NATIONAL 4 - (Spotlight Weekly)

The governance of the country on the whole has invited bitter criticism from all sectors. What has been your experience in the financial sector?
One of the main issues in the financial sector at the present time is the overwhelming role that the government plays as an owner and operator of financial institutions. Not only does it own the largest commercial bank, and hold the dominant shareholding in the second largest commercial bank, but it also owns some shares in virtually every other commercial bank. In addition, it owns the two development banks, insurance companies, regional rural cooperative banks, and is heavily involved in micro finance institutions. As in most developing countries, government ownership has resulted in poor internal governance, weak management, fragile financial health, and an unhealthy politicization of these institutions. To mention just one example: the fact that major financial institutions can go for years without publishing audited financial statements, exposing the country to severe risks, is a feat rivaled by few other countries.

At the same time that the government has played a dominant role as an owner and operator it has failed to play an adequate role as a supervisor and regulator of the financial system. Consequently, weak institutions have been permitted to carry on business without government or central bank sanction and indeed have continued to deteriorate over time. Many institutions are characterized by weak capital bases, high levels of non-performing loans, and even allegations of corruption and inappropriate management action. In an industry based on confidence, such conditions cannot be allowed to persist. Hence, there is a critical need for the Government to realign its role within the financial system away from being a direct owner to being a supervisor and regulator of financial sector activity.

Financial sector reform is not an easy process and it strikes at the heart of good governance and public sector reform. A strong commitment by the government to this reform process demonstrated by effective action would send an important message to the donor community on the government's willingness to address some of the worst excesses of mis-management and poor governance.

Since corruption has been rampant and uncontrolled in the democratic regime, are foreign-aided projects also badly affected? How do you find projects under World Bank loans?
The Bank's interest in addressing corruption arises because it is a constraint to development. From this perspective, corruption, like inadequate skills, is something standing in the way of a well-performing economy and the achievement of a country's development goals.

The World Bank maintains a policy of zero-tolerance against corruption in Bank-financed projects. If corruption is found to taint a particular Bank project, Bank procedures will be applied to the fullest (including e.g.declaration of mis-procurement and cancellation of relevant credit proceeds; blacklisting of contractors found to be engaging in corrupt practices etc.) and should in general be adequate to address the issue. If corruption were to be found to jeopardize the achievement of development objectives in an entire sector, the design and size of Bank assistance in that sector will be reconsidered. In extreme cases of far-reaching systemic corruption that affects most sectors, Bank assistance will need to be focused on unaffected sectors, if any, limited to institution-building or non-lending activities, or curtailed altogether.

In general terms, given the mounting evidence of the costs of corruption and the need for more coordinated approaches at both the country and international levels, the Bank has adopted a four-part strategy for tackling corruption: - Preventing fraud and corruption within Bank-financed projects. - Helping countries that request Bank support in their efforts to reduce corruption. - Taking corruption more explicitly into account in country assistance strategies, country lending considerations, the policy dialogue, analytical work, and the choice and design of projects. - Adding voice and support to international efforts to reduce corruption.

Grants, aid and loans from donor countries and donor agencies are meant to improve the overall economic situation in the country. Do you believe World Bank loans have achieved those objectives?
While aid has been much higher per capita in Nepal than most other South Asian countries, the potential of donor assistance has not been fully realized. Although the seventy odd projects the World Bank has supported in Nepal over the past thirty years have led to some important achievements, the question must be asked whether this assistance should not have produced more results, particularly among the most disadvantaged -- the rural population that still represents the overwhelming majority of Nepali people.

The World Bank has learned a number of lessons from the thirty years of its development partnership with Nepal. One key lesson is that, in the past, the Bank supported too many projects that were designed from a Kathmandu perspective that failed to adequately meet the needs of villagers. These projects were usually executed from Kathmandu by agencies that did not necessarily have the capacity or incentives to implement the projects effectively. Another lesson is that, in the past, the Bank was sometimes competing, rather than cooperating with other donors. And finally, the projects the Bank supported did not always have the mechanisms and local ownership to ensure adequate, sustainable operation and maintenance. At the local level, the poor performance of many projects and programs has resulted mainly from lack of ownership and other institutional constraints, rather than lack of money.

Since 1998, the World Bank has placed new emphasis on decentralization and bringing resources and controls closer to the local people the projects are meant to benefit. In areas such as forestry, water supply, roads and irrigation, community commitment to locally managed projects has grown to a point where they are proving self-sustaining. And World Bank funded projects are now increasingly involving beneficiaries and NGOs at all stages of project design and implementation. This should help avoid past problems of inappropriate design and insufficient attention to operation and maintenance. In other sectors such as telecommunications, urban water supply and power, World Bank funded projects are moving towards a much greater reliance on the private sector. To these ends, His Majesty's Government and the World Bank have been implementing a new strategy since 1998, placing renewed emphasis on decentralization and closer donor-coordination.

The World Bank was recently criticized for interfering in the administration. What is the truth?
What are you referring to? Whose criticism? On what, specifically?
Grants, aid or loans must always be governed by the performance of governments. How do you evaluate the performance of HMG to justify World Bank loans?

Performance as a prerequisite for lending should not be seen as an abstract test, or an effort to meet targets arbitrarily set by donors. What this is all about is absorptive capacity, the ability to use financial resources effectively and productively for sustainable improvements in the poverty situation. Our current assessment is that Nepal?s progress on many indicators of performance laid down in our Country Assistance Strategy has been very modest and slow in coming, and often lacking altogether. This raises serious questions as to what amount of lending can be justified, given the uncertain prospects of the government being in a position to produce tangible and enduring results in poverty alleviation with such resources.

Donor agencies are said to pressurize the government to make exorbitant increases in the price of power as a precondition for more aid. Does the World Bank too resort to such tactics?
Tariff adjustments are a difficult, yet inevitable part of any reform if there are issues of subsidy removal and cost recovery to be addressed. However, I think it would be wrong for any government to adjust tariffs simply out of fear of jeopardizing future aid flows. Adjustments in tariff should be made not on account of "donor conditionality" but driven by a thorough understanding of the problems, a broad-based consensus in society, and a political will to pursue concomitant reforms designed to reduce wastage, enhance efficiency in the delivery of services, while mitigating the impact on the most vulnerable groups, for example through an appropriate tariff structure favoring small users.

Nepalis are still very far from seeing the full benefits of reform as long as Nepal continues to follow the piece-meal approach of tinkering with reforms in the individual sectors, while ignoring a whole range of concurrent reforms that need to be appropriately pursued and sequenced at the institutional level. For example, the hardship and resentment resulting from the tariff hike associated with power sector reform experienced today among Nepals? manufacturers could have been mitigated to a large extent, had Nepal pursued a vigorous effort at financial sector reform and private sector development designed to improve access to competitive credit and investment flows. Similarly, the hardship and resentment resulting from the removal of fertilizer subsidy and food depots could very well have been mollified if these were preceded by institutional reforms in the areas of decentralization and the civil service which ensured that qualified staff were sufficiently motivated to stay in their duty stations to promote new cropping methods and to control fertilizer quality. Reforms in the government?s economic management practices would not only maximize returns on development investments but gradually reduce Nepal?s dependence on external assistance.

Since governmental agencies have failed to live up to the expectations, why should not you use the services of NGOs to achieve the recipient countrys objectives?
By representing the interests of the poor and as advocates in promoting the priorities and concerns of local communities, civil society organizations are important partners of the World Bank. Having said that, however, I should explain that the Articles of Agreement by which the 182 member countries of the World Bank Group are bound, specifically require that all development finances provided by the Bank be channeled through the borrower government or beguaranteed by the government. Obviously, this puts a considerable hurdle in the way of resource transfers from the Bank to such organizations.

However, this does not prevent us from working in other ways with development actors outside of government. In fact the Bank cooperates with multiple development partners: His Majesty's Government, other bilateral and multilateral donor organizations, Non-Governmental Organizations (NGOs), the private sector, and the general public -- including academics, scientists, economists, journalists, teachers and local people involved in development projects. The Bank's method of operation is not to implement "World Bank projects" but to provide financing and advice for projects which are owned and supported by the Nepali people and which should be a logical part of an efficient over-all development agenda.

The World Bank in Nepal has, over the past few years, actively sought to engage NGOs and other civil society groups in Bank-funded projects and in the wider policy dialogue. For example, the Bank-funded Rural Water Supply and Sanitation Project works closely with nearly 85 NGOs. These NGOs help communities to make decisions about the identification, design, implementation, operation and maintenance of their water supply and sanitation schemes and ensure that the investments of the project are sustainable. In Sunsari Morang III, a Bank-funded irrigation project, an NGO is monitoring the project's Resettlement Action Plan (RAP) and will provide an independent verification and assessment of its implementation. Other examples could be added.

The World Bank also sees the private sector as an important player to achieve faster growth and deeper poverty reduction. Nepal needs to grow well above its current 2 to 3 percent per annum if growth is to have any impact upon poverty reduction. Growth will only come from investment - the majority of which will have to come from the private sector. Investment in Nepal is very low - Foreign Direct Investment (FDI) was less than US$ 9.0 million in 1998. And throughout the world, the private sector has a much more credible record in sustainable job creation than any governmental effort. In order to understand the private sector in Nepal better, the World Bank, in conjunction with the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), is carrying out a private sector survey of 250 firms within the manufacturing sector. The results of the survey are expected to help identify the major constraints to private sector development in Nepal.

As key disseminators and analysts of development information, the media is a respected development voice. The World Bank now understands better the links between development and issues of voice, accountability and transparency, and it is running courses for journalists in all regions of the developing world. In Nepal, the World Bank Institute has started to offer core courses in economics and business to help journalists understand the changing dynamics of their environment.

But the Bank's most important development partners are the citizens who participate in and are affected by projects. Whether they are part of a civil society organization or are simply an individual whose life a project strives to change for the better, their views are important since, without their input and ownership, projects are predisposed to fail. In 1998, the Bank took its most determined step yet in seeking local input into its assistance program for Nepal. It held a series of meetings throughout the country, inviting Nepalicitizens to discuss their needs, expectations and concerns about development and the World Bank's role. Nearly 1,000 people, including village organizations, farmers? groups, women's groups, NGOs, government officials at all levels,journalists and academics attended the meetings. The results of these meetings were taken into consideration as the World Bank produced its Country As sistance Strategy, the comprehensive plan which outlined its development assistance to Nepal for the next three years.