Common minimum infrastructure agenda (CMIA)

Why a common minimum infrastructure agenda?

If there is one thing that we can be certain off, it is that it will take time for Nepal to get its political act together.  Unless the public surprises us with a two-thirds or even a simple majority to a single party in the upcoming constituent election, we are resigned to a few decades of political instability.  The can of worms opened by the Maoists and other parties on secularism, ethnic based federalism, number of states in the Terai and other such issues will take a lot more time to resolve that we anticipate.  It is even not clear whether the next constituent assembly, if elected, will write a constitution if the state of affairs are to remain the same.  We can only hope for the best.

The political leadership takes the largest share of blame for getting us to where we are.  They also have the biggest responsibility to get us out of this mess they have created and move this nation forward.  If they have any sense of ethics, any sense of honesty and any sense of pride in their country, they should not keep this country hostage to the economic growth that its people want and are entitled to.  While they sort out their differences, the political leadership should have the vision and the courage to come above the fray and agree on some common economic agenda to move this nation forward.    An important one would be to come up with a “common minimum infrastructure agenda” (CMIA). I had written on this topic on July 16th, 2012 in a nepalnews.com column.  The objective here is to once again emphasize the need for this and to elaborate some more of my thoughts on the issue.

A robust basic infrastructure is a necessity for any country’s development.  When I talk about infrastructure

Figure 1: Benefits of Infrastructure (prod'humme 2004)

here I am basically talking about the transportation and electricity generation because these are the two key infrastructure components that have the largest impact on moving the economy forward.  As depicted in Figure 1, infrastructure provides benefits to households and industry and the government by its enabling feature of lowering costs and enlarging markets both of which help drive economic growth and thereby improve the living standards of the average citizen and the revenue base of the government which can be utilized to cater to the other services the government can provide to improve the living standards of its citizens.

One of the reasons why China is growing faster than India is because it has a stronger infrastructure base.  China consumes 4 times more electricity per capita compared to India.  Similarly, while the length of total roads is higher in India at 4.69 million km vs. China’s 4.2 million km, the expressway network of China at 84,946km overshadows India’s at only 500km and 3,000 km if you include expressways that are under construction. Nepal in comparison to its two neighbors and other countries in South Asia has a dismal record in these two area consuming per capita electricity one sixth of India and a total road network of 23,434 km with no expressways.  We are far behind both in terms of electricity consumption per captia, road length per square kilometer and road length per capita.

Need for Government to take ownership of infrastructure development

If Nepal wants to move up the income ladder, she as a nation must invest in her future. Thus far, in comparison to growing nations, we have taken a minimalist approach to investment in basic infrastructure. The capital investment by the government in the past 9 years was only 443 billion rupees, 23% of its total expenditure during that period which is relatively insignificant in the big scheme of things.

There is a need for a big bang approach where we need to front load investment in infrastructure in a large scale to meet our growth objectives.  Not 4 billion dollars in 9 years but more like 4 billion dollars in a year for the next 10 years if we can.   

Figure 2: Why government needs to be active?

The government needs to take a more direct and active interest in infrastructure development.  It cannot hide from its obligations to provide its citizens basic infrastructure in the name of trying to get the private sector involved.  The private sector can be involved but more in a build and operate capacity (BO) rather than build, own and operate.  By taking ownership a lot of hurdles are removed from providing PPAs to signing PDAs and all that come in between.  The expected rate of return for the government is much lower than the private sector and it is also by far the most credible institution that can borrow in international capital markets.  

Take politicization out and instil professionalism, transparency and accountability, state-owned companies can perform and they have a role to play in large scale infrastructure development.   Look at China where most if not all of the infrastructure are financed and developed by the state and state-owned agencies.  This is not however an endorsement for the state sector to be involved in the manufacturing and other service sectors where private sector is quite capable of providing the goods and services.

Most of our infrastructure, to date, whether they be roads, airports, and electricity generation facilities have been primarily, if not completely, developed through foreign assistance.  These development assistance come with strings attached and continue to keep us at the mercy of the donor countries or multilateral agencies.  If we had control of our own funds, then we could take appropriate action when companies fail to deliver on time because we would not have to justify those actions to the donor countries and agencies.  It is time we took serious stock on how we, as a nation, should move forward with the development of the country’s basic infrastructure.  

From a cash flow perspective, there are two types of basic infrastructure.  The first are those that generate significant cash flows and have the capacity to finance themselves over the life of the assets through these cash flows.  In this category would fall toll roads, railway networks, airports, and electricity generation facilities.  The second type are those which do not necessarily generate or only generate minimal direct cash flows but do help in the growth of the economy and thereby generate tax and other benefits through the enlarged economy.  In this category, would fall non-toll roads, water, sewerage, irrigation and other such services.  It may be that some of these can pay for themselves but the general belief is that the government often provides them as a service at subsidized rates.  For the latter we should continue to use the current mix of foreign aid in the form of grants and development loans to finance them until we develop our own capacity to fund them.  For the first category, however, we should use the international capital markets to source funds and finance their development.

Getting a political consensus

Getting a political consensus is probably easier said than done in today’s political environment.  However I do not see why the political parties cannot sit down and agree on a portfolio of infrastructure projects that we as a nation should finance for the benefit of our country.   Let us label this the CMIA portfolio.  

Figure 3: Coming to a consensus

First, the Investment Board of Nepal (IBN) should come up with a list of projects encompassing the transportation sector and the power sector with the relevant ministry and agencies that would be part of the CMIA portfolio.  The projects in this portfolio should include only those projects whose cash flows should at the minimum provide a positive NPV at the government’s expected rate of return but exclude any project for which financing has already been closed. 

Second, once the possible set of projects have been identified, IBN, with assistance from relevant ministries and agencies, should create a detailed business plan for each project including the nature of costs, revenues, cash flows anticipated over the life of the projects and anticipated IRRs and NPVs.

Third, this list of projects with their detailed plans should be submitted to the relevant parliamentary committee, if we are lucky to have one by then, or presented to an all-party committee for review and discussion.  It should also be provided to the public domain for interested parties to comment on.  

Fourth, through repeated discussion, the list of projects should be finalized and if possible approved by the parliament or all-party committee for the nation to proceed with and take necessary steps to seek financing in international markets and implement them.

Tapping international capital markets

Fifth, with the approval obtained, IBN should seek the help of a reputed international global investment banking firm to determine the nature of the fund that should be created and the instruments that could be issued to finance the portfolio of projects.  IBN with the financial advisor will need to determine the issue schedule, how the proceeds would be invested and how it would be returned to each category of investor.  A detailed prospectus providing all the details would have to be prepared. It should also clearly let the investors know the companies that will be involved in the actual implementation of the projects and their operation once completed.

Figure 4: Financing and Implementing CMIA portfolio

Sixth, with a detailed prospectus, IBN along with the nation’s finance minister and if possible the prime minister should go on a road show to market the fund in  London, New York, Tokyo, and other financial centers to global investors.

Finally, the nation then should issue the securities as per the prospectus and follow the prospectus diligently in the implementation of the infrastructure projects, proper management and operation of the infrastructure assets and return of investment plus returns to the investors during the lifecycle of the fund.

Some of the securities of the fund could be rated and the securities listed in some of the international exchanges for trading.

One might think that Nepal may not be able to pull this off but I think otherwise.  I know from experience that many of the investments marketed by investments banks globally are more risky than that what is proposed here which is an exposure to a basket of infrastructure projects backed by cash flow generating hard assets on the ground.  They are a lot less risky than investment in hedge funds, repackaged instruments, such as collateralized debt obligation where billions have been invested and then written off.  We just need to be able to sell our story the same way other emerging markets have been doing.

In April of this year, Rawanda issued 400 million USD of 10 year bonds at 6.875% which was oversubscribed 7.5 times.  Similarly Nigeria’s1 billion USD bond issue in July 2013 and Petrobras’s 11 billion USD bond issue in May 2013 were oversubscribed 4 times.  Ghana and Senegal are looking into entering the market.  So if Rawanda and Nigeria can, why can’t Nepal?   For global pension funds (30 trillion USD), global mutual funds (28 trillion USD) and Sovereign funds (6 trillion USD) Nepal would provide a good investment that would allow them to get better return leading to a more diversified investment portfolio.  If we wait too long we might lose out on the low yield environment that still exists in the international capital markets today.  With the US Federal Reserve now signaling the end to their quantitative easing policy, we might be headed for a higher interest rate environment.

Are the political leaders going to continue to keep this country’s economic growth a hostage to their political maneuverings or are they going to step above the fray and give this country’s economic growth a boost by agreeing to a common minimum infrastructure agenda? While this is unclear, the time to act is now and I sincerely hope our politicians feel the same way.