Infrastructure: Key to Economic Growth

By Hom Nath Gaire

Background

Nepal is a small and beautiful country. The bio-diversity that exists across the narrow cross section of the country is quite vast. The water resources that are available here could be harnessed for global benefits. The friendly people here with a pride history could be of interest as a living museum to global visitors. However, we have not been able materialize the theoretical potentials of the multiple sectors that the country inherited.

According to government statistics, we have been happy with the less than one million tourists per annum while the countries having less attractive natural beauty and cultural heritage have been attracting millions of tourist annually. In this context, the reality is that unless we expand the capacity of our airport infrastructure we cannot bring more tourists. Unless we build more transmission lines, we cannot have a real power/energy market. Similarly, if we look at the regional balance and supply as well as value chain of our goods and services, it is one of the poorest in the south Asia. In this case as well, unless we develop more and better road network in every nocks and corner of the country, we shall not be able to enjoy the delicious Mustang apples or aromatic oils from Karnali. In absence of the good network, we even cannot consume the imported products at reasonable price. The reality what we have been facing right is we have to purchase one kilo Chinese apple with Rs. 150 in Kathmandu what cost only Rs. 50 at the Chino Nepal boarder.

Notion of infrastructure

It is very hard to find a generally agreed definition of infrastructure even though economists in their early works stressed that transport infrastructure is crucial for economic development. Infrastructure is usually understood as basic public infrastructure, which forms the foundation for society and economics. As it is mentioned in World Bank report (2010): infrastructure is an umbrella term for many activities, it plays a very important role for industrial and overall economy. Various descriptions of infrastructure and its features create possibilities to analyze infrastructure in different ways which result in different and hardly comparable conclusions. Economists and urban planners distinguish two types of infrastructure: economic infrastructure and social infrastructure. Economic infrastructure is defined as the infrastructure that promotes economic activity, such as roads, highways, railroads, airports, sea ports, electricity, telecommunications, water supply and sanitation. On the other hand, social infrastructure such as schools, libraries, universities, clinics, hospitals, courts, museums, theatres, playgrounds, parks, fountains and statues are defined as the infrastructures that promotes the health, education and cultural standards of the population– activities that have both direct and indirect impact on the welfare. Infrastructure assets can produce three broad range of service:  

·         Infrastructure assets that combine with labor produce capital or intermediate goods

·         Infrastructure capital that combines with labor produce final goods and service

·         Infrastructure capital that combines with other forms of capital improves their productivity i.e. roads with trucks

In this sense, a common feature of infrastructure seems to be that infrastructure goods are strongly used by public. Economists label such goods physical infrastructure, or infrastructure capital. They argue that the role of such infrastructure is understood through services which are provided using the assets of physical infrastructure. Thus, infrastructure services, such as power, transport, telecommunications, provision of water, sanitation and safe disposal of waste, are fundamental to all activities of households and to economic production. This is depicted the following table:

Infrastructure and Associated Services

Service	Associated Infrastructure
Transportation	Roads, bridges, tunnels, rail tracks ports etc.
Water Supply	Dams, reservoirs, pipe lines, treatment plants etc.
Water Disposal	Sewers, used water treatment plants etc.
Irrigation	Dams, Canals etc.
Garbage disposal	Dumps, incinerators, compost units etc.
Telecommunications	Telephone exchanges, telephone lines etc.
Power	Power plants, power stations, transmission and distribution lines etc.

Infrastructure and Economic Growth

Theoretically it is agreed that the infrastructure sector is the backbone of economic growth of the country. The analysis of various empirical studies which use various methods and models for evaluation has also confirmed the significant contribution of infrastructure to economic growth and development. Although all studies find growth-enhancing effect of infrastructure in one or another way, the impact differs in different countries. The common ways that infrastructure impacts on economic growth can be summarized as:  

·         Infrastructure lowers the cost of input factors in production process and this effect is called the direct productivity effect

·         Infrastructure improves the productivity of workers, and this effect is known as the indirect effect

·         Impact of infrastructure on growth is obtained through the initial building and construction period: working places are created in construction and related industries.

·         As infrastructure investments require maintenance, it further boosts the long-term creation of jobs

·         Infrastructure also has positive effect on education and health outcomes: good health and high education of labor force that in turn induce economic growth

Nepal's Situation

In Nepal, due to the rugged terrain the first shift of freight transport was naturally to a ropeway in 1922. The second shift came in 1928 in the form of a railway line in Janakpur. However, road infrastructure development in Nepal started during 1050. Until then Nepal had no road infrastructure linkages to the rest of the world. Construction of roads and availability of subsidized fossil fuel from India heralded the shift to trucks in 1956. With the marginalization of the earlier modes which could have been developed to higher efficiency and better sustainability, trucks have become the undisputed mode throughout the last century.

Since then, the government has been making efforts to provide increased access to education, transportation, communication, health services, electricity and other infrastructure services. Despite these efforts Nepal remains one of the poorest countries with infrastructure development as the major challenge. One of the most dominant challenges of Nepal is to develop the basic infrastructures to accelerate its pace of development. For this, transportation, education, information and communication technology (ICT), health and electricity play a vital role in the overall development and socio-economic transformation of a country.

In Nepal, road transport has predominant role because it is the only means for public transportation except the limited air service to some part of the country which is not affordable to common people. Road infrastructure serves as a backbone for an overall socio-economic development of Nepal. Negligible length of Railways available in Nepal has diminished surprisingly in the last 4 decades. Janakpur to Jainagar Railway which is a narrow gauge in poor condition is the only railway facility in Nepal. Since the overall development of Nepal is pivoted around Infrastructure development focused at road transport and aimed at poverty reduction, Government of Nepal has its priority in this sub-sector. Similarly, hydropower, ICT, irrigation, health, education, industrial estate and urban development, drinking water and sanitation, electricity transmission line as well as technology developing and innovation have to be developed in order to accelerate the socio-economic development of the country.  

Infrastructure Financing

Traditionally, as governments start facing cash flow problems to fund capital intensive infrastructure projects, alternative and innovative means of project financing were sought. Accordingly, in support from bilateral and multilateral agencies, the government of Nepal has always been in charge of constructing, financing and maintaining large-scale infrastructure projects such as highways, hydropower plants, and airports. Along the liberalization of economy, Public Private Partnership (PPP) concept has emerged as an alternative solution of infrastructure financing mechanisms. However, it is important to note that the underlying projects are commercially viable or can provide the desired level of returns on equity investment to private investors.

Despite the fact, Nepal has been able to expedite its infrastructure development in the last two decade. This has made it possible that all the district headquarters would be road linked within next two years. Infrastructure including Road transport, education, health and hydropower are seen as a vital tool towards poverty reduction. People have shown their keen interest towards infrastructure development in their areas. The development partners and multilateral agencies support towards infrastructure development is increasing over the last few decades which have been instrumental to shape the road network of Nepal to present status.

Road Ahead

The past efforts and experiences have revealed that there are some constraints to develop basic infrastructures in Nepal. The funding has always remained as a key issue. Haphazard and non engineered construction has raised serious concerns towards the sustainability of already developed infrastructure projects. The quality control has not received due emphasis in some of the infrastructure developments in the past. These issues need to be addressed well as the country moves towards ‘Construction of New Nepal’.

However, the scenario now is gradually improving. Encouraged by recent historical steps taken in entering Power Trade Agreement (PTA) and Project Development Agreement (PDA) , Nepal's hydropower sector is entering into the stage of the market reform thus adhering to a competitive market based economic regime. Many international companies have set their eyes on the hydropower sector of Nepal. Similarly, legal provisions such as Acts, Regulations, plans and policies are in place to create enabling environment. As a result, the private sectors are willing to put their investment to infrastructure sector. Rapid progress of China and India, the two big neighbors could benefit Nepal from their development. The opportunity for infrastructure development is therefore, quite high in Nepal.

Realizing the inadequate investment in infrastructures like power, airports, roads, bridges, and communication facilities is impeding the economic growth, the Government of Nepal is partnering with the private sector. The recently concluded Nepal Infrastructure Summit-2014 is the best example of this partnership which was organized by Confederation of Nepalese Industries (CNI), Government of Nepal and Young Community for Nepalese Contractors (YCNC) with an aim of accelerating investment in infrastructure sectors. The proceedings of the summit will be documented and published which would be a very useful guideline to the government agencies, policy makers, private sectors and researchers.