A full 40% of Nepal’s federal capital budget went unspent last year. In local governments, the figure was much worse. This is not austerity at work. In fact it is institutional decay laid bare. Despite ambitious allocations for roads, bridges, schools and hospitals, the state’s competence in delivering infrastructure has shrunk. Its public capital stock (the value of its infrastructure) has tumbled from three-quarters of annual economic output in the 1990s to little more than half today. Nepal is allocating money but it is not building.
The problem has deep roots. For many decades public investment averaged a meagre 2.7% of GDP, well below regional peers. A surge in spending followed the devastating 2015 earthquake, peaking at over 11% of GDP in 2021. But this proved an aberration. Since then execution rates have collapsed. Between 2021 and 2024, the state failed to deploy an average of five percentage points of GDP in planned investment a year. Money was approved but it never turned into concrete and steel.
The failure begins at the project’s conception. A National Project Bank was established to vet proposals, but its guidelines are skeletal. Projects frequently enter the annual budget without proper feasibility studies or design plans. The government’s medium-term spending framework paints a rosy picture of future fiscal space, encouraging over-commitment. Consider seventeen ongoing “national pride” projects. At current funding levels, they would take 41 years to complete. Dedicating the entire federal capital budget to them would still require eight years.
Information systems are scattered and unclear. Each ministry relies on its own database, none of which talk to one another. Without unique project identification codes, officials have to merge data by hand—a process guaranteed to produce mistakes. The problem’s true scale is buried in broad budget categories: roughly 2,100 separate road projects sit inside just a few dozen budget lines. As a result, there is no reliable way to know which projects are progressing and which have ground to a halt.
Even when a project is funded, it is often not ready to build. Critical preliminary work such as acquiring land and securing tree-cutting permits, among others, is usually left unfinished. Construction cannot begin, but the budget is already allocated. This reflects a political preference for ribbon-cutting ceremonies to inaugurate new projects, rather than the dull administrative work needed to complete existing ones.
The heart of the problem, however, is procurement. The system is paralysed by a rigid adherence to selecting the lowest bidder. While meant to prevent corruption, this practice encourages bidders to submit unrealistically low offers. The winning contractor often finds the project is unprofitable, leading to delays, renegotiations and, worse, corner-cutting. The contract is awarded, but the work does not proceed as planned. The quest for the cheapest price becomes a guarantee of the slowest delivery.
Compounding this are restrictive internal rules. Budgets are notoriously inflexible; money cannot easily be moved from a stalled project to a ready one. Cash management is poor, leading to intermittent funding flows that halt construction. High turnover among project staff and a civil service with weak performance incentives disrupt continuity. There is no one left to hold accountable.
The consequences are brutal. Nepal’s infrastructure deficit widens, constraining economic growth and public service delivery. The maintenance backlog grows, shortening the lifespan of existing assets. Most tragically, fiscal space is wasted. The allocated funds that return unspent to the treasury represent schools unbuilt, roads unpaved and irrigation systems unrepaired.
A solution requires fixing every stage of the project cycle, in order. The National Project Bank needs the authority to act as a real gatekeeper, stopping projects that lack proper paperwork. Data systems should be connected so officials can see progress in real time. The long list of ongoing projects must be trimmed, and no new ones should begin until the backlog is cleared. Early obstacles—such as land acquisition—also need to be made faster and simpler.
Most critically, procurement must be reformed. The tyranny of the lowest bid should be replaced with quality-adjusted scoring, valuing a contractor’s track record and technical proposal. This would yield better value, even at a slightly higher initial cost. The alternative is more of the same: budgets that look generous on paper, but that lead to death by lowest bid. Nepal’s choice is between continuing to fund promises or starting to build assets. ■