Foreign aid absorption capacity low: Development partners

The country has not been able to increase its foreign aid absorption capacity in the last fiscal year too as it has been rated ‘moderately satisfactory’ in foreign aid effectiveness.

As Nepal lost its aid absorption capacity also due to weak public finance management system and project development cycle, it has been able to spend only 74 per cent of grant and 36 per cent of the loans in the last fiscal year 2012-13, the 13^th Nepal Portfolio Performance Review report revealed adding that utilisation of aid has remained poor over last couple of years due to the low absorption capacity of the country.

“Low disbursement of foreign aid is a key problem,” said finance minister Dr Ram Sharan Mahat addressing Nepal Portfolio Performance Review meeting.

“Aid money is primarily being channellised into capital expenditure, and the low disbursement of foreign aid adversely affects Nepal’s highest priority economic goals. He also stressed the need to identify the reasons behind the slow disbursement. “The country needs support of development partners as Nepal is under a major economic transition and planning to graduate to developing nation by 2022.”

Mahat also asked to select result-oriented projects only in the budget. He also suggested to the development partners not to scatter their assistance in small projects. “Fragmentation of aid will not give substantial result,” Mahat said, adding that low disbursement from development partners is also becoming a major problem.

Donors disbursed only $928 million – lower than a fiscal year ago – in the fiscal year 2012-13.

“Development partners expect strong political commitment and leadership of the government to advance reforms in the review,” said Asian Development Bank country director for Nepal Kenichi Yokoyama, addressing the meet on behalf of development partners, on the occasion.

Calling for steps to expand the country’s absorptive capacity by increased capital expenditure, he said aid disbursement has been stagnant since fiscal year 2011-12 to fiscal year 2012-13 despite enhanced commitment from donors to increase aid. “Due to low absorptive capacity of the government, non-disbursement of aid from the World Bank and ADB has been increasing,” he added.

The poor capital expenditure – also due to delayed budget – has not only hit the development works but also discouraged public financial management.

Share of capital expenditure in GDP was 3.4 per cent of GDP in the fiscal year 2010-11 but fell to 3.3 per cent in fiscal year 2011-12 and 3.1 per cent in fiscal year 2012-13.

In the last fiscal year, only three per cent of the budget was spent in the first quarter, 11 per cent in the second quarter, 31 per cent in the third quarter, and remaining 55 per cent in the last quarter.

Yokoyama said that land acquisition problems had remained serious in transmission projects and in some road projects. “A high proportion of infrastructure projects have encountered weak performance of contractors delaying the projects,” he said.

Nepal Portfolio Performance Review – a joint forum of the government and development partners – has presented an unimpressive scorecard due to poor implementation of ‘Sectoral Action Plan’ that had planned measures to bring reforms in local governance to roads and transport management, agriculture and energy.

The review takes stock of aid effectiveness every year after evaluating the performance of projects and programmes funded by development partners.

Nepal Portfolio Performance Review 2014 that was released here today also evaluated performance in five thematic areas – public finance management, public procurement, human resource management, managing for development results, and mutual accountability –  in which Nepal received a ‘satisfactory’ rating this year.

The thematic areas include lowering bunching of budget expenditure in the last quarter of a fiscal year, strengthening internal audits, reducing external audit irregularities, institutionalisation of e-bidding, addressing procurement related issues, reducing the frequency of transfer of government staff and building their capacities, establishing linkages between planning and budgeting, and aiming for improved management of development assistance.
But the review last year has added four more areas – local governance, roads and transport management, agriculture and energy – to the NPPR Action Plan, in which Nepal this year received ‘unsatisfactory’ rating.

The poor performance of these areas is because of project start-up setbacks, weakness in budget execution, delay in contract awarding, frequent transfer of key project staff and high-ranking government officials, failure to conduct timely audits and effectiveness of projects, weak performance of contractors and consultants, and absence of effective contract monitoring system, according to the review meeting.

Likewise, problems of land acquisition – especially for projects related to energy and roads – have also been identified as hindrances to project implementation, it added.

The development partners emphasise on inclusive economic growth for shared prosperity and enhancing the economy’s competitiveness. They pledged to funnel hundreds of millions of dollars every year to achieve Nepal these goals.

Enforcement of the Pubic Procurement Act and Public Procurement Regulation has been weak due to limited capacity of procurement entities and the Public Procurement Monitoring Office, said donors.

“Lack of expertise in procurement and timely procurement planning, collusion, intimidation and insecurity and uneven ex-post physical verification are other concerns,” the donors said.

But the bureaucracy has a different story to tell. “Donor agencies at times allocate the budget even when detailed project reports are yet to be ready,” said head of the Budget and Programme Division at the Ministry of Finance Baikuntha Aryal.

“The practice makes it appear that Nepal has not been able to utilise the funds,” he said, adding that taking donors’ approval at every stage of project designing and implementation has also delayed the project implementation.

Donors, however, expressed readiness to share the blame for the poor implementation of projects funded by them. World Bank country director for Nepal Johannes Zutt said that he would like to take ownership of the problems mentioned by the government officials.