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Amit Pokhrel

Urban Infrastructure Financing in Nepal

The process of financing in infrastructure development is quite ineffective in Nepal.

It is often argued that investment in infrastructure will ‘pay for itself ’ in the long run because there is a strong positive correlation between growth of productivity and investment in infrastructure, the direction of causation generally being assumed to be

from the latter to the former. Improvements in productivity arise not only from economic

infrastructure (e.g. transport systems and utility networks) but also social infrastructure

(e.g. education and health services) and environmental infrastructure (e.g. water and

sewerage networks). Improved transport systems and better educated, better trained

and healthier working populations are all prerequisites of economic growth. The

possibility of adverse social and economic outcomes arising from a structural gap in the

public finances has long been recognized (Bailey 2004).

To minimize the risk of such outcomes, the golden rule of public finance is that long term

borrowing should only be used to finance capital expenditures on infrastructure. As long

as this prudential practice is adhered to, it is generally accepted that governments can

be reasonably sure that the higher tax revenues resulting the economic growth fostered

by that investment will be sufficient to repay the related public sector debt. Hence,

rather than rely on hoped for future economic prosperity to repay the debt incurred in

funding infrastructure, developing countries must consider not only from where to get

funds for infrastructure but also how to finance repayment of the associated debt.

Funding and financing infrastructure must be considered simultaneously if infrastructure

is to be provided and maintained and upgraded on a sustainable and resilient basis

over its lifetime.

Funding refers to the money required to pay for infrastructure upfront. That money can

be raised by either the public or private sectors. Funds have conventionally been raised

by governments borrowing from financial markets to pay for infrastructure which they

then operate to provide services. However, funding for infrastructure is increasingly

coming directly from private sector organizations building and then operating that

infrastructure to provide public services under contract with the public sector.

Financing refers to how the upfront cost of infrastructure is repaid over time. Where

the public sector raises funds from financial markets, financing is concerned with

repayment of the debt related to government borrowing for provision of specific

infrastructure programmes and projects. Where private sector organizations provide

and operate infrastructure to provide public services, financing is concerned with how

they are remunerated during the contract period.

Failure to recognize the distinction between funding and financing has led many

governments to borrow funds to pay for infrastructure upfront but subsequently be

unable to find the finance not only for paying the associated debt charges (i.e. interest

and amortization payments) but also for maintaining that infrastructure in a satisfactory

condition. As a result, very substantial backlogs of repairs and maintenance

expenditures have built up and public services infrastructures have become

increasingly unfit for purpose in many countries.

In Nepal, urban infrastructure financing is lacking due to weak governance, political

instability and failure to address the local planning in behavior actually. The paper

agreement between parties and the governments are not addressing exact rather

creating difficulties. There should be the stability to address and get help from FDI

(Foreign direct investment) for our cities and rural areas in the minimum provisions of

physical infrastructure development. The process should be there and local

participation with technicalities should be managed from the authority levels. In Nepal,

the concept of urban is quite misunderstood by bureaucrats, political leaders and

constitution members and of the local people. The urban infrastructure provision like

water supply, sanitation, road, electricity, and sewage disposal are the most necessary

and most necessary the TOD and BRT’s, and provision of pedestrians in the area with

conservation oriented planning.

The urban infrastructure financing in Nepal can be from:-

Borrowing

•Commercial banks

• Multilateral funds

• Sovereign wealth funds

• Infrastructure banks

• PFIs (Public finance initiatives) and PPP (Public private partnerships)

• Privatization

• Insurance and Pension funds

• Retail Infrastructure Products

• Corporate Investment

• Foundations

Interest Rates

−− government bonds tend to pay the lowest interest rates

• default is deemed less likely than for private sector organizations

• but recent problems for Greece and other Euro zone countries

−− national government bonds pay the lowest rates on bonds

−− joint government & revenue-backed organizations pay intermediate rates

−− regional & local governments pay higher rates