January 17, 2017 Sujeev Shakya

Low Capital Expenditure

Until a decade ago, funds were an issue for Nepal. Low government revenue meant that there was little money for public spending. Most of the annual budgets was for regular government expenditure and little was left for capital expenditure. Loans, grants and aid from foreign governments have been the focus of successive governments, which have been begging for money without realising that they have not been able to spend what they already have. Nepal, with a $20 billion economy with $6 billion of revenue and ambitious plans of spending $10 billion, does not even manage to spend a fraction of the capital budget. The government has been able to spend only 11 percent of the total capital budget in the first six months of this fiscal year. In terms of sheer numbers, this is lower than what Bhutan, an economy one 10th the size of Nepal, has been able to spend in the first six months of this fiscal year.

Spending and Growth

Economic growth and spending are interrelated. Capital expenditure builds physical and social infrastructure, which helps attract more investment, which, in turn, helps create more jobs and raise taxes, which again will lead to more expenditure. However, we have not been able to spend the money. This is stunting our economic growth. When we compare Nepal government’s spending with that of other countries like Cambodia and Rwanda,  we find that this is one of the key factors behind Nepal’s low growth and its inability to graduate to a middle income country. Rwanda, a country that has a GDP less than half of Nepal’s, spends a budget that is just a third of Nepal’s, but has been able to do it well and it has achieved high economic growth. Similarly, Cambodia, with approximately equal GDP but lower government revenue than Nepal, has been able to put money into physical and social infrastructure to ensure a consistent 7 percent growth.

While one can blame the frequent changes in government, a parallel regime run by the former chief of the Commission for the Investigation of Abuse of Authority (CIAA), the low capacity of the government to spend and cultural factors, there are three distinct issues that this low spending can be attributed to.

Three Reasons

First, the way our procurement rules are steeped in corruption, good companies will not be interested to work in Nepal. We have mediocre global companies tying up with rent-seeking Nepali businesses that deliver poor results. When a fast track road was to be developed, the government, with nationalistic euphoria, signed a contract with a Nepali company that has not even built a decent drain. The procurement system is not transparent and has been designed to benefit a few individuals at the cost of the nation.

Second, we cannot think big. What Nepal needs is the capacity to think big. In Rwanda, a conference hall, built at half a billion dollar cost, is changing the face of the country’s tourism. Roads were built overnight. The ambition to host global conferences drives Rwanda to build world-class facilities. In Nepal, ministers and senior government officials are happy inaugurating toilets and ATMs. Garland maniacs who are happy to give long speeches in makeshift tents that have a strong stench of toilets cannot think of what it means to deliver global standards. Further, petty corruption has kept big projects at bay.

Third, our capacity to deliver is weak because of low quality human resource and logistics. While transport cartels ensure that global logistics companies cannot do business in Nepal the way they do in other countries, the patronage of labour from political forces has made our labour productivity low with little investment in training and development. Building infrastructure needs good engineers with world-class training. While Nepalis are building good infrastructure elsewhere in the world, we have not been able to attract the same resources for our infrastructure development, as our incentive system is flawed. We do not reward productivity; we reward rent-seekers who have political connections.

Cultural Issues

The culture of begging for money but not having a plan to spend it has been an age-old problem in the country. After the earthquake, people who had the money to rebuild waited for government grants. Banks with more than half a billion dollar capitalisation wait for money from donors to start branches or send their people for training. People borrow from relatives and friends at times of emergencies, despite having the money to spend. Perhaps spending management is not something that is taken seriously in our culture, which is reflected in our government, development or corporate spending.

We have grown up knowing destruction well without ever having to construct. As children, when you throw things all over the room, unlike in many cultures, you are not forced to pick up what you have destroyed, as the granny or the domestic help is there to clean the mess. Similarly, in infrastructure development, we notice that we are very good at destroying what is there, but cannot build on time. Yes, destruction is easy but, as most people know, construction is tough. A change in mind-set is direly required for the country to develop.

Another government change will take place in a few months, which will provide yet another excuse for not spending. Perhaps, time has come to ponder. Donors please do not give more money to a government that cannot spend it. And please stop taking politicians on junkets, and especially to inaugurating projects whose cost is lower than that of a helicopter ride. Let no minister inaugurate a project that is worth less than $500 million!

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