NEPALI TIMES: What do you make of the government's spending plan for 2002/03, vis-?-vis the goals and policy statements?
KEN OHASHI: Commenting on HMG's spending plan has been a hazardous exercise, because the actual spending typically has differed much from the budget. However, this year, HMG has gone through quite a serious process of prioritising expenditures in most sectors. The 2002/03 budget reflects this effort pretty well. So I feel it is consistent with HMG's poverty reduction objective. Of course, the proof of the budget is in actual spending.

But is it good enough for donors to extend budgetary support?
Well, no matter how polite I try to be, the answer is no. The budget is only a plan. We cannot assume that the actual spending will be close to the plan. In a pre-election period, there may be a lot of pressure to divert funds to lower priority projects that are nonetheless politically attractive. To Prime Minister Deuba's credit, he did overcome severe political resistance to cuts in unproductive spending. The true test, however, will be whether he and HMG more generally can stick to their guns, in a manner of speaking.

There are two basic requirements before donors will consider budget support seriously. First, HMG must show that it is now able to keep actual spending close to the budget. Spending it well is quite another matter. The basic problem of public spending in Nepal has been the quality of spending, more than its quantity. The second requirement is effective implementation of the Immediate Action Plan. If these two things happen, then I think donors should get ready to offer budget support.

What other expectations do you have for budgetary support?
We are looking for evidence that HMG is substantially improving its ability to deliver public services and is implementing some key reforms to which it had committed. I think there are three sets of actions we look for. First, the vigorous implementation of the Immediate Action Plan, including the transfer of the first batch of at least 100 public primary schools to full community management and putting a certain number of sub-health posts under community oversight. The Plan also includes important funding rules for development expenditures whereby the release of budget for P1 is tied to performance indicators and P2 and P3 projects will get funding only after funding of P1 projects are assured. Second is bringing RBB (and NBL) under external management teams. This has been the key "trigger" for raising the overall lending level by the World Bank. Without HMG following through on its commitment in this area, it will be difficult to consider budget support. Third, strong and concrete actions to demonstrate HMG is truly committed to fighting corruption. With elections coming, there is a heightened concern about abuse of public resources.

What about projections on revenues, foreign aid and loans?
I think the projections are still on the optimistic side. In 2001-02, revenues grew a meager 3 percent, because of a sharp economic slowdown. The new budget projects revenue growth of 13 percent, which implicitly assumes a fairly healthy economic turnaround. I hope that will happen, but I do not think it is wise to assume that. Since HMG will be short of cash in 2002-03 and will have a hard time coming up with the "counterpart funds" for many donor-assisted projects, I also think the projected levels of aid inflows may be too high. This leads us to the perennial concern of an unrealistic development budget. As in the past, the Ministry of Finance (MOF) may have to impose the real budget constraint by limiting the "release" of budget, thereby making the budget figures fairly meaningless. Are we back to business as usual? Not quite. HMG has come up with a sensible and important innovation. This budget specifies a small number of priority projects ("P1" projects), which amount to only about Rs 17 billion. This should give MOF a tool to allocate limited money on important development projects on a priority basis.

Are you satisfied with the numbers, quality of projects and prioritisation in the budget?
I think the list of 100 P1 projects is good. One can argue about whether certain projects should be really P1, but my sense is by and large this is a credible list. I understand that some donors are unhappy that "their" projects are relegated to P2 or P3. There is also speculation that some ministries deliberately put some donor-assisted project in P2 or P3 lists and their favorite projects in the P1 list, figuring that donors would put pressure on government to fund their P2/P3 projects anyway.

Well, this is a learning process. Ministries may make mistakes. They may play games. But the best response by donors is to respect HMG decisions. Even if HMG makes some mistakes, unless donors respect its priorities, HMG will never become accountable for its own decisions.

Generally, the World Bank seems to have become very selective about the projects you fund.
I am glad that you have noticed how selective we have become. We want to fund broadly two types of projects. First, projects where, things are happening in the way of reform. Second, we want to fund community-based projects on the belief that empowered communities will make things happen. We hope to be able to fund three or so new projects: a financial sector reform project; to support the reform of RBB and NBL; and a rural water project, which promotes community-based water schemes and a power project, to support reform of NEA, creation of a system to bring private power generators on a competitive basis, and community-based micro hydro schemes. If conditions are right, then a budget support operation.

What about Melamchi? Why aren't you involved?
Well, those are exactly the questions we have been asking ourselves. I know this is not necessarily a popular position in Kathmandu, where many people view Melamchi as the solution to all their water problems. We believe that important options have not been explored to utilise the water resources available within the valley. First order of business is to fix the distribution system, and start charging prices to reflect the scarcity of water. Only then, one can find out how serious the alleged water shortage is.

It may turn out that a shortage does not exist, at least for many years. Besides, without fixing the distribution system, Melamchi water will have no place to go but into the Bagmati River. Now you may ask why the World Bank is reluctant to fund rehabilitation of the system. You need only to look at the history of the four projects we did try to support over the last two decades to realise that it was money down the Bagmati. The question that begs to be asked before spending about 10 percent of GDP on this project, which benefits arguably the richest 5 percent of the population, is about its necessity and priority relative to the vast needs of the poor who live outside the valley. Some have argued that higher water charges will pay for Melamchi and hence this project does not affect HMG's ability to implement more poverty focused projects. I question that assertion. This project costs over $400 (Rs 31,000 ) per valley resident. Do you really think people are ready for that kind of investment? Also, in 2002-03 budget, inclusion of Melamchi as P1 did displace Rs 1.8 billion worth of other priority projects.

How are donors reacting to the government's decision not to extend the terms of local councils?
I think donors are deeply concerned. DDCs and VDCs are meant to represent the interest of the people through local electoral processes. Many donors have supported DDCs and VDCs precisely because they believed that such processes are likely to make them more accountable to the people. Although the process of decentralisation is far from complete or satisfactory, there is evidence it has been changing the governance dynamics locally. The latest development is a serious setback in this process.

How has DTT's no show delayed the financial sector reform program?
We are exploring with HMG alternative ways to address the problems of RBB (Rastriya Banijya Bank). The introduction of an external management team at NBL (Nepal Bank Limited) is in itself a very important step in reforming the ailing commercial banking sector. So, DTT (Deloitte, Touche Tomahatsu) or not, we will be prepared to support HMG.