The Manila-based Asian Development Bank (ADB) is one of Nepal's largest development partners with around $2 billion invested since its assistance to Nepal began in 1969. Country Director for Nepal, Richard Vokes spoke to Nepali Times about ongoing assistance to Nepal, including delays in the Melamchi scheme, the development of hydropower infrastructure and the controversy over the lifting of subsidies for shallow tubewells.

Vokes admits that Nepal is going through a critical period, and thinks the key is to restore peace. "If it is possible to resolve the conflict in the near future.there is a meaningful and effective program of rehabilitation, and development that really addresses the underlying causes of the conflict, then the prospects for economic recovery and addressing Nepal's persistent poverty are good, " he says.

The fiscal crisis is more serious, Vokes adds, and says the donor community is willing to help address it. But what donors also want to see is an improved effectiveness of public expenditure.

Nepali Times: How do you assess Nepal's current politico-economic situation?
Richard Vokes: On the political side, Nepal is going through a very critical time, the most pressing issue being the insurgency itself. It is having an impact on the economy and on the whole development process. On the economic side, recent indicators show negative economic growth last year, for the first time in 19 years.
For a low-income country like Nepal this is a very serious situation. Unless you have more rapid, sustainable and broad-based growth it's difficult to achieve a significant reduction in poverty. The insurgency has had a major adverse affect on both the industrial sector and tourism. This in turn has contributed to the current fiscal crisis. The immediate prospects of recovery depend on finding a peaceful solution to the conflict. After the sharp downturn, we expect some recovery in growth this year, to between 1-2 percent, but this is lower than the rate of population growth. So, this is a pretty worrying situation.

What has been the impact of the Maoist insurgency on ADB-assisted projects?
Certainly there has been some impact. Implementation of a few projects has been seriously affected, including Upper Sagarmatha, Rural Infrastructure Development, as well as Melamchi, mainly because of restrictions on the use of explosives for road construction. However, most projects are continuing to function though there are some difficulties. There is also an impact on the identification and preparation of new projects aimed at poor areas and those districts that are more affected by the insurgency. The insurgency also requires us to look at new ways to continue to support poverty-focused projects in conflict-affected areas.

Would you say, then, that Nepal is spiraling downwards towards disaster?
No, I wouldn't say this. Yes, different components of the economy have been hit hard, but we are probably reaching the bottom in several areas. Take tourism. Despite the problems quite a few tourists are still coming. Secondly, there has been a sharp increase in the export of labour. While, of course, it would be better to see more employment generation within the country, overseas opportunities are a safety valve. But the exodus of a large number of people from the hills can be expected to have an adverse impact on agriculture. However, this is too early to assess. Agriculture production also depends on weather and prices in India. Nepal's economy is clearly linked with that of India. So, if India experiences strong growth it will have a positive impact on Nepal. Most of the macroeconomic fundamentals of the economy remain sound and Nepal has a comfortable level of foreign exchange reserves.

Yes, there is a fiscal crisis. But we and the number of other donors have indicated our willingness to try and help alleviate this problem and ensure that funds are available to finance critical development expenditure. However, there is a need to improve effectiveness of this development expenditure at the same time.

We hear Melamchi is further delayed. What is the status?
There has been some delay, and as a result the expected completion is now year-end 2009. This revised date assumes that a private operator for distribution will be in place by early 2004 so that tunnel construction can begin during 2004. While, there have been some delays, but the government and development partners are working to keep this complex project on track.

But given the record of privatisations in this country, isn't it a gamble to try to privatise water distribution?
People have said that the donors want to privatise the Nepal Water Supply Corporation (NWSC). That is not what we are talking about. The government and donors have reached a consensus to introduce a private sector operator, working under a performance-based management contract, to manage Kathmandu's water distribution. This is not a privatization and the assets of NWSC will remain with the government. Looking at the poor track record of NWSC in water distribution - significant inefficiencies, sizeable leakages, and poorly managed development funds - there is broad consensus that change is necessary, and introduction of a private operator at this point is the most reasonable option. Clean water is a scarce resource in the Kathmandu Valley. Given the large size and cost of Melamchi it is critical that the water is not wasted and equally crucial that it reaches the poor. Both the government and donors recognize the need for sound water management and a new institutional structure, including an appropriate regulatory mechanism - all to be developed in consultation with concerned stakeholders.

Now that Nepal has surplus power after Kali Gandaki-A, do you think it is time we started investing in developing infrastructure for transmission and distribution?
There is now quite significant surplus in the wet season and some surplus in the dry season. And, of course, you need to expand transmission and distribution to make full use of available power. ADB is supporting the rural electrification transmission and distribution project with this in mind. You have a power exchange agreement with India, but it is not fully exploited given lack of transmission lines. But you can't afford to ignore generation because bringing new generation capacity on stream takes time.

No one seems to be talking anymore about the 20-year-long Agriculture Perspective Plan (APP). Do you see lack of commitment on the part of government to implement this plan?
I don't think there is lack of commitment. If you look at the Tenth Plan sections related to agriculture and rural development these are within the framework of APP with an emphasis on a package of measures to support commercialisation of agriculture and increase productivity.

The removal of subsidies for shallow tubewells has been controversial. Is this an ideological issue, or an economic one?
It's difficult to give a short answer as this is quite a complex subject. Certainly it is not an ideological issue about whether subsidies are good or bad. Rather, the aim is to create a policy environment that supports a more rapid growth in groundwater development. The old subsidy effectively prevented private sector traders from coming in and making available what is very clearly a private good, designed to serve an individual farmer or small groups of farmers. This, coupled with limited funds for the subsidy was limiting the numbers of wells installed. In addition, due to the collateral requirements, the old subsidy was captured mainly by large and medium sized farmers who didn't need it. Under the government's Community Groundwater Irrigation Sector project, supported by ADB and CIDA, small farmers are being assisted to gain access to this technology. Certainly, immediately after the removal of the subsidy, there was a significant fall in the number of wells installed. While some such dislocation is to be expected, it was made worse by the sharp fall in the prices of rice and wheat at that time. But now the number of installations is picking up again and equally importantly, a much wider range and cost of shallow tubewell technology is being offered to farmers.

Despite the ADB's strong anti-corruption guidelines, some procurement procedures leave room for irregularities. There is also the perception that the ADB hires expensive foreign consultants when local expertise is available.
We have well established procurement policies and procedures designed to minimise corruption. And we do closely monitor the implementation of these procedures. Regarding use of local expertise, ADB allows a margin of preference for domestic manufacturers or contractors in the supply of goods and civil works. But they still must be able to meet the quality specifications and have a financial position to provide the required level of production. Local suppliers may also form a consortium within the country or with companies outside Nepal to meet such requirements. ADB also considers whether there is local consulting expertise available during design of assistance, and where local expertise is not sufficient, foreign consultants team up with local consultants.

The donor community, including ADB, has been pushing for holding local elections as soon as possible. But do you think it is realistic?
First, let me make it clear that ADB has not pressured the government on this sensitive political decision. Still, the suspension of the local bodies has complicated development activities at the grassroots. The system of local government based on elected local bodies had been working reasonably well, and there was considerable donor support to strengthen them as part of their support to decentralization. The present government is aware that the current interim arrangements are not as effective as the previous system and this is hampering development of new programs at the local level. The government has itself indicated its intention to hold local elections but it is for the government to decide on the timing.

How optimistic are you that the Tenth Plan will be able to attain its objectives under the present circumstances?
Based on the current situation and recent data, even the lower growth scenario included in the plan is optimistic. But, it depends critically on the insurgency. If the conflict can be resolved in the near future and there is an effective program of rehabilitation and development that really addresses the underlying causes of the conflict, including the problem of exclusion, then I believe that the prospects for economic recovery and addressing Nepal's persistent poverty, are good.