Financing Nepal’s Future

Nepal has taken a decisive step toward transforming its infrastructure financing, addressing a gap that has long constrained economic growth. On August 22, the House of Representatives unanimously passed the Alternative Development Finance Operation Bill, 2025, paving the way for the establishment of the Rs 100 billion Alternative Development Finance Fund. The fund is designed to mobilize capital for power, transport, digital and industrial projects, offering a new model of state-led blended financing that could redefine how Nepal approaches development.

As per the bill, the fund will have an authorized capital of Rs 100 billion and a paid-up capital of Rs 25 billion at launch. The government will initially hold a controlling 51% stake, investing Rs 12.75 billion, though this share is expected to gradually decline as the fund matures. Three domestic institutional investors—the Employees Provident Fund (EPF), Citizen Investment Trust (CIT) and Social Security Fund (SSF) will collectively hold 25%, while insurance and reinsurance companies will take the remaining 24%. To ensure credibility, all subscribed shares must be fully paid within two fiscal years. Any unsubscribed shares may be resold at the government’s discretion.

The legislation also outlines the rules for future share transfers. Existing shareholders must first offer their shares within their institutional category before approaching external investors. Foreign governments and intergovernmental financial institutions may invest with Cabinet approval and public notice in the Nepal Gazette, enabling the fund to attract global partners while retaining domestic control.

Bridging Strategic and Structural Gaps

The fund is both a strategic and structural response to Nepal’s development needs. The country is set to graduate from Least Developed Country (LDC) status in November 2026 and faces the dual challenge of meeting the Sustainable Development Goals (SDGs) by 2030 and achieving energy and climate targets. The government has pledged to generate 28,500 megawatts of electricity within the next 12 years and reach net-zero carbon emissions by 2045.

Achieving these goals will require massive investment in transport and digital infrastructure, including expressways, tunnels, railways, aviation upgrades and IT connectivity. The current financing models, however, are insufficient. Official development assistance (ODA) is dwindling, concessional loans are getting costlier, and borrowing limits from multilateral institutions limit fiscal space. Nepal can no longer rely solely on traditional aid or domestic banks. The new fund is designed to unlock diverse capital sources of capital and bridge this widening investment gap.

Learning from Global Models

Nepal’s initiative follows successful examples from countries such as China, India, Ethiopia and Vietnam, which have used alternative development finance to accelerate infrastructure growth, industrialization, job creation and export competitiveness. India’s National Investment and Infrastructure Fund (NIIF), for example, pools domestic and foreign capital for large-scale projects through innovative financial instruments.

These global precedents show that well-structured development funds can reduce dependency on external borrowing, spread investment risks and attract private-sector participation. By adopting a similar model, Nepal intends to channel long-term domestic savings into high-return infrastructure projects while creating a vehicle for foreign capital inflows.

Addressing Annual Financing Gap

Nepal’s current infrastructure investment is estimated at Rs 200–300 billion per year, whereas sectoral requirements exceed this by several hundred billion rupees, leaving an annual financing gap of more than Rs 500 billion. The domestic banking sector cannot sustain the financing of large, long-gestation and high-risk projects.

The fund is designed to fill this void, raising resources from the government, institutional investors and innovative financing mechanisms such as equity financing, stock market instruments, remittance-backed funds and green bonds. The parliamentary Finance Committee has expanded the scope of eligible investments to include agriculture, forest products, mining and mineral-based industries, linking infrastructure growth directly to industrial expansion and export potential.

Financing Instruments and Strategy

The Bill lays out a multi-pronged strategy for capital mobilization. The fund may issue bonds and project-specific financial instruments, raise loans backed by government or international guarantees and establish guarantee funds to secure debt financing. Partnerships with domestic and foreign investors, remittance-based funds involving migrant workers and Non-Resident Nepalis (NRNs), and monetization of public assets or project revenues are all envisaged. Integrated funds may also be created to channel resources into other infrastructure-focused initiatives.

Nepal already has institutions like Investment Board Nepal (IBN) and Nepal Infrastructure Bank (NIFRA) tasked with attracting foreign and domestic capital for infrastructure. However, both have faced limitations. IBN in attracting large-scale investors and NIFRA in mobilizing sufficient domestic resources. The fund aims to complement these mechanisms, pooling resources and assuming larger, more complex projects that existing institutions cannot handle at scale.

Potential Impact and Risks

If implemented effectively, the fund could transform Nepal’s development trajectory. By mobilizing long-term savings, attracting foreign partners and financing strategic projects, it has the potential to accelerate economic growth, industrialization and job creation.

However, the success of the fund will depend on professional fund management, robust governance and transparent project selection. Without these safeguards, the fund could risk political interference or underperformance. Yet, the Bill’s unanimous parliamentary approval signals a rare consensus on the urgency of addressing Nepal’s infrastructure financing shortfall.

The fund represents more than just a new financial instrument. It embodies Nepal’s strategic ambition to combine public resources, institutional savings and foreign capital into a unified vehicle capable of financing transformative infrastructure and industrial projects. As the fund becomes operational, it may well redefine the contours of Nepal’s growth model, offering a sustainable solution to long-standing investment challenges.

This report was originally published in September 2025 issue of New Business Age magazine.