Nepal’s main development challenge is to boost growth

1. NEPAL: 3 “Is”for GrowthInvestment, Infrastructure and InclusionArticulating a vision for Nepal’s development and implementing it

2. Nepal’s main development challenge is to boost growth Average growth remained broadly flat since 1995 with structural transformation in reverse. It will take higher and better growth to achieve Nepal’s ambitious goals To reach middle income status by 2020, Nepal would need to grow at least 7 percent per year.

3. Redefining the growth model will be key To rekindle faster and sustained growth and make poverty history will require focus on 3 “Is” • Investmentfor • Structural transformation • Technology upgrading • Knowledge spillovers • Infrastructure development • Infrastructure for • Electricity: to power households and firms and generate FOREX revenues • Transport Connectivity: to unlock Nepal internally and externally and expand the reach of markets and services INVESTMENT Potential for a virtuous circle INFRASTRUCTURE Reduced risk of conflict & strong investment climate INCLUSION • Inclusionto • Make poverty history • Allow individuals and households to realize their full productive potential (mobility /protection) • Achieve a more harmonious and stable society

4. Building blocks

5. Policy Agenda: Investment The first I: increasing private and public investment

6. Improving the environment is key for private investment • Improve A2F • Alleviate regulatory burden for domestic and foreign investors • Reduce non-wage labor costs and improve monitoring • Incentivize production for exports(subsidies and trade finance) • Attract FDI

7. Better PFM is needed to leverage fiscal space for impact • Develop a vision for PFM reform • Using insights from PEFA • Including competency audit and capacity building • Boost budget execution • Reform the budget process in depth (with focus on “how”) • Front load capital project preparation • Enforce ceilings and limit virements • Strengthen local contracting, implementation, supervision • Strengthen accountability • Scale up TSA system into Financial Management Information System (FMIS). • Strengthen audit institutions and practices • Enhance accountability of local governments

8. A strong and stable financial sector is a necessary foundation • Capacity for financial supervision and crisis management : • Legislation: NRBA Amendments; DCGT; BAFIA Amendments • Capacity building: strengthen FSMD to function in the context of a financial crisis • Implement AML and CTF regulations • Build capacity of DMLI and Special Courts • Expand the efficiency and reach of • the financial sector: • Restructure state control banks that distort the market • Rebalance policy priorities from development toward stability in the context of a holistic A2F strategy • Incentivize (rather than mandate) credit expansion through better credit information and collateral registries • Enforce enhanced transparency in disclosure of effective costs of financial services

9. Policy Agenda: Infrastructure The second I: boost infrastructure Focus investment on… INFRASTRUCTURE The BIG two Electricity Transport

10. Unlocking Nepal’s hydro potential can change the game • Restore NEA’s financial health • Tariff reform • Corporate development plan (technical and financial) • Loss reduction master plan and settlement of dues, restructuring government loans, capitalization etc. • Provide Guarantees for private sector • Power Development Agreement (PDA) template for reasonable coverage of country risks • Partial Risk Guarantees from multilateral banks • Develop Right of Way (ROW) policies for transmission: • ROW policies for NEA in line with legislation • Corporate Social Responsibility policy

11. Option 1: Prithivi Highway • ≈ 152 km / 4 hours detour • ≈ US$ 30 in extra fuel for heavy truck Expanding connectivity can boost growth and inclusion • Focus on Transformational and Forward Looking Interventions • “Fast track” project through • stabilizing the project environment for implementation • technical fundamentals to avoid delays and cost overruns • updated cost and traffic projections for funding strategy • Quality of public transport • Pedestrian infrastructure in Kathmandu valley • Improve Efficiency of Spending on Transport • Maintenance of assets >> new constructions with monitoring mechanisms for maintenance grants • Capacity of implementing agencies and no ‘mandate overlaps’ • Pinnacle institution to manage urban transport in Kathmandu • Criteria for investment selection and insulation from politics • PPPs as a vehicle for enhancing efficiency rather than funding • Option 2: Tribhuvan Highway • Mountainous and not passable for freight vehicles • Landslides often render impassable in rainy season Proposed “Fast Track” Birganj – Nepal’s busiest border crossing with India

12. Policy Agenda: Inclusion The third I: calibrating growth for inclusiveness A Strategy “tailored” to Nepal INFRA STRUCTURE Leverage resilience stemming from community governance More (productive) Jobs Public Service Delivery Legitimacy & Political Stability

13. Boosting agriculture productivity and diversity would expand output with maximum impact on poverty • Boost Productivity • Identify and acquire improved agriculture technologies from abroad • Irrigation infrastructure development and management • Review fertilizer subsidies • Promote Agribusiness • Encourage private sector participation in seed production • Refocus government’s role on regulation and facilitation • Diversify crop production • Identify and support non-traditional high value production targeted to the export market

14. Expanding the opportunities set of Nepalis would allow all to realize their full potential • Address inequalities in access to health and education • Develop a strategy for expanding the coverage of poverty-targeted scholarships • Consolidate existing programs for access to basic health and make them poverty-targeted • Improve quality, including through leveraging the private sector • Ensure that NASA is institutionalized and learning outcomes are monitored systematically • Improve the accountability of decentralized • health and education delivery systems • Establish a contracting/purchasing capacity at MoH • Pilot performance-based management and • results-based financing of health facilities • Promote access to jobs - skills development • Develop a skills development programwith • a focus on the informal sector and migrants

15. Smarter social protection can free household savings for investment and help those left behind • Limit proliferation of SP programs • Finalize preparation of the SP policy framework • Restrain the creation of new SP schemes • Strengthen the core administrative systems • Roll-out the management information system in MOFALD to other districts/programs • Scale-up cashless payment methods • Strengthen grievance redress mechanisms for SP programs • Introduce safety net coverage for specific risks/vulnerabilities • Conduct vulnerabilities/risks assessment and adequacy of existing programs to address them

16. A plan is needed for federalism to realize the promise of more and better services • Institutional Structure • Create a high level entity with substantial power and political support to facilitate reforms • Create a strong finance commission capable of conducting • financial analysis and manage intergovernmental transfers • Prepare transfer of functions and administrative control • Carry-out detailed functional unbundling and mapping across levels of government • Compile data on immediate financing costs • Sequenced phase-in of reforms • Establish the provincial and local units within which the governments will be formed • Develop a timeline and criteria for the transfer of responsibilities and powers • Provide local governments with substantial discretion to determine tax rates and bases • Enforce limitations on subnational government (hiring, spending) for an interim timeframe to allow them to build their management capacity • Prepare transfer of functions and administrative control • Establish a Public Service Management Board to develop common standards

17. Policy Priorities

18. Conclusion: The 3 Is for Growth • Improve Investment Climate • Alleviate Regulatory Burden • Offer Foreign Investors Easier Access to Nepal • Reduce Non-wage Costs of Labor • Incentivize Production for Exports • Streamline PFM • PFM Reform for Better Accountability & Oversight • Strengthen Budget Execution • Strengthen Financial Sector • Legislation for Financial Sector Crisis Management & Effective Safety Net • Expand the Reach of Financial Sector • INVESTMENT • Unlock Nepal’s Hydro Power Potential • Restore NEA’s Financial Health • Provide Guarantees for Private Sector • Develop ROW Policies for Transmission • Expand Connectivity • Focus on Transformational – Forward Looking Interventions • Improve Efficiency of Spending on Transport to Maximize Every Rupee Spent Strong link to Investment & Inclusiveness. Quality infrastructure is central to individual welfare, job creation & poverty reduction through better health, education & public service provision. • INFRASTRUCTURE • Boost Agriculture Productivity & Diversity • Improve Governance • Promote Agriculture Diversification & Agribusiness • Expanding Opportunities in Health & Education • Better Targeting to Reach the Un- and Underserved • Improve Quality • Provide Skills Development for Job Access • Refocus Public Sector Role in Health Service & Leverage the Private Sector Better Strategic Use of Existing Resources • Streamline Social Protection System • Improve the fiscal affordability and efficiency of SP expenditures • Consolidate existing social protection programs • Pro-poor Targeting & Improve Benefit Levels • Preparing for Decentralization • Create Institutional Structure to Steer the Process and Balance Competing Institutional Interests • Administrative & Financial Functions Transfer Preparedness • Careful Federalization of Public Service • Sequence Phase-in of Reforms • INCLUSION

19. ANNEXES

20. Shifts in output composition Industry looses momentum after 1996

21. The opportunity cost of current growth BD income per capita is $200 higher

22. China’s success: an investment story GCF above 40% of GDP

23. Infrastructure investment low Data from multiyear plans linearly interpolated to get annual investments.

24. Gaps in education attainment Large inequities remain at post-primary

25. Does the proposed framework make sense? Did we miss anything? • How do you think Nepal can achieve growth at 7%? • What would it take to develop Nepal’s hydro-potential? • What are the areas of consensus and difference across party lines on the issues we covered?   • What are specific areas in which the WB could add value through analytical and/or advocacy work? • How can we engage with you going forward?

26. Questions&Discussion

27. Questions for discussion