging the Government to do even better. The Governance Reform Program is very challenging and has moved slowly. The Corporate Governance Program has also moved slower than expected. But there are other sector reforms where there has been more progress. On the whole, there has been progress in Nepal if we take into account the difficult times the country is going through.

On the question of rating, we do not rate countries like a credit rating agency does. We do, however, have a performance based allocation system for our concessional resources. In this exercise we assess the eligible country’s performance across benchmarks such as macroeconomic, governance, environment and portfolio performance. Depending on the assessment, we allocate resources.

The ADB and the other donors are frequently criticized for forcing the Nepali authorities to raise the charges of public utilities. Would you please explain to what extent the critics are right or wrong?

Well, we do face such criticisms, especially, relating to utilities like water and electricity. Let me assure you that there are very competent experts in the Government with a lot of experience. They are also technically very qualified. They know how to negotiate effectively with the donors. They make assessments of what the problems and issues are. We discuss those matters and come to an understanding. This is not at all a one sided process. As a development partner ADB is fully aware that reforms imposed from outside will not work and that such approach is not well suited to the realities of our developing member countries.

Returning to utilities, the Government has to focus on how the institutions can become more efficient and equitable, i.e. minimizing waste and ensuring that government resources are not misdirected. In the Kathmandu Valley itself the water and electricity distribution is not proper. There is need of reforms in these areas. Part of the reform program is to make these institutions capable to finance themselves. Otherwise they add to the fiscal burden since scarce government resources may need to be used to subsidize these services. This is neither efficient not equitable because such subsidies may not reach the intended persons.

The business people complain that the loan conditionalities of the ADB and the other donors virtually make the Nepali companies disqualified from bidding for jobs under the projects being implemented with the donor assistance. Also the provision for 15% consideration granted to the Nepali manufactured goods is found insufficient. Would you mind explaining the logic behind such conditionalities?

This is not something that I have heard during my many interactions with the private sector. We regularly hold training programs to inform the government agencies about what our business processes are, and how private sector can access opportunities in ADB. If the 15% advantage to local bidders is an issue, I would try to find out more from the private sector, during my frequent dialogue with them. The processes that we have now has evolved over time. We do entertain constructive feedbacks and, certainly, if I receive such feedback I will relay it to the concerned department of ADB.

ADB’s involvement in private sector projects in Nepal, one major example being Taragaon Regency Hotel has not been so successful. What changes are being considered in ADB strategy in this regard?

Directly supporting the private sector investment is not the only kind of assistance we provide to the private sector. The private sector benefits enormously from ADB-assisted projects implemented by the Government.  Thus, our assistance to Nepal generates many opportunities for the private sector. Our private sector operation is a relatively small window where we directly invest in a private sector entity or we provide loan financing or both. The private sector entities where we invested are not able to show the kind of return that was expected. For the moment, we are, therefore, not considering any additional investment or loan financing in this area. In such a situation, we have to step back and think of what went wrong.

We are reviewing all our operations in Nepal in both the public and the private sector. We are helping the private sector not only by improving the quality and regulatory environment but also in several other ways. We are including private - public partnership in the new strategy.   We are expecting a high level mission from our headquarters in October to review our private sector operations in Nepal.

Your assumption of the office in Nepal as the Chief of ADB Mission here was welcomed with an expectation that your special experience in the agriculture sector would be highly helpful in Nepal’s agriculture development plans. What changes are being planned in ADB’s strategy to help Nepal’s agriculture development?

A lot of our operation has supported agricultural sector. As Nepal has complex topography the agricultural sector is complex. There is still a lot of potential to be tapped. The productivity is low and agricultural practices are still traditional. For poverty alleviation, Nepal has to diversify the agricultural sector. The linkage between agricultural and non-agricultural sector has to be strengthened. However, as the agricultural sector gets advanced it requires small workforce and there will be a problem of unemployment if other sectors cannot absorb them. Therefore, it is necessary for Nepal to develop the non-agricultural sectors as well, especially the service sector. It is also extremely important for Nepal to liberalize more rapidly. This will help Nepal go a long way towards addressing these issues.

There is tremendous potential in this sector and Nepal has the advantage of cultivating a number of crops as the climate and geology are diverse. However, a big problem for Nepal is poor transport facilities. Being a landlocked country its access to the sea is limited. It would be far better for Nepal to have access to more than one seaport. There should be some rapidly growing commercial hubs in Nepal that can absorb the increasing labor force of the country.

What is ADB’s evaluation of the challenges facing the private sector in Nepal?

In the early 1990s, a broad range of policy reforms were undertaken to liberalize Nepal’s trade, investment, and the financial sector. These had a positive impact on private sector development and economic growth. However, these reforms have not been sufficient. After a period of high growth, the industrial sector performance stagnated due to the conflict, and Foreign Direct Investment dropped significantly. In the emerging global scenario shaped by lowering of trade barriers, the private sector needs to significantly improve productivity and competitiveness. To facilitate this, the Government needs to implement major legal, institutional, and policy reforms aimed at broadening and strengthening the role of private sector.

What kind of a role does ADB see for itself in the development of private sector in Nepal?

ADB recognizes that private sector is THE engine of growth and its development is critical for poverty reduction, ADB’s overarching goal. ADB also recognizes that a strong private sector does not always emerge by itself in developing economies. Therefore, one of key areas of ADB’s assistance in Nepal has been to promote private sector investment by fostering a more conducive policy and enabling environment, with special attention to enhancing enforcement of policies aimed at catalyzing private sector initiatives.

How has this role evolved over the last decade?

Initially, ADB’s assistance to Nepal for private sector development focused on providing direct financing of private sector ventures in the industry and service sectors. Given the difficult operating environment, the performance and development impact of these private projects have been limited. With its new Private Sector Development Strategy (approved in 2000), which seeks to strengthen the linkage between its public and private sector operations for more effective poverty reduction, ADB’s private sector development assistance has significantly expanded in recent years. For instance, the ADB-supported Industrial Sector Program (ISP, implemented during 1993 –1995) helped to improve the efficiency and productivity of Nepal’s industrial sector through rationalization of import/export tariff structure, introduction of a duty drawback system, easing import controls, liberalizing export regulations, and streamlining customs procedures and industrial relations and incentives. ADB has also supported commercialization of key public sector activities for development of the private sector as well as rationalization and strengthening of the role of the public sector. More recently, ADB’s private sector development assistance to Nepal has focused on creating an enabling environment with particular emphasis on financial market regulation and corporate governance. The ongoing ADB-assisted Corporate and Financial Governance (CFG) Project and related technical assistance projects aim to improve governance and efficiency of Nepal’s corporate and financial sector through improved transparency, accountability, and basic financial/corporate sector infrastructure, helping to promote domestic private sector investments as well as foreign direct investment. Based on the lessons of the ISP, the ongoing ADB-supported project preparatory technical assistance project (Market Access and Productivity Growth for the Private Sector) is helping the government to address more micro-level private sector development constraints by identifying further policy, legal, and institutional constraints; integrating Nepal’s industry and service sectors with key international markets; identifying emerging comparative advantage in market niches, and developing effective mechanisms to address these issues. 

Looking ahead, there seems to be significant potential for public-private sector partnerships in many sectors. Under its new assistance strategy ADB will attach priority to assisting such operations in Nepal.

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