Policy and Infrastructure Development

Tribhuvan University
Institute of Engineering (IOE)
Paschimanchal Campus
Sabita Subedi a
Sahil Dahalb
Tsering Ngutuk Gurungc
aPAS076MSIEM011 bPAS076MSIEM012 cPAS076MSIEM018
ROLE OF INFRASTRUCTURE POLICY TOPROMOTE
THE INFRASTRUCTURE DEVELOPMENT
INTRODUCTION
Infrastructure is the representative term for the basic physical systems of a business
region or nation. For instance, it includes transportation systems, communication
networks, sewage, water and electric systems. These systems may be capital
intensive and high-cost investments and are vital to a country’s economic
development and prosperity. Projects of Infrastructure may be funded publicly,
privately or through public-private partnerships. In economic terms, Infrastructure
often involves the production of public goods or production processes that support
natural monopolies. According to WEF Global Competitive report 2019, Nepal rank
108th
out of 141 countries in overall quality infrastructure development. There is
close relationship between the infrastructure policy and pace of infrastructure
development. Quality infrastructure development can be established with strong,
clear and predictable legal and policy regime.
Where policy is a course or principle of action adopted or proposed by an
organization or individual. Infrastructure policy can be generally defined as a system
of laws, regulatory measures, courses of action, and funding priorities concerning a
given infrastructure promulgated by a governmental entity or it’s representatives.
The policy in its broader concept includes not only the policy formulation but its
implementation and evaluation too in a whole policy cycle. Thus, policy is closely
related to economic activities of a nation, which is converted into plan for

implementation and evaluation to achieve the goal. The National Planning
Commission (NPC) provides the government with impartial, expert advice on the
country’s long-term infrastructure needs.
As per 2019 World Bank report, Nepal’s investment needs average 10-15 percent of
the gross domestic product annually over the next decade as the country aspires to
graduate from the least developed country status by 2022 and towards a middle-
income country by 2030.

BASIC DESIGN OPTIONS FOR INFRASTRUCTURE POLICY
➢ Demand: Demand or need is often determined with reference to “standard
norm”. A certain percentage of GDP is believed to be invested in
infrastructure as per development requirements by policymakers. The
infrastructure provider will estimate demand and calibrate it against the cost
to protect from wasteful investment.
➢ Market Structure: The following basic market structure options exist.
a. Head to Head Competition or “Competition in the market”: In this
type of market, customer have a choice of who to buy from, firm are free
to set prices. An exit mechanism for failing firm exists- sale, liquidation or
some form of restructuring. For e.g. telecommunication providers,
transport ventures, multiple ports or airport.
b. Competition for the market: Head to head competition may not be
feasible due to natural monopolies. Competition for the market refers to
the struggle to create a new market or to erect a new standard, and it is
usually associated with the process of innovation that brings new
displacing technologies to market.
c. Free entry into unregulated natural monopoly business: Firms enter
freely. In each service area a single firm survives with the power to set
monopoly prices. The threat of entry forces firms to provide a service that
customer are willing to pay for, even though it may approximate the
monopoly price level.
d. Regulated natural monopoly: Under this option, firms provide monopoly
service under prices set by a regulatory body. Prices are reset by regulators
periodically, typically every two to five years, to take into account shifting
demand and cost developments. They lose pricing freedom.
➢ Price Regulation: It is the mechanism by which the policy of setting prices by
government agency, legal statute or regulatory authority. The price ranges are
defined by policy. The mechanism of price regulation are:
a. Establishing regulatory commitment
b. Pricing rules and commitment

c. Legal and contractual framework
d. Organizational and procedural arrangement
e. Dealing with problem firm
➢ Implication for Ownership: The choice of ownership form may not just vary to
the basic choice of private vs state-owned. Public- Private Partnerships (PPP)
model varies from fully state-owned firms to fully privately owned ones.
➢ Finance: Financing is provision of paying upfront for infrastructure. In this
sense, it refers to how governments or private companies that own infrastructure
find the money to meet the upfront costs of building it. Financing is distinct from
funding infrastructure: funding is how taxpayers, consumers or others ultimately
pay for infrastructure, including paying back the finance from whichever source
government or private owners choose. There are two broad ways to finance
infrastructure – publicly or privately.
➢ Access and Subsidies: Generally, policymakers may also want access to
infrastructure to be extended to customers with willingness-to-pay below the cost
of service. Price discrimination is an efficient form of Cross-subsidy. In sum,
subsidies relieve over-burden of poor and marginalized communities.

DEVELOPMENT POLICY PROCESS
➢ Agenda Setting: It is initial step of policy formulation. The problems of
different forms, such as economic, political, social, cultural, religious,
educational and so on rooted in the ground of people are main sources. Besides
these issues, the constitutional, ideological, theoretical and other external
components are also considered as the source of development agencies.
➢ Agenda Adoption and Plan Formulation: The development policy agenda
in Nepal takes place from the draft of approach which is converted into the
development plan through different steps. The major steps are:
a. Draft of approach paper
1.Agenda
4.Monitoring
and Evaluation
2.Agenda Adoption
And Plan Formulation
3.Plan Implementation

b. Discussion on draft
c. Review of draft
d. Final approval of reviewed approach paper by National Development
Council
e. Plan implementation
➢ Plan Implementation: Implementation is the process that turns strategies and
plans into actions in order to accomplish strategic objectives and goals. For
effective implementation, sensible politics and good public administration is
required. Thus, the operation of designed policies and plans takes place
through the budgeting process.
➢ Monitoring and Evaluation: The effective implementation of plan, policies,
strategies regarding the ongoing programs and projects are monitored and
evaluated independent regulatory body called National Planning Commission
(NPC).

GENERAL POLICIES AND STRATEGIES
Nepal doesn’t have standalone national policy, legal or regulatory framework for
infrastructure investment. The sector specific key legal and the regulatory provisions
that are relevant or related to the infrastructure financing are:
➢ Enactment of New Land Acquisition Resettlement and Rehabilitation
Act: This act provides the dispute settlement mechanism for acquiring private
land for large projects with suitable compensation package. The government
is now planning to enact a new law replacing the Land Acquisition Act (1977)
in line with the Land Acquisition Resettlement and Rehabilitation Policy
(2014).
➢ Public Private Partnerships and Investment Act (2019): The GoN has long
been trying to promote PPP model to reduce the overburden of investment in
infrastructure solely by government. The legal provisions regarding PPP are
associated with the Private Financing in Build and Operation of Infrastructure
(BOOT) Act (2006) and Rules (2007). This act deal with the development,
operation and concession of privately financed infrastructure projects.
Similarly, the Investment Board Act (2011) and Investment Board Rules
(2012) deal with the privately financed mega infrastructure projects.
➢ New Foreign Investment and Technology Transfer Act (2019):
This act has a provision for approving Foreign Direct Investment (FDI) within
a week of application, one stop service through establishment of a centre at
the Memorandum of Incorporation (MoI), provision for 100 % of foreign
investment and technology transfer, repatriation of investment and profit in
foreign currency, investment through opening a branch or by establishing
venture capital fund, etc.
➢ New Industrial Enterprise Act (2016): This act provides for one stop
service, contract manufacturing, import of goods from foreign company for
market development of new goods, 40% exemption on income tax rate for
industries investing in construction of roads, bridges, tunnel, railways, etc. and
100% percent tax exemption for the first five years to manufacturing
industries with investment of at least NPR one billion and providing
employment to more than 500 individuals.

➢ Public Procurement Act (2007) and Rules (2008): Activities such as
acquiring goods and services and commissioning of large infrastructure
projects are governed by the Public Procurement Act (2007) and Rules (2008).
In the absence of proper guidelines and technical notes to facilitate public
procurement efficiently and transparently, users are not fully accustomed to
effectively use public procurement process.
POLICIES AND STRATEGIES FOR THE ENERGY SECTOR
Nepal Electricity Regulatory Commission Act (2074): The governing body
is Nepal Electricity Authority (NEA). Under this act institutionalizing,
forecasting of national electricity demand, making power purchase agreement
process public, promoting energy efficiency and renewable energy etc. are
carried out. Hydropower Development Policy (2001) is also amended under
this act.
POLICIES AND STRATEGIES FOR THE TRANSPORT SECTOR
Road-National transport policy (2001/2002): The road systems in Nepal are
classified on the base of classical administrative hierarchy. The road
construction procedure has been practiced in stages as strategy adopted by
DOR. To achieve the goals set by the government (such as SDGs, Strategic
Plans, National Pride Projects, etc.) and increase the role of the private
investor in the transport sector, the following strategies are of prime
importance:
a. Revision of current road classifications on the base of functionality of
the road systems.
b. Changes in practice of usual road construction.
c. Establishment of a backbone economic connectivity corridor to
facilitate the economic growth.
d. Focus on urban transport.

POLICIES AND STRATEGIES FOR THE WATER AND
SANITATION SECTOR
The government aims to achieve universal access to basic water services and
make the country open defecation-free by 2021. The 15th
Five Year Plan (2019)
has a target to provide 40% of the population with improved water supply and
provide 100% of the population with basic water supply. The plan also targets to
treat. Water and Sanitation sector needs shift in vision from universal access to
improvement of water quality and standard of services. To achieve
aforementioned goals following strategies are taken into consideration:
a. Distinctive and clarity of roles and responsibilities of each level of
government.
b. Strong agencies at province and local levels for implementation of project
programs and monitoring service providers and user committees.
c. Involvement of private sector in development sector.
d. Proper identification and mapping of remote and marginalized communities
with lack of facilities.
POLICIES AND STRATEGIES FOR THE URBAN
DEVELOPMENT SECTOR
➢ Generally urban policies will continue to be framed at the federal level,
however municipalities emerge as dominant force in terms of urban planning.
Some strategies for urban development are
a. Enforcement of the PPPI Act-2019 with provisions of VGF, sharing of
risks and benefits between the government and the private sector, and easy
land acquisition to increase the role of the private sector in urban
development.
b. Clarity of roles of private sector and three tiers of government under Urban
Development Act.

SUSTAINABLE DEVELOPMENT AND PUBLIC POLICY ON
GLOBAL PERSPECTIVE
Public policy has a central role to play in the agenda to promote sustainable
development and manage climate change through provision of better
Infrastructure. This is in part because the public sector itself is a major investor
in infrastructure. But, more importantly, policy provides signals and sets the
regulatory and institutional frameworks that influence the action of all actors,
including private investors and customers. Given the magnitude of the
infrastructure challenge, private invest and finance will need to play a much
great role than before.
The Sustainable Development Goals recently adopted by the international
community incorporate climate sustainability integrally into global
development agenda. The Organization for Economic Co-operation and
Development (OECD) addresses the multidimensional nature of diverse
issues through a variety of horizontal projects and international initiatives. Its
Policy Coherence for Sustainable Development Framework helps to identify
synergies and trade-offs among economic, social and environmental policy
areas. COP25 seeks to deliver a clear pathway with short and long term
milestones, and a system to tackle the challenge of climate change and
supervise implementation of the agreed measures. G20 tends to support
effective global SDG monitoring by pioneering best practice and supporting
other countries.

Issues on practicing infrastructure policy:
There is an intrinsic relation between law and pace of infrastructure development. A
solid and predictable legal and policy regime forms the foundation of infrastructure
development. More importantly if the infrastructure projects have to be financed and
operated by private sector. Although many policies act and regulation are made for
infrastructure development their implementation has be a major problem in many
developed developing and underdeveloped countries. Different issues regarding
implementation of infrastructure policies are discussed below.
1. Policy making process:
The current policy making process is centralized‚ top-down‚ and elite
dominated in a old tendency which is not a compatible process. The process is
short sighted and lacks overlay strategy. Such poor policy making could lock
economy to inappropriate infrastructure system for many years with
significant harmful effects on the property. The policies that are passed through
such process will be confusing‚ insolvent and mostly for personal agenda and
implementation of such policies will be an issue and barrier rather than a
motivating factor in field of infrastructure development.
2. Policies not being right‚ strict and inclusive:
In many countries there are different polices for similar matters. In context of
Nepal there are separate policies on foreign investment industrial enterprise
and separate sectorial infrastructural policies .For example: The Hydropower
Development Policy 2001 deals with utilization of hydropower resource. The
law dealing with infrastructure are scattered .For example: Act concerning
Private Financing in the Construction and Operation of Infrastructure 2007
("BOOT Act") and rule concerning "Private Financing in Construction and
Operation of Infrastructure 2007 "BOOT Rules" deals with development op-
eration and concession of privately financed infrastructure projects similarly
the investment board act 2011 and Investment Board Rules 2011 deals with
privately financed mega infrastructure project. So if private company is inter-
ested in generation‚ transmission and distribution of electricity then they have

to follow up all the acts and rules which become confusing and conflicting
during the implementation process.
3. Lack of clear and predictable legal and policy regime:
There are many existing law which appear to be conflicting with each other
and are failing to provide clear comfortable and predictable bias especially for
private sector investment. Some laws are irrational and causing duplication in
approval process for foreign investment.
For example: Foreign Investment and Technology Transfer Act 2049 requires
the approval of Department of Industries (DoI) for foreign investment in
Nepal. After months of waiting and rigorous follow up in DoI the approval
arrives and one has to repeat the same exercise again to get approval of same
matter from NRB. So the question arise "Since both work for GoN why is
approval from one not?".
4. Inconsistency between laws made by Parliament and notification and no-
tification/ directives issued specific regulators:
This issues has been one of the prime factors to bring confusion and many
legal barriers in Infrastructure Development. There are many cases where a
single notification issued by a regulator as a part of its regulation is completely
discounting and negotiating the implementation of parliament made law in
state of complete futility.
I. For example: Insolvency Act 2006 and Blacklisting Directive issued by
NRB .The former allows debtor to file for insolvency proceedings and
to seek organization and/or liquidation .However blacklisting di-
rective issued by NRB has been a major stumbling block to the insol-
vency process. The said directive undermines right of an honest but un-
fortunate investor who is looking for a fresh start and reorganization of
his business through a legal process.
II. BOOT Act and Investment Board Act 2011 has made regime for infra-
structure projects more complicated by allowing overlapping of author-
ity between the govement line ministry and Investment Board .Section
4 (1) of BOOT Act provides that GoN can invite letter of intent for
development of infrastructure project costing more than 20 Million

NPR without prescribing maximum threshold whereas Section 9 of IBA
2011 provides that executing of projects including hydropower projects
above 500MW fast-track road project tunnel railway project with fixed
assets above NPR 10 Billion will be under IBA 2011 not- withstanding
anything specified in other laws.
These example clearly explains how laws are formulated on ad-hoc
basis without considering the probability of possible overlapping of
authority among agencies and potential implication during
implementation of these laws.
5. Irrelevance of policy with change of time:
Company Act 2063 ‚ Foreign Exchange Regulation Act 2019 are insufficient
to carter the present day need for foreign currency investment.
6. Failure to secure cross party agreement which translates into a high political
risk for investors and local community opposition ‚ which often leads to delay.
Solution to issues:
I. Making the policy making process inclusive‚ bottom up approach and
deconstruction of centralization with insurance of multi-dimensional
meaningful participation and ownership development to concerned
stakeholder
II. Inclusive and integrated policy for different field of infrastructure which will
lead to reduction in duplication and confusion
III. A development friendly policy should be passed which would avoid duplica-
tion of unnecessary procedures.
IV. Seeking of cross party agreement during passing of the policies so that the
policies and laws are not affected every time the government changes and the
infrastructure development remain unaffected due to political instability to
some extent.
V. Policies made by parliament should be rigid and consistent so that they are not
affected by notification or directives issued by any sector specific regulator.

Case study
• KOSHI BARRAGE
Background
Nepal has historically been dependent on foreign aid when it comes to the
development of large structure. Koshi barrage situated near Nepal – India was
one of the mega projects of Nepal built with the assistance of India. The
construction was held between 1958 & 1962 after India and Nepal both signed
an agreement on 25 April, 1954. The Mega Project was a huge success for Nepal
as it was not just for flood regulation but also for the development
transportation infrastructure development.
Agreement and Policy issues:
Koshi Agreement signed on 25 April, 1954 was further amended on 19
December, 1966 as the old agreement was not clear on various issues like land
use, compensation & water use. The agreement was amended in leadership of
Matrika Prasad Koirala. Policy maker tried hard on revising the agreement but
still the amended policy was not in favor of Nepal. Some points from the
amended agreement are
I. Land lease for a period of 199 years
Agreement in 1954 explained the acquired land will be the property of
Union but on further amendment made on 1966 explained the acquired
land is the property of Nepal and is leased to India for 199 years. Lease
period of 199 year clearly shows the amendment was made without the
consideration of design life of structure and even after the expiry date of
barrage the land is still under the control of India.

II. No Provision regarding the involvement of Skilled Manpower from Nepal
side in barrage construction and management
The agreement talks about the provision of Nepali labour involvement in
clause 12, but there is no provision of involvement of skilled power
(engineers, technicians) in construction and maintenance of barrage. So,
the weak policy on manpower involvement has affected the Nepal side at
present state as the Nepal side have to rely on India side for the data and
report of koshi barrage. So, it is obviously a strong point for India which
help them in forecasting the data based on their favor.
III. Water right and control & Management of barrage
Nepal is an upper riparian country where as the India is lower riparian and
it makes it clear that if India lost control over barrage it will be a great loss
to them. In clause 4 of Koshi agreement, it clearly describes that Nepal
has right to use the water for irrigation but the control to regulate the
water in barrage site is on hand of India.
Every monsoon Nepal has clearly faced the problem of flood due to delay
in opening of barrage gate.
IV. Submerged land compensation
According to clause 8 of agreement India is fully responsible for the
compensation of submerged land with mutual agreement between the
government of both countries. But due to no limitation on time the
compensation amount is still on hold and are not provided to the affected
area. The victims of 1982 and 2008 are still left to be compensated and a
good policy on timely compensation would have been fruitful.

Solving of policy issue
The Koshi Project was and is still a fruitful Mega project for Nepal but being a good
project Nepal lacked various points that made Nepal a bit more dependent in India.
So, for the solution of strong policy for good infrastructure development needs to
consider the following points:
• Political pressure involvement in process of policy development should be
minimized
• Proper field study and public assessment before the implementation of the
policy.
• Obligation should be defined clearly.
• Review the policy regularly
So, these are some points to be considered during the policy implementation and
development.
And obviously the Koshi Barrage was a good infrastructure but lack of proper
infrastructure policies, the local people around the site are affected by flood,
untimely compensation etc. Hope the policy maker will learn the mistake from
Barrage construction and make a good guidelines on proposed Koshi High Dam
project .
CONCLUSION:
So, after 10 years of civil war and a federal government, Nepal is lacking in pace of
infrastructure development. Infrastructure development has been on critical
condition in Nepal as many National level Project are delayed and is still under
construction phase like Upper Tamakoshi, Melamchi, Babai Irrigation project are
some example of delayed development. The delay in the project clearly refer in the
weak infrastructure laws and policies.

And now it is clear, the article along with koshi barrage example suggest that there
is no quality infrastructure without good policy guidelines for infrastructure
development.
REFERENCES:
Dixit, A. M. 2017. Infrastructure Finance Strategies for Sustainable Development in Nepal. Available at
SSRN: https://Ssrn.com/abstract=2924424.
UNCRD. 2015. National Sustainable Transport Strategy (NSTS) for Nepal (2015~2040). Nagoya, Japan:
United Nations Centre for Regional Development.
DUDBC. 2007. National Urban Policy, 2007. Kathmandu, Nepal: Ministry of Physical Planning and
Works, Government of Nepal.
Kharas, H. 2010a. The emerging middle class in developing countries (OECD Working Paper. No. 285).
Retrieved from https://www.oecd.org/dev/44457738.pdf
NEA. 2018. A Year in Review-Fiscal Year 2017/18. Kathmandu, Nepal: Nepal Electricity Authority.
NPC. 2016b. Nepal SDG Report. Kathmandu, Nepal: National Planning Commission, Government of
Nepal
NPC. 2019. Fifteenth Five Year Plan ( 2019/20-2023/24). Kathmandu, Nepal: National Planning
Commission, Government of Nepal.
WECS. 2005. National Water Plan. Kathmandu, Nepal: Water and Energy Commission Secretariat.
WECS. 2017. Electricity Demand Forecast Report (2015-2040). Kathmandu, Nepal: Water and Energy
Commission Secretariat

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