Principal-agent Approach in Construction of National Highways

The constitution of Nepal provides the jurisdiction of construction and maintenance of National Highways to the federal government more specifically its federal agency i.e. Ministry of Physical Infrastructure and Transportation.  In line with the same roads that were formerly classified as Strategic Road Networks prior to the federal model of governance form a major chunk of the existing national highways. The exercise of the jurisdiction so conferred is either exercised directly by the federal ministry or through its divisional offices. Certainly and undoubtedly the jurisdiction for any road of national significance should be bestowed upon the federal government. Definitive arguments as to this regard can be found in the Oates theorem that states that when a road is not limited to a geographical subset its jurisdiction should not be decentralized. The fundamental backing for this theory is that sub-national forms of governments owing to their size are incapable of accounting for Inter-jurisdictional spillovers and the resultant economies of scale.

However, it must also be acknowledged that Oates theorem is not without flaws. While Oats theorem only concerns itself with decentralization to the lowest unit possible i.e. Local/Municipal governments, Nepalese structure consists of a second tier of government i.e. Provincial which is larger than the local government but smaller than the federal government. Naturally, it can be observed that Provincial Governments might be better suited for construction and maintenance of National Highways. The reason being Provincial governments are at strategic advantage as compared to the Federal Government. This advantage stems from the fact that Provincial governments are geographically located in a position where they can understand the needs of the vicinity through which the national highway passes thereby being efficient in construction in a manner which will result in long term benefits.

With regards to economies of scale and capacity the argument for conferring jurisdiction on provincial governments can be found in the pre-federalism model of construction and maintenance of National Highways. Prior to 2072 national highways were constructed and maintained by the relevant district offices of the Ministry of Physical Infrastructure and Transportation. These district offices have either been amalgamated into the Provincial Ministry or their officers have been transferred to the provincial ministry. In either case relevant knowledge regarding such construction and maintenance has been adequately transferred to provincial ministry thereby the capacity of construction and maintenance has also been conferred upon the provincial governments. As to the question of economies of scale, the size and the budgetary capacity of the Provincial governments shows to a certain degree that road projects might not face diseconomies of scale.

Of particular importance in this regard is the international practice, particularly practice of nations that have for a large number of years been successful in practicing a federal form of government. Australia’s government structure is similar to that of Nepal in that she too has a three-tiered structure. The practice related to national highways is such that, while the jurisdiction lies with the federal government, construction and maintenance of national highways is delegated to the provincial governments. In other words, each province is given the responsibility to construct and maintain parts of the national highway falling under their territory. The monetary resources needed for this are allocated by the federal government. To put it simply, the provincial government acts as an agent of the national government in relation to construction and maintenance of national highways resulting in properly constructed and timely maintained roads. Indian practice in this regard is also the same. With state governments given the responsibility of the construction and maintenance of national highways falling under their territory by the Union Government, the results are the same as witnessed in Australia (to a certain degree).

Perhaps, during the construction of any future national highway or the remainder of the construction of the North-South Corridors, the responsibility can be delegated to the relevant provincial governments. It only seems appropriate to do so, given the evidence we garner from international practice. Equally important in this regard is the legislative framework. While, Public Roads Act 2031 is the governing legislation in relation to construction of public roads, it talks very less about delegating responsibility, the standards for classifying the existent roads, the jurisdiction on the roads so classified post federalism (only the schedule to the constitution provide jurisdiction but no definition of minimum standard of qualification is provided elsewhere). Conversely, legislative framework in Provincial level is also required to follow a principal-agent approach to construction and maintenance of National highways for better, sustainable, efficient road networks.

– This article was originally published by Yatindra KC in The Himalayan Times on January 12, 2020.