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The World Bank Group in Nepal, 2014-23

Chapter 4 | Private Sector Development and Jobs

Highlights

The World Bank Group’s country strategies were grounded in strong diagnostics that identified critical constraints to private sector development and job creation, but key policy barriers to private sector–led job creation were not overcome.

Bank Group engagements in the roads, energy, and financial sectors were highly relevant to the constraints to growth and job creation and achieved important results, but there were gaps in Bank Group support for areas with strong job creation potential, such as tax, trade, and labor reforms and tourism and small and medium enterprise support. The Bank Group did not develop the coalitions for change needed to advance in these areas.

The Bank Group was more successful in constructing physical assets than in strengthening institutions and reforming policies and ensuring their implementation.

This chapter presents the evaluation’s findings about how effective the Bank Group has been in its support to PSD and job creation in Nepal. The chapter finds that the Bank Group provided relevant and broadly successful support for the roads and hydropower sectors and for institutional reforms in finance and energy. However, the World Bank’s portfolio had coverage gaps on jobs, gained little traction on reforms to enhance private sector competitiveness and create jobs, and failed to build institutions with the capacity to implement policy and deliver services. IFC made solid contributions to hydropower development, and its advisory services helped establish gender, environmental, and social standards in the hydropower sector, but its risk standards and other factors made it hard for IFC to increase its financing to local private sector hydropower developers.

Private Sector–Led Growth

This section covers the country program’s support areas targeting barriers to private sector investment and productivity. As shown in figure 4.1, it analyzes three sectors important for expanding private sector–led growth: (i) financial sector, through activities aimed at improving financial access and stability; (ii) electricity, with an assessment of support to increase electricity access and to expand generation capacity; and (iii) transport and trade, with a review of efforts to enhance transport connectivity and trade logistics performance. IEG focused on these sectors because they represented major obstacles to private sector–led growth and areas of high development impact, according to the SCD and other diagnostics.

Figure 4.1. Channels for Supporting Private Sector Investments and Growth

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A flow chart of a results chain shows how World Bank Group interventions contribute to private sector development. The first column lists the three channels of support: financial sector, electricity, and transport and trade. The second column explains the objectives of each channel of support. The third column lists examples of activities needed to achieve the identified objectives. Finally, the fourth column presents the outcome of expanded private sector led growth.

Figure 4.1. Channels for Supporting Private Sector Investments and Growth

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A flow chart of a results chain shows how World Bank Group interventions contribute to private sector development. The first column lists the three channels of support: financial sector, electricity, and transport and trade. The second column explains the objectives of each channel of support. The third column lists examples of activities needed to achieve the identified objectives. Finally, the fourth column presents the outcome of expanded private sector led growth.

Source: Independent Evaluation Group.

Note: NEA = Nepal Electricity Authority.

Financial Sector

Since 2013, the Bank Group supported Nepal’s financial sector through a stand-alone DPC, two programmatic development policy series, and IFC investments and advisory services. The 2013 stand-alone DPC provided $30 million in financing. The first series—the Financial Sector Stability DPC—spanned from 2014 to 2017 and consisted of three operations with $300 million in financing. The second series—the Finance for Growth DPC (2018–24)—is in its third operation and has provided $430 million in cumulative financing. During the evaluation period, IFC invested $24 million (including mobilization and blended finance utilization) in private equity investments, provided $160 million in long-term financing (including mobilization) to commercial banks, and provided advisory services on financial inclusion.

The World Bank’s support for financial sector stability was highly relevant and aligned with the government’s priorities. The reform strategy followed the recommendations of the Financial Sector Assessment Program, conducted by the International Monetary Fund and the Bank Group in 2014, which highlighted significant systemic vulnerabilities, including gaps in the supervisory capacity of the Nepal Rastra Bank (NRB). The reform program aimed to mitigate risks and strengthen the financial system’s resilience, which is essential for macroeconomic stability and growth. In addition, the World Bank’s DPC prior actions were part of a larger government-led financial sector reform initiated before the launch of the DPC series. The DPC operations benefited from a complementary structure, with the International Monetary Fund leading the policy dialogue and the United Kingdom complementing the reform process with technical assistance.

The World Bank effectively supported government actions to restructure and consolidate Nepal’s banking and financial system. Since 2015, Nepal’s bank capital adequacy ratios have consistently exceeded regulatory minimums, despite a post-2017 decline in ratios with the end of the postpandemic credit growth. The World Bank backed government measures to limit new licenses for banking and financial institutions, the implementation of prompt corrective action programs, including resolution schemes, and the increase in minimum capital requirements. This helped reduce the number of banks and financial institutions from 167 in 2014 to just 54 by FY23 (figure 4.2). Financial institutions that did not meet prudential guidelines were subject to corrective measures, paving the way for mergers and acquisitions that enhanced operational efficiency and contributed to the sector’s financial stability.

Figure 4.2. Number of Banks and Financial Institutions and Capital Adequacy Ratio

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A combined column and line chart shows that from 2015 though 2023, the number of banks and financial institutions dropped from nearly 160 to about 50 (columns), but overall capital adequacy ratios (line) were between 12 percent and 15 percent throughout.

Figure 4.2. Number of Banks and Financial Institutions and Capital Adequacy Ratio

Source: Independent Evaluation Group based on Nepal Rastra Bank and International Monetary Fund data.

The World Bank’s efforts to enhance the supervision of financial cooperatives have not enhanced the sector’s oversight. In 2014, the NRB supervised only 15 out of 17,000 financial cooperatives, with the rest licensed by the Registrar of Cooperatives, who lacked supervisory and resolution authority. The DPC series facilitated the passage of a new Cooperative Act, granting regulatory powers to address troubled cooperatives. The Cooperative Act’s enactment in 2017 had limited impact because strong opposition from vested interests led to the weakening of key governance provisions. Currently, cooperative oversight falls under the Department of Cooperatives or local authorities, which lack adequate data to assess institutional risks (IMF 2023), therefore imposing risks to overall financial stability and hindering the government’s money-laundering prevention efforts.

DPCs helped strengthen the NRB’s supervisory capabilities, although capacity gaps persist. The DPC’s actions improved NRB’s adherence to Basel Core Principles, established frameworks for both on-site and off-site supervision, and introduced a new supervisory information system. These measures aimed to enhance the banking sector’s monitoring efficiency and risk analysis, but their implementation has been delayed. Reports are needed that will enable NRB supervisors to conduct benchmark analyses of performance indicators across all significant risk categories. Further training would enhance NRB staff’s analytic skills to use the new statistical reports and financial ratios for early identification of emerging risks (IMF 2023).

Nepal’s financial sector continues to face risks because of related party lending and underreporting of nonperforming loans. The 2014 Financial Sector Assessment Program flagged both issues as problem areas. The practice of using revolving working capital loans to artificially sustain nonperforming accounts—known as evergreening—obscures the true asset quality and nonperforming loans in reported financial ratios. In 2023, commercial banks’ nonperforming loans more than doubled from 1.3 to 3.0 percent, driven by higher lending rates and the end of forbearance measures after the postpandemic credit expansion. Nonperforming loans further deteriorated to 4 percent in the third quarter of FY24 due to new guidelines regarding working capital loans and asset classification. The seventh DPC operation, launched in 2022, supports amendments to the Banks and Financial Institutions Act to address these issues in alignment with international standards, but these actions come in late in the evaluation period relative to their critical nature. As noted in Bank Group reports, related party lending and nonperforming loans have been key contributors to banking crises in the developing world (World Bank 2023f).

The World Bank and IFC contributed to establishing a new framework governing private equity funds, but the scale of these investments remains limited. The World Bank–supported DPC actions in 2019 that led to the government’s adoption of the Specialized Investment Fund regulations, setting the regulatory framework for venture capital, hedge funds, and private equity investments. The regulations are restrictive by international standards but have developed the industry by setting guidelines for the registration and operation of alternative investment funds, resulting in enhanced clarity for industry participants and investors. Concurrently, IFC has mobilized $14 million in investments to Business Oxygen (Nepal’s first domestic private equity firm) and in 2021, leveraged IDA Private Sector Window resources to invest $10 million in the Dolma Impact Fund II. Private equity funds can offset the financing gap for Nepal’s small and medium enterprises, and IFC’s participation in these funds was critical to signal confidence to potential investors. However, despite IFC’s use of blended finance solutions, IFC has not been able to significantly increase its own-account investments in private equity, which remain small compared with the sector’s potential. Bank Group specialists note that, aside from business environment obstacles, IFC’s strict risk standards and volume-driven incentives limit its ability to expand private equity investments in Nepal. Investments in Nepal tend to be small, come with high risks and transaction costs, and contribute little to IFC’s corporate volume targets.

Electricity

The Bank Group kept a strong focus on supporting Nepal’s hydropower development, deploying a wide range of instruments during the CPE period. From 2009 to 2014, the World Bank supported the hydropower sector with infrastructure financing and analytic work to identify investment barriers. After 2015, the focus shifted to supporting electricity sector reforms, with two DPCs totaling $400 million to enhance the financial viability of the Nepal Electricity Authority (NEA), improve the electricity sector’s governance, and adopt adequate environmental and social standards. Trust funds have supplemented these efforts. In 2023, the World Bank initiated a donor-funded platform to oversee technical assistance and policy dialogue for hydropower. Upcoming World Bank analytic work under this platform will inform a national hydropower plan that includes a river basin strategy and integrated environmental and social assessments to improve the sustainable management of Nepal’s fragmented electricity sector.

The government’s implementation of DPC-recommended institutional and system improvement measures contributed to ending Nepal’s load shedding in 2018. The NEA adopted measures supported by a DPC in 2018 to use performance-based contracts to reduce system losses from theft and irregular billing and collection and the Distribution Activity Information System to systematically monitor losses and established theft control units in NEA Distribution and Consumer Service offices. These measures led to significant reductions in transmission and distribution losses that, coupled with increased power imports from India, contributed to ending Nepal’s load shedding (figure 4.3). A change in leadership in the NEA in 2016, with strong political backing, played a key role in driving the implementation of these institutional reforms.

The World Bank helped the NEA improve its financial viability. The NEA has been profitable for the past seven years after more than a decade of financial losses (figure 4.4). This change occurred, in part, because of World Bank contributions to helping the NEA limit technical and nontechnical losses, increase its revenues, and reduce financing costs through the implementation of the NEA’s Financial Viability Action Plan. DPC-supported actions to move Nepal toward a more structured and cost-reflective tariff system have also enhanced the NEA’s financial viability, which increases private investors’ confidence by minimizing offtake risks.

Figure 4.3. Factors Contributing to Ending of Load Shedding

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A line chart shows the share of T&D losses (percent) and domestic generation, imports, and load shedding in gigawatt hours. Imported electricity increased steadily starting in 2012, and domestic electricity generation was mostly flat until its dramatic rise starting in 2016. Transmission and distribution losses and load shedding declined steadily starting in 2015.

Figure 4.3. Factors Contributing to Ending of Load Shedding

Source: Independent Evaluation Group based on World Bank project documents.

Note: GWh = gigawatt-hour; T&D = transmission and distribution.

Figure 4.4. Nepal Electricity Authority’s Profits and Losses over the Decade

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A line chart shows that, during the C P E period, the Nepal Electrical Authority, despite some vicissitudes, improved its balance sheet from a loss of 6 billion rupees in 2013 to a profit of 12 billion rupees in 2022.

Figure 4.4. Nepal Electricity Authority’s Profits and Losses over the Decade

Source: Independent Evaluation Group based on data from the Nepal Electricity Authority annual reports.

The DPC1-supported reforms incentivized the private sector’s involvement in Nepal’s hydropower development. In 2017, the NEA adopted differentiated power purchase rates and guidelines on foreign currency–denominated power purchase agreements for hydropower generation projects. Before these changes, a uniform electricity tariff disincentivized private sector investments in peaking run-of-river hydropower plants, which are much needed during Nepal’s dry seasons. These measures increased private sector interest as evidenced by an increase in signed power purchase agreements,1 but they did not encourage large foreign investments in hydropower development (figure 4.5), mainly because of investors’ concerns over currency risks and financing restrictions (World Bank 2023a).

Figure 4.5. Foreign Direct Investment in Hydropower

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A line chart shows that the primary sector for F D I was hydropower, with spikes in 2014 and 2017. Beginning in 2018, though, F D I in other sectors began to grow, with a notable increase in 2021 (the most recent).

Figure 4.5. Foreign Direct Investment in Hydropower

Source: Independent Evaluation Group based on data from the Department of Industry of Nepal.

Note: FDI = foreign direct investment.

IFC has supported Nepal in adopting environmental and social standards in the hydropower sector, including gender diversity and equality dimensions. During the CPE period, IFC supported the development of the Hydropower Environmental Impact Assessment Manual to align the sector with best international environmental and social practices. IFC reports training 150 officials to strengthen their understanding of the Environmental Impact Assessment framework and monitoring processes (which resulted in 67 hydropower projects benefiting from these activities). IFC also implemented the Powered by Women initiative, which reportedly has enabled a 19 percentage point increase in women in leadership roles in the sector.

The World Bank’s support to the new Electricity Bill has faced several challenges, and the bill has not been enacted as of April 2024. Since 2015, a World Bank IPF and DPC series have supported the drafting of a new Electricity Bill, which would liberalize the sector by allowing private power plants to access the transmission grid and trade power, including cross-border trade. However, the Electricity Bill has faced numerous setbacks since 2020, in part because of opposition from key stakeholders (World Bank 2023a). In addition, this law is politically sensitive because it entails correcting mistakes in current regulations, thereby penalizing earlier investors. After years of deliberations, the bill was reintroduced in the Federal Parliament of Nepal in November 2023. Its multiple revisions have led to a version of the bill that waives competition provisions for entities with a majority government investment, reduces the regulator’s powers, and disregards the water basin strategy by allowing provincial and local authorities to license smaller hydropower plants without following the strategy.

World Bank–supported reforms established important energy sector institutions, but their effectiveness remains unrealized pending the enactment of the Electricity Bill. In collaboration with development partners, the World Bank–supported prior actions contributed to the establishment of the first independent electricity regulator in Nepal—the Electricity Regulatory Commission. World Bank efforts focused on making the Electricity Regulatory Commission operational and broadening its mandate, but the organization remains understaffed and not fully functional (World Bank 2023a). In addition, the World Bank contributed to the development of the Nepal Power Trading Company Limited, which currently manages cross-border electricity trade as a service provider for the NEA. However, as power trade becomes a licensed activity under the new Electricity Bill and generation capacity grows, the Nepal Power Trading Company Limited is expected to transition to a power trading company, marketing Nepal’s electricity surplus, thereby contributing to improving electricity affordability and the financial viability of the power sector.

The Bank Group–supported policy actions have not yet removed binding constraints to private investment in hydropower. The sector continues to suffer from underinvestment to adequately expand its generation capacity. Although substantial generation capacity is under development,2 most projects face implementation delays and local financing is insufficient (which leads to cost escalations affecting the feasibility of new projects).3 The Bank Group–supported policy actions have been ineffective in removing binding constraints that limit access to the transmission grid and undermine hedging and profit repatriation mechanisms (World Bank Group 2019). However, this slow progress is not atypical; steps toward liberalization are by nature incremental and reliant on gradual trust building between trading partners and the public and private sectors.

The World Bank’s convening contributed to paving the way for subregional electricity trade. In 2016, South Asian power sector cooperation plans were interrupted because of tensions between India and Pakistan. In this context, a Bangladesh, Bhutan, India, and Nepal subregional framework was the most viable entryway for electricity trade discussions. The World Bank’s regional integration unit has used its expertise and influence to host Power Secretaries Roundtables, an informal forum to discuss subregional issues (which has contributed to the advances of the Bangladesh, Bhutan, India, and Nepal energy market).4 This is a notable development because although Nepal and India have been trading power for many years, the terms of trade had been determined solely through bilateral arrangements. The involvement of a third country, as either producer or consumer, changes the nature of the transmission infrastructure, which begins to play the role of a regional good (Pillai and Prasai 2021).

IFC convened lenders and leveraged the Multilateral Investment Guarantee Agency and IDA resources to finance Nepal’s largest hydropower foreign direct investment. After seven years of preparation, IFC and a consortium of Korean and Nepalese partners, in collaboration with the government of Nepal, completed the development of a 216-megawatt run-of-river hydropower project on the Upper Trishuli River through a $453 million innovative debt financing package approved in 2019. Construction began in January 2022, with completion expected by December 2026. The financing structure for this operation is a good example of Bank Group collaboration for its use of a $87.4 million Multilateral Investment Guarantee Agency political risk guarantee and $100 million in blended concessional finance from the IDA Private Sector Window. The IDA Private Sector Window support lessens the costs and risks associated with the project’s long development period. The hydropower plant includes a storage facility, which is crucial for maintaining a reliable electricity supply during dry seasons. IFC carried out an impact assessment and management plan to assess the cumulative environmental and social risks of the Trishuli River Basin’s various hydropower projects.

World Bank support for electricity infrastructure investments had mixed results. Since 2011, the World Bank has supported five hydropower infrastructure projects—none of them completed the planned works before project closure, and all of them received modest ratings in the Implementation Completion and Results Report Review efficacy and efficiency dimensions. These projects experienced implementation challenges related to procurement, financial management issues, and community disputes. That said, some World Bank–supported infrastructure initiatives helped enhance Nepal’s electricity capacity. For example, the Nepal–India Electricity Transmission and Trade Project (2011–21), after seven restructurings, successfully constructed a transmission line between Dhalkebar and Muzaffarpur in 2018, increasing the power transmission capacity between India and Nepal by 1,000 megawatts. This facilitated power trade between the countries and helped reduce load shedding. Fewer firms cite electricity as the main constraint to doing business in 2023 compared with 2013.5

Transport and Trade

The World Bank faced several challenges in addressing Nepal’s transport and trade sector constraints, which led to more gradual progress than anticipated in areas such as maintenance and asset management, institutional strengthening, and enhancing private sector participation. Analytics showed that Nepal’s infrastructure issues stemmed from weak institutions with overlapping mandates, inefficient spending, and weak policies for private investment. High trade costs were linked to both infrastructure and policy inadequacies. The CPS and CPF set forth bold strategies for transformation, emphasizing rural transport and connectivity to India, stronger government institutions, and increased private sector participation. The CPS stated that “instead of focusing on specific transactions, the [Bank Group] will take a more holistic approach that focuses on the necessary governance, policy, and institutional frameworks before committing to specific transactions and projects” (World Bank 2014, 30). While this approach was intended, in practice, projects moved forward under governance and policy frameworks that could have been strengthened. The World Bank’s support addressed some regulatory challenges but left room for further progress in areas like interagency coordination, procurement management, and trade policy coherence. This was often because of entrenched institutional and structural issues beyond the control of the World Bank. IEG’s interviews and document reviews found no evidence of joint World Bank–IFC efforts to boost private sector engagement in the sector.

The size and complexity of transport operations increased during the evaluation period, and implementation challenges followed. The World Bank has a long history of engagement in the sector, with the first transport operations in Nepal dating from the early 1970s. Since then, the size of commitments has consistently increased, peaking recently with the Accelerating Transport and Trade Connectivity in Eastern South Asia and the Nepal Strategic Road Connectivity and Trade Improvement Project, valued at $275 million and $450 million, respectively (figure 4.6). Projects have become more complex, integrating trade, resilience, and environmental and social aspects and using diverse financing instruments. However, project design was not enough attuned to counterparts’ implementation capacity. Reviews of Project Completion Reports and Implementation Status and Results Reports revealed delays and low disbursement rates, with some projects facing operational and financial sustainability risks. Interviews also pointed to interagency coordination problems.

Figure 4.6. International Development Association Support to Transport in Nepal

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A chart depicts IDA transport projects from 1968 through the present. It shows a long history of transport support to Nepal, with an increase throughout this time range.

Figure 4.6. International Development Association Support to Transport in Nepal

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A chart depicts IDA transport projects from 1968 through the present. It shows a long history of transport support to Nepal, with an increase throughout this time range.

Source: Independent Evaluation Group.

Note: AF = additional financing.

The results frameworks could have included outcomes for institutional strengthening. On completion, all transport operations received positive ratings based on the achievement of results, as outlined in their monitoring and evaluation frameworks, in accordance with the World Bank’s standard methodology for rating projects at completion. However, the monitoring and evaluation frameworks often lacked robust indicators for measuring outcomes associated with institutional strengthening activities. This constrained opportunities for adapting and learning.

The World Bank contributed to the country’s increased transport and trade connectivity. The bridges improvement and maintenance project helped increase the share of bridges in good and fair condition in targeted routes from 53 to 81 percent. This accounts for 481 out of 1,709 bridges on the Strategic Road Network. The Project for Strengthening the National Rural Transport Program rehabilitated 2,760 kilometers of roads and provided routine maintenance to 5,500 kilometers of roads. These results benefited 37 districts with 15.7 million people, more than half of Nepal’s total population (ILO 2021), and contributed to a 12.7 percent increase in the population within a two- to four-hour walking distance of an all-weather road. These investments targeted districts that are home to approximately 60 percent of Nepal’s poor population. In addition, as validated in IEG’s field visit, the Nepal–India Regional Trade and Transport Project helped reduce in seven hours the transit time from Birgunj to Kathmandu by constructing four bridges and upgrading 33 kilometers of the most important road trade corridor between Nepal and India, which is the route for 60 percent of bilateral trade of goods between the two countries (box 4.1). The 2023 Enterprise Survey shows discreet progress, with 2.4 percent of firms reporting transportation as the biggest constraint in 2023, compared with 6.2 percent in 2013.

World Bank investments in trade logistics delivered outputs but not outcomes and show high operational and sustainability risks. The Nepal–India Regional Trade and Transport Project completed relevant activities to reduce trade logistics costs by constructing the Inland Container Depot in Kathmandu, developing the Nepal National Single Window, and constructing and equipping a sanitary and phytosanitary laboratory. The project had completed its expected outputs by the time the evaluation team visited in December 2023, but many activities faced operational and financial sustainability risks, as described in box 4.1.

Box 4.1. Verification of Select Roads and Trade Outcomes

The Project for Strengthening the National Rural Transport Program (2013–20) aimed to enhance transport connectivity across 37 districts, benefiting 15.7 million individuals—more than half of Nepal’s population. The project created an estimated 6.6 million person-days of temporary employment from upgrading and maintenance activities. The project collaborated with the International Labour Organization to increase the economic empowerment of women and marginalized groups through labor intensive maintenance, employing 2,700 people in road maintenance groups, 64 percent of whom were women and 35 percent Dalits, a historically marginalized community. The project also improved year-round road access, which is anticipated to boost economic activities and create further indirect and induced employment opportunities.

A project-commissioned survey of 1,080 households along 30 roads found that self-reported travel time to major markets dropped by 56 percent for people near paved roads and by 9 percent for people near gravel roads. Self-reported employment rose by 40 percent for people near paved roads and by 36 percent for people along gravel roads. Terai districts saw the most significant gains, whereas Hill districts saw more modest improvements. Independent Evaluation Group (IEG) reanalysis of the survey data confirmed the statistical validity of the claimed travel time reductions and employment increases, although noting the uneven benefits distribution and the potential for recall bias because the analysis was based on retrospective baseline data collected by the survey.

The Nepal–India Regional Trade and Transport Project (2013–21) sought to reduce transport time and logistics costs for Nepal–India trade along the Kathmandu–Kolkata corridor by upgrading infrastructure and streamlining border management. This project had national importance, given that 60 percent of Nepal–India trade transits through the selected corridor. Using direct observation, interviews, and traffic-data analysis, IEG’s team confirmed the project’s claimed reduction in travel time from two hours to 50 minutes along the upgraded 35 kilometers of the Narayanghat–Mugling road section, which was previously a bottleneck between the India border and Kathmandu. Community members interviewed by IEG praised the road’s quality and the upsurge in domestic tourism and small and medium enterprise growth brought by the improved road.

The Nepal–India Regional Trade and Transport Project also sought to improve trade efficiency by targeting key trade barriers. IEG’s site visits showed risks to achieving this objective. First, upgrades to the sanitary and phytosanitary laboratory building were completed to enable rapid, on-site testing, but the laboratory remained underused because the Ministry of Agriculture had delayed appointing staff for more than two years. As of December 2023, the laboratory operated with only three part-time staff, just 4 percent of the 36 full-time equivalent positions needed. As a result, export samples were still being sent abroad for testing before the border crossing could be permitted. Second, a newly constructed Inland Container Depot in Kathmandu was intended to reduce crossing times at the Raxaul–Birgunj border post, but the Inland Container Depot was nonoperational during IEG’s visit, despite reports of its functioning since April 2022 in the project’s Implementation Completion and Results Report. The Inland Container Depot’s function is dependent on the completion of the Kathmandu–Terai Expressway, which connects Kathmandu to the Indian border at Birgunj, but this was not part of the World Bank project, and it was only partly complete. Moreover, trade association representatives explained that customs officials mandate cargo clearance at the Birgunj border post to meet their revenue targets, implying that customs officials’ organizational incentives are misaligned with the Kathmandu Inland Container Depot becoming fully operational.

Two project-supported digital solutions—the Nepal Trade Information Portal and the Nepal National Single Window—face operational and sustainability challenges. Interviews with stakeholders revealed that the single window is only partially digitized, traders had received insufficient training in using it, and the portal was launched without an approved legal framework, resulting in time-consuming negotiations to integrate additional agencies into the platform. The Nepal Trade Information Portal, designed to provide trade data to exporters, had been nonfunctional for several months at the time of writing because of technical issues. Furthermore, both systems’ maintenance costs were not fully anticipated in the government agencies’ budgets, posing a significant threat to the platforms’ sustainability.

Several lessons can be offered. First, collecting survey and other evidence on project outcomes, including travel times and employment, proved valuable. Second, the project’s engineering-centric design overlooked the need to create institutional communication between government entities and beneficiaries, such as trader groups. Third, Project Completion Reports and results frameworks did not reflect the institutional obstacles to ensure that completed facilities and portals are staffed, used, and maintained.

Source: Independent Evaluation Group based on site visits and project documents.

World Bank–supported transport and trade institutional strengthening activities achieved limited outcomes and focused insufficiently on sustainability. Projects were designed with components to support implementation and coordination but without support for sustainability, institutional performance, and guarantee of staffing beyond projects’ timelines. For example, the Road Sector Development Project’s institutional strengthening component focused on completing audits, surveys, and trainings. These outputs are relevant but unlikely to have a broader or sustained impact on outcomes. The Nepal–India Regional Trade and Transport Project had a trade component aimed to address systemic constraints, such as strengthening the mandate of the National Trade and Transport Facilitation Committee (NTTFC) to coordinate public and private agencies involved in trade and transport logistics. However, the World Bank has a stop-go track record of investing in this institution without sustainability considerations, which this project’s design repeated. A World Bank–financed project established the NTTFC in 1994. It was instrumental in drafting legislation and simplifying and harmonizing transit and trade documents (UNCTAD 2006). However, the NTTFC was not sustained after the World Bank project closed in 2003. The NTTFC was reactivated in 2012 with World Bank support and contributed to trade and transport facilitation while it received World Bank project support. The NTTFC weakened after project completion; it holds meetings irregularly and focuses on information sharing rather than strategizing to address the problems and follow-ups. A main cause of its ineffectiveness is the lack of a secretariat with staff dedicated to its functions and activities (Kharel and Dahal 2021).

The Bank Group–supported private sector engagements in transport have been limited. The 2019 Infrastructure Sector Assessment Program identified Nepal’s potential for infrastructure development and service delivery through private sector solutions (including PPPs) in energy, roads, and airports (World Bank 2019). Country strategies accordingly recommended building a PPP pipeline to tap into private sector efficiencies in road construction and maintenance and airport management. In 2013, IFC began advising the government on a PPP to upgrade, operate, and manage Tribhuvan International Airport; however, the initiative ended after six years without a decision on the partnership’s modality because political will was absent. There is no indication of concerted World Bank–IFC efforts to reform the legal and regulatory framework for PPPs. The World Bank’s private sector engagement in transport has primarily been confined to advocating for private contracting in road projects.

The Bank Group coordinated with development partners active in the sector but can still enhance its strategic leadership. A World Bank–International Labour Organization project partnership under the Project for Strengthening the National Rural Transport Program was successful in generating 3.4 million person-days of temporary employment in rural roads maintenance, with notable female and Dalit community representation. This partnership came about by chance, as the International Labour Organization was piloting its initiative when the Bank Group launched the Project for Strengthening the National Rural Transport Program. Interviewed stakeholders argued that the World Bank could assert greater leadership in the crowded field of donors to Nepal’s transport sector, for example, via policy dialogue and building synergies.

Job Creation

This section evaluates the country program’s direct lines of support for job creation, which IEG focused on because of the shortage of jobs in Nepal. The section examines direct support for job creation goals: (i) reducing labor supply barriers through projects that improve workers’ skills, (ii) alleviating labor demand constraints by supporting private sector job creation, and (iii) enhancing labor market flexibility and policies that promote workers’ mobility (figure 4.7),6 complementing indirect contributions via energy, transport, and financial sector support discussed above.

CPS job creation objectives were grounded in technical analytics but did not address barriers to advancing policy reforms. The Bank Group diagnostics7 pointed to competition barriers as key constraints to private investment and identified job creation potential and unexploited comparative advantages in tourism, agribusiness, and information and communication technology. However, the Bank Group did not develop the broad coalitions needed to advance in these areas and the country strategies did not overcome the key policy barriers to private sector–led job creation as this would require promoting outward orientation and competition, which have consistently faced resistance from entrenched interests in Nepal. In addition, the CPF cites the development of a comprehensive jobs strategy based on the recommendations of the World Bank’s Nepal—Jobs Diagnostic (Bulmer et al. 2020), but the evaluation team found no evidence of the country team’s uptake of this diagnostic, nor development of such a strategy.

The jobs-related portfolio was narrow in scope. From 2014 to 2018, the World Bank concentrated on supply-side job-related interventions, particularly skill building for youth and women. Generally, quality education is linked to better employment and income outcomes; however, in job-scarce contexts like Nepal, the impact of improved education quality on job outcomes is unclear (World Bank 2024c). In the second half of the evaluation period, the World Bank broadened its portfolio to also include demand-side barriers in agribusiness and, more recently, information and communication technology services. However, there were gaps in support for developing the tourism sector and promoting economywide enabling regulations for private investment and job creation, including regulations related to trade, taxation, and labor markets.8

Figure 4.7. Channels for Supporting Jobs

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A flow chart of a results chain shows how World Bank Group support contribute to job creation. The first column lists the three channels of support: labor supply, labor demand, and labor market flexibility. The second column explains the objectives of each channel of support. The third column lists examples of activities needed to achieve the identified objectives. Finally, the fourth column presents the outcome of more, better, and more inclusive jobs.

Figure 4.7. Channels for Supporting Jobs

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A flow chart of a results chain shows how World Bank Group support contribute to job creation. The first column lists the three channels of support: labor supply, labor demand, and labor market flexibility. The second column explains the objectives of each channel of support. The third column lists examples of activities needed to achieve the identified objectives. Finally, the fourth column presents the outcome of more, better, and more inclusive jobs.

Source: Independent Evaluation Group.

Note: MSMEs = micro, small, and medium enterprises.

The Bank Group’s support has not been effective in strengthening policy dialogue around jobs or promoting the competitiveness agenda. The World Bank’s 2020 jobs diagnostic recommended investment climate reforms and support to improve Doing Business indicators as short-term measures to advance this agenda. However, Bank Group–wide internal reorganizations halted most investment climate engagements after 2018, despite this being an area of support highly valued by the government. In addition, public-private dialogue initiatives, such as the Nepal Business Forum, established in 2010 with IFC support, proved ineffective. The Nepal Business Forum was established to create an engagement platform between the business community and government officials. The forum achieved some initial successes, facilitating policy reforms that led to the implementation of 62 out of 175 recommendations put forward by both the private and public sectors, but has been dormant since 2017. The Nepal Business Forum gave parity to high-ranking government officials and private sector representatives. This parity was not well received by some officials and led to a lack of ownership on their part. This issue, along with divisions within the private sector and diminishing donor support, led to the forum’s decline (Kharel and Dahal 2021).

The country program dropped key jobs interventions amid political resistance. The proposed Maximizing Finance for Development DPC was informed by the robust findings of the Country Private Sector Diagnostic—a collaborative diagnostic that included extensive stakeholder consultations and achieved consensus between the World Bank and IFC. The $150 million Maximizing Finance for Development DPC, initiated in 2018, aimed to foster private sector investment through major policy reforms to the Foreign Investment and Technology Transfer Act, Procurement Act, and the Public-Private Partnership and Investment Act. These reforms could have improved market competitiveness and PSD, if the country program carried out its implementation as originally planned. However, the World Bank dropped the operation without documented reasons, apparently because the government was unwilling to undertake procurement and other systemic reforms. Similarly, in 2019, the country program dropped the private job creation component of the Youth Employment Transformation Initiative Project, which supports the implementation of the Prime Minister Employment Program, as a result of government pushback, undermining the project’s conceptual integrity and relevance. The World Bank’s labor experts critiqued the project’s design because of Nepal’s limited job opportunities and weak implementation capacity. The project was intended to offer an employment guarantee, but it did not give jobs to more than 99 percent of the unemployed workers who registered. There are allegations of political patronage in the project’s targeting, and the Office of the Auditor General called the program “unproductive” in its 57th Annual Report and cautioned that the program needed serious revision. Project documents did not provide reasons for the cancellation of the job creation component.

Skills development initiatives in Nepal have achieved project-level results but have not addressed systemic constraints. The $110 million Enhanced Vocational Education and Training Project, running from 2011 to 2024, sought to address the skills mismatch between inadequate and outdated training offerings and the evolving needs of the private sector. The project trained more than 170,000 disadvantaged youth, with an average employment rate for trainees of more than 70 percent within six months. However, the project’s institutional strengthening activities focused on outputs, such as completed trainings, but not on outcomes, such as the beneficiaries’ use of the developed systems. The project also did not systematically involve the private sector in curriculum development and policy formulation.

  1. In the first five months after the new guidelines were adopted, the NEA signed power purchase agreements with 52 hydropower projects. Cumulatively, the NEA signed 356 power purchase agreements totaling 6,354 megawatts until April 2022.
  2. A total of 5,000 megawatts combined and 9,000 megawatts under construction. Under current conditions, Nepal’s forecasted electricity demand, mainly dependent on exports of surplus electricity to India and Bangladesh, remains significant and realistic. The country’s power generation capacity reached 2,800 megawatts in 2023 and is expected to increase to 5,000 megawatts in 2025, whereas domestic consumption is expected to be half the potential generation by 2025. India’s ambitious commitment to a green energy mix and the seasonal complementarities among the countries support optimistic scenarios of hydro exports.
  3. Most hydropower plants in Nepal have been financed through commercial loans (higher interest rates), and delays lead to cost escalation.
  4. For example, in 2023, India granted Bangladesh, Bhutan, and Nepal access to its real-time power market via the Indian Energy Exchange by amending the procedure for approval and facilitating import and export of electricity issued in February 2021.
  5. According to the IFC–World Bank Enterprise Surveys (2013 and 2023), as cited in the forthcoming SCD.
  6. These job creation objectives were defined in IEG’s World Bank Support to Jobs and Labor Market Reform through International Development Association Financing: A First-Stage Evaluation (World Bank 2024c).
  7. Country Economic Memorandum, SCD, and Country Private Sector Diagnostic.
  8. In 2019, amendments were introduced to labor regulations that sought to provide greater social benefits to employees but disproportionately affected smaller businesses, raised effective labor costs, and further eroded competitiveness (IMF 2019).