Alternative Finance Aims To Boost Growth

Nepal’s parliament has recently enacted the landmark legislation - Alternative Development Finance Mobilisation Act, 2083. The new legislation establishes a separate alternative financing fund and authorises the government to pool resources from various sectors for the identification, execution and operation of high yielding large infrastructure development projects. This statutory provision opens a new pathway for the government to deploy the various fiscal and monetary instruments to leverage development finance from market for country’s socio-economic development through large scale infrastructure financing.

 In Nepal’s public finance history, this newly legislated provision can be considered as progressive journey paving the way forward in diversifying Nepal's development finance envelope away from traditional sources such as domestic revenue, foreign ODA, and conventional loan. However, its development impact will largely depend on its actual implementation.

Finance landscape

Historically, persistent shortfall in development finance, coupled with meagre budget surpluses and unpredictable foreign aid along with poor spending quality have long been the defining headwinds in Nepal’s development landscape. These fiscal challenges have been more pressing when Nepal prepares for LDC graduation and pursues 2030 agenda for sustainable development. Achieving these transformative milestones in turn requires enormous, front-loaded capital investments in physical and social infrastructure to accelerate growth and create jobs. However, the traditional sources of capital finance- namely revenue surplus, ODA commitment, and domestic borrowing remain fundamentally inadequate to meet these skyrocketed capital requirements. 

In an attempt to explore the additional resource windows for development, alternative financing instruments have come into the global spotlight, specifically following the adoption of 2030 agenda for development in 2015. The Third Financing for Development (FfD) conference held in Addis Ababa in 2015 provided structured approach for stepping “out of the box” to generate development finance through innovative instruments. This non-conventional window of financing aims to attract private, philanthropic, and foreign capital into development process while ensuring a financial return on investment. 

Even in the modern hi-tech economy, primary responsibility for delivering public goods and critical infrastructure still rests with the state.  However, contemporary governing architecture allows the government to employ a variety of fiscal instruments. Instead of relying exclusively on state-treasury, government can employ wide range of policy initiatives or act as aggregators to crowd in non-state actors into the development mainstream. In this new arrangement, government encourages non-states actors through regulatory framework and incentives, creating an environment where these actors will automatically invest in public infrastructure.  In this way, alternative finance intervention is the planned course of action of government to onboard private business in the development mainstream. 

This modern approach to development finance blends capital coming from varying risk portfolio through tailored mechanisms such as co-investment, blended finance, resource pooling, revenue sharing, credit guarantees, financial intermediation and among others. The financing framework is designed in such a way that commercial capital would automatically crowd in the identification, development and operation of critical infrastructure projects. Crucially, it restructures resources and risk such that public infrastructures are fully funded while investors receive their returns. Instruments under these interventions such as Viability Gap Funding (VGF) and first-loss capital prepare the stable business climate within the country and guarantee predictable return on investment.

A major defining feature of alternative finance is its emphasis on additionality and a dynamic financial mix.  This means the fund mobilised under this arrangement must be entirely new money. Without this intervention, funds would otherwise not be attracted to public development cycles. This mechanism blends resources through various investment instruments to reallocate risk inside ring-fenced structure.  In this sense, alternative financing arrangement is both structuring and investment approach. 

Complement 

Alternative finance is a non-conventional approach of partnering, collaborating, and catalysing resources with the explicit goal of diversifying our financing windows for development. It provides robust breathing rooms for an already stressed fiscal space in capital spending. Though multistakeholder partnership and engagement, it also contributes to improving the quality of public spending for tangible development outcome.

However, it is vital to understand that recent legislated framework is not a financial magic, fixing all the challenges related the development finance in Nepal; rather it supports the development through expanding the envelope, leveraging the investment and improving the quality of spending By making every rupee of capital more productive and impactful, this new legal provision ultimately contributes to growth, provides stable business climate and anchor public-private trust.

(The author works at the Inland Revenue Department, International Taxation Section. The ideas expressed here are personal, do not necessarily represent the official position.)