Nepal is at a transformative crossroads, facing challenges related to its federal transition, economic recovery, increasing climate risks, and a growing youth population that needs jobs and skills. In response, the Asian Development Bank (ADB) has launched its new Country Partnership Strategy (CPS) for Nepal for 2025–2029, which promises significant support for private sector development, public enterprise reform, green infrastructure and digital governance. As one of Nepal’s largest multilateral development partners, ADB is crucial in shaping policy, funding priority infrastructure and improving project implementation.

The new CPS represents a strategic shift in both what ADB finances and how it engages with all levels of government and the private sector. It places a strong emphasis on climate resilience, social inclusion, regional connectivity and strengthening federal structures. A key goal is to help Nepal attract private investment in energy, infrastructure and innovation, areas that urgently need capital.

In an exclusive interview with Umesh Poudel of Fiscal Nepal, ADB Nepal Country Director Mr. Arnaud Cauchois explains how the CPS aligns with Nepal’s long-term vision, including the 16th periodic plan and SDG goals. He provides insight into how ADB is tackling implementation challenges like procurement delays, institutional capacity gaps, and inefficiencies in state-owned enterprises, while also helping to build a more competitive, green, and digitally empowered economy. In this conversation with Fiscal Nepal, Mr. Cauchois discusses the bank’s evolving approach to development in Nepal, detailing how ADB is redefining its partnership with the country for greater impact and long-term sustainability. Excerpts:

ADB’s new CPS for Nepal prioritizes private sector development. What specific measures will ADB take to crowd-in private investment, especially in infrastructure and energy?

As you’ve noted, Nepal has a substantial infrastructure gap, which is well-documented in the 16th periodic plan. Despite many years of ongoing work, closing this gap remains a significant challenge. The ADB has long supported infrastructure projects, particularly in connectivity and energy. Our previous CPS was very focused on public sector-led infrastructure to help the private sector close productivity and competitiveness gaps.

The new CPS continues this effort with a more holistic approach. We will still invest heavily in helping the government bridge its infrastructure gap, including roads, energy and urban infrastructure, but this new strategy departs from the last by directly targeting private sector development in Nepal.

We’ve come to a clear realization that public investment alone won’t generate the jobs the country needs; most jobs must come from the private sector. Despite the government’s continuous efforts, the current business environment is not yet conducive to attracting foreign direct investment. Foreign investors look for the best conditions, such as the ability to repatriate profits and the ease of divesting. We are also seeing a slowdown in investment from the domestic private sector. Capital is available, but there is a lack of investment appetite, which is also tied to the business environment.

To address this, we will support reforms through a combination of technical assistance to identify gaps in the legal and policy frameworks, and budget support to incentivize the passage of these reforms, all in close collaboration with the government. While it may take time to see direct private investment in major connectivity projects like roads, we see and will support great potential for private sector involvement in energy infrastructure. We are already financing power generation projects with 100% private funding and see opportunities for investment in transmission lines and parts of the distribution network. We are already preparing transactions with the government to help incentivize private sector financing for these projects.

How is the ADB ensuring that major infrastructure projects in Nepal are both green and socially inclusive, in line with the CPS? How does this approach relate to recent devastating floods on the Nepal-China border?

Nepal has strong climate ambitions for both mitigation and adaptation. However, since the country’s emissions are minimal, the primary focus must be on adapting infrastructure and communities to be more resilient and better withstand the increasing number of climate-induced disasters.

ADB is supporting Nepal’s new CPS with a three-pronged approach:

First, we are promoting reforms, including policy, legal and institutional changes, to support Nepal’s green, resilient and inclusive development agenda. For this, we are using a combination of technical assistance and budget support to incentivize these reforms. We had a similar program with the World Bank in the last two years and will continue this partnership, as it is critical for creating an enabling environment.

Second, we are focusing on knowledge by leveraging global expertise to enhance local capacity, especially in assessing climate risk during the project planning stage. We have launched a large regional technical assistance initiative called “Building Adaptation and Resilience in the Hindu-Kush Himalaya” to demonstrate how to approach risk assessment on major projects. This will help mainstream government guidelines and improve design criteria for future infrastructure. The initiative involves a consortium of international technical institutions and top engineering firms to provide advice on climate impact and design modifications. This work also includes developing systems to monitor and prepare for risks that cannot be fully mitigated, such as early warning systems for events like massive floods. Successfully implementing these measures should also give Nepal greater access to the insurance industry and potentially reduce premiums.

Third, we are helping Nepal access climate financing. Although Nepal is one of the most vulnerable and affected areas, it has had very limited access to these funds because the application process is complex and requires extensive preparatory work. In discussions with the Ministry of Finance, we are now working to create a “Green Resilience Financing Facility.” This facility will be managed by the government and will help Nepal tap into climate funds by providing a programmatic approach to project preparation. It will be open to federal, local, and private sector projects, and it is closely aligned with an alternative bill being prepared by the Ministry of Finance.

ADB plans to support reforms in state-owned enterprises (SOEs). What are the key sectors or institutions where SOE reforms will be prioritized during 2025–2029?

Yes. As you know, there are many public enterprises in Nepal, and most of them, as you say, are facing financial and operational challenges. I believe the only one we can truly be proud of is the Nepal Electricity Authority (NEA), which has been performing quite well. These enterprises create a dependency on government support and lead to liabilities.

Through a combination of technical assistance and budget support, we’ve been helping to enhance transparency, strengthen governance, and create opportunities for private sector investment. In 2023, we began working with the government to form a high-level public enterprise reform committee. This committee was established to recommend restructuring or divesting public enterprises, improving governance, and introducing performance-based management. To enhance its oversight, we helped create a public enterprise management information system and a fiscal risk tracking tool. These tools allow the committee to effectively access and monitor information.

Moving forward, we will continue to support governance reform and develop what we call an asset monetization framework. This framework will identify potential assets that could be handed over to or be of interest to the private sector. This would help reduce the risk posed by public enterprises and generate non-tax revenue. Assets like airports, for example, could be managed well by the private sector without creating liabilities for the government. This is the work we are currently focused on, and we will continue to provide support in this area.

It seems that ADB is supporting the reform or downsizing of public enterprises in Nepal, particularly through policy-level assistance. Are there any specific public enterprises or institutions that ADB is directly focusing on, or is this support more broadly targeted across the entire sector?

The Ministry of Finance handles the overall management and decision-making; the government is not simply pushing for privatization. In fact, for an enterprise like NEA, we are providing significant support, including with its business processes. However, given the current fiscal constraints, the government realizes it cannot continue to maintain public enterprises that are not performing. Therefore, they need to find solutions, which could include closing them, providing more investment with a clear governance framework, or offering them to the private sector if it is an attractive option.

ADB’s strategy highlights federalism and local government capacity. How will ADB ensure effective implementation of federalism-related programs, especially in under-resourced provinces?

Federalism in Nepal is still very new. It has only been about 10 years since the constitution. While it is a work in progress, there has been tremendous advancement in passing and enacting laws crucial for fiscal federalism, which has allowed the system to begin functioning. However, this is a very long endeavor.

We are very supportive of this process, as are the government and the constitution. The first thing we do when preparing and financing a project is to carefully determine which level of government has the mandate for it. If the constitution and regulations say it’s a provincial or local government’s responsibility, we work to ensure that mandate is given to them as much as possible. This is a crucial first step, as it gives them skin in the game and provides valuable learning experience.

The second part of our approach involves reforms and systems. We help strengthen fiscal federalism at the federal level, focusing on public financial management and reducing fiscal stress. We also work on reforms at the provincial and municipal levels. We are helping build an effective, inclusive, and fiscally resilient public sector by focusing on public financial management, domestic resource mobilization, and fiscal federalism to improve services. This is achieved through a combination of projects, technical assistance, and budget support for reforms.

Specifically, we are preparing public financial management reform strategies, strengthening debt and public enterprise management, integrating fiscal risk into budgeting, and improving e-governance, especially in procurement. At the sub-national level, we are working on planning, tax policy, sub-national borrowing, public asset management, and local investment systems. We are also helping provinces with project banks, as they often have ideas but don’t know how to build a strong case for them. For example, we are helping the Sudurpaschim province better understand its private sector investment opportunities and plan its first investment summit in November. Our approach is a mix of broad reforms and targeted interventions designed to help them unlock their potential based on their willingness to act.

With Nepal’s exposure to climate risks, what is ADB doing to mainstream climate adaptation and disaster resilience across all its investments in Nepal?

I’ve already explained our broad approach. A critical part of it is the “Building Adaptation and Resilience in the Hindu-Kush Himalaya” initiative, which focuses on risk assessment and mitigation. As I mentioned, this work will inform not only ADB and government investments but also make critical information and expertise readily available.

This is important because ADB performs climate risk assessment for every investment, ranking whether the infrastructure is vulnerable to climate impacts.

For example, building a dam, an irrigation intake, or a bridge, projects that involve water, may be vulnerable. If a project is ranked as vulnerable, we then look more closely at the specific risks and how to modify the design. This new initiative will help us do this even better by making global knowledge and modeling expertise readily accessible. Previously, we had to hire consultants to do this on an ad-hoc basis. In short, we systematically screen our projects and, if a significant risk is identified, we develop a comprehensive plan to reduce the climate impact on that infrastructure.

The CPS outlines support for Nepal’s digital transformation. Can you share details about ADB’s planned interventions in digital governance or fintech in Nepal?

For our new CPS, we performed a digital diagnostic to determine the best areas for us to support the government. So far, our digitalization efforts have focused on specific sectors, like electricity and water supply, to improve their efficiency. A good example is our collaboration with the Nepal Electricity Authority to digitalize its systems, which allows you to receive your electricity bill via SMS. This has improved collection efficiency and made the process easier for consumers.

Moving forward, we will continue to scale up this work with sectors like NEA, and potentially expand into education and water resources. In the medium term, we will likely focus more on digital public infrastructure. We are currently working to better understand Nepal’s needs and may partner with the government on investments to improve data centers and the digitalization of public services. We are also digitalizing business processes, which is an ongoing effort.

When it comes to the private sector, we are focusing on enabling reforms to make the business environment more attractive, dynamic, and conducive to investment. This includes examining reforms related to access to productive inputs such as labor, capital, and land. A third layer of reforms will focus on facilitating investment for key growth sectors, such as information and communication technology (ICT), where we see a lot of potential. With a recent export figure of $1 billion, it’s clear that this is an area that needs support. We believe these reforms will create a platform for the ICT and fintech sectors to grow by improving access to finance and services for startups.

How does ADB plan to align its operations with Nepal’s long-term development vision, for instance, the SDG goals and 16th periodic plan)?

As you can see, the new CPS is fully aligned with the government’s 16th five-year plan, which guides its operational priorities. It’s important to note that the strategies cover the exact same five-year period. The 16th periodic plan aims to build a self-reliant, sustainable, and inclusive economy by accelerating broad-based economic growth, reducing poverty and inequality, enhancing social development, and, very importantly, strengthening resilience against climate and disaster risks.

The CPS reflects these goals by emphasizing economic diversification, employment generation, social inclusion, and resilience. We are doing this by prioritizing the expansion of productive employment, boosting agricultural productivity, and increasing economic competitiveness through private sector development and the creation of high-quality infrastructure. This directly aligns with the plan’s focus on bridging infrastructure gaps, improving access to services, and ensuring balanced regional development across the provinces. Additionally, we are investing in human capital development and inclusive urban growth through education, skills development and sustainable urbanization. And, of course, we are continuing our work to improve resilience to climate change.

What specific initiatives will ADB take to address Nepal’s youth unemployment and skills gap during the CPS period?

Yes, during our joint consultations with the World Bank, we engaged with many stakeholders, including youth, through an online survey. The survey showed that youth are primarily concerned with employment, and our strategy for addressing this is twofold.

First, we must focus on the demand side by creating a business environment that attracts private sector investment and foreign direct investment (FDI). This will generate the high-quality jobs that youth are seeking. Second, we need to address the supply side by improving the quality of skills and education. This means ensuring that skills development programs, including Technical and Vocational Education and Training (TVET), are aligned with the demands of the labor market.

This will be a gradual process, as 500,000 young people enter the job market each year. However, we are hopeful that we can help the number of jobs grow gradually from the current 50,000. The good news is that both the ADB’s CPS and the World Bank’s Country Partnership Framework (CPF) are fully aligned on this goal. Together, we represent 70% of the Official Development Assistance (ODA) in Nepal, and our efforts are also supported by the government’s 16th periodic plan. We will work to improve skills, education, and higher education to meet the requirements of both local industries and new businesses developing in the country.

ADB aims to enhance project implementation capacity. What are the major bottlenecks in Nepal’s current project execution framework and how is ADB helping to fix them?

Capital expenditure remains a significant problem in Nepal, with no real progress shown over the past year. Since ADB began working in Nepal in the 1960s, implementation capacity has been a critical constraint. While we offer capacity building in areas like procurement and safeguards, there are systemic issues that cannot be fixed by simple training. The most critical, and something we cannot solve, is the high turnover of government bureaucrats linked to political instability. This creates a serious disconnect in accountability and decision-making, and must be addressed through public administration reforms by the government.

Beyond this, other issues we’re working to address include procurement delays, which often result from the local procurement act favoring the lowest bidder. This can lead to poor-quality work and project delays. There are also readiness issues, where projects are not fully prepared before implementation. However, there’s good news: for the first time, the government, ADB, and the World Bank have agreed to a readiness filter, meaning projects that don’t meet specific standards for safeguards, design, and staffing will not be approved. Land acquisition is another major bottleneck, as the national law is not aligned with our own, causing delays. We are helping the government work on aligning the law and clarifying issues like compensation for transmission lines. Inter-agency coordination is also a significant problem.

To tackle these issues, we have two technical assistance programs underway. One focuses on structural and institutional bottlenecks, offering legal, operational, and digital solutions. The other supports the Public Procurement Monitoring Office in updating laws and the e-Government Procurement system. From 2025 onwards, we’ll pilot a merit-based evaluation system on select projects to prioritize quality over low bids. We are also helping the government digitize environmental clearances and contract management, which we believe will streamline processes and show results in the medium term. This will make it easier for everyone, including ministers, to track files and progress, without compromising on due diligence.

Cross-border connectivity and regional integration are crucial for Nepal. What regional cooperation initiatives is ADB planning to support in the coming years?

Regional cooperation is crucial for Nepal, but trade between countries in South Asia is minimal, not even reaching double-digit percentages. It’s a complex region, but we’ve been working on this for a long time. Our approach has two main aspects.

We foster dialogue between Nepal and its neighbors, such as Bangladesh, Sri Lanka, India, and Bhutan, through the South Asia Economic Cooperation (SASEC) program. In this forum, member states discuss developing specific infrastructure corridors, like roads, transmission lines for energy trading, and ports connected to railways, as well as “softer” aspects like improving customs and logistics. These discussions lead to actual investments. For example, we’ve supported the upgrading of the East-West Highway, a critical part of regional cooperation, and are working on a new transmission line to help Nepal export power to India. We are also focused on simplifying customs and improving logistics strategies.

On the softer side, we have been supporting Nepal, India, Bhutan and Bangladesh for years on the BBIN Motor Vehicle Agreement. This agreement was stalled for a while, but we are hopeful that trial tests on both cargo and passenger transport will continue, with the next step being a formal agreement. We will continue to support these efforts in infrastructure, energy, and logistics as part of the new CPS.

What are the biggest implementation challenges ADB faces in Nepal and how are you working with the government to address issues like procurement delays, policy instability or weak institutions?

As I mentioned, we’re focusing on systemic issues, which are problems that the government, the World Bank, and the ADB all face. We’ve been working with the government through two technical programs. One is aimed at structural and institutional bottlenecks by offering legal, operational, and digital solutions. The other supports the Public Procurement Monitoring Office in updating procurement laws, bidding documents, and the Electronic Government Procurement system.

Starting in 2025, we have agreed to pilot a merit-based evaluation system on select projects to prioritize quality over the lowest bid. We’re also trying to convince the government to include this in its new laws, but first, we’ll pilot it to see how it works in the Nepali context and to reduce delays. Additionally, we are helping the government digitalize processes for foreign clearance, initial environmental examinations, and environmental impact assessments. We’re also developing contract management tools to track performance in real-time, with a pilot program planned for 2026. We believe strongly that reforms and digitalization are the key to making these improvements.

Is there anything else you would like to add about the CPS?

It’s very important to note that, for the first time, Nepal is fortunate to have its two largest multilateral development banks (MDBs) working together. We have jointly developed our country partnership strategy and country partnership framework through a unified strategic approach that is in full alignment with the government. This collaboration will create substantial opportunities for joint programming, where we will work together on shared outcomes and topics, such as job creation, private sector development, and resilience.

By combining our resources based on our comparative advantages, we will be able to maximize our impact. This initiative has also attracted the attention of bilateral partners, who see it as a very important development and will likely support our efforts. Essentially, we are uniting the power of Official Development Assistance (ODA) in Nepal to better support the government’s plans.

The World Bank has already increased the loan interest rate for Nepal. Will ADB be following suit?

That is not happening immediately. You are referring to the issue of graduation, which is not an automatic process for ADB. Graduation from low-income status is not set to happen in 2026. While there may be pressure from member states to start a dialogue with Nepal on this, it will be a gradual process, not something I expect to happen next year. We also need to assess the sustainability of this graduation. It’s not a flip-of-a-switch situation where the interest rates change the moment the date passes. We are in dialogue with the government and will monitor the situation.

Our ADB headquarters’ policy department will gradually review how Nepal is evolving into this new status and hold discussions with the government based on that. At the moment, Nepal has crossed all three criteria, so it is officially above the low-income country threshold. But I want to stress that this is not an automatic change. If and when it happens, it will be a good thing, as it means Nepal has progressed to a lower-middle-income country. We want to see how far the country goes before we make that decision. If you look at other countries in the region, Bangladesh, for example, is already facing higher interest rates. The specific rate, even after graduation, depends on a country’s income per capita, GNI, and so on. We are monitoring all of this, and the change will not be automatic.