Technical Assistance Consultant’s Report
Project Number: 37172 (TA 4288) December 2006
Nepal: Establishing Economic Policy Network
Prepared by Dipendra Purush Dhakal, Team Leader
This consultant’s report does not necessarily reflect the views of ADB or the Government concerned, and ADB and the Government cannot be held liable for its contents.
Final Report
Establishing Economic Policy Network ADB TA 4288-NEP
Volume I: Main Text
Dipendra Purush Dhakal Team Leader
December, 2006
CURRENCY EQUIVALENTS (as of 30 September 2006)
Currency Unit – Nepalese rupee/s (NRe/NRs) NRe1.00 = $ 0.0134 $1.00 = NRs 74.89
ABBREVIATIONS
AC : Advisory Committee ADB : Asian Development Bank APP : Agricultural Perspective Plan BIC : Business Incubation Center BOI : Board of Investment BOT : Build, Operate and Transfer CIT : Citizen’s Investment Trust CNI : Confederation of Nepalese Industries DDC : District Development Committee DIR : Department of Inland Revenue DOLIDAR : Department of Local Infrastructure Development and Agriculture Roads DOR : Department of Roads EAPAD : Economic Affairs and Policy Analysis Division EPF : Employees' Provident Fund EPN : Economic Policy Network FCAN : Federation of Contractors' Association of Nepal FDI : Foreign Direct Investment FNCCI : Federation of Nepalese Chamber of Commerce and Industries GDP : Gross Domestic Product GON : Government of Nepal HAN : Hotel Association of Nepal ICD : Inland Container Depot ICT : Information Communication Technology JS : Joint Secretary LRN : Local Roads Network MDG : Millennium Development Goal MfDR : Managing for Development Results MLD : Million Liters per Day MOAC : Ministry of Agriculture and Cooperatives MOCTCA : Ministry of Culture, Tourism and Civil Aviation MOF : Ministry of Finance MOICS : Ministry of Industry Commerce and Supplies MOPPW : Ministry of Physical Planning and Works
MOWR : Ministry of Water Resources MTEF : Medium Term Expenditure Framework NATO : Nepal Association of Tour Operators NCC : Nepal Chamber of Commerce NEA : Nepal Engineering Association NGO : Non Governmental Organizations NPC : National Planning Commission NRB : Nepal Rastra Bank NTB : Nepal Tourism Board PBMC : Performance Based Management and Maintenance Contract PPP : Public Private Partnership RBN : Roads Board Nepal SC : Steering Committee SCAEF : Society of Consulting Architectural and Engineering Firms SRN : Strategic Roads Network TA : Technical Assistance VAT : Value Added Tax VC : Vice Chairperson WTO : World Trade Organization
NOTES
(i) The fiscal year (FY) of the Government ends on 15 July. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2003 ends on 15 July 2003.
(ii) In this report, "$" refers to US dollars.
CONTENTS
Page EXECUTIVE SUMMARY I I BACKGROUND 1 II. OUTPUTS AND OUTCOMES 2 A. Overall Goal 2 B. Scope and Outputs 2 III. IMPLEMENTATION MODALITY 3 A. Steering Committee 3 B. Advisory Committee 3 C. Focal Unit at the Ministry of Finance 4 D. Policy Research and Interactions 4 IV. ACIEVEMENTS 8 A. Economic Policy Reform Agenda and Focus of Policy Studies 8 B. Information Dissemination and Follow-ups 24 C. Institutionalization of Economic Policy Network 27 D. Monitoring the Implementation of Economic Policy Reform Agenda 28
V. MAJOR ISSUES 29 VI. CONCLUSIONS AND RECOMMENDATIONS 31 A. Conclusion/ Findings 31 B. Recommendations 31
APPENDICES 1. Design and Monitoring Framework 33 2. Membership in EPN Committees 36 3. Meetings, Consultations, and Seminars 37 4. Policy Studies under the Thematic Areas 39 5. Policy Briefs 43
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EXECUTIVE SUMMARY
1. In order to help improve Nepal's economic policy reform agenda by evaluating policy reforms and providing feedbacks on implementation and to foster constructive policy dialogue between concerned institutions to generate a national consensus, Asian Development Bank (ADB) has assisted the Government of Nepal (GON) through this Technical Assistance (TA). The TA was commenced on August 9, 2004 and concluded on December 2006.
2. The goal of the TA is to develop and institutionalize an open, responsive, and result- oriented economic policy formulation process based on sound economic analyses. The policy recommendations developed through such transparent and consultative process is expected to support and consolidate the Government's economic reforms and assist it to achieve the development targets of the Tenth Plan and beyond.
3. In order to steer the project activities, a high level Steering Committee (SC), under the Chairpersonship of the Hon'ble Member of National Planning Commission (NPC) is constituted. The secretaries in the concerned ministries of the Government, representatives from private sector organizations, and individual experts are members of the committee. This committee is found to be influential to carryout the recommendations made by the studies.
4. There is one Advisory Committee (AC) for each of the four thematic areas, which is chaired by the secretaries of the Government ministry. These committees are also represented by private sector organization, academia, individual experts and Government officials. These committees are involved in identifying issues, selection of consultants, and reviewing and validating reports. There is a feeling of ownership of the work since the initial stage. Following are the thematic committees and secretaries of the ministries as chairpersons: Macroeconomic management : Ministry of Finance (MOF) International trade, investment, and employment : Ministry of Industry, Commerce, and Supplies (MOICS) Infrastructure development : Ministry of Physical Planning and Works (MOPPW) Tourism, agriculture, and regional development : Ministry of Culture, Tourism and Civil Aviation (MOCTCA)
5. The focal unit of the project is located in MOF under the leadership of the Joint Secretary (JS), who is also the in charge of the Economic Analysis and Policy Analysis Division (EAPAD).
6. A comprehensive list of economic policy reform agenda were developed within all thematic groups to consider the core issues. A total of 8 policy papers were prepared under each of them, which served the basis for policy dialogue. Study reports were discussed at the AC meetings in the beginning and also finally validated after wider consultations in the workshops. Three workshops were also organized outside Kathmandu valley. Studies were done by former finance ministers, former VC and members of NPC, former governors of the Nepal Rastra Bank (NRB), former secretaries of the Government, academia, and experts. Out of 32 papers, 14 policy studies were led by private sector and civil society organizations and academic institutions.
7. The studies carried out under macroeconomic management are concerned with (i)Tax policy for export promotion, (ii) Non tax revenue, (iii) Excise duty, (iv) Tax compliance habit, (v) Revenue implications of World Trade Organization (WTO), (vi) Macroeconomic stability, (vii) Utilization of contractual savings, and (viii) Framework for Economic Policy Network (EPN). In
International Trade, Investment, and Employment group the studies are concerned with (i) Foreign Direct Investment (FDI) policy, (ii) Promoting Nepal as a manufacturing hub, (iii) Business incubation centers, (iv) Garment industry, (v) Industrial property licensing, (vi) Transit treaty, (vii) Supply management, and (viii) Enhancing economic diplomacy.
8. The studies on Infrastructure Development are concerned with (i) Public Private Partnership (PPP) in transport infrastructure, (ii) PPP in information and communications technology, (iii) PPP urban waste management, (iv) North-south transportation connectivity, (v) Transport infrastructure maintenance, (vi) Urban housing, (vii) Sanitary sewerage, and (viii) Disasters and development. Similarly areas covered under Tourism, Agriculture, and Regional Development group are concerned with (i) Sustainable rural tourism, (ii) Crisis management in Tourism, (iii) Regional tourism markets, (iv) High value agriculture, (v) Pocket package development in agriculture, (vi) fertilizer supply, (vii) Investment priority for mid and far western Nepal, and (viii) Expenditure patterns of local governance.
9. Alongwith the full text of study reports, a four pager policy brief is also published for each of the study to serve as an abstract of the main report. The final reports and briefs are posted in the EPN website. All draft reports were also posted in the web sites to receive comments from readers but no one had ever responded. The electronic version of the reports are also prepared and widely circulated.
10. EPN team individually met the Vice Chairperson (VC) and all concerned members of NPC and secretaries of all relevant ministries to follow up the implementation of reports. The copies of reports were also handed over. The NPC officials were mentioned that these reports will be substantially contributing during the formulation of the forthcoming three year plan.
11. In light of the new political change which has given hope to permanently end the decade long conflict in the nation, a National Conference on “Peace, Democracy and Development” was organized. The Maoist's were given forum to speak on economic issues for the first time in the country. Similarly, towards the end of the TA a national seminar was also organized to disseminate the findings of the study to the wider public.
12. This TA has prepared enough ground works to develop an institutional framework to facilitate policy discourses and reforms that are characterized by transparency and openness. Such policy dialogue platform would focus on promoting consensus building and creating ownership of, and commitment to, the economic reform process among stakeholders.
13. EPN has contributed considerably to initiate open dialogue among major stakeholders through EC, ACs, and thematic workshops but is doubtful of it being continued as there is no project office, permanent institution, budget, and inadequate capacity in the civil service. The public private modality of monitoring and evaluation mechanism was also limited within the framework of SC, ACs, and workshops in this TA but with closure of the project this initiation may also be jeopardized. Few of the other issues faced during the implementation of TA include (i) short timeframe of studies (one man month), (ii) frequent change in government positions including the counterpart staff in EAPAD, MOF, who are also only part timers, (iii) lengthy procedure in finalizing policy papers, (iv) slow implementation of recommendations, and (v) underutilized website.
14. Building on the experiences of the TA an efficient institution with resourceful leadership is essential for continuing the policy reform process in the country. Such institution should engage in conducting demand driven studies in the areas of policy enhancement, conduct interactions and iii consultations, have a permanent and effective public private mechanism of monitoring, appoint academic and research institutions as its hub centers, optimally utilize all forms of media and Information Communication Technology (ICT) portals. This innovative institutional network should have adequate funding from the Government and other sources.
15. The recommendations put forth by the studies have contributed to address the policy issues by the concerned ministries. Hence, these ideas have to be sufficiently incorporated in the forthcoming Interim Plan as well as the 11th plan.
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I. BACKGROUND
1. Nepal has undergone through several economic reform processes, the most prominent one being the liberalization during early 90s. The reform in economic and industrial policies; financial deregulations were few commendable steps taken by the Government. But due to the lack of similar openness in other sectors of the economy, integration of activities among economic sectors of national importance, and weak institutional base the reform could not deliver desired results. Thus, there was a necessity of a comprehensive economic policy framework to streamline and bring noticeable changes in the economic development process of the country.
2. Among others, stakeholders in Nepal identified a number of specific weaknesses contributing to slippages in the economic policy reform process. The weaknesses identified in the policy initiatives were (i) ad hoc, top-down, and supply-driven economic reform agenda, (ii) inadequate consultation processes for securing commitment and consensus from other stakeholders, and (iii) failure to specify appropriate implementation arrangements, and (iv) ineffective monitoring capacity
3. In the context of tenth plan, which is aimed at alleviating poverty and enhancing growth and achieving a competitive environment, a sound economic policy framework is essential. But due to the political conflicts spread all over the country the development efforts are severely curtailed and the problems of slippages and implementation delays have also considerably escalated. Thus the need for an EPN to support and consolidate the reform process is more compelling now than ever. It is also needed to rectify the deep-seeded divisions that are brought along by the conflict between the rural and urban societies and between certain regional and ethnic groups. This Networking process have to be supplemented by good linkages established between the policies of major economic sectors such as macro economic management, international trade, investment, employment, infrastructure development, tourism and regional development, which are identified as the high priority areas to be addressed from an economic policy perspective.
4. The GON, acutely aware of these weaknesses and failures of past attempts to address them, requested the ADB to assist in developing an institutional mechanism that could serve as a forum for economic policy dialogue based on sound analysis. The policy dialogue platform would focus on promoting consensus building and creating ownership of, and commitment to, the economic reform process among stakeholders.
5. The EPN is expected to serve as a vehicle to (i) evolve and develop a strategic vision for private sector development, (ii) help improve the GON's economic policy reform agenda by evaluating policy reforms and providing feedback on implementation, (iii) recommend new ideas and policy options to policy makers, (iv) assist policy makers in analyzing and responding to regional and global economic challenges, and (v) foster constructive policy dialogue between the GON and other institutions so as to generate a national consensus on policies and thereby enhance the credibility of reforms.
6. The TA was formally launched in August 9, 2004, after an initial delay of about 6 months due to unavoidable circumstances within the MOF including their heavy involvement in preparation of the National Development Forum and other priorities of the Government. This initial delay, change of the Team Leader in June 2005, and few remaining works caused the shifting of the completion date to December 2006.
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II. OUTPUTS AND OUTCOMES
A. Overall Goal
7. The goal of the TA is to develop and institutionalize an open, responsive, and result- oriented economic policy formulation process based on sound economic analyses. The policy recommendations developed through such a transparent and consultative process is expected to support and consolidate the Government's economic reforms and assist it to achieve the development targets of the Tenth Plan and beyond.
B. Scope and Outputs
8. The scope of the TA covered: i. developing an institutional framework for economic policy dialogue and analysis; ii. assisting for policy research and analysis, data collection, and information dissemination; iii. creating a forum for policy dialogue and analysis through a vibrant partnership; and iv. laying the groundwork for an institutionalized consultative process that will ensure continuity of the Government's economic policy reform agenda.1
9. Four major outputs expected from the TA were: i. an economic policy reform agenda identifying challenges and concerns for promoting private sector development, as well as specific issues requiring in-depth analysis; ii. 32 demand-driven, results-oriented economic policy papers (8 per thematic area) deriving from the policy reform agenda that will contain important findings and recommendations, backed by sound economic analysis; iii. establishment of improved institutional processes for policy discourse and reform that are characterized by transparency and openness; and iv. establishment of a public-private modality for monitoring the implementation of economic policy reform agendas.
1 The TA Design and Monitoring Framework is in appendix 1. 3
III. IMPLEMENTATION MODALITY
10. The forum for economic policy dialogue had been established with an active participation of public and private sector partners through the SC and the advisory committees. These committees had enabled all stakeholders to get engaged in establishing innovative partnership among senior policy makers, leading private sector entrepreneurs, opinion makers, and other experts.
A. Steering Committee
11. The composition of high level SC is as follows; Hon'ble Member of the NPC —Chairperson Secretary, MOF—Member Secretary, MOICS—Member Secretary, MOPPW —Member Secretary, MOCTCA —Member Secretary, Ministry of Agriculture and Cooperatives (MOAC) —Member Secretary, Ministry of Water Resources (MOWR) —Member President, Federation of Nepalese Chamber of Commerce and Industries (FNCCI) —Member President, Confederation of Nepalese Industries (CNI)—Member President, Nepal Chamber of Commerce (NCC) —Member Mr. Prithvi Raj Ligal, Expert—Member Dr. Bina Pradhan, Expert—Member Dr. Ava Darshan Shrestha, Expert—Member Joint Secretary, EAPAD, MOF—Member Secretary
12. The original structure of SC, under chairpersonship of Chief Secretary of the GON was functioning well for last twelve months. However, this study being entirely devoted in policy level analyses it was felt to have further closer linkages with NPC, which is the responsible entity of GON to work and decide on policies. Hence, the chairpersonship of the SC was shifted from the Chief Secretary of the GON to the Hon'ble Member of NPC since the fourth meeting. Earlier, the third meeting of SC had inducted Dr. Pradhan and Dr. Shrestha as its members.
13. The committee took timely decisions on establishing and guiding the ACs for adoption and implementation of recommendations flowing from the studies; identifying implementing agencies for each of the four thematic areas, and also in supervising and monitoring of overall activities of the TA. This committee was instrumental in conveying policy recommendations to the political level.
B. Advisory Committee
14. The ACs in each of the above mentioned four thematic areas were established along with the assignment to MOF, MOICS, MOPPW, and MOCTCA to act as the implementing agencies. All of these ministries had spotted their responsible unit and designated JS level officer to act as the Member Secretary of the committee. The implementing ministries were
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engaged in planning, organizing and chairing the meetings; monitoring activities, and helping the project team in preparation of quarterly progress reports and dissemination of information.
15. The ACs were chaired by the respective secretaries in the government ministries. There were JS level representations from concerned government offices and executive director of NRB and head of the economics department in the Tribhuvan University. Private sector representatives in these committees included representatives of FNCCI, CNI, and NCC and presidents of the Society of Consulting Architectural and Engineering Firms (SCAEF), Federation of Contractors' Association of Nepal (FCAN), Nepal Association of Tour Operators (NATO), Hotel Association of Nepal (HAN), Nepal Economic Association, Nepal Engineering Association (NEA), and Nepal Tourism Board (NTB). There were also a few expert invitees and individual experts in each of the committees. This nongovernmental sector participation constituted around 40% of the total number. Besides, numbers of personnel concerned or knowledgeable with the subject under discussion were also invited during the meetings (the membership in the committees is presented in annex 2).
C. Focal Unit at the Ministry of Finance
16. A focal unit of the project had been set up under the leadership of the JS within the EAPAD of the MOF at Singha Durbar. The Under Secretaries of the division were also assigned to the focal unit. This unit was responsible for day to day project administration including:
i. Preparing consolidated progress reports on the activities of the implementing agencies, ii. Preparing a final report focused on the activities of the implementing agencies at the conclusion of the TA, iii. Serving the role of the secretariat of the SC and the AC on macroeconomic management, iv. Providing technical support to various ACs, v. Organizing participatory policy reform consultations, vi. Coordinating the overall TA activities, vii. Submitting consolidated progress reports to the SC and ADB, viii. Disseminating information by organizing policy reform seminars with stakeholders, ix. Disbursing funds in accordance with ADB regulations, and x. Maintaining the EPN website.
D. Policy Research and Interactions
17. The ACs were engaged in identifying contemporary issues in the concerned sectors, choosing policy research topics, commissioning policy papers for the study by selected consultants upon approval by the ADB, monitoring the quality of the policy papers, guiding the project team in organizing discussions/ expert technical workshops and participatory policy reform consultations; and also persuading the implementation of the policy reforms as recommended.
18. A comprehensive list of economic policy reform agenda were developed within all four thematic groups to consider the core issues. Such initiation had incorporated the overall review of the existing policies, identified challenges and suggested measures on priority basis for its
5 adoption by the Government and all stakeholders including the private sector within stipulated time frame. The sectors requiring further in-depth analysis were also identified.
19. During the course of the TA, a total of 8 policy papers were prepared under each of the broad thematic areas.2 These policy papers served the basis for policy dialogue. The extensive consultations during the AC meetings, periodic feedback from the higher level SC, and pressing problems identified by the group were the basis for identifying the specific studies. The terms of reference for the studies were developed by the EPN Focal Unit in consultation with the private and public sector members in the respective committees. Once the study was selected and approved by the committees, several potential consultants were identified. The consultants were finally selected on the basis of recommendations from the committees and screening by the ADB.
20. The AC meetings and corresponding workshops provided forums for transparent and open discussions on burning policy issues. The topics of the papers were demand driven and also chosen by the respective ACs. These policy papers studied by nongovernmental local experts served as the basis for policy dialogue. There was a good mix in the selection of consultants. Out of 32 papers, two papers each were contributed by former finance ministers; former VC of the NPC; former members of the NPC, and former governors of the NRB. Similarly, seven papers were prepared by former secretaries to the GON. Including five from academia, altogether seventeen studies were carried out by independent experts. A total of 14 policy studies were led by private sector and civil society organizations and academic institutions. The policy papers served to review the most recent issues faced by the implementers and to devise achievable solutions for timely implementation.
21. Though the time allotted for studies was only one month, several rounds of interactions took place during the course of preparation and finalization of each paper. Before presenting the first draft, the consultants interacted with concerned people and organizations at individual level as well as in groups. The draft was then discussed in the corresponding AC, chaired by the secretary to the GON and attended by high level government officials from other concerned ministries and departments, experts, selected representatives from private sector and professional organizations. It thus provided a platform for the Government to provide its feedback on the proposed policy interventions. The revised draft, incorporating the feedback of the AC was then reviewed by an independent reviewer and simultaneously presented by the consultant before a wider audience at the workshop organized by the EPN. These workshops provided a forum for a wider discourse on the policy papers from nongovernmental organizations (NGOs), academicians, freelance experts, representatives of private sector and civil society organizations, businessmen, students, implementers and organizations concerned with the sector under consideration. The final drafts incorporating the comments and suggestions from the workshop were again presented to the AC for final endorsement. This improved procedure was adopted since the third meeting of the SC. Before this, the validation used to be done by the workshop itself. The final reports, endorsed by the ACs, were then forwarded to the SC and the respective ministries and agencies for implementation (figure 1).
2 The four thematic areas identified were (i) macroeconomic management; (ii) international trade, investment, and employment; (iii) infrastructure development; and (iv) tourism, agriculture, and regional development.
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Figure 1: Development of Policy Papers
AC meeting (Selection of policy studies and consultants)
Terms of reference developed (in consultation with AC members and independent experts)
Draft policy paper prepared (in consultation with relevant stakeholders)
AC meeting (Discourse on draft policy paper/government feedback)
Review of revised draft by external reviewer
EPN workshop (Discourse on revised policy paper)
AC meeting (Endorsement of final policy paper)
Endorsed policy paper forwarded (SC & implementing agencies)
22. Wider participation of stakeholders harnessed during this finalization process contributed significantly in maintaining a good quality of the reports. Most of the recommendations coming out of the studies have a strong reform focus and are found to be useful by the concerned government offices and private sector institutions. The close interaction of consultant with the concerned offices of the Government and other sectors during the course of study had helped identifying smaller to bigger issues to be attended. At several occasions during AC meetings, the secretaries, especially in the MOICS, had expressed that the studies were found also useful to improve simple working procedures within the ministry.
23. The Focal Unit of the TA facilitated the development of a modality for enabling the public and private sectors to work together in revitalizing the economy through policy reforms. Through the direct involvement of the EPN, an inception seminar was organized in October, 2004 to arrange an in-house discussion amongst all the members of the Steering and ACs on the modality of the EPN. The meeting had recommended on the operating procedure of the EPN activities relating to selection of topics, consultants, production of study reports, conducting AC meetings and workshops, etc. A national conference was organized on June, 2006 to interact on the burning issues of peace, democracy and development at a time when the Maoist's had just agreed with the GON on bringing the safety and security situation of the country to normalcy and venture into the agenda of making New Nepal. It was the first forum for them to discuss on economic agenda with the wider public after the successful conclusion of Jana Andolan II, 2006. Another national level seminar was organized towards the end of the TA on December, 2006 to disseminate the findings of the 32 studies carried out by EPN unit and also to receive feedbacks which may help GON to smoothly implement the recommended activities in the coming days. The Chief Guest of the seminar - Hon'ble VC of NPC, and session chairs - Hon'ble Members of NPC observed that the reports would contribute immensely in formulation of the forthcoming three year plan, which is under consideration.
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24. A tripartite meeting was held towards the conclusion of the TA in December 2006 and expressed satisfaction on the progress of the Project. It also discussed on owning of these studies and translating the outcomes into ministry’s actions. Observing that some delays had occurred in the course of operations it also identified the necessity of widening interactions to include more stakeholders in the coming days. The meetings suggested to have the reports remain in the websites and enhance its accessibility by creating linkages with other useful websites. The tripartite meeting strongly recommended having the project to be continued through its second phase.
25. The SC met six times during the entire project period and had considerably contributed in coordinating the concerned ministries and departments of GON to successfully carryout project activities. It had also steered the project team to operate smoothly. The Focal Unit's meetings were held six times. These meeting had been instrumental in maintaining close cooperation among the major Ministries and for logistic arrangements for the ACs in MOICS, MOPPW, MOCTCA, and MOF.
26. Altogether, 48 meetings of the ACs were held. These committees mostly dealt with the areas of identifying topics for the study, selection of consultant and their terms of reference, pre- appraisal of the draft report prepared by the consultant, and validating the findings of the final report after it was discussed in the workshop. Similarly, a total of 11 workshops were organized in Kathmandu, which were attended by government officials, experts, academia, students, private sector, non government sector and civil society. Each workshop dealt with in-depth discussions on the findings of study reports. On the average two study reports were discussed in each workshop. A resource person was chosen as a lead commentator before-hand and general discussion was supplemented to his critical comments on the respective study. In addition, three similar interaction meetings were also organized at the regional level in Solukhumbu, Birgunj, and Nepalganj, which were attended by 76, 60, and 92 participants respectively.
27. Inclusive of all the meetings mentioned above, altogether, more than 1,400 individuals had directly participated in EPN organized events.
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IV. ACHIEVEMENTS
A. Economic Policy Reform Agenda and Focus of Policy Studies
28. Based on the need to accelerate pro-poor growth and achieve the development targets identified in the Tenth Plan, and extensive consultations with experts in the public and private sectors, the following four cross-cutting themes that have direct relevance to poverty reduction were identified for policy dialogue and analysis: i. Macroeconomic management ii. Economic policy on international trade, investment, and employment iii. Economic policy on infrastructure development; and iv. Economic policy on tourism, agriculture, and regional development.3
29. All 32 policy papers (8 per thematic area) targeted at the beginning of the TA were successfully completed. A lot of valuable recommendations, both short and medium term, have come out of these policy papers to support the Government’s policy reform agenda to accelerate broad based economic growth, augmenting private sector participation, and reducing poverty in the nation.
30. A general discussion on the major issues and recommendations under each of the thematic follows.
1. Macroeconomic Management
31. Focused studies related to macroeconomic management including those having serious implications for the national budget, improving fiscal management, sustaining monetary and external stability, and developing the financial sector were selected. A study on recommending a structure for public policy dialogue was also undertaken.
32. Specific policy studies related to macroeconomic management include:
i. Status, prospects and constraints in tax policy for export promotion ii. Measures for expanding non tax revenue iii. A study on excise duty iv. Measures for tax compliance habit and leakage control v. Revenue implications of WTO regime and alternate measures for revenue mobilization vi. Current macroeconomic stability factors and their sustained management vii. Effective and efficient utilization of contractual savings viii. Framework for EPN
33. The four policy papers related to the tax policies of the Government identified that current export related policies on investment, lending, and rates of income tax, value added tax (VAT), custom duties, and local taxes are not investor friendly for attracting investments, including FDIs for exports. They also identified that the lending policies of financial institutions favor trading over the industrial sector. As for tax compliance, it is estimated that the evasion is
3 Agriculture was added by the first SC meeting.
9 over 40% of taxable capacity. The amount of customs leakages is around NRs 3.58 billion and loss in VAT is about NRs 3.71 billion
34. They also argued that income taxes on export have an increasing effect on prices of export commodities thereby stifling Nepal’s competitiveness in the global market. Export taxes ranging from 0.5–8.0% are still levied on 35 items.
35. The studies identified many policies, institutional, administrative, procedural and legal constraints for expanding export oriented industries and for tax compliance. The current labor Act, Customs Act, Industrial Enterprises Act, Income Tax Act, Leakage Control and Investigation Act, and Export and Import Control Act were also found to have inconsistencies among them, requiring a thorough revision. The studies also point out a lack of a Bankruptcy Act to deal with insolvency matters.
36. Furthermore, existence of non-tariff barriers to export goods into India and markets beyond were identified as a major constraint. Due to lack of proper guidelines inconsistencies and lack of cohesiveness in fixing non-tax rates, and unclear basis for fixing such rates exist.
37. Despite a share of 22.7% of total revenue in 2004, there is no institutional mechanism for reviewing and monitoring rationalization of existing non-tax rates and mobilizing it. Different government departments fix their legal fees, charges, royalties, and penalties at random. There is also a lack of understanding between the Government and public enterprises on resolving issues of exchange rate, rate of interest and repayment schedule. Inefficient and underutilization of public enterprises is another constraint in mobilizing tax revenue.
38. The collection of excise duties increased from 13.9% of total indirect tax in FY1999 to 15.7% in FY2005, and is the fourth largest revenue contributor but draws only minimal attention of the Department of Inland Revenue (DIR). The institutional setup, staffing, and proper training is less than adequate. Similarly the excise policy seems to be working on ad-hoc basis. Though improvement is done regarding the Harmonized System Codes (HS Codes) in the budget of FY2006, it is yet to be critically reviewed and adjusted in view of international trading practices to control revenue leakages.
39. The studies recommend reviewing and rationalizing the existing rates on income tax, custom duties, VAT, and local taxes to ensure competitive prices of export commodities in the international market. They also call for simplifying duty drawback procedures by allowing it to be done through commercial banks, and introducing duty suspension schemes for export commodities. The principle of single rated VAT system also needs to be revised to widen the tax base. Similarly to curb tax evasion, optimal use of information technology and focusing on effective tax payer inspections by pyramid based mechanism has become necessary.
40. Suggestions are made to replace the existing import tax by a 1.25% turnover tax on export earnings at the point of exportation, or exemption of 50% of taxable income from export earnings for the short period; and also to acknowledge the investment made for the production of new products as expenses.
41. Similarly, they recommend revising the Labor Act to make it investment friendly and compatible with the employment contract law, bringing about consistencies among the various acts regulating trade, industries, income, employment and investment. Developing consistent institutionalized mechanisms to review and rationalize non-tax revenue across all institutions,
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departments and offices, and ensuring efficiency in administration in public enterprises, postal service and forestry sector for effective mobilization of non-tax resources were also emphasized.
42. Other recommendations include conducting studies on fiscal devolution and acting on the recommendations of those studies to resolve the ongoing debate on revenue sharing between the central and local governments.
43. Finally, the studies point out the need for the MOF and NPC to outline objectives, programs, procedures and timeframe for monitoring and evaluating tax and non-tax revenue and also to formulate a medium term rolling plan. Recommendations are also made to establish a unit to deal with non-tax matters within the MOF and a member added to the Revenue Advisory Committee to look after non-tax related matters. Similar plan should also be drawn for excise duties and a new position of Deputy Director or an independent sub-directorate and a financial analyst should be created in the DIR.
44. As regards to institutional improvements, a Revenue Board is recommended under the chairpersonship of Revenue Secretary, with expert members from each field of taxes to consider the policy interventions and revenue staff related matters. Similarly, Revenue Intelligence Unit and Risk Management Unit are necessary in each office of tax administration. The sub custom offices are suggested to be rationalized and converted into border patrolling posts.
45. The potential revenue loss due to the WTO regime is estimated to be around NRs 5,588 million, which represents around 25% of import duties. The factors contributing to compensate losses are identified as (i) trade creation as a liberalization impact, (ii) the increased rate and base of VAT, and (iii) bringing informal trade with neighboring countries into formal channel. Thus, VAT base is suggested to be broadened to include distribution sector and agriculture inputs. Among others, excise tax could also be taken as a source of revenue collection.
46. Assessing the macroeconomic stability, recommendations are made to bring the informal trade between India and Nepal into the tax net, containing defense and security expenditures, maintaining fiscal deficits at less than five percent and domestic debt financing at less than one percent of the gross domestic product (GDP). Similarly, streamlining subsidy and transfers, expanding poverty alleviation fund's coverage to additional districts, and effectively operating micro finance institutions to avail easy financial access to deprived sections of the rural population are also suggested.
47. A key challenge for effective and efficient utilization of contractual savings is making a correct tradeoff between return and risk on asset portfolios. Institutions like Citizen’s Investment Trust (CIT), Employees’ Provident Fund (EPF), Postal Savings Bank and Savings and Loan Cooperatives do not have a regulatory body. Furthermore, CIT lacks disclosure requirements and its accounting practices do not adhere to international practices. Similarly, clear cut policies are lacking in case of connected lending, single borrower limit or group of borrowers, consortium financing, risk minimization measures and corporate governance. CIT also has an inadequate loan provisioning policy.
48. It is recommended that EPF take the initiative to form a consortium of resourceful non- bank institutions to appraise small scale hydropower projects and possibly invest in such projects. EPF could also form partnerships with other institutions and the private sector to finance toll highways, tunnel ways and construction of airports, overhead bridges, bus parks, cable car, ropeways and other projects that have an assured return.
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49. It is also recommended that contractual savings institutions should invest in moderation in government papers since it is unlikely that yields on government bonds will increase since net internal borrowing as a proportion of GDP has declined over time. Investments in time deposits should also be reduced; instead, investments should be prioritized for new ventures with minimal risks and higher returns. Non-bank financial institutions like EPF, CIT and Postal Savings Bank should join hands to open a non-bank financial institution, which would provide funds for high yielding development projects.
50. An efficient regulator should be established to ensure corporate financial governance in these institutions. NRB can be delegated the responsibility of regulating EPF and CIT and to facilitate the necessary changes in these institutions. CIT should involve itself in establishing a credit rating agency, deposit insurance and other institutional facilities to create a healthy investment environment.
51. A critical assessment of the present status of economic policy networking is done and an appropriate institutional model for it is recommended. The suggestions made in this regard are analyzed and slightly refined for its practicality, clarity, and brevity to desired outputs (please refer paragraphs 130-142).
2. Economic Policy on International Trade, Investment, and Employment
52. Specific policy studies related to international trade, investment and employment include:
i. Implementation evaluation of FDI policy in Nepal ii. Promoting Nepal as a manufacturing hub: prospects and constraints iii. Strategy for promoting business incubation centers (BICs) in Nepal iv. Sustaining garment industry after quota abolition v. Strategies for promoting industrial property licensing in Nepal vi. Policy reorientation study on transit treaty vii. Supply management of essential commodities viii. Enhancing economic diplomacy for trade, investment and employment
53. The study on FDI points out that the limits to aid financing based on loans has been reached as debt repayments, at around 50% of GDP, may be leading to a situation of a debt trap for Nepal. Current debt stands at NRs 234 million and annual repayment is around NRs 17 billion. It thus argues that this aid financing strategy can only be sustained with exports keeping up with debt repayments—13% annually— that would entail not only improving the investment climate drastically but also taking special measures to invite FDI into the country in new markets, and new and higher quality products.
54. The study identified that “bureaucratic burden” comprising variables like red tape, corruption, and delays in decision taking was the greatest obstacle to a conducive business climate followed by taxation bottlenecks—refund of VAT and duty drawback privileges—and customs administration hassles.
55. The study recommends creating a high level Board of Investment (BOI) with its own secretariat placed under the cabinet secretariat and promulgating a BOI Act. It also recommends establishing a new superstructure—the Prime Minister’s Advisory Economic
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Council on PPP for Globalization. Keep One Window Committee under MOF or under the proposed BOI with one special secretary as its chairperson. Decision of One Window Committee should be final and should be obeyed and followed by all the concerned departments. Such administrative procedure and institutional setup would ensure a conducive business climate —a precondition for attracting FDI into the country.
56. It also stresses on the need to promulgate the legislation on non-resident Nepalese to attract FDI - a measure that has been a great success in India and China. Similarly, it calls for promulgating the Competition Act and establishing a Competition and Consumer Rights Commission as a constitutional commission to protect consumers.
57. An assessment is done to analyze the prospects of developing Nepal as a manufacturing hub and has identified many hindrances to attract foreign investments though the country has been highly receptive to unhindered investment flow and produced so-called investment friendly policies and legal instruments. The red tapeism, comatose policies, infrastructure bottlenecks, and few other general impediments like small and scattered local market; unavailability of raw materials; cheap but lowest labor productivity and extremely politically divided labor force; inflexible Labor Act; uncomfortable legislations to protect the investors' interests; and meager capital market persist in Nepal but due to it being located between two highly advancing and fast growing neighbors, there are equally ample opportunities to the country's benefit. As both of these markets are dismantling trade barriers, and the road and rail accesses are speedily developing across the border towards Tibet and northern India, Nepal can substantially gain from such infrastructural developments. Sensible use of hydropower potential could bring fortunes to the country.
58. The study proposes to immediately act on amending business related Acts e.g. Company Act to override all others in industry and business sector, intellectual property rights, bankruptcy law, and competition law. Financial sector reforms are needed mostly in the areas of tax administration, lessening discretionary powers of tax officials, rationalizing and reducing cost of capital, easy funding for mega projects, strengthening stock exchange and making capital market more vibrant, extending off shore banking facilities, and allowing raising financial resources from abroad through various debt and equity investments. An intensive sector focused FDI policy; allowing portfolio investments; unbundling of Nepal Electricity Authority to separate companies so as to ensure cost effective and assured supply; encouraging build, own operate and transfer, build, own, operate, and PPP in roads, railways, dry ports; adoption of open sky policy; attractive frontier formalities and easily granting residential visa; and a high powered one stop statutory body, BOI, to facilitate investments have to be adopted.
59. Business incubation, a powerful tool to instigate and prepare prospective entrepreneurs for investment, is a new subject in Nepal. The study in this area has pointed out the failure of this initiation in the past when the private sector holding created for it was closed in Lalitpur. The Information Technology Park in Banepa is also full of hassles. Most of the businesses in Nepal are family run, adopt traditional system of management and dominated by outdated technology and know how. The general constraints in the industry sector include weak and short lived policies, difficult and strenuous access to credit, inappropriate and inefficient industry development services, negligible support and incentives for innovative ideas, less attention of the Government and financial institutions to smaller borrowers, and inordinate delays in the delivery of utility services, which are also costly.
60. The paper on suggesting strategies to promote BICs in Nepal have proposed to have few areas firstly identified needing potential activities for incubation through the help of industry
13 sector associations like FNCCI, its Youth Entrepreneur Development Forum, CNI, etc. It should also be tied up with university and corporate private sector to nurture internships from colleges; selected training institutions engaged in offering enhancement of skills and knowledge that also have laboratory facilities. The Government should facilitate prospective BICs by availing leasehold lands for the development of centers and technology parks; initial seed money as needed; recognize it as a service industry; adopt a national policy to encourage this venture; help introduce curriculum on entrepreneurship development and business start up cases at the high school level; help create sizeable fund for venture capital and extend its coverage to include BICs and incubates; provide tax holidays; and local tax credit exemptions. The credit mobilization through financial institutions for BIC promoters have to made available. However, for meeting the recurring and development cost during the initial phase, mobilization of external support should also be encouraged.
61. As regards to the garment industry, the study finds that the Nepalese garment industry relied heavily on the market access quasi-guaranteed by the Multi Fiber Arrangement (MFA)— notably the spillover business from quota constrained countries like India. The expiration of the MFA resulted in Nepal losing more than 50% market share in the United States where 85% of garments were exported. It had prompted garment manufacturers to stop their production en masse, bringing down the number of operating industries to less than twenty from over 100 just a year before. The insufficient commitment at the industry and policy levels to respond to the foreseen adjustment problems in trade without quotas was also identified. Cutting output cost and raising delivery efficiency as well as diverting export of apparels to the markets with preferences elsewhere would have been useful to overcome persistent problems but nothing was done in this direction. Another area is about the priority of international buyers, which has also gone towards countries having a massive scale of output and a capacity for vertical production: from fabric to fashion designing but Nepalese garment industry lagged behind in both cases. The down spiral in the world apparel prices due to Chinese product's interventions, which had declined on the average by 48% between 2001 and 2004, seems to be a serious concern to Nepal. Nepalese apparels are also subject to average tariffs of about 15% in US, almost ten times greater than the US average MFN rate for other products. In addition, Nepal had to compete with clothing made in sub-Saharan poor countries in which US had extended duty free imports. Administrative complications with regard to bank guarantee, refund of VAT and duties, and rigidity of the policies relating to labor and income tax were also cited as constraints in the Nepalese garment industry.
62. The study recommends a two-pronged strategy focusing on the (i) preferential and (ii) non-preferential markets. Under the first strategy it is suggested to intensify lobbying for privileged market access in US to offset the increased output cost through duty advantage. Similarly the second Strategy was to intensify measures in utilizing preferences in the European Union and Canada. Harnessing the opportunities available in Indian market is also recommended. The capacity to product innovation and skill development, as well as institutional development for monitoring of regional and multilateral trading system, vis-à- vis the international apparel trade is also crucially important. Nepal should be vigilant of the monopolization of big suppliers, particularly China, which also produces and exports similar items. It also proposes the establishment of a garment processing zone in a location near the inland container depot (ICD) in Birgunj to reduce transportation and transit costs, and give Nepalese garment industries extra leverage for attracting Indian business outsourcing in Nepal. It will lower the cost of production, increase the economies of scale, and make Nepalese products more competitive. Broadening the role of existing readymade garment export promotion committee in formulating strategies and programs for guiding the industry, lobbying
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for duty free markets in foreign countries, intensifying promotion, campaigns, and the GSP markets is also proposed through its modified PPP modeled structure.
63. Major constraints highlighted in the industrial property licensing study include (i) a lack of licensing mechanism for patents in Nepal; (ii) inability of the Department of Industry to administer patent licensing; and (iii) lack of transparency in patent licensing causing usage of patents without registration, resulting in a lack of transparency in transfer of technology and exploitation of the patent for more than its granted term of protection; which has resulted in the Government losing revenues from taxes on patent licensing. The Patent Law in Nepal does not adequately protect inventors resulting in reduced research and development and consequently increasing the possibility of brain drain. Compulsory licensing cannot be granted or enforced under the Nepalese Patent Law because licensing administration is not controlled by the concerned patent office.
64. On Trademark Licensing, the study points out that Nepalese Trademark Law considers only the source of identification function of trademarks and does not consider its other functions such as advertisement, goodwill creation and quality control. Lack of registered user provisions in Nepalese Trademark Law has created an environment that fosters monopoly in trademark because it does not facilitate competition through licensing and inadequacies in licensing provision discourage foreign investment in joint ventures and impede goodwill promotion.
65. On Design Licensing, the Patent, Design and Trademark Act 1965 does not have design licensing provisions in Nepal. Thus, designers are not sufficiently protected and have inadequate bargaining power with users, hence inhibiting domestic design. Nepalese Design Law does not accept the owner plus user right on a single design and Nepalese trademark licensing provision has the effect of inhibiting joint venture investment in design since lack of owner plus user right on a single design obstructs foreign investors from working on the same design. Similarly, Nepalese proprietors cannot exploit the design and goodwill in such design because of lack of provisions to lease the design. Furthermore, goodwill in design cannot be given to foreign investors, consequently reducing joint venture in investment.
66. The study highlights the need to make national policies on trade and economics clear about intellectual property and compatible with the changing international scenario and prevailing international policies on intellectual property and trade related aspects of intellectual property rights. It also recommends developing concrete industrial property protection mechanisms under the framework of intellectual property law. The Patent, Design and Trademark Act, 1965 has to be amended to include complete patent licensing provisions such as, (i) basic licensing requirements, (ii) registration procedure and license administration, (iii) proposals for particular form of patent license, (iv) aspects related to taxation on patents, and (v) provision of compulsory licensing, and (vi) provisions of registered trademark and design user.
67. The paper on transit trade of Nepal pointed out several shortfalls in the areas of transit trade facilitations. The major ones belongs to the policy as the burden of prohibitive transit costs obstructing the flow of trade; the complicated transit procedures; unreliable transport infrastructures; lack of high speed railways and roads; and varying standards on load bearing vehicles. Effective joint institutional setups as the inter-governmental committees, custom cooperation mechanism; sharing through electronic information systems; advanced cargo information system; harmonization of international standard transit documents; full adoption of the outcomes of international and regional conventions; overcoming cost and delayed time constraints mostly at the port and in the transit points; would help easing the flow of goods between.
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68. The study proposes to harmonize tariff policy between India and Nepal to control deflection of goods in transit. It should facilitate transport of commodities through the least cost multiple high quality alternate road and railways. Custom cooperation agreement with the neighboring countries has to be finalized and implemented. Human skills in the areas of e- business, port efficiencies, customs environment, and related areas have become necessary. Hence, an Institute of Foreign Trade is proposed to be established either in the Government sector or through PPP approach. The improvement of load bearing capacity of the existing Nepalese roads is also equally essential. Diplomatic efforts are urgently needed to connect Nepal with Asian railways covering east-west and at least one in the north-south corridor. Excessive time taken can be substantially reduced by improving customs procedures, and reducing paper work. The study has emphasized PPP approach in developing infrastructures. Few new routes in Nepal-India-Bangladesh sector are also identified such as (i) Kolkata – Dunlopbridge – Barrackpore – Krishna Nagar – Malda – Raiganj – Dalkola – Purnia – Muzafarpur – Motihari – Raxaul; (ii) Rohanpur – Shinghabad railway route (in Bangladesh route) to Mongla port (iii) ICD Dhaka to ICD Birgunj.
69. Major constraints for bringing efficiency in supply management of essential commodities such as petroleum products, sugar, salt, rice and pulses, edible oil, and essential drugs include legal bottlenecks such as inadequate monitoring of unscrupulous hoarding and black marketing, and ineffective protection of consumer’s rights. The institutional constraints such as lack of organized marketing systems, specialized cooperatives and fair price shops, and proper storage facilities to maintain adequate stocks are also identified. It also points out administrative and policy weaknesses such as imposition of local taxes that raises prices of essential commodities, and ineffective government interventionist policies to stabilize shortages and escalating prices.
70. The study has highlighted the losses incurred by the Nepal Oil Corporation due to political considerations overshadowing economic rationalization in pricing of petroleum products. However, the overall lack of geographical connectivity compounded by scattered settlements is seen to be the major constraint in supplying essential commodities in the nation.
71. The policy paper recommends implementing an open tender with full transparency to encourage the private sector in supplying essential commodities. Sale price of essential commodities should be based on their cost price, which should also take into consideration the prevailing border markets. It also calls for institutional structures such as a high level National Supply Coordination Committee chaired by the Secretary of MOICS at the central level and similar committees at the districts and zonal levels to fix support prices, formulate policies, rules and regulations, and ensure smooth supply. A Unified Valley Supply Action Committee, under the chairpersonship of NCC to manage the supply of essential commodities in Kathmandu valley is also proposed. Better coordination among the various public corporations such as Nepal Food Corporation, National Trading Limited, and Salt Trading Corporation for procurement and distribution of essential commodities is a must. Consumer protection council should be constituted through PPP in all five development regions.
72. The policy study on economic diplomacy proposes restructuring the Ministry of Foreign Affairs to better coordinate with the sectoral line agencies, Nepalese missions abroad and the private sector. It also calls for Nepalese embassies and missions to expand their activities beyond routine consular matters to actively promote tourism, trade, investment and employment. Similarly, a high level Economic and Policy Council is recommended under the chairpersonship of the Prime Minister for mainstreaming development policies and priorities into the foreign policy of the country.
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3. Economic Policy on Infrastructure Development
73. Specific policy studies related to this thematic group include:
i. Prospects and approach in PPP in transport infrastructure development ii. Strategy for enhancing PPP in ICT enabled services iii. Prospects and constraints in PPP in urban waste management iv. Strategic approach for north-south transportation connectivity v. Sustainable approach to transport infrastructure maintenance practices for effective service delivery vi. A policy study on urban housing: planning and reality vii. Service enhancement and development of sanitary sewerage system in urban and semi urban setting in Nepal viii. The nexus between natural disasters and development: key policy issues in meeting the Millennium Development Goal (MDG) and poverty reduction
74. Three policy papers under this thematic area focused on PPP in transport infrastructure development, ICT, and urban waste management. The studies point out that PPP models applied in Nepal have concentrated for the most part, on the build, operate and transfer (BOT) model.
75. Several policy level and legal constraints highlighted by the studies include inconsistencies between the BOT policy and BOT Act and a very generic and impractical PPP Policy. Also emphasized is the unequal playing field for private and government owned consultancy firms. The studies also highlight that despite the promulgation of the BOT Act, inconsistencies in its implementation prevails, especially at the local level. Also important is the fact that civil servants often avoid the BOT practices because of the lack of standard regulations, guidelines and documentation procedures.
76. In the field of urban waste management, the study points out that the current legislative and regulatory framework does not facilitate the formation of cross-sectoral partnerships and does not have adequate provisions for promoting PPP—mandates for public service delivery impede contracting out to the private sector and a lack of legislative and regulatory framework for managing contract related risks.
77. A major constraint for private investment in ICT in the rural areas is the currently low level of awareness of information technology which translates into unwillingness to pay for services. The study also points out inconsistencies among the various acts and regulations governing the various components of ICT and calls for one comprehensive ICT policy.
78. Recommendations from these policy papers include starting a few model PPP projects to boost the confidence of private investors, amending the existing BOT Act and Regulations and forming an umbrella PPP Policy and Act with adequate provisions related to projects under the local bodies, and preparing comprehensive guidelines for facilitating PPP deals from beginning to end. Highlighted is also the need to make provisions for BOT/PPP in local body financial rules. The study also calls for the creation of a regulatory agency and a BOT/PPP Committee.
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79. Other recommendations include strengthening the administrative capacity and developing efficient human resource within related agencies, and relaxing on a case to case basis, the single borrower limit imposed by the NRB.
80. Similarly, recommendations are made for mobilizing NGOs and community based organizations to develop ICT and ICT enabled services in rural areas, with the government playing a facilitator role. Policies should build on lessons from successful practices in neighboring countries like India where several rural schemes have been very successful. A rural telecommunication fund is also proposed for cross-subsidizing rural ICT services.
81. In the field of urban waste management, additional recommendations include bringing the management of solid waste, wastewater, and air pollution under one institution, and creating an urban waste management fund through taxation, fees, and revenues from the trade of recycled and reprocessed wastes.
82. The study on north-south connectivity highlighted the prospects for not only connecting the three geographical regions of the country for cross regional trade, agricultural market; linkages with the settlements and district headquarters; but also the emerging prospects of Nepal linking with the Asian Highways and also serving as a transit point between India and China. In this respect, the major constraints in developing transport corridors include high costs of development; paucity of funds; lack of coordination among related agencies and seriousness in implementation of the medium term expenditure framework (MTEF); inadequate community participations; resettlement, and land acquisition issues.
83. The study recommends reviewing the National Transport Policy 2001 to integrate transport connectivity with wider development agendas. It also points out the need to strengthen the administrative capacity of transport sector agencies, and to prepare a realistic MTEF for the transportation sector and a 10-year road sector investment plan. The need to make necessary changes in the legislation to attract private sector investments in transportation infrastructure is recommended. Upgrading mountain airports, establishing satellite communication and differential geographic positioning system would make air travel safe and reliable. Suggestions are also made to upgrade Arniko highway, Galchhi-Trishuli-Syabrubesi road and completion of the 18-Km Syabrubesi-Kerung road. It also calls for prioritizing the feasibility study of a fast track route to connect Kathmandu with the terai and implement the project as soon as possible.
84. The road plays an important role to cater effective service delivery to the general public. Hence its maintenance has to be appropriately addressed but such activities, normally in the under developed world, gets less attention compared to new constructions. The routine maintenance practices 'length person system' is introduced in Nepal for over a decade, especially in the rural roads, the norms of routine maintenance are also developed by the Department of Roads (DOR). Performance based management and maintenance contracts (PBMC) of roads is a new concept to ensure maintenance throughout the contract period, which contains a provision of monthly lump sum amount paid to the contractor for this purpose. The Roads Board Nepal (RBN) is engaged in routine, recurrent, periodic and emergency maintenance of roads and to collect the revenue from toll tax. In addition, RBN receives fuel levy on diesel and petrol, and vehicle registration fee and distributes funds to the DOR for
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maintaining the Strategic Road Network (SRN) and to the Department of Local Infrastructure Development and Agriculture roads (DOLIDAR) for Local Road Network (LRN). The backlog in roads maintenance, both in urban and local areas is very high due to inadequate budget—which has emerged as the leading problem.
85. The study has suggested differentiating the entire roads in different groups and making a priority listing of roads for maintenance based on the commercial viability and traffic load; fully authorizing NRB for regulating user charges; providing training to NRB staffs; and regulating axle road coordinating with traffic management. On SRN, the regular monitoring of the length worker system should be continued and future strategy be formulated after reviewing the recently introduced PBMC system. Regarding LRN, a separate maintenance unit should be established in the District Development Committee (DDC) and its staffs trained. DOLIDAR should also engage in liaising with politicians to avoid non-technical interferences. These roads have to be handed over to local bodies gradually. With regard to urban roads, a separate utility lane has to be introduced in existing ones as feasible and compulsorily in new constructions. A separate maintenance unit is needed in the municipalities and their staffs’ skills enhanced.
86. Urban housing scenario is not encouraging in Nepal as the overcrowding indices are high, utility services are in short supply as there are additional tenants living in huge numbers, the squatters and slum areas are on continuous rise, availability of land plots squeezing, urban houses are in dilapidated state and exposed to natural disaster risks as they are mostly owner built. There is the paucity of data on urban housing, however the new entrant private sector is assumed to have settled 10% of the urban housing issues. Rental housing is emerging as a significant market but proper legislations are still missing. Organized housing is the only solution to urban problems, but it should be encouraged also to address the issues of low cost houses to cater to the needs of the urban poor.
87. The study has suggested to enforce Building Code and initiate constructing dikes in the rivers passing through the urban areas; invest in one core area to make the urban core population move to disaster safe houses; create consortium of financing to avail loan financing for building houses, initiate government sponsored land development projects for low income households, and upgrade squatter colonies. On the long run it has also recommended to enter into a memorandum of understanding with academic institutions to help use efficient building materials, constructing senior citizen's homes, dormitories for infants, and street children.
88. Many of the urban and semi urban areas rely on on-site sanitation or combined sewers except for new constructions. It is found that the total wastewater produced in the country is around 370 million liters per day (MLD), out of which the installed waste water treatment plants account for only 37 MLD and functioning plants accounts for only 17.5 MLD as three of the waste water treatment plants in Dhobighat, Sallaghari, and Hanumante Khola are totally dysfunctional and the other three, in Kodku, Guheswori and Hetauda Industrial District are only partially operational. The sewerage system in Nepal practically failed with the withdrawal of donor support inviting huge environmental hazards and damage to human health. The management issues of ownership, institutional capacity, operation and maintenance, behavior of users and timely expansion of these systems are the root causes of waste water system failures. There
19 are several other environmental policies with indirect linkages with waste water management but not a specific policy of its own.
89. Based on the lessons learnt, it is suggested to embrace the following approach: (i) waste management at source; (ii) Choice of technology based on environmental standards and economy; (iii) Consensus building and approval by stakeholders and competent authority; and (iv) follow up, monitoring and evaluation and auditing. Based on these approaches (i) on site sanitation method is recommended for semi-urban and rural settings; (ii) independent sewerage system but with restriction on discharging affluent into nature or city networks for institutions and organizations; (iii) package treatment facilities for small communities; (iv) existing sewer systems in core city areas; (v) separate and mixed system in new urban areas with dense population; and (vi) household aerated waste water management in small settlements and for those producing minimal wastes. There is also a need of an exclusive and dedicated organization responsible for policy reforms, clearance of projects, monitoring of work, conducting technical audit and consensus building. A National Council for Urban Waste Management is proposed.
90. The study on natural disasters has identified the lack of policy, appropriate legal instrument, and a responsible apex body as the biggest impediments in disaster risk reduction. The major challenges at present include mainstreaming disaster risk considerations into the development plans and programs including poverty alleviation programs, mitigating loss of lives in disasters and protecting development gains, reducing disaster risks, and sustainable human development agenda. There is not yet a separate national disaster policy. Only an outdated Act of 1982 is in existence, which does not cover the entire spectrum of natural disasters.
91. There is an urgent need to frame a comprehensive policy on disaster management covering the whole gamut of preparedness, mitigation, response, rehabilitation and reconstruction. Accordingly, the Act has to be completely re-written with delineated responsibilities to all stakeholders including nongovernmental actors, and local bodies. Such a legal document should bring disaster risk reduction issues in the forefront and help ensure better risk management. Similarly, Disaster Impact Assessment Guidelines have to be developed to safeguard the negative impact of development on the environment and people. In order to smoothly carryout the functions, more practical institutional restructuring is also necessary to supplement the present isolated efforts of the Ministry of Home Affairs. Media of all types have to be encouraged to disseminate information to people to prepare for combating foreseen disasters.
4. Economic Policy on Tourism, Agriculture, and Regional Development
92. The AC decided to allocate 3 studies each in the sectors of tourism and agriculture, and 2 in the area of regional development.
93. Specific policy studies related to this thematic group include:
i. Sustainable rural tourism for improved livelihood of local communities with special reference to Tourism for Rural Poverty Alleviation Programme, ii. Building confidence in tourism through crisis management
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iii. Focusing on regional tourism markets: prospects and challenges for Nepal iv. Constraints and approach for developing market access and vertical linkages in high value agriculture v. Operational modality for pocket package development to enhance Agricultural Perspective Plan (APP) vi. Constraints and approach for improving fertilizer supply for meeting domestic demand vii. Investment priority for mid and far western Nepal viii. Expenditure patterns of local governance in the context of rural poverty alleviation
94. The study on sustainable rural tourism highlights that although the Tourism Policy of 1995 aims at expanding broad based tourism to reduce regional imbalances by mobilizing local communities, it fails to highlight culture as a niche product of Nepalese tourism which has high market potentials that could benefit the rural poor and marginalized communities, employ local expertise and skills, define the role of NGO, community based organizations and locally elected bodies in rural tourism. Cost-benefit aspects of the industry’s relation with the rural communities, and establishing backward and forward linkages in tourism are also missed out in the Policy. Similarly, neither multiplier nor spillover positive effects of tourism have been addressed. The Policy considers environmental protection as the means for sustainable development without addressing the importance of alternative sources of energy. Self regulating code of conduct for tourism services to mitigate undercutting of tariff, and legally protected system of recycling of funds generated through tourism is also overlooked.
95. The study recommends reviewing the existing Tourism Policy and proposes recycling 95% of tourism income, out of which 50% is to be forwarded to the same district and the remaining 45% to any other districts nominated by the Government. It also calls for updating regulatory instruments to follow uniform procedures in sharing of revenue between Government and Management Authorities. Similarly, it calls for removing all discrepancies in the mode of collection of revenue. The conflicts on legal instruments such as Local Self Governance Regulations, National Parks and Wildlife Conservation Act, Conservation Area Management Regulations and Tourism Act and Regulations should be reconciled and harmonized through cross ministerial coordination.
96. The study proposes introducing ‘leave travel concession’ schemes in the Government and nongovernment sectors to promote domestic tourism and calls for reducing or removing entry fees in controlled areas such as Upper Mustang, Manaslu and Upper Dolpo. It also proposes waiving group travel and other restrictions.
97. On the institutional front, it recommends reviewing the membership and functions of the high level Tourism Council. It also calls for reorganizing the structure of NTB to deal with issues of poverty, gender, community and overall sustainability of tourism and establishing a higher- level structure of Sustainable Tourism Development Division. It also proposes creating a forum like Technical Advisory Group for NTB and establishing a separate Section like the Sustainable Tourism Development Section in every tourism prospective DDC, Tourism Sub-committee in the Buffer Zone Users Committee, and a permanent Tourism Section in the Department of National Parks and Wildlife Conservation.
98. The policy paper on building confidence in tourism through crisis management has identified several national, regional and international causes of different nature such as the
21 political instability after the restoration of democracy, frequent street demonstrations, Maoist insurgency, negative and exaggerated press coverage about the law and order situation of the country, the pollution, deteriorating condition of national heritages and threat to remove them from world heritage sites, unplanned urbanization of Kathmandu valley, the ailing condition of national flag carrier as some of the major crisis generating factors. Given the recent changes in the political sphere which has brought to and end the decade long insurgency which seriously deteriorated Nepal’s image and stalled tourism growth in the last six years or so, it is time to campaign to regain lost confidence. In this regard, this policy paper proposes strengthening the existing High Level Action Committee by identifying the sphere of its activities and corresponding working modalities. Similarly, the existing Crisis Management Cell within the NTB should also be made more responsive to the various ‘crises’ that tourists may face in Nepal, particularly in regards to strikes, bandhs, and rescue operations.
99. The promotion activity should also concentrate mainly in maintaining good public relations and immediate dissemination of positive but correct tourism information to the outside world. It also calls for strengthening the capacity of the existing media center under NTB to make it more proactive and building awareness among the domestic media. It should work on creating media networks to make them more responsible. The study points out that even during the insurgency, much of the negative media coverage was uncalled for as no tourists were ever hurt during the decade long “People’s War”, during which time both the state and the rebels maintained strict discipline to not harm tourists. Considering at the increasing level of competition in tourism in global market Nepal needs a suitable branding for its marketing and promotion, which would help her to establish a distinguished and unique image. Once the branding is done Nepalese embassies and missions should be made more active to carry on the brand based tourism promotion. The celebrities could also be assigned as brand ambassadors. The scale of familiarization tours of foreign media and tour operators have to be increased. Similarly, NTB should open Tourism Information Centers on the trunk routes, starting from the Indian cities.
100. The study on developing regional tourism in South Asia has identified many opportunities in the form of cultural tourism circuits across India, Nepal, and Sri Lanka. A Ramayana Circuit could link places such as Janakpur (Nepal), Ayodhya (India) and Nyuwara Eliya (Sri Lanka); while a Buddhist Circuit could link places such as Lumbini (Nepal), Bodh Gaya (India), and Kandy (Sri Lanka) with a possible extension to places in the Tibet Autonomous Region of China such as Mount Kailash and Lake Mansarovar which are important pilgrimage sites for both Hindus and Buddhists.
101. It also calls for developing and enhancing strategic alliances to create synergetic benefits. Given the surge in Chinese tourists in the international market in recent years, the study strongly recommends increasing air networks between Nepal and China to target outbound Chinese tourists. To promote cross boundary tourism within the SAARC region, the study proposes establishing air links between the capitals of the seven SAARC nations and promoting regular travel fairs on a rotational basis in the seven countries. It proposes embracing an open-sky policy as it would allow market forces to determine the aviation environment and provide consumers with better products at a lower price; and promoting low cost carriers by framing a separate policy for them. It also calls for administrative reforms to minimize the bureaucratic burdens faced by tourists coming into Nepal.
102. In the area of agriculture, one study makes a critical review of the pocket package approach adopted by the Government to implement the 20-year APP. It finds that the operational aspects of prioritized productivity package has remained largely within the MOAC in
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contrast to the integrated package approach conceptualized in the APP; which requires all relevant line agencies to act together. It also argues that there is a lack of proper identification of potential areas with road and irrigation and less potential areas without road and irrigation and a serious oversight in terms of failure to establish the APP National Implementation Committee under the chairpersonship of the Minister of Agriculture. The study also points out that there is no provision of establishing an APP secretariat in MOAC and there is limited market research and study of commodities produced in Nepal.
103. The study strongly recommends that the implementation of APP must be decentralized and it must adopt prioritized productivity package in its original understanding. In this regard, it calls for replacing the pocket package approach currently adopted by the MOAC by project approach as described above. It also proposes carrying out surveys and research of potential markets and creating full partnership between research and extension activities. Similarly, it calls for establishing a high level commission for administrative and management purpose, for fast track implementation of APP, and to resolve any problems concerning coordination. In this regard, an APP secretariat must be established within the MOAC.
104. The study also recommends creating appropriate environments, incentives and conditions for commercial production and marketing of high value products, and assuring irrigation facilities year round. Similarly, the Government must ensure facilities for electricity, roads, farm inputs and commodity price information to farmers; while farmers must be encouraged to adopt cost reducing production technologies to lower costs, increase production and to make agricultural products more competitive.
105. Another study looked into the constraints and prospects of developing vertical linkages and market access of high value agriculture. The study finds that the major constraints in this regard are (i) lack of effective transportation infrastructures, (ii) low productivity due to lack of basic inputs, (iii) lack of agricultural marketing extension services, (iv) lack of quality regulation, (v) transportation levies imposed by local bodies which increase the cost of agricultural products affecting their competitiveness with Indian products, (vi) rent seeking behavior at checkpoints and customs points which further increases prices, and (vii) poor technological backstopping.
106. Major recommendations include developing an agribusiness policy that provides a comprehensive framework, clear strategies and a regulatory framework for agribusiness development and promotion of commercialized agriculture. It also calls for linking all stakeholders in an effective value chain not only to improve the value of their activities but also to improve and maintain a high level of competitiveness.
107. Similarly, it proposes establishing market information systems or networks to provide information on prices and supply situation and expanding transport infrastructures to reduce costs, provide access to markets and increase competitiveness. Products with comparative advantage need to be identified and promoted for exports. Focus should also be given to technology and skills development, and quality control. It also calls for promoting PPP to develop local capacity.
108. The study on fertilizer supply noticed that the fertilizer prices in Nepal are around 39- 101% higher than in India. Informal imports of chemical fertilizers constitute somewhat around 65.8% of the total supply. Though liberalization of the fertilizer market has helped to some extent, the national demand is not yet met. The constraints in supply are due to (i) limited number and capacity of importers, (ii) only few financial institutions involved in this trade and no
23 consortium financing, (iii) low profitability to traders, (iv) difficulty in maintaining risk exposure ratio, (v) transportation and transit problems, and (vi) limited storage facilities, among others.
109. The study highlights the need for (i) a separate unit in the MOAC, (ii) engaging the private sector to deal with matters related with fertilizers and its flow, (iii) providing storage facilities to private traders on pay basis, (iv) facilitating smooth movement of fertilizer through rail and road heads, and (v) assisting the private sector in arranging finance. In a medium term, there is a need to review the fertilizer subsidy policy, pooling of resources of importers to maximize the lot size and reducing transport and other costs, converting illegal trade into the legal, and strengthening the roles of cooperatives to deal in fertilizer matters at the local level. On the long run, exploring possibilities of equity investments in fertilizer factories in Bangladesh and planning for regional factories of fertilizer, such as those in south East Asia should also be explored.
110. Of the two studies carried out on ‘regional development’, one looked into the investment priorities for the mid and far western development regions which are the most impoverished regions in Nepal. The study finds that resources are thinly distributed in this region resulting in uncertainty in program completion. It also points out the absence of government officials in the districts, particularly in the upper hills and mountain districts which cause difficulties in implementing programs and projects. Furthermore, the thinly scattered population in the hill and mountain districts makes service delivery costly and less effective and the Government lacks a short and long term regional development plan and strategy. Insufficient educated and skilled human resources in most of the districts in the region also compound to the problem while accessibility and a general lack of basic infrastructure in most of the areas is a serious constraint for service delivery.
111. The study recommends working out a medium to long term strategy to provide road services in the districts and to expedite the completion of the 12 road projects as soon as possible. It also calls for constructing and upgrading airports in all inaccessible districts, developing trekking routes, and providing access to credit for local entrepreneurs to promote tourism in these regions, which have some potential destinations and serves as a gateway to important tourist destinations in Tibet. It also calls for developing package programs to address the food deficiency in these regions. In this regard, it proposes making available high yield variety seeds of local cereal grains at subsidized rates to select farmers, ensuring that Nepal Food Corporation makes arrangements for 100% buy back of seeds grown by these farmers, providing credit facilities to farmers, facilitating farmers to market access, providing irrigation facilities, and facilitating the use locally produced organic manure. It also calls for focusing on livestock development and herbs, which are famous in this area.
112. The study calls for resettlement of scattered populations of thinly populated Village Development Committees of the northern districts in appropriate places for efficient delivery of basic services and to save on cost of service delivery. It also deals with adopting community based cooperative programs that are labor intensive and launching programs to generate nontraditional sources of energy for domestic use (micro hydroelectricity, solar energy, wind energy, and biogas). Similarly, the study emphasizes the need to mobilize foreign, domestic private and public investments in large scale hydropower generation for both domestic consumption and for export to India.
113. A four plus two pillar strategic framework is recommended to mainstream the region's development: (i) The completion of identified north-south road links, (ii) Harnessing of hydropower and other natural endowments, (iii) Social sector development, and (iv) Social
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inclusion and safety nets. The suggested plus two pillars of development are (i) strengthening systems of governance and (ii) development of non-conventional energy and ICT. The study also strongly recommends that the Government should accelerate the process of decentralization and delegate more tasks and functions to local bodies, community organizations, and civil society organizations to play a crucial role in development activities.
114. The study on local governance expenditure has highlighted that the status of local expenditure in Nepal is very low compared to all international standards. The local capital expenditure is low and expenditure practice has yet to be fully transparent. The accounting formats among local bodies are not uniform. Among all development expenses, expenses in the roads sector is higher at the local level. However, there is no reliable database within local bodies, hence difficult to assess the amounts spent towards poverty alleviation programs. The pattern of local governance can be regarded as not fully poverty alleviation friendly so far. It lacks skilled manpower, infrastructure, adequate planning, poverty mapping, expenditure tracking, and sources of revenue, among other constraints.
115. In order to help improve the livelihood of the people, the study suggests that services like education, health, agriculture have to be devolved to the local level. Internalization of government organizations into local governance, autonomy to local bodies in functioning, deciding on local taxes, developing technical manpower, introducing public audit system, adopting participatory planning process are also recommended. Other propositions include poverty mapping at the household level, implementing income generating activities, increasing contributions to local development fund, among others. With regard to the expenditure pattern in the local bodies, the study suggests to have uniformity in expenditure head classifications and accounting formats, developing regular contacts between the audit and account sections, effective pre-audit, linking periodic plans with annual plans and budgets, and adopting a system of regular dissemination of financial reports to the upper level government and to the public through the media.
B. Information Dissemination and Follow-up
116. Along with the first submission of the draft of the study by the consultant to the concerned AC, it has been uploaded in the MOF's website under the 'Economic Policy Network' link for receiving comments from the readers. However, no comments or queries were received on any of the studies indicating that the general Nepalese public is not yet utilizing the convenience of the digital world. Nevertheless, all final reports and the respective four pager policy briefs of all the 32 studies have been uploaded in the EPN's website for access by the general public and the media for constant monitoring of the time bound policy recommendations in the papers. Similarly, in order to enhance public understanding of the issues, attempts were made to publish newspaper articles written by the authors. However, only one article on excise duty could be published.
117. The Policy briefs are published for all studies, which represent as an abstract of the concerned study. The facts and information mentioned in the main report are edited for clarity and brevity and thus produce most up to date information at the time printing. These Policy briefs mainly summarize the background, status of policy endeavor, emerging issues, and subsequent recommendations to rectify them. It is found handy and appreciated by most the concerned organizations and individuals. Around five hundred copies are printed for each study and have been widely circulated. The electronic version of it is also distributed alongwith the full reports.
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118. Policy papers that were endorsed by the respective ACs were circulated among the SC members and also forwarded to the respective implementing ministries and agencies for further action. In order to ensure the proper implementation of these reports and to consider them as the inputs for the forthcoming 3-year national plan presently under consideration, the EPN team held separate meetings with the Vice-chairperson and members of the NPC individually to brief them on the outcomes of the policy studies carried out under the EPN. Similarly, the EPN team also met the secretaries of the MOF, MOPPW, MOCTCA, MOICS, MOAC, Ministry of Science and Technology, Ministry of Home, Ministry of Information and Communications, MOWR, Ministry of Local Development; and Ministry of Foreign Affairs to discuss the implementation aspects of the policy papers. Hard and soft copies of the policy papers have been submitted to each of these secretaries who have instructed their subordinates to review them for implementation.
119. In light of the new political change which has given hope to permanently end the decade long conflict in the nation, a National Conference on “Peace, Democracy and Development” was organized by the EPN in partnership with the Nepal Economic Association on June 30, 2006. The conference provided a forum for high level dignitaries to discuss on the development prospects of the nation in the changed political context and was also one of the first of such forums in which the Communist Party of Nepal-Maoist (CPN-M) were invited to present their economic vision.
120. Representatives of major political parties, prominent civil society members, businessmen, academicians, and freelance experts took part in the conference. The Honorable Finance Minister, Dr. Ram Sharan Mahat and Dr. Sultan Hafeez Rahman, Country Director of the ADB Nepal Resident Mission addressed the floor and Mr. Devendra Poudel spoke on behalf of the CPN-M. Several papers were also presented in the conference:
i. “Socioeconomic Transformation of Rural Areas for Peace and Democracy” by Dr. Prakash Sharan Mahat (Nepali Congress-Democratic); ii. “Growth and Equity: Policy Challenges in the Context of Inclusive Democracy” by Honorable Member of Parliament, Dr. Dilli Raj Khanal (United Marxist Leninist); and iii. “Nepal’s Growth Prospects” by Dr. Raghab Dhoj Pant, Executive Director, Institute for Development Studies.
121. The conference provided an opportunity to highlight the works done under the EPN to such high level dignitaries. It was also a forum to share the observations of different leading political parties and the representatives from the civil society to inform their views on several contemporary issues that is expected to evolve while shaping the country's new development agenda in the reinstated democratic and peaceful environment. There was a consensus in the opinions that there is no time to waste. While strong focus on political issues must continue, development concerns cannot be “put on hold.” Thus there was a need to emphasize for all the political forces to unite to address the challenges concerning development immediately.
122. It was also unanimously felt that Nepal can grow at 7% growth rate, which is not an unachievable target in view of abundant resource endowments and the dedicated workforce. There are enormous prospects for the country to promote to a middle income country within a decade if there could be consensus in framing the development agenda and honestly adhering to it despite several political changes. However the issues of gender, caste, ethnicity and inequality, which has remained as a major political threat of all times and presently emerged as a sources of instability posing serious constraints to economic growth and poverty reduction has
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to lead the development agenda. The past has shown weak governance as a root cause of economic, social and political problems of the country hence it needs to be ensured by all the political parties to be candid on following the norms of good governance to override any political or other biases.
123. It was realized that the failures in the last 12 years was a result of discrimination, neglect and under representation of women, ethnic communities and back ward regions; preoccupation with political power; and frequent changes in the Government. These issues contributed to rising frustrations among the people resulting from a rise in expectations that could not be met. Hence, the future economic course of the country should also deal in delinking hydropower from politics; developing an ardent and objective approach to analyze economic problems; making no compromises on issues concerning national interest; developing the right policy framework; promoting a market oriented open economy to promote growth because domestic capital is insufficient; facilitating an export oriented economy; and state intervention on issues of social justice.
124. The CPN–M representative had also expressed that they desired peace, progress and prosperity for Nepal and prioritize on the development of modernized agriculture, new policies for industry, managing water resources in the best interest of the country, and judicious and optimal utilization of natural herbs and resources. They would never be willing to nationalizing private property. The party is not against foreign investment rather wish to invite multilateral institutions to help with correct approaches for the development and prosperity of the third world countries. However, they were optimistic that correct utilization of labor power may contribute in converting Nepal into prosperous country may not need huge foreign investments. The politics and economics are interrelated.
125. Nepal is closer to peace now than at any time in the past decade so the political forces have to show commitment to work very hard to achieve peace for the sake of their country and the people and to build a just and prosperous society.
126. A brief overview of the EPN and four policy briefs were also distributed to the participants.
127. A national seminar was organized towards the completion of TA in December 27, 2006 in Kathmandu to share the findings of EPN with implementing partners in the government, nongovernmental sector, academia and civil society. The Hon'ble VC of the NPC, Mr. Jagadish Chandra Pokharel; Secretary in the MOF, Mr. Vidya Dhar Mallik; Officer Incharge, ADB/ NRM, Mr. Paolo Spantigati spoke during the occasion and expressed satisfaction on the progress of EPN. It was observed that the TA had provided ample forums for wider discussions among serious stakeholders in the government, nongovernmental sector, academia and civil society to discuss in most pertinent issues of economic policy. It was also felt that the studies were a rich reservoir of knowledge and provided insights for the forthcoming three-year interim planning process, which is under active consideration within the Government. During the course of implementation, these papers have to be revisited to make them relevant to reconstruction, inclusion, rehabilitation and reintegration, which are the immediate challenges for the country. EPN was also found to be a remarkable step for Nepal as the economic transformation requires revisiting the policy making process in any country.
128. The findings of all 32 papers were summarized and discussed in separate technical sessions for each of the four thematic groups. The EPN consultants namely, Mr. Prithvi Raj Ligal, Mr. Rajendra Bahadur Shrestha, Dr. Puspa Kandel, and Mr. Iswer Raj Onta were the
27 resource persons to prepare the synthesized presentations for the thematic groups on Macroeconomic Management; International Trade, Investment and Employment; Agriculture, Tourism and Regional Development; and Infrastructure Development respectively. The technical sessions were chaired by Hon'ble Members of the NPC, Dr. Posh Raj Pandey, Mr. Bhim Neupane, and Mr. Rama Kanta G. Tharu.
129. The seminar concluded by making observations that the EPN exercise had been timely and useful, especially in the context that the country is entering into a new structure with innovative visions. It has helped the Government and other stakeholders, especially the private sector on economic policy reform agenda. This TA has facilitated tremendously through vibrant partnership among government, non government, academia, experts, civil society, students in a platform to interact on existing policies, achievements and shortcomings, identification of issues and guiding the future of the country. EPN has done enough groundwork to develop an institutional framework for economic policy dialogue and analysis, which has to be carried further in coming days. This only could sustain the outcomes of this effort to ensure the continuity of nation's economic policy reform process. In this regard, the Government has to come forward to own this whole process. All partners of EPN were acknowledged for the good work and the meeting strongly insisted for its continuity.
C. Institutionalization of Economic Policy Network
130. One of the goals of this TA is to develop and institutionalize an open, responsive, and result-oriented economic policy formulation process based on sound economic analyses. It was also intended to prepare ground works to develop an institutional framework to facilitate policy discourses and reforms that are characterized by transparency and openness. Such policy dialogue platform would focus on promoting consensus building and creating ownership of, and commitment to, the economic reform process among stakeholders.
131. The high level SC formed under this project is found to be influential to carryout recommendations made by different studies. The sense of ownership prevails among the committee members, most of whom are also chairing the respective ACs. Though with change over of the chairpersonship and prolonged absence of the individual in the NPC, the SC was able to meet six times to steer the functioning of the project.
132. The AC, which also has representation from the non-governmental sector, academia, private sector, and experts, has been the main instrument in ensuring proper operation of the network. The EPN's experience with these committees is also rewarding. Over a period of two years the macroeconomic management group met ten times; international trade, investment, and employment group met 11 times; infrastructure development group met 14 times; and tourism, agriculture, and regional development group met 13 times. All of these committees were sensitive in identifying the topics of study and selection of consultants. Lively discussions were held among the members while interacting on the draft of the respective studies.
133. Thus, EPN has contributed considerably to initiate open dialogue among major stakeholders on continual basis. However, in absence of the project it is likely to be irregular as there would be no study reports to dwell upon. Similarly, in absence of project office and focal unit on one hand and a no permanent institution on the other would loose the momentum that has already been generated. The focal unit chiefs are not the full time employees and this may fall as an additional responsibility to them. Government has neither earmarked any
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budget for carrying out such works to be performed by utilizing expertise from outside the civil service nor is the government officials equipped for this kind of job.
D. Monitoring the Implementation of Economic Policy Reform Agenda
134. One of the outputs of the TA was to establish a public-private monitoring and evaluation mechanism to follow-up on the implementation of the policy reform agendas. In this context, as detailed in the inception report, the regional workshop and large-scale national level workshops are considered as the means of the public private modality for monitoring policy implementation as it had a wide participation of private sector and general public in these meetings.
135. As envisaged in the inception report, monitoring of the overall output was done by the SC. The ACs also assisted in monitoring the implementation of policy recommendations within their own thematic areas. In this regard, the Focal Unit also assisted the committees in monitoring the overall activities of the TA. The tripartite meeting will further evaluate the program soon.
136. The EPN also hired a consultant to survey the implementation status of the recommendations made by the first few studies. The study found that overall implementation was generally satisfactory, but slow.
137. The EPN web site also provides a forum for public comments and feedback. However, there are no encouraging results so far. Supporting newspaper articles were also considered to be the additional tools for getting feedback and disseminating information to the public at large. Despite several attempts, however, the articles could not be published with only one exception. The consultants have, however, provided their write-ups to the EPN.
138. as an immediate contribution of the EPN's work, the Finance Bill 2006/2007 has incorporated some of the recommendations made by the study on Excise Duty, particularly the ones related to the harmonized Code and the excise duty rate of 70 UP Whiskey. The bill contains amendment to the Excise Act 2002 with Annex on the excisable products, and excise rates. The number of excisable products has increased from 30 to 43.commodities. A Column is added on the Harmonized Code/ Sub-Head Numbers. The commodities have been defined and classified on the basis of the explanatory notes of the Harmonised System. For example fruit juice is classified as per the source of raw material (orange, grapefruit, pineapple etc). Definition of soft drinks is clarified and the excise rate is fixed as per LP Liter in case of prepared whiskey, wine and other liquors. As suggested in the policy paper, anomaly in the excise rate of raw material and the prepared 70 UP whiskey has been corrected.
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V. MAJOR ISSUES
139. A few major issues faced during the implementation of the TA were as follows:
140. Timeframe of the studies: Partially due to lack of funds, but mostly due to the decision of the SC to focus only on short term studies, long term policy studies could not be commissioned through this TA despite the demand for some of these. This led to the ACs to compromise on issues other than those that they were often more concerned with, but which required in-depth and long term studies. The first SC meeting had suggested developing one third of the papers that were identified as high priority issues to be developed in greater detail, building upon the working papers. However, the SC later decided to restrict to short-term (one month) studies curtailing the possibility of undertaking detailed studies in the most pertinent issues faced by the concerned organizations. Similarly, due to the short, one-month assignments, consultants were not able to carry out primary research and data collection. They were restricted to base their studies on secondary data and limited interviews thus compromising the quality of policy prescriptions.
141. Frequent change in government: The frequent change in Government may have compromised the institutional memory of the EPN’s efforts. During the 28 months of TA implementation, the JS of the EAPAD—the chief of the focal unit and the Member Secretary of the EPN SC—was replaced five times. Similarly, the Secretaries and Joint Secretaries of the implementing ministries, who were also members of the committees under the EPN also changed many times, requiring the Team Leader to brief them on the TA every time there was a change. Such frequent changes severely restricted the Government staff from embracing new ideas and processes and are seen as a major hurdle in institutionalizing the EPN process.
142. Government counterpart staff in the TA: The JS of the EAPAD was assigned as the chief of the EPN Focal Unit and the Member Secretary of the EPN SC. However, as the head of a major division within the MOF, the JS’s primary responsibility was to his division’s regular work rather than to the TA. This not only put additional pressure on the TA Team Leader but compromised the level of commitment by the Government—who are the ultimate stakeholders.
143. Lengthy procedures in finalizing policy papers: From the selection of the policy study to its final validation, three AC meetings and one technical workshop was required under the modality selected by the SC. For a one-month assignment, this put too much pressure on the consultants as well as the TA staff—none of the consultants finished their assignments within the stipulated one month. Furthermore, organizing meetings with high level government officials was also very difficult.
144. Slow implementation of recommendations: The actual implementation of the policy recommendations made through the policy papers has been rather slow. This may be because of the frequent change in Government, which affected the institutional memory within the organizations. However, public sector organizations are traditionally reluctant to change, preferring to follow the standard accepted norms and practices. In this regard, continuous pressuring is needed from the media and civil society organizations. The time bound policy recommendations in all the policy papers provides a sound guideline for monitoring implementation of reforms.
145. A one-time assessment of the implementation status of policy reform agenda, carried out through a consultancy was not sufficient to streamline the implementation process to the desired level. Hence, a built-in mechanism of public-private model of monitoring the
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implementation has to be ensured in the future policy networking initiatives. Similarly, the modality suggested in the inception report—to monitor the implementation through the advisory and SC meetings—was also only partially fruitful. Furthermore, due to major changes in the Government towards the end of the TA, which led to the absence of a chairperson in the EPN SC for a prolonged period, the effectiveness of this modality could not be assessed properly. It is thus recommended that a more effective modality such as creating a monitoring committee and strengthening a partnership with the media and civil society is further explored. The current TA did not have the financial resources or the strategy to create such a committee.
146. Underutilized website: Although the TA uploaded all the draft policy papers for public access and feedback, no comments were received at all. Similarly, the final policy papers with the time bound policy recommendations are also on the website for public access providing an opportunity for the media and the civil society to monitor the implementation of policy reforms. However, Nepalese society has not yet adapted to the technological breakthrough available from the digital media. Perhaps some focused awareness building initiatives is required in this area.
147. Publication issues: The first SC meeting had suggested publishing all of the policy papers for wider dissemination. These reports would have been very useful for concerned users as they contain the most recent information on major policy issues. However, due to paucity of funds, these reports could not be published for wider circulation. Instead, four page policy briefs were prepared and widely disseminated.
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VI. CONCLUSIONS AND RECOMMENDATIONS
A. Conclusions/ Findings
148. Earlier reform initiatives of the Government were not sustained due to the absence of institution that is engaged in constant oversight of the nation’s development results and policy interventions.
149. The TA has prepared substantial ground works to establish an institution to carry out open, responsive, and result-oriented economic policy dialogues and research works. Such platform would offer opportunities to promote consensus among several stakeholders on major economic issues in the country. It would also be a reliable forum to provide advices to the Government at every stages.
150. EPN has established that there is no dearth of competent experts, researchers, scholars, opinion makers or national institutions to identify and design best suited development policies for the nation. All of its 32 studies were carried out by nationals. Thus there is a necessity to have these national expertise fully utilized on sustainable basis in policy formulation, implementation and monitoring processes.
151. The operational modality designed for the project was found suitable and the feeling of ownership prevailed among the SC and ACs. These committee meetings and workshops in Kathmandu and in the districts also provided ample opportunities to the people to contribute in policy formulation works.
152. SC, and ACs were experimented as the private public model of monitoring, but due to unavailability of time and capacity of officials not much was achieved.
B. Recommendations
153. Policy reform agenda of the country should have a common ownership of all concerned sectors. Hence, representations from governmental as well as nongovernmental institutions and individuals have to be ensured through an institutional process to innovate economic policy networking in Nepal.
154. Building on the experiences of the TA—which has been instrumental in sensitizing the process of economic policy networking in the Nepali administrative domain—an efficient institution with resourceful leadership is essential for continuing the policy reform process in the country.
155. Among others, this network should engage in conducting demand driven studies in the areas of policy enhancement, conduct interactions and consultations, have a permanent and effective public private mechanism of monitoring, appoint academic and research institutions as its hub centers.
156. As information dissemination plays a pivotal role to make the people aware of policy developments and also to gather public opinions, special mechanisms should be undertaken to sensibly involve all forms of media and ICT portals.
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157. The success of an independently run EPN will depend largely on the ability to fund its activities. Therefore, financial sustainability has to be ensured through the Government budget and through other means.
158. The recommendations put forth by the studies have contributed to address the policy issues by the concerned ministries. These ideas have to be sufficiently incorporated in the forthcoming Interim Plan as well as the 11th plan.
159. Furthermore, the ADB is currently implementing TA for the mainstreaming of Managing for Development Results (MfDR) which seeks to (i) strengthen the monitoring and evaluation function of the government and (ii) address the ‘software’ aspects of MfDR—the management aspects. In this endeavor, the Policy Reform Network and MfDR will become complementary to each other. In fact, the Policy Reform Network is in essence a vital component of an effective MfDR system. As development monitoring and evaluation become strengthened, the sectoral and organizational indicators will become the basis for decision making and policy reforms. The proposed Network could play a pivotal role in complementing the work of the MfDR TAs in this regard.
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Annex 1: Design and Monitoring Framework Performance Design Monitoring Assumptions Indicators/ Summary Mechanisms and Risks Targets Goal Develop and Implementation of Continued monitoring Non-policy variables institutionalize an open, policy and quarterly progress may adversely affect responsive, and result - recommendations, reports by the SC. outcomes. oriented economic based on sound Tripartite meeting Policy policy formulation economic analyses. assessment of outputs, recommendations may process, based on outcomes, and not be translated into sound economic participation. reforms. analyses, to support and consolidate the Government's economic reforms. Purpose Establish a public- Establishment of the Continued monitoring Delays in establishment private policy dialogue network. and quarterly progress of the network. and analysis network reports by the SC. Development of Lack of demand and with active participation acceptable policy Tripartite meeting interest from senior of concerned public- recommendations with assessment. policy makers and private stakeholders, to sound economic private sector accommodate analyses. participants. contemporary economic challenges and Wider acceptance of the concerns. economic reform agenda. Outputs Identification of Significance of reform Continued monitoring Delays in identification economic policy reform agenda identified. and quarterly progress of economic reform agenda. reports by the SC. agenda. Acceptance of the Development of reform agenda by public Tripartite meeting Lack of acceptance of acceptable policy reform and private stakeholders assessment. the identified reform recommendations with agenda by stakeholders. Completion of Technical workshops. sound economic acceptable policy reform Delays in completion of analyses. Continued monitoring recommendations of 32 and quarterly progress policy analyses. Establishment of policy reports. reports by the SC. Lack of acceptance by improved institutional Effective implementation various stakeholders. processes for Tripartite meeting road maps with clear transparency and public assessment. Inadequate timelines and participation. Minutes of the SC and consideration on implementation the subcommittees. implementation Establishment of public- arrangements. constraints. private monitoring and Institutionalized process Tripartite meeting evaluation mechanism and modality for public- assessment comprising Reform conditions may for implementation of private stakeholder public and private not be effective. policy reform agenda. involvement. sectors participants. Unwillingness of the Government policy Constituency building for Improved transparency Continued monitoring makers to embrace economic policy reforms of the policy formulation and quarterly progress views raised from other among principal process due to active reports by the SC.
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Performance Design Monitoring Assumptions Indicators/ Summary Mechanisms and Risks Targets stakeholders. stakeholder involvement Tripartite meeting stakeholders. in processes. assessment comprising Public participation public and private Specification of detailed might be undisciplined sectors participants. monitoring and follow- and raise only rent- up arrangements for the Continuous monitoring seeking behavior. policy and quarterly progress Lack of commitment by recommendations. reports by the SC. policy makers for Broader range of reform monitoring. coalitions to be formed Reform conditions may within 2 years. not be effective. Lack of acceptance of the reform agenda. Activities Establishment of the SC Timely establishment of Tripartite meeting Activities may be and ACs for thematic the ACs. assessment. delayed. priorities. Identification of Continued monitoring Activities may cost too Identification of institutions and and quarterly progress much. institutions and individual experts. reports by the SC. individual experts. Activities may take more Periodic and timely time to complete. Planning and review holding of the meetings. meeting of the Lack of interests and committees. Timely preparation of motivation from acceptable policy stakeholders. Preparation of recommendations. acceptable policy recommendations Timely completion of (review of policy agenda reform-oriented policy and constraints, research papers. formulation of policies, Timely holding of implementation workshops. arrangement). Timely holding of policy Commissioning of policy reform seminars with research papers. various concerned Expert technical stakeholders. workshops. Frequent and interactive Policy reform seminars policy reform with stakeholders. consultations with various stakeholders Participatory policy reform consultations. Periodic status reports (4 per year) and follow- Monitoring and up of the evaluation of activities implementation of policy and following-up of recommendations. implementation. Periodic reports, public Dissemination (periodic conference. reports, conference). Compiling and collection
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Performance Design Monitoring Assumptions Indicators/ Summary Mechanisms and Risks Targets Knowledge depository of reports and activities. documents. Inputs ADB funding of Provision of adequate Continued monitoring Financial inputs may $200,000. inputs by ADB and the and quarterly progress cost too much. Government and other reports by the SC. Counterpart funding by Staff reassignment and private sector the GON of $60,000 Tripartite meeting time constraints. participants. including of the in-kind assessment. Delays caused by lack cash contributions from of commitment on the the government though part of the principal staff input and logistic agencies. support. Inability to expedite ADB staff inputs. action during project implementation. Delays in appointing consultants. Lack of interest among senior policy makers.
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Annex 2: Membership in the EPN Committees
Advisory Committees International Tourism, Macro High Level SC Trade, Infrastructure Agriculture and Focal Unit Economic Investment and Development Regional Management Employment Development Chair: Chair: Chair: Chair: Chair: Chief: Secretary, Secretary, Secretary, Member, NPC Secretary, MOPPW JS, EAPAD, MOF MOF MOICS MOPPW JS (in charge of Secretary, NPC ED, Research JS (in charge of JS (in charge of Member: infrastructure) Secretariat Dept., NRB industry), NPC tourism) NPC JS, MOICS NPC Secretary, Head, Econom. Member: JS, MoAC JS, MoAC JS, MOAC MOF Dept., TU JS, MOPPW Chairperson, Secretary, Nepal Member: JS, MOLTM JS, MoLD JS, MoLD MOCTCA Economic JS, MOCTCA Association Secretary, JS, Budget, DG, DOI JS, MOWR DG, DOR MOICS MOF Secretary, Dr. Puspa JS, MOIC DG, DNPWC MOPPW Kandel Secretary, DG, DOR DG, DOLIDAR MOWR Secretary, President, NEA CEO, NTB MOAC Expert Expert Expert invitee: Expert invitee: Expert invitee: invitee: invitee: Mr. Binod Mr. Iswer Raj OntaMr. Khem Raj Mr. Prithvi Raj Mr. Madahab Karrmacharya Others (2) as Nepal and Ms. Ligal Prasad required Chhaya Sharma Dr. Ava Ghimire Darshan Shrestha Dr. Bina Pradhan Private sector: Private sector: Private sector: FNCCI Private sector: Private sector: Presidents of Presidents of TA Team Leader and official, FNCCI, CNI, Presidents of NATO FNCCI, CNI, SCAEF and support staff (economic and NCC and HAN and NCC FCAN affairs) Member Member Member Member Member Secretary: Secretary: Secretary: Member Secretary: Secretary: Secretary: Under Secretary, JS, EAPAD, JS, EAPAD, JS, MOCTCA JS, MOICS JS, MOPPW EAPAD, MOF MOF MOF
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Annex 3: Meetings, Consultations and Seminars Inception meetings, seminar, mission and tripartite meeting No Meetings Date 1 Pre-inception meeting June 1, 2004 2 Commencement of the TA August 9, 2004 3 Inception Mission August 9 - 1 3 , 2004 4 Inception Seminar October 5, 2004 5 National Conference June 30, 2006 6 Tripartite Meeting December 19, 2006 7 National Seminar December 27, 2006 Focal Unit Meetings 1 First Meeting Oct 1, 2004 2 Second Meeting Dec 14, 2004 3 Third Meeting March 3, 2005 4 Fourth Meeting May 29, 2005 5 Fifth Meeting January 23, 2006 6 Sixth Meeting December 8, 2006 Steering Committee Meetings 1 First Meeting August 16, 2004 2 Second meeting December 24, 2004 3 Third Meeting June 2, 2005 4 Fourth Meeting August 8, 2005 5 Fifth Meeting January 23, 2005 6 Sixth Meeting December 29, 2006 Advisory Committee Meetings Theme 1: Macroeconomic Management 1 First Meeting October 4, 2004 2 Second meeting December 22, 2004 3 Third Meeting May 25, 2004 4 Fourth Meeting August 2, 2005 5 Fifth Meeting October 26, 2005 6 Sixth Meeting March 17, 2006 7 Seventh Meeting May 21, 2006 8 Eighth Meeting July 2, 2006 9 Ninth Meeting August 30, 2006 10 Tenth Meeting October 31, 2006 Theme 2: International Trade, Investment, and Employment 1 First Meeting November 1, 2004 2 Second meeting December 22, 2004 3 Third Meeting May 19, 2005 4 Fourth Meeting June 8, 2005 5 Fifth Meeting August 1, 2005 6 Sixth Meeting Sep 16, 2005 7 Seventh Meeting February 20, 2006 8 Eighth Meeting May 9, 2006 9 Ninth Meeting July 23,2006 10 Tenth Meeting September 26, 2006 11 Eleventh Meeting October 30, 2006
38
Theme 3: Infrastructure Development 1 First Meeting September 15, 2004 2 Second meeting November 10, 2004 3 Third Meeting February 9, 2005 4 Fourth Meeting May 22, 2005 5 Fifth Meeting June 22, 2005 6 Sixth Meeting July 31, 2005 7 Seventh Meeting October 5, 2005 8 Eighth Meeting December 5, 2005 9 Ninth Meeting May 9, 2006 10 Tenth Meeting August 25, 2006 11 Eleventh Meeting August 27, 2006 12 Twelfth Meeting September 3, 2006 13 Thirteenth Meeting October 10,2006 14 Fourteenth Meeting October 11, 2006 Theme 4: Tourism, Agriculture, and Regional Development 1 First Meeting September 16, 2004 2 Second meeting November 5, 2004 3 Third Meeting Feb 1 & Feb 14, 2005 4 Fourth Meeting May 16, 2005 5 Fifth Meeting June 26, 2005 6 Sixth Meeting December 4, 2005 7 Seventh Meeting February 14, 2006 8 Eighth Meeting March 19, 2006 9 Ninth Meeting May 9, 2006 10 Tenth Meeting September 8, 2006 11 Eleventh Meeting September 14, 2006 12 Twelfth Meeting October 11, 2006 13 Thirteenth Meeting October 20, 2006 Technical Workshops Central level workshops organized in Kathmandu 1 First Workshop (Three Papers) Aug 8, 2005 Hotel Yak & Yeti 2 Second Workshop (Three Papers) Sep 22, 2005 Grand Hotel 3 Third Workshop (Three Papers) Sep 23, 2005 Grand Hotel Nepal Administrative Staff College 4 Fourth Workshop (Two Papers) Mar 30, 2006 (NASC) 5 Fifth Workshop (Two Papers) Mar 31, 2006 NASC 6 Sixth Workshop (Three Papers) Apr 2, 2006 NASC 7 Seventh Workshop (Two Papers) Aug 17, 2006 NASC 8 Eighth Workshop (Three Papers) Aug 18, 2006 NASC 8 Ninth Workshop (Two Papers) Sep 21, 2006 NASC 10 Tenth Workshop (Two Papers) Sep 22, 2006 NASC 11 Eleventh Workshop (Three Papers) Sep 28, 2006 NASC Regional Workshops 1 Regional Workshop I (One Paper) Nov 10, 2005 Salleri, Solukhumbu 2 Regional Workshop II (One paper) Oct 13, 2006 Nepalganj 3 Regional Workshop III (Two papers) Oct 18, 2006 Birganj
39
Annex 4: Policy Studies under the Thematic Areas Advisory Committee – Economic Policy on Macroeconomic Management Study S.N no Topic Commissioned to Consultant 1 2 Tax Policy for Export Promotion FNCCI Mr. Vidya Nath Nepal 2 5 Measures for Expanding Non-Tax Revenue FNCCI Mr. Madhab Prasad Ghimire 3 11 Policy Reform Net-working in Nepal: A Suggested Framework Independent Expert Mr. Prithvi Raj Ligal Nepal Economic 4 12 Effective & Efficient Utilization of Contractual Savings Dr. Tilak Rawal Association 5 18 Study on Excise Duty Independent Expert Mr. Madhab Prasad Ghimire 6 25 Macroeconomic Stability: Contributing Factors and Their Sustained Management Independent Expert Dr. Rabindra Shakya Independent Expert 7 29 Revenue Implications of WTO Regime and Alternate Measures for Revenue Mobilization Dr. Dandapani Paudel
8 32 Study for the Measures of Tax Compliance Habit and Leakage Control Independent Expert Mr. Banshidhar Ghimire Advisory Committee – Economic Policy on International Trade, Investment, and Employment Study S.N Topic Commissioned to Consultant no Mr. Madhukar SJB Rana/ 1 1 Implementation Evaluation of FDI Policy in Nepal CNI Mr. Stalin Man Pradhan Garment Association 2 3 Sustaining Nepalese Garment Industry After Quota Abolition Mr. Bijendra Man Shakya of Nepal Mr. Rajendra Bahadur 3 6 Supply Management of Essential Commodities NCC Shrestha 4 10 Enhancing Economic Diplomacy Independent Expert Dr. Badri Prasad Shrestha 5 13 Strategies for Promoting Industrial Property Licensing in Nepal CNI Mr. Sajjan Bar Singh Thapa 6 20 Policy Reorientation Study on Transit Trade of Nepal Independent Expert Mr. Vidya Nath Nepal 7 21 Strategy for Promoting Business Incubation Centers in Nepal Independent Expert Dr. Chiranjibi Nepal 8 31 Promoting Nepal as a Manufacturing Hub Independent Expert Mr. Min Bahadur Karki
40
Advisory Committee – Economic Policy on Infrastructure Development Study S.N Topic Commissioned to Consultant no Mr. Birendra Bahadur Deoja/ 1 7 Prospects and Approaches to PPP in Transport Infrastructure FCAN Mr. RP Adhikari and/ Mr. BR Pande 2 8 Strategic Approach for North-South Connectivity NEA Mr. Iswer Raj Onta School of 3 14 PPP led ICT Enabled Services in Rural Nepal Prof. Dinesh Chapagain Engineering, KU 4 15 Prospects and Constraints of PPP for Urban Waste Management SCAEF Mr. Badan Lal Nyachhyon Service Enhancement and Development of Sanitary Sewerage System in Urban and 5 23 Independent Expert Mr. Badan lal Nyachhyon Semi-Urban Setting in Nepal Sustainable Approach to Road Transport Maintenance Practices for Effective Service 6 24 Independent Expert Mr. Hare Ram Shrestha Delivery 7 26 A Policy Study on Urban Housing in Nepal Independent Expert Prof. Dr. Jiba Raj Pokharel The Nexus Between Natural Disasters and Development:Key Policy Issues in Meeting 8 27 Independent Expert Prof. Dr. Bishal Nath Upreti the MDGs and Poverty Alleviation Advisory Committee - Economic Policy on Tourism, Agriculture and Regional Development Study S.N Topic Commissioned to Consultant no 1 4 Sustainable Rural Tourism for Improved Livelihood of Local Communities NTB Mr. Dipendra Purush Dhakal 2 9 Building Confidence in Tourism Through Crisis Management NATO Mr. Rabindra Nath Adhikari Constraints and Approaches for Developing Market Access and Vertical Linkages in High 3 16 CNI Mr. Jagan Nath Thapliya Value Agriculture 4 17 Operational Modality for Pocket-Package Approach to APP Implementation Independent Expert Dr. Ram Prakash Yadav 5 19 Investment Priority for Mid and Far Western Nepal Independent Expert Mr. Prithvi Raj Ligal 6 22 Patterns of Local Governance Expenditure in the Context of Rural Poverty Alleviation Independent Expert Dr. Puspa Kandel 7 28 Focusing Regional Tourism Markets: Prospects and Challenge for Nepal Independent Expert Mr. Sunil Sharma 8 30 Constraints and Approach for Improving Fertilizer Supply for Meeting Domestic Demand Independent Expert Mr. Yam Bahadur Thapa
41
Annex 5:
Policy Briefs
42
Government of Nepal Ministry of Finance
Brief Overview of Economic Policy Network
Background semination; (iii) creating a forum for policy tions as well as with a multitude of indepen- he Economic Policy Network dialogue and analysis through a vibrant part- dent experts in various fields. (EPN) is an undertaking of the nership; and (iv) laying the groundwork for A high level Steering Committee Government of Nepal with Asian an institutionalized consultative process that chaired by the Member of the NPC (mac- Development Bank support. The will ensure continuity of the Government's roeconomic sector) provides overall guid- TEPN was established in August 2004 to sup- economic policy reform agenda. ance to the EPN. Four Advisory port the Government's policy reform drive. The economic policy reform network Committees chaired by the respective Sec- The Ministry of Finance (MoF) through its is contributing to producing four major retaries of these implementing ministries Economic Affairs and Policy Analysis Di- outputs: (i) an economic policy agenda work under these thematic areas. The imple- vision (EAPAD) is currently executing the identifying challenges and concerns for menting ministries include the (i) Ministry Network. A Focal Unit has been established promoting private sector development, as of Finance; (ii) Ministry of Industry, Com- under the EAPAD within the MoF to coor- well as specific issues requiring in-depth merce and Supplies; (iii) Ministry of Physi- dinate the initiatives under the program. analysis; (ii) eight demand-driven, re- cal Planning and Works; and (iv) Ministry sults-oriented economic policy papers per of Culture, Tourism and Civil Aviation. In Overall Purpose, Scope and thematic area (giving a total of 32 papers) addition, representatives from the Minis- Outputs deriving from the policy reform agenda tries of Water Resources, Agriculture and The EPN promotes establishment of an that contain important findings and rec- Cooperatives, Local Development, Infor- operational economic policy network with ommendations, backed by sound eco- mation and Communication, and Labor and active participation of stakeholders in the nomic analysis; (iii) establishment of Transport Management; and the Depart- public and private sectors to address con- improved institutional processes for ments of Industry, Roads, Local Infrastruc- temporary issues and concerns, and sup- policy discourse and reform that are char- ture Development and Agricultural Roads, port implementation of the Government's acterized by transparency and openness; and National Parks and Wildlife Conser- poverty reduction strategy. In this respect, and (iv) establishment of a public-private vation are actively involved in the EPN rep- the EPN provides a forum for economic modality for monitoring the implementa- resenting the public sector. policy dialogue and analysis in priority tion of economic policy reform agendas. Representing the private sector are areas and facilitates the development of a The EPN supports the preparation of Nepal Economic Association, Federation modality for enabling the public and pri- policy papers in four thematic areas: (i) of Nepalese Chambers of Commerce and vate sectors to work together in revitaliz- macroeconomic management; (ii) trade, Industries (FNCCI), Confederation of ing the economy through policy reforms. investment and employment; Nepalese Industries (CNI), Nepal Cham- These goals are being realized through an (iii)infrastructure development; and (iv) ber of Commerce (NCC), Nepal Engineers' innovative partnership arrangement tourism, agriculture, and regional devel- Association (NEA), Society of Consulting, among senior policy makers, leading pri- opment. Architectural and Engineering Firms vate sector entrepreneurs, opinion mak- (SCAEF), Federation of Contractors' As- ers, and other experts to engage in Current Network sociation of Nepal (FCAN), Nepal Asso- continuing policy discourse and analysis. The EPN has so far successfully expanded ciation of Tour Operators (NATO), and The scope of the TA covers (i) devel- a working network comprising of the Na- Hotel Association of Nepal (HAN). Work- oping an institutional framework for eco- tional Planning Commission (NPC), Nepal ing partnership has also been established nomic policy dialogue and analysis; (ii) Rastra Bank (NRB), 9 ministries, 4 depart- with the Tribhuban University and providing assistance for policy research and ments, 1 semi-government organization, 2 Kathmandu University, and with more than analysis, data collection, and information dis- universities, and 9 private sector organiza- 30 freelance experts.
1 Policy Studies Under the EPN 11. Sustaining Nepalese Garment In- ment of Sanitary Sewerage Systems 1.1.1. Macroeconomic Management dustry after Quota Abolition in Urban and Semi-urban Setting in 1. Tax Policy for Export Promotion (A 12. Supply Management of Essential Nepal Study on Status, Constraints and Commodities 24. The Nexus between Natural Disasters Prospects in Tax Policy for Export 13. Strategies for Promoting Industrial and Development: Key policy issues in Promotion) Property Licensing in Nepal meeting the millennium development 2. Measures for Expanding Non-tax 14. Promoting Nepal as a Manufactur- goals and poverty all eviation Revenue ing Hub 3. Effective & Efficient Utilization of 15. Strategy for Promoting Business 4.4.4. TTTourism, Agriculture, and Regional Contractual Savings (Employees Incubation Centers in Nepal Development Provident Fund and Citizen Invest 16. Policy Reorientation Study on 25. Building Confidence in Tourism ment Trust) Transit Trade of Nepal through Crisis Management 4. Policy Reform Networking in Nepal: 26. Sustainable Rural Tourism for Improved A suggested framework 3.3.3. Infrastructure Development Livelihood of Local Communities 5. Revenue Implications of WTO 17. Prospects and Approaches to Pub- 27. Constraints and Approaches for Devel- Regime and Alternate Measures for lic Private Partnership in Transport oping Market Access & Vertical Linkages Revenue Mobilization Infrastructure in High Value Agriculture 6. Study on Exercise duty 18. Strategic Approach for North 28. Operational Modality for Pocket 7. Macroeconomic Stability: Contrib- South Connectivity (with Emphasis Package Approach to APP Implem- uting factors and their sustained on Tourism, Trade,Industry and entation management Agriculture) 29. Focusing on Regional Tourism 8. Study for the Measures for Tax 19. PPP Led ICT Enabled Services in Markets: Prospects and Challenges Complaince Habit and Leakage Rural Nepal for Nepal Control 20. Prospects and Constraints of Pub- 30. Constraints and Approach for Impr- lic Private Partnership for Urban oving Fertilizer Supply for Meeting 2.2.2. TTTrade, Investment and Employment Waste Management Domestic Demand 9. Implementation Evaluation of For- 21. Sustainable Approach to Road 31. Patterns of Local Governance Expe- eign Direct Investment Policy in Transport Maintenance Practices nditure in the Context of Rural Pove- Nepal for Effective Service Delivery rty Alleviation 10. Enhancing Economic Diplomacy (For 22. A Policy Study on Urban Housing 32. Investment Priority for Mid and Far Trade, Investment and Employment) 23. Service Enhancement and Develop- Western Nepal
Economic Policy Network Ministry of Finance, Singha Durbar Kathmandu, Tel: 4211353, E-mail: [email protected] Web: www.mof.gov.np
EPN EPN TTTeam:eam:eam: Steering Committee Chairperson: Dr. Posh Raj Pandey Advisory Committee Chairpersons: Mr. Vidyadhar Mallik Mr. Bharat Bahadur Thapa Mr. Narayan Prasad Silwal Mr. Madhav Prasad Ghimire Focal Unit Chief: Mr. Bimal Wagle Team Leader: Mr. Dipendra Purush Dhakal Administration In-charge: Mr. Subarna Prasad Acharya Consulting Editor: Mr. Samtenla Sherpa ADB Project Officer: Mr. Shahid Parwez
© 2006 Government of Nepal/Asian Development Bank All rights reserved
2 Government of Nepal Ministry of Finance ECONOMIC POLICY NETWORK PUBLIC PRIVATE PARTNERSHIP FOR POLICY FORMULATION POLICY BRIEF No. 11No. June 20062006June
Implementation Evaluation of FDI Policy in Nepal
ith the restoration of (vii) Nepal Rastra Bank removed provision litical and consequential administrative multiparty parliamentary for banks to have to invest in treasury bills; instability in Nepal. This also resulted in democracy in 1990, the (viii) actions were taken in earnest to sim- the non- implementation of the proposed investment climate plify tax administration by introducing a strategic national policy of economic di- Wchanged dramatically as the democratically value added tax (VAT) regime; (ix) a highly plomacy-enunciated in 1996 by the High elected government ushered in market favorable trade treaty was signed with In- Level Task Force on Economic Diplo- orientated reforms to accelerate economic dia in 1996; and (x) the negotiations over macy and fully accepted by the Govern- growth and opted to participate in the sharing water resources with India was ment-which could have been instrumental process of economic globalization sweeping progressing satisfactorily. in attracting large foreign direct invest- the world's economy. The results of these actions speak for ments (FDI) in the country. The only Thus, (i) except on gold and silver, full themselves: (i) gross domestic product positive development of real signifi- convertibility of the Nepalese Rupee on (GDP) growth increased from 4.8% per year cance has been the acceptance of man- current accounts was introduced; (ii) all on average during 1985-1991 to 5.2% dur- power exports as a useful policy to quantitative restrictions and import li- ing 1992-1996; (ii) Private sector investment pursue sustained economic growth, re- censes were removed; (iii) tariff structure accelerated remarkably from 4.7% annual duce poverty, and contribute towards was rationalized; (iv) investment incentives average growth during 1985-1991 to 13.2% exchange rate and financial stability. were extended; (v) a new Foreign Invest- during 1992-1996; (iii) The growth rate in Actually, this policy kept the economy ment and Technology Transfer Act was manufactured value added shot up to 13.0% afloat during the most trying period of promulgated in 1991; (vi) the process of on average between 1992-1996 as com- Nepalese history post 2001. liberalization of the financial sector that had pared to 5.3% during 1985-1991; and (iv) However, it must be noted that the actually begun in 1985 was further accel- Employment in manufacturing rose by more positive effects of economic liberalization erated with new foreign joint venture than 36% within a couple of years of the during the first half of the 1990s was over- banks, national and regional commercial, liberalization policies of the 1990s. shadowed by the political instability af- and development banks entering the mar- Unfortunately these changes could ter 1996, making FDI levels in Nepal to ket coupled with a liberal policy towards not be sustained, and after 1996 the remain low in comparision to the other entry of financial intermediaries, coop gains from liberalization could not be least developed countries (LDC) of Asia erative banks, and insurance companies; consolidated in the wake of extreme po- (Figure 1).
1 be changed to play the role of facilita- tor for (i) promoting the domestic pri- vate sector to assume the lead role in the economy by engaging the private sector through innovative public pri- vate partnerships (PPP); (ii) advance Nepal's international competitiveness in the global and regional economy; and (iii) be the knowledge and data bank and chief negotiator over World Trade Or- ganization (WTO) regulations and stan- dards and for their application nationally.
! Government must continue its drive on Source: UNCTAD (2005) privatization of public enterprises— however, allowing some sectors to be opened for both public and private Constraints and Challenges stantially from its annual growth rate of 15.2% sector investments to spur competition. ConstraintsConstraintsConstraints to 22.7% and investment to GDP will have to In the benchmark report of the World Bank rise annually from 24.3% to 26.8%. If the sav- ! Currently, the Department of Industry (DoI) and Federation of Nepalese Chambers of Com- ings to GDP does not rise as estimated, then is undertaking the task of patent, design merce and Industry (FNCCI) it was found by the importance of mobilizing FDI to fill the and trademark registration but in the long 44.3% in the sample survey that "non-bureau- savings- investment gap is obvious. run, a separate office is recommended. cratic factors" such as "inadequate demand" This would require an even better (18.6%), "inadequate access to long-term fi- business climate to prevail in the wake of ! Private sector organizations such as nance" (14.8%) and "inadequate infrastruc- the political transition in order to meet the Confederation of Nepalese Industries ture" (10.9%) were the main obstacles to a GDP target critical for reducing the level of (CNI) should engage national economic favorable investment climate. absolute poverty from 31% to 20%. think tanks to do the Annual Survey of In the sample survey, 42.6% deter- The limits to aid financing based on Investment Climate and disseminate its mined "bureaucratic burden" comprising loans has been reached as debt repayments, recommendations. The methodology to variables like red tape, corruption, and de- at around 50% of GDP, may be leading to a be pursued for the survey should fol- lays in decision- taking (30.5%) to be the situation of a debt trap for Nepal. Current low the approach taken by the Heritage greatest obstacle to a conducive business debt stands at NRs 234 billion and annual Foundation in determining its Economic climate followed by taxation bottlenecks repayment is around NRs 17 billion. This Freedom Index (EFI). (12.1%)—refund of VAT and duty draw- aid financing strategy can only be sustained back privileges—and customs administra- with exports keeping up with debt repay- ! Annual Industrial Investment Plan tion hassles (5.4%). ments— 13% annually— that would entail should be formulated by the MoICS in not only improving the investment climate partnership with the private sector, ChallengesChallengesChallenges drastically but also taking special measures civil society, Ministry of Finance Improving the investment climate is a vital to invite FDI into the country in new mar- (MoF) and Nepal Rastra Bank (NRB). necessity for the Tenth Five-year Plan's kets, and new and higher quality products. On the basis of the projected GDP con- (2002-2007) annual growth target of 6.2%. tribution by the industrial sector in Currently, savings as a percentage of Recommendations next 10 or 15 years a strategy has to be GDP and investment as a percentage of GDP General Recommendations developed for inviting FDI for devel- are 15.2% and 24.3%, respectively. To be pre- ! The role of the Ministry of Industry, oping industrial infrastructure. Such a cise, savings to GDP will have to rise sub- Commerce and Supplies (MoICS) must plan should be handed over to the pro-
2 posed Board of Investment (BoI) for in respect of the formation, of the South Cabinet Secretariat and promulgate Bol implementation. Asian Growth Quadrangle (SAGQ) and Act. Salient features of the Bol are: BIMSTEC which will significantly im-
! As the development of hydropower pact Nepal's investment climate. — Bol to be chaired by Prime Minister will have a chain effect in the economy or Deputy Prime Minister, and Indus-
export based hydropower projects ! Remove need for detailed project ap- try Minister to be vice-chairperson; must be encouraged. Moreover, highly praisals by the Department of Industry power consuming industries like fertil- or Bol—the banks can do this if they — Finance Minister, Vice-Chairperson izer production, arc furnace, steel plant, provide loans. of National Planning Commission, plying of electric rail and vehicles, rope Governor of Nepal Rastra Bank, Fi-
way and cable cars must be encour- ! Setup a National Venture Capital Fund nance Secretary, Industry Secretary, aged to create employment within in collaboration with the Government, and private sector representatives Nepal. NRB, commercial banks, and multilat- to be members; eral financial institutions to promote
! Establish Special Economic Zones research and development and devel- — Representatives from other minis- (SEZ), Export Processing Zones opment of new products. tries to be invited as and when (EPZ), Export Promotion Villages needed;
(EPV), and Product Specific Zones ! Financial and technical support should (PSZ) regionally and sectorally, in- be provided to institutionalize the pro- — Since Bol is a very high level body cluding bonded warehouses where posed changes by executing a pilot a and cannot meet regularly, a Work- the zoning infrastructure is not im- project initially. ing Committee under the chairman- mediately feasible. ship of Industry Minister should be TTTax Incentives formed.
! Target FDI at 3% of GDP by 2007 and ! Reduce dividend tax to zero as soon as private fixed investment to GDP ratio at possible. — Limit the current Industrial Commer- 16% and 25% for 2007 and 2010, cial Board to local investors only
respetively. ! Remove all exemptions except for those and abolish the Foreign Investment goods and services that are consumed Promotion Sections of MoICS and
! Allow FDI in large real estate develop- in significant budgetary proportions by Dol. ment such as townships and tourism people below the poverty line.
resorts and hotels. ! Establish a separate National Productiv-
! Remove all export taxes as well as ity and Promotion Council (NPPC) and
! Exempt licensing requirement for FDIs supplementary taxes. Economic Service Center by bifurcating of any size exporting 100%, except those the current National Productivity and Eco-
which may pollute the environment. ! Reduce customs duties to a minimum nomic Development Center (NPEDC). of 5% by 2010.
! Allow foreign investors to open foreign ! Merge existing export oriented institu-
currency account, and faclitate them ! Reduce Income tax rates gradually by tions within the MoICS into a single to repatriate dividend/ profit from com- 15, 25 and 50% between 2007 and 2012. autonomous Export Authority supple- mercial banks. mented by an Export Marketing & Pro- Policy Reorientation Needs motion Company as a commercial joint
! Allow to undertake external commercial ! Establish a new superstructure: The PM's venture unit between the Government borrowings. Advisory Economic Council on Public- and private sector, including foreign Private Partnership for Globalization. private investors.
! Aggressively pursue a strategy of eco-
nomic diplomacy to coordinate foreign ! Create high level Board of Investment (Bol) ! Each core ministry should create an In- policy with economic policy especially with its own Secretariat placed under the ternational Relation Desk, Unit or Sec-
3 tion depending on the volume of trans- nal and should be obeyed and followed ! Promulgate Competition Act and es- actions to act as FDI Promotion Cell and by all the concerned departments. tablish a Competition and Consumer linked with the proposed Bol. Rights Commission as a constitu- ! After which abolish the current OWC tional commission to protect the con-
! Establish an Industrial Dispute Tribu- and Fast Track Committee. sumers. nal to adjudicate commercial disputes between the Government and private ! Promulgate the legislation on Non Resi- ! Promulgate the draft Governance Act sector. dent Nepalis (NRN) to attract FDI to provide good governance not only through NRNs—a measure that has to the public in general but also to the
! Keep One Window Committee (OWC) been a success in India and China. foreign investors. under MoF or under the proposed Bol with one Special Secretary as its Chair- ! Amend labor laws to permit flexibility in ! Introduce practice of rewards and pen- person. Decision of OWC should be fi- recruitment. alties within the bureaucracy.
The Economic Policy Network is an undertaking of the Ministry of Finance with Asian Development Bank support. It supports the preparation of policy papers in the areas of (i) macroeconomic management; (ii) international trade, investment, and employment; (iii) infrastructure development; and (iv) tourism, agriculture and regional development based on participatory dialogue. This policy brief is an abstract of the policy report Implementation Evaluation of FDI Policy in Nepal prepared by Mr. Madhukar SJB Rana and Mr. Stalin Man Pradhan on behalf of Confederation of Nepalese Industries. It has been edited for clarity and brevity. Please refer to the original report for a comprehensive discussion on issues and recommendations. Full version available at: http://www.mof.gov.np/economic_policy/keys.php
Economic Policy Network Ministry of Finance, Singha Durbar Kathmandu, Tel: 4211353, E-mail: [email protected] Website: www.mof.gov.np
EPN EPN TTTeam:eam:eam: Advisory Committee Chairperson: Mr. Bharat Bahadur Thapa Focal Unit Chief: Dr. Madhav Prasad Ghimire Team Leader: Mr. Dipendra Purush Dhakal Edited by: Mr. Samtenla Sherpa and Mr. Arun S. Rana ADB Officer: Mr. Bipul Singh
© 2006 Government of Nepal/Asian Development Bank All rights reserved
4 Government of Nepal Ministry of Finance ECONOMIC POLICY NETWORK PUBLIC PRIVATE PARTNERSHIP FOR POLICY FORMULATION POLICY BRIEF No. 22No. June 20062006June
Tax Policy for Export Promotion
epal's entry into the World This report has reviewed (i) the cline in export of carpets, garments and Trade Organization (WTO) exporter's entitlement schemes during pashmina. On the other hand, the present and the Government's deci 1960s and 1970s; (ii) dual exchange rate in export related policies on investment, lend- sion in the early 1990s to opt late 1970s; and (iii) the liberal and market ing, customs, income tax, value added tax forN market oriented economic reforms to oriented policies of the Government in (VAT) and local taxes have been identi- accelerate economic growth recognized 1990s which laid emphasis on import sub- fied as constraints for increasing exports. trade as an engine of growth. However, stitution strategies, incentives to encour- Furthermore, there are several administra- the reform policies have been largely un- age export of new products, convertibility tive, procedural, and legal constraints that able to accelerate exports and reduce the of foreign currency in current account and are impediments to the export sector. trade gap. This is evident in the alarming other fiscal incentive packages. Thus, (i) the Government's inconsis- rate of increase in the trade deficit, which tency in investment policies and lack of experienced a 10.7% rise from FY2002 to Constraints proper incentives for investors can be wit- FY2003.1 This report has identified the following as nessed through the declining trend in FDI; Besides reviewing Nepal's tax policy economic constraints: (i) lack of proper (ii) lending policies of commercial banks on export promotion, this report also technology, (ii) high transit costs, (iii) low favor the trading sector over the industrial makes a comprehensive analysis of export level of productivity, and (iv) sector; (iii) export tax ranging from 0.5% to items and volume, and revenue from ex- infrastructural problems. A few other prob- 8.0% are levied on 35 items; (iv) refund ports to India, Europe and the United States lems identified include: inflexible hiring and process of VAT on exports is fraught with (US) since 1980s; and also reviews the firing provisions in the Labor Act, unat- inefficiency and ineffectiveness; (v) in- present status of duty drawback scheme, tractive handling costs in the inland con- come taxes on exports have an increasing bonded warehouse facility and the export- tainer depots, and weak technology effect on the prices of export commodities; processing zone. transfer mechanisms. (vi) Village Development Committees, Dis- The share of export tax in total rev- The decline in the export sector's per- trict Development Committees and Munici- enue has been modest as shown in Table 1 formance can be attributed to factors such palities in some cases levy area export tax below. Notwithstanding the as the insurgency, Nepal's landlocked situ- on local products; (vii) the prevailing pro- underperformance of the export sector in ation, expiration of the multi fiber arrange- cedures of duty draw back system and revenue generation, it still has a signifi- ment (MFA) since the end of 2004, bonded warehouse facilities including cant impact on employment generation, quantitative restrictions imposed in the bank guarantee release provisions are cum- foreign currency earnings and creation of 2002 Trade Treaty with India, a decline in bersome and time consuming; (viii) there backward linkages. foreign direct investment (FDI) and a de- exists a lack of coordination and duplica-
1 The fiscal year (FY) of the Government ends on 15 July. Fiscal year before a calendar year denotes the year in which the fiscal year ends. For example, FY2002 ended in 15 July 2002. Table 1: Revenue Contribution of Export (NRs million)
Descriptions FY2001FY2001FY2001 FY2002FY2002FY2002 FY2003FY2003FY2003 FY2004FY2004FY2004
Export volume 55,654 46,945 49,931 53,911
India 26,030 27,956 26,430 30,777
Other countries 29.624 18,989 23,501 23,134
Import 115,687 107,389 124,352 136,277
India 45,211 56,623d 70,924 78,740
Other countries 70,476 50,767 53,428 57,538
Total volume of trade 171,341 154,334 174,283 190,188
Total customs revenue 12,552 12,659 14,236 15,555
Contribution of export 493 917 856 527
Revenue share of export from customs 3.9% 7.2% 6.0% 3.0%
Total tax revenuea 38,865 39,331 42,587 48.173
Revenue from export 1,049 1,387 1,355 1,061
Revenue from customs 493 917 856 527
Revenue from income taxb 557 469 499 539
Share of export taxes on total tax revenue 2.7% 3.5% 3.2% 2.2%
Total revenue from income tax 9,547 9,466 8,692 10.215
Share of income tax from export 5.8% 4.9% 5.7% 5.3%
aLocal development tax not included: bIncome tax on exports at 5% profit turnover estimated by the consultant. Source: Ministry of Finance.2004. Economic Survey 2003/2004. Kathmandu: Government of Nepal tion of activities among many committees, goods into India are time consuming and Challenges councils, and boards related to the export have added costs. It is important to formulate an export policy sector; (ix) the Labor Act, Customs Act, This report has also identified a few with the aim of product development. Cur- Industrial Enterprises Act, Income Tax Act, constraints that are prevailing in the pub- rently, the concentration of exports is lim- and Export and Import Control Act are not lic private partnership model for promot- ited to a few items such as garment, carpet, industry friendly; (x) there is no separate ing exports in the country and has and pashmina; and the destination for ex- Bankruptcy Act to deal with insolvency suggested actions to be taken by the Gov- ports is also limited to a few countries such matters on time; and (xi) the existence of ernment and the private sector to correct as India, Germany and USA. Additionally, non tariff barriers and permits to enter those deficiencies. these few items of exports depend on the
2 import of raw materials for their produc- new products for export to be ac- to all export oriented industries; simplify tion. In light of this, it is not only impor- counted as expenses. bank guarantee release; automate bank tant to diversify and increase the range of guarantee release in each customs point products being exported but equally so to ! With the exception of some items, Nepal's and include provision for online release develop new products that use local raw present tariff rates on final products are of bank guarantee. materials. high, whereas the rate of duty on raw
Nepal faces transit problems of a dif- materials and auxiliary raw materials of ! Reduce transportation and handling ferent nature—unique even from the prob- industries is comparatively lower and costs by making the following provi- lems facing other land locked countries. needs to be adjusted. In addition, the sions: encourage private sector to es- The Government thus needs to effectively tariff rates should thus be restructured tablish export houses; provide fast negotiate with India and Bangladesh to to ensure: (i) investment in export ori- track clearance to exports; provide minimize the 25% extra transit cost on bulk ented industries, (ii) competitiveness of transport subsidies to export fresh items. Nepalese products in the international fruits, cut flowers and vegetables and Similarly, as discussed earlier, Nepal's market, and (iii) that tariff is in line with other non traditional products; renew investment climate will have to improve to changes in neighboring countries. transit treaty with India in 'Nepal's fa- facilitate FDI for better export. Neighbor- vor; make provisions for a transit cargo ing states of India including Uttaranchal ! Make tariff rates compatible with WTO house; develop business accounting have special incentive packages for both rules. system with Institute of Chartered Ac- internal investment and FDI, and countants of Nepal (ICAN) model; and
Uttaranchal has given better incentives to ! Identify feasible projects and promote explore means to accede in convention both internal investment and FDI than that value added projects in hydropower, in- on the international transport of goods by West Bengal, Bihar and Uttar Pradesh formation and communication technol- under cover of TIR Convention, 1975 —our bordering states. ogy and labor markets. Nepal's strength amended as of May 12,2002. lies in its rich biodiversity; therefore, Recommendations small-scale industries based on local On Institutional Develoment On Policy agro forest resources should be pro- ! Develop proper coordination mecha- ! As the prevailing One-Window System moted. nisms among the plethora of institutions is non-functional for FDI approval, the such as Trade Promotion Center (TPC), following policy improvements are rec- On Administration and Proce- Export Promotion Council (EPC) and ommended: (i) revisit the FDI policy in dural Improvement Trade Board to avoid duplication of ac- the medium term, (ii) ensure invest- ! Provide means for small producers to tivities. ment security to investors and espe- get refund on exports, and suspension
cially for those in export oriented, of taxes on exports should not be lim- ! Negotiate to revise Trade Treaty with industries, and (iii) encourage FDI to- ited to big exporters only. Simplify the India to promote Nepalese products in wards development of new exports. duty draw back procedures by settling Indian market and readymade garments the old duty draw back cases and by in US markets.
! The commercial banking sector should making provisions for payment through
give priority to professional supervision commercial banks. Introduce the duty ! Get maximum benefit for preferential and monitoring of loans. suspension scheme; make pass book entry through "Everything but Arms" system simple and predictable and pro- in EU.
! Replace income tax on export earnings vide passbooks to all export oriented
by a 1.25% turnover tax on export earn- industries. ! Negotiate effectively with WTO, ings at the point of exportation, or ex- SAARC and BIMST-EC to get more fa-
empt 50% of taxable income from export ! Develop private sector warehouse on cilities as least developed country. for the short period only, and allow in- the basis of build, own, operate, trans-
vestments on further development of fer (BOOT); provide bonded facilities ! Make provision to establish Exim Bank.
3 On Legal Aspects laws and regulations and Foreign In- ! Control informal trade. ! Labor laws should be revised and made vestment and Technology Transfer Act ! Increase ceiling on annual sample ex- flexible, industry friendly and in compat- to make them FDI friendly. Also intro- port. ibility with the employment contract law. duce bankruptcy law. ! Introduce legality in e-commerce. ! Abolish syndicate activity at custom ! Revise The Export and Import Control Other Recommendations points. Act of 1956; Industrial Enterprises Act ! Provide technical training to Nepalese 1990, Income Tax Act 2001, arbitrary labor.
The Economic Policy Network is an undertaking of the Ministry of Finance with Asian Development Bank support. It supports the preparation of policy papers in the areas of (i) macroeconomic management: (ii) international trade, investment, and employment: (iii) infrastructure development; and (iv) tourism, agriculture and regional development based on participatory dialogue. This policy brief is an abstract of the policy report Tax Policy for Export Promotion prepared by Mr. Vidya Nath Nepal on behalf of the Federation of Nepalese Chambers of Commerce and Industry. It has been edited for clarity and brevity. Please refer to the original report for a comprehensive discussion on issues and recommendations. Full version available at: http://www.mof.gov.np/economic_policy/pdf/Tax_Policy.pdf
Economic Policy Network Ministry of Finance, Singha Durbar Kathmandu, Tel: 4211353, E-mail: [email protected] Website: www.mof.gov.np
EPN EPN TTTeam:eam:eam: Advisory Committee Chairperson: Dr. Bhoj Raj Ghimire Focal Unit Chief: Dr. Madhav Prasad Ghimire Team Leader: Mr. Dipendra Purush Dhakal Edited by: Mr. Samtenla Sherpa and Mr. Arun S. Rana ADB Project Officer: Mr. Bipul Singh
© 2006 Government of Nepal/Asian Development Bank All rights reserved
4 Government of Nepal Ministry of Finance ECONOMIC POLICY NETWORK PUBLIC PRIVATE PARTNERSHIP FOR POLICY FORMULATION POLICY BRIEF No. 3 June 2006 Surviving in the Post MFA Regime
he Multifiber Arrangement Review of Nepals Garment Nepalese garment industry to high (MFA) was introduced in 1974 to Industry volatility. On average, more than 85% Timpose restrictions through quo- Until the mid 1980s, export of readymade of total apparels made in Nepal are ex- tas on imports of textiles and cloth- garments from Nepal was minuscule. ported to the US. In 2000, Nepal ex- ing by the developed nations—notably the Gradually, industries from quota con- ported garments worth $164.2 million United States (US), European Union (EU), strained neighboring countries—mainly to the US; but the volume of trade de- Canada, and Norway. For Nepal, this meant India—relocated into Nepal and the num- clined sharply thereafter and in 2005— a quasi-guaranteed market access due to ber of garment industries and export vol- the first year after the complete phase spillover business from quota constrained ume increased unexpectedly. The number out of the MFA—export volume to the supplying countries—notably India. of registered garment firms increased from US declined to a mere $50.7 million (fig- Hence, until the complete phase out of the 58 in the early 1980s to over 750 at the ure 1). quota at the end of 2004, Nepal's garment beginning of 1990s, and reached a peak of industries were enjoying market access over 1,000 after 5 years. However, the num- Major Issues in Trade through an artificial comparative edge. ber of garment industries and volume of without Quotas The Agreement on Textiles and Cloth- trade declined, at first due to changes in The complete phase-out of the MFA ing of the Word Trade Organization (WTO) the internal quota distribution mechanism, since January 1, 2005 has marked the agreed to phase out the quotas imposed and later due to the elimination of the MFA beginning of liberalized trade in textiles under the MFA, in four phases; starting quota. Currently, only 130 are registered, and apparel leading to fierce competi- from 16% in 1995, 17% in 1998, 18% in 2002, and out of that hardly 20% are operating. tion in leading markets, and resulting and 49% in 2004. The quota free regime as By mid 1990s, the garment industry in increased international demand and of January 1, 2005 has led to the beginning became one of the most important sectors reduced prices. Considering the new of liberalized trade in textiles and apparel of the economy with total investment of developments in trade without quotas, and a significant loss in the market share NRs 6 billion and direct employment of the survival of the Nepalese garment of many small nations. According to the over 50,000 people, contributing about 8% industry will be determined by the fac- National Council of Textile Organizations to the manufacturing sector. Although the tors relating to: in the US, 31 countries suffered a loss of import content of the garment industry was (i) Reduced number of coun- 75-100% market share in categories re- very high, the value addition was estimated tries for sourcing. In a trade without moved from the US quota, 40 countries to range between 30—35%. Its share of quotas, the international buyers will suffered a 50-74% decline, and 17 others total export earnings was almost one fifth have more discretionary power to de- witnessed a 25—49% loss in market share throughout the 1990s, against 3% in the cide on where to source for textiles and in the US. Nepal has lost more than 50% early 1980s. However, Nepalese garment apparels. They will thus give priority market share in the US where 85% of the exporters are overly dependent on one to countries with a large production garments were exported. single market—the US—subjecting the capacity with vertical production at the to 20% for eligible GSP countries and 100% duty advantage to all Least Developed Countries. However, Nepal is yet to fully capitalize on the advantageous trade rela- tions with the EU. Persistent Internal Bottle- necks and Implementation Problems The constraints to strengthen Nepalese garment industry stem from internal bottle- necks, which will intensify with external shocks on the one hand and with increased demand for more services from buyers, on the other. The most prominent internal limi- tations to growth prospect of the Nepalese cost of inefficient and small suppliers like oped countries still remain significantly apparel sector include: Nepal. higher than in other industrial goods. (i) Constraints to supply efficiency. (ii) The Chinese domination. China Nepalese apparels face a tariff rate of 14.6% Supply side of the Nepalese apparel in- has gained an increasingly large share in on average in the US. Other non-tariff bar- dustry is impeded particularly by low pro- the post MFA international textiles and riers include (i) social compliance and work ductivity and high transaction costs. The apparel market as a result of its capacity place code of conduct imposed by buy- (i) use of outdated and non-competitive for vertical production, availability of un- ers; (ii) application of measures such as technology, including the lack of methods limited supply of cheap labor with rela- eco-labeling and adoption of stringent to rationalize production with research and tively higher productivity, and investment rules for the use of chemicals in textiles, development; (ii) high cost of imported in- in modern manufacturing and trade infra- which can impede entry into markets; and puts; (iii) lack of skilled manpower for ef- structure. China's market share in the US (iii) issues of intellectual property rights ficient design, production, and marketing; increased from less than 10% in 2001 to and copyrights on textile designs. Al- and (iv) high transportation and transit over 70% as of June 2004, and also saw though Nepalese exporters have not been costs have largely inhibited Nepalese pro- substantial growth in its market share in confronted with these kinds of obstacles ducers to compete efficiently on the basis the EU, capturing 30—50% of the market so far, they should be acquainted with such of price, quality and delivery in several key categories. issues in the future. .(ii) Inadequate institutional and (iii) Downward spiral of world ap- (v) Preferential trading arrange- trade support services. The problems with parel prices. Average world apparel ments. Major international buyers like the regard to institutional and trade support prices are rapidly falling with the aboli- US and EU have established preferential services in the garment sector are prima- tion of quotas and intensified competi- trading arrangements in different forms to rily related to (i) poor logistics and cargo tion. A study in 2003 revealed that meet their own objectives. Despite textiles services; (ii) lack of updated international international apparel prices had declined being a sensitive product and excluded market and price information; and (iii) by almost 32% and the trend seems to from the Generalized System of Preference complicated export financing mecha- continue with increased world produc- (GSP), the US has most prominently es- nisms. The cost for logistics and transit tion, reduced distribution costs, and tablished a number of preferential arrange- is approximately 20% of the ex-work price transformation of production bases to ments in this sector with Mexico and a host for garments, mainly due to high costs of cheaper locations as well as reduced of countries in the Caribbean and the sub- air and sea cargo rates. However, it is es- transaction costs in the absence of ad- Saharan region. Despite some efforts, timated that the transportation cost ditional quota premiums. Nepal has so far failed to receive such an would come down by 40% after full imple- (iv) Tariff and non-tariff barriers. arrangement with the US. The EU on the mentation of the Inland Container Depot Average tariff rates on apparels in devel- other hand provides duty reduction of up (ICD) facilities in Birgunj. Garment entre-
2 preneurs have long been suggesting the Recommendation verted into an institute, and can be es- establishment of a Garment Processing Ultimately, the survival of the Nepalese tablished inside the GPZ with the inten- Zone (GPZ) close to the ICD to reduce garment industry will depend upon how it tion of coordinating demand for and transaction costs through increased de- builds capacity towards providing a full supply of skilled manpower. livery efficiency. Furthermore, the gar- package of manufacturing and delivery l There is a very likely chance of escalat- ment sector among other export-oriented system taking into consideration the ing use of trade remedy measures, such industries are paying relatively higher changed trading environment. Thus, the as safeguards and anti-dumping, by bank rates and are subject to higher col- major areas of concentration should in- major importing countries. The recent lateral requirements compared to other clude the following: action against China has created uncer- countries in the region. l Given that the markets for Nepalese gar- tainty to place orders by importers, di- (iii) Administrative complications. ments in a quota free trading environ- verting their import orders to other Administrative burdens faced by garment ment are distinctly divided into the countries. Although the trade diversion industries include (i) the requirement for preferential and non- preferential mar- benefit is not immediately expected, it two separate recommendations from the kets, two separate strategies need to be is suggested that Nepalese manufactur- Customs Department and the Inland Rev- developed to retain positions in the re- ers get prepared to attract the business enue Department, instead of a single rec- spective markets and contribute to spillover. Again, the GPZ could play an ommendation from the Customs growth of the overall export volume. instrumental role in enhancing Nepal's Department, as was the case before, to re- l The immediate strategy for the US mar- position to capture the spillover busi- lease bank guarantees; (ii) lengthy process ket should be an intensified lobbying ness. of VAT refund; and (iii) inconsistency in for the US duty-free market access. It is l A consolidation of the garment industries designating an export-oriented industry. also highly recommended that Nepalese within the proposed GPZ is expected to (iv) Policy drawback. Lack of flexibil- exporters concentrate on the EU and have manifold benefits such as: ity in the labor laws has discouraged em- Canadian markets which provide pref- — It would consolidate scattered indus- ployers from hiring permanent workers and erential treatment by escalating promo- tries in the short run and facilitate ver- investing in trainings, affecting labor turn- tional programs in these countries. tical production in the long run; over, long-term labor productivity and l India has emerged as one of the lead- — As an industrial estate it can take competitiveness. The rigidity in the labor ing garment exporters after China, but advantage of economies of scale; laws is recognized to be the factor respon- a gradual rise in input and output — GPZ allows for joint investment in sible for encouraging hiring of workers costs in India indicates that they will sophisticated and costly technolo- from our neighboring country. soon be searching for cheaper pro- gies. They can also initiate coopera- (v) Limitations to developing backward duction locations. In light of this tive purchasing of imported raw linkages. Currently, the Nepalese garment emerging possibility, the concept of materials, mainly high value fabrics industry relies heavily on imported inputs consolidating Nepalese garment in- and materials, at the most competi- from fabric to all other ancillaries—driving dustries within a GPZ could give ex- tive prices to reduce manufacturing up the cost of end products. However, de- tra leverage to Nepal for attracting cost; spite the obvious benefits of developing Indian businesses. — It could be instrumental for cluster- ancillary industries within the nation, their l Nepalese producers should focus on ing of ancillary industries; viability is questionable in terms of econo- fashion-oriented high value products to — With regard to cumbersome trade mies of scale—-with regard to accesso- capture niche markets. To facilitate this, and transit procedures, the GPZ can ries, garment manufacturers are forced to development of trained manpower and contribute to procedural simplifica- rely on imports due to unfavorable busi- fashion institutes are needed. It is ad- tions by establishing a single win- ness terms, consistency in quality and de- visable to activate the existing dow system within the zone to deal livery, and competitive pricing. In this Readymade Garment Training Center with all kinds of government and ex- regard, the consolidation of garment indus- under the Department of Cottage and port requirements; tries within a GPZ and the promotion of Small Industries by restructuring and — It is very important for the GPZ to be ancillary industries to support them is the strengthening it with modern equip- constructed near the Birgunj ICD— best option for the foreseeable future. ment. The Training Center can be con- the country's main transit point for
3 external trade—to reduce transpor- Nepalese apparels to meet stringent mittee should be responsible for formu- tation and transit costs; rules of origin for preferential market lating strategies and programs for guid- —In the long run, the collective demand access wherever applicable; ing the Nepalese garment industries, for a larger quantity of textiles by — The GPZ with an approach to indus- and for enforcing decisions with full au- the industries inside the GPZ can try consolidation and industrial clus- thority and executive powers. In the attract domestic and foreign invest- ter is also important to attract likely longer run, the scope of the partnership ment in modern fabric industries, business spillover from India and should concurrently focus on (i) conti- which are capital intensive and have other nations in the future. nuity of lobbying for dutyfree market relatively larger optimum size of op- access in the US and other emerging erations. With the development of a l It is recommended that a public- private markets; (ii) intensified promotional pro- fabric base it can ultimately meet partnership be developed in regards to grams to exploit the GSP markets vertical production with more pos- the garment industry by broadening the (Canada and EU); and (iii) development sibility of import substitution. Apart role of the existing Readymade Garment of a modality for construction and op- from that it will also facilitate Export Promotion Committee. The com- eration of the GPZ.
The Economic Policy Network is an undertaking of the Ministry of Finance with Asian Development Bank support. It supports the preparation of policy papers in the areas of (i) macroeconomic management (ii) international trade, investment, and employment; (iii) infrastructure development; and (iv) tourism, agriculture and regional development based on participatory dialogue. This policy brief is an abstract of the policy report Sustaining Nepalese Garment Industry after Quota Abolition prepared by Mr. Bijendra Man Shakya on behalf of the Garment Association of Nepal (GAN). It has been edited for clarity and brevity. Please refer to the original report for a comprehensive discussion on issues and recommendations. Full version available at: http://www.mof.gov.np/economic_policy/pdf/ sustaining_nepalese.pdf
Economic Policy Network Ministry of Finance, Singha Durbar Kathmandu, Tel: 4211353, E-mail: [email protected] Website: www.mof.gov.np
EPN Team: Advisory Committee Chairperson: Mr. Bharat Bahadur Thapa Focal Unit Chief: Dr. Madhav Prasad Ghimire Team Leader: Mr. Dipendra Purush Dhakal Edited by: Mr. Arun S. Rana and Mr. Samtenla Sherpa ADB Project Officer: Mr. Bipul Singh
© 2006 Government of Nepal/Asian Development Bank All rights reserved
4 Government of Nepal Ministry of Finance ECONOMIC POLICY NETWORK PUBLIC PRIVATE PARTNERSHIP FOR POLICY FORMULATION POLICY BRIEF No. 4 June 2006
Sustainable Rural Tourism for Improved Livelihood of Local Communities
he Government of Nepal has versified employment opportunities Table 1 shows the income from Tourism acknowledged tourism as a such as: craft production, trekking and for the FY2004 and for the first six months of Tstrong sector, contributing sig mountaineering, and other service re- FY2005; the income is report edly declining. nificantly towards the socioeco- lated employment; and tourism's contri- nomic development of the country. This is bution can also be perceived in the The Four Management evident in the role tourism can play to meet balance of payments—its share in total Models the Tenth Plan's (FY2002-FY2007) sole ob- foreign exchange earnings peaked at The Tenth Plan has clearly stated in its jective to reduce the poverty ratio from 38% 21.4% in FY1996, and then declined to objective to contribute to poverty reduc- in FY2002 to 30% in FY2007.1 Three of the 11.1% in FY2004 and 7.1% in FY2005, tion through increased people's partici- four approaches of the "four pillar" pov- respectively. pation in tourism related activities, while erty reduction strategy formulated by the ensuring sustainable development. A no- Government's Tenth Plan are directly re- Review of Present Status ticeable feature of the Tenth Plan is the lated to tourism. These approaches are The recent conflict in the country has had a responsibility awarded to the rural com- based on: (i) achieving a high and broad- negative impact in the overall development munities to manage the recycled re- based economic growth focusing on the of the tourism industry. Thus, the period of sources for socio economic development rural economy; (ii) accelerating human de- intensified conflict also witnessed a sharp works. velopment through effective delivery of decline in the number of tourist arrivals— Thus, Nepal has adopted four differ- basic social services and infrastructure; from 491,504 in 1999 to 277,129 in 2005. ent models of management for recycling and (iii) ensuring social and economic in- There are no definitive studies pro- of revenue to tourist destinations. clusion of the poor and marginalized ducing a clear and detailed analysis of re- groups, and backward regions. tention of tourist dollar in specific locations. Constraints Tourism has the capacity to improve Obviously, the accumulation of income Policy Constraints livelihoods of local communities, while from tourism is higher at the center than in l Although Tourism Policy 1995 aimed at also contributing significantly to the na- backward areas. The center has signifi- expanding broad based tourism to re- tional economy: it is estimated that tour- cantly more resources and is better located duce regional imbalances by mobilizing ism in Nepal generates about 122,745 to take advantage of lucrative pre-paid or- local communities, it failed to highlight direct employments (29 jobs per 100 tour- ganized treks, compared to rural areas culture as a niche product of Nepalese ists); in half a century, tourism has grown where mostly small-scale individual trans- tourism. Nepalese culture and traditions as an important industry providing di- actions occur. have high market potentials, which
1 Table 1 : Tourism Income could benefit the rural poor and marginalized communities. (NRs in million)
FY 2004 FY 2005 l The Policy also fails to adopt a strate- Services 6 months Annual 6 months gic vision to employ local expertise and skills. In certain regions, tourism Hotels 299.1 833.4 315.0 has emerged as a strong alternative Travel Agencies 2,224.4 4,518.6 2,601.0 to the agriculture sector; however, rural areas have not succeeded in Airlines 655.9 1,307.1 283.7 reaping justifiable returns from tour- Trekking & Rafting 281.5 578.6 298.1 ism. Tourists 2,396.1 4,376.8 2,750.6 l Tourism Policy does not include the role Other 403.8 722.9 449.6 of nongovernmental organizations Total 6,260.8 12,337.4 6,698.0 (NGO), community based organizations (CBO) and locally elected bodies in ru- Source: Nepal Rastra Bank ral tourism.
Models for Recycling of Tourism Revenue
Model Brief Provisions
1st Fulty Authorized Granting of full authority of managing and collecting revenue to contracting Nongovernmental Agencies non-governmental agencies such as, Annapurna Conservation Area Project (ACAP) and Nepal Mountaineering Association (NMA). Almost fifty per- cent of tourist expenditures were retained locally in ACAP area. Similarly, NMA is authorized to collect royally from 33 trekking peaks. Presently, it raises around 14% of overall royalty from mountaineering in Nepal.
2nd Recycle a Fixed Portion 30% to 50% of revenue generated in the National Parks is recycled to local of Earning to local committees for conservation and development activities in the designated Communities buffer zones through the provision of National Parks and Wildlife Conserva- tion Act (NPWCA), 2029.
3rd Grant Management Government has granted management responsibility to designated agecies Responsibility to Designated without any formal commitment to provide budget on a regular basis. Upper Agencies Mustang and Manaslu Conversation Area managed by National Trust for Nature Conservation and Sagarmatha Pollution Control Committee fall in this model.
4th Recycle Fund , through District Recycling of 30 percent of fees and royalty generated from activities such as Development Committees (DDC) trekking, entry to National Parks and Wildlife Reserves, mountaineering and any other entry fee charged to tourists to enter the concerned district devel- opment area. DDC is entitled to receive such funds through the new provi- sions made in the amended local Self-Governance Regulation (LSGR), 2061. As these provisions have not been operational, the benefits are yet to be Judged.
2 l Cost-benefit aspects of the industry's On Policy revenue between Government and relation with the rural communities, l Review Tourism Policy and rewrite pro- Management Authorities. and establishing backward and for- visions to highlight issues concerning ward linkages in tourism have not sustainable tourism and poverty re- l Remove all discrepancies in the mode been mentioned in the Policy. Similarly, duction. of collection of revenue. neither multiplier nor spillover posi- tive effects of tourism have been ad- l Encourage local forms of governance l The conflicts on legal instruments dressed. in tourism, and mobilize NGOs and such as: LSGR, NPWCA, Conserva- CBOs. tion Area Management Regulation l The Policy considers environmental (CAMR) and Tourism Act and Regu- protection as the means for sustain- l Government should provide incentives lations should be reconciled and har- able development without addressing to encourage investment in employment monized through cross-ministerial the importance of alternative sources generating activities. coordination. of energy. l Establish tourism's backward and for- l Encourage use of local products Legal Constraints ward linkages with the national and services in amended Tourism l Absence of self regulating Code of Con- economy. Act. duct for tourism services to mitigate undercutting of tariff. l Act immediately to upscale Tourism l Provide incentives in the concerned for Rural Poverty Alleviation (TRPAP) Acts to encourage investment in ru- l To encourage the use of local services and extend its programme to a few more ral areas. and products, proactive provisions districts. have to be introduced in the Regula- On Promoting Tourism Related Eco- tions and concerned Acts. l Otherwise, draft an exit policy for nomic Activities TRPAP and immediately frame an l Encourage Government and nongov- l Regulations lack processes to establish appropriate transfer model to ernmental agencies to introduce relationships with nongovernmental facilitate the gradual takeover by Leave Travel Concession schemes to bodies. Sustainable Tourism Development promote domestic tourism. Unit (STDU) of the Nepal Tourism l Mountaineering regulations consist Board (NTB). l Reduce or remove entry fees in con- of meager benefits to the poor, such trolled areas such as Upper Mustang as low wages and unequal insurance l Cape Town Declaration 'Responsible and Dolpo, and also waive group policies. Tourism in Destinations' of 2002 should travel and other restrictions. be considered for all product devel- l Absence of legally protected system of opment, planning and implementation l Set aside budget from the Annual recycling funds of the Government. activities. Tourism Budget for marketing Nepalese tourism products. Recommendations On Legal Aspects Notwithstanding several best practices l Recycle 95% of tourism income, out of l Introduce Satellite Accounting sys- adopted during different periods of tour- which 50% should be forwarded to the tem in Nepalese tourism. ism development, there is still a necessity same district and the remaining 45% to to review policy and regulatory instru- any other districts nominated by the On Institutional Improvement ments to ensure greater benefits to local Government. l Review the membership and func- communities. Thus, several major actions, tions of the high level Tourism Coun- as summarized below, have been recom- l Update regulatory instruments to fol- cil. Some representation should also mended: low uniform procedures in sharing of be drawn—on rotational basis—
3 from the local bodies and CBOs of dis- tion like the Sustainable Tourism De- On Public Private Partnership (PPP) and tricts with potential in tourism. velopment Section. Equitable Distribution of Tourism Receipts l Reorganize the structure of NTB to deal l Replicate in all non-TRPAP districts, the l Utilize PPP modeled NTB to help for- with issues of poverty, gender, commu- concept of Sustainable Tourism mulate and implement code of conduct nity and overall sustainability of tourism. Development Committee (STDC), for tourism establishments at the cen- Sustainable Tourism Development Fund tral level, which can also contribute to l Establish a higher-level structure of and Sustainable Tourism Village Fund, and maintaining standard tourism environ- Sustainable Tourism Development Di- establish Tourism Development Cell in all mental guideline. vision and make STDU permanent. Village Development Committees (VDCs). l STDC, Tourism sub committees of Buffer l Create a forum like Technical Advisory l Convert Program Management Office Zone Users Committee, or partnerships Group for NTB. into a permanent Tourism Section in the between VDCs and NGOs should be Department of National Parks and Wild- used for retaining maximum level of tour- l Establish in every DDC a separate Sec- life Conservation. ism revenue at the local level.
The Economic Policy Network is an undertaking of the Ministry of Finance with Asian Development Bank support. It supportsthe preparation of policy papers in the areas of (i) macroeconomic management; (ii) international trade, investment, and employment; (iii) infrastructure devefapnient; and (iv) tourism, agriculture and regional development based on participatory dialogue. This policy brief is an abstract of the policy report Sustaining Rural Tourism for Improved Livelihood of Local Communities prepared by Mr. Dipendra Purush Dhakal on behalf of the Nepal Tourism Board . It has been edited for clarity and brevity. Please refer to the original report for a comprehensive discussion on issues and recommendations. Full version available at: http://www.mof.gov.np/economic_policy/pdf/ sustaining_nepalese.pdf
Economic Policy Network Ministry of Finance, Singha Durbar Kathmandu, Tel: 4211353, E-mail: [email protected] Website: www.mof.gov.np
EPN Team: Advisory Committee Chairperson: Mr. Govinda Prasad Pandey Focal Unit Chief: Dr. Madhav Prasad Ghimire Team Leader: Mr. Dipendra Purush Dhakal Edited by: Mr. Samtenla Sherpa and Arun S. Rana ADB Project Officer: Mr. Bipul Singh
© 2006 Government of Nepal/Asian Development Bank All rights reserved
4 Government of Nepal Ministry of Finance ECONOMIC POLICY NETWORK PUBLIC PRIVATE PARTNERSHIP FOR POLICY FORMULATION POLICY BRIEF No. 5 November 2006
Measures For Expanding Non-Tax Revenue
esides forming a sizeable (ii) the Government seeks to recover partly Sources of Non-Tax Revenue portion of total Government or wholly the cost incurred in providing The sources of non-tax revenue are (i) duty revenue, non-tax revenue has services through charges and fees for and fees; (ii) penalties, fines and been substantially increasing commodities or royalty for utilization of forfeitures; (iii) receipts from sale of Bover the recent years—the ratio of non- natural resources. Government property and services; (iv) tax revenue to total revenue increased from The performances of tax revenue and royalty and sale of Government property; 21.6% in 1990 to 22.7% in 2004. The non-tax revenue for 1990–2004 are given in (v) dividends; (vi) interest; (vii) principal Government of Nepal identified the Table 1, which shows that the growth rate of repayment; and (viii) donation, gift and necessity to reform non-tax revenue non-tax revenue has fluctuated in the last 15 miscellaneous income. mobilization to address institutional years. Non-tax revenue increased more than (i) Duty and fees. This subhead weaknesses in macroeconomic seven fold in the 1990–2004 period from NRs2 includes fee charged for providing services management. billion to NRs14.16 billion, while it had a to the general public. The categories of fees Given the growing dependence of the negative growth rate of 4% for two years in include firm and agency registration, export Government on foreign resources and the 1993 and 1997. Despite the fluctuations in and import license fee, arms registration, need to increase tax revenues, it is growth rate, the overall annual growth rate vehicle license fee, examination fee, passport necessary to explore the prospects and of non-tax revenue is better than the annual and tourism fee, and telephone ownership constraints of sources of non-tax revenue growth rates of tax revenue and total revenue. fee. The revenue under duty and fees has with a view to mobilize additional revenue Moreover, non-tax revenue as a percentage phenomenally increased in the last 15 years and to complement for any shortage in of total revenue has been increasing over amounting to more than NRs3.24 billion in revenue generation from taxes. the years and the ratio of non-tax revenue to 2004. Revenue under this head has doubled gross domestic product (GDP) increased every five years since 1990. Non-Tax Revenue: from 2.01% in 1990 to 2.99% in 2004. It should (ii) Penalties, fines and forfeitures. Current Status and Trend also be noted that non-tax/GDP ratio of 2.99% This revenue head includes court fees, legal The Government of Nepal has in 2004 surpassed the Tenth Plan’s projected penalties, penalty to contractors and other different sources for collecting non-tax non-tax revenue target of 2.8%. Even though administrative penalties and forfeitures. The revenue: (i) it renders services to people, the share of non-tax revenue to total revenue revenue under this head was exceptionally sells properties and commodities and is still low in comparison to other South high during the period 1990 to 1992, while it seeks appropriate returns on its Asian countries (Table 2), the increasing sharply declined in 1993. Since then it has investments in terms of dividends and trend of non-tax revenue over the years is shown irregular changes and revenue for repayment of principal and interest; and still very impressive. 2004 was at NRs133 million.
1 Table 1 : Comparison Between Tax Revenue and Non-Tax Revenue and Their Growth Rates (in NRs million)
Revenue Annual Growth Rate (%) Fiscal Tax Revenue Non-Tax Revenue Total Revenue Tax Revenue Non-Tax Revenue Total Revenue 1990 7,283.9 2,004 9,287.5 1991 8,176.3 2,554 10,729.8 12.25 27.45 15.53 1992 9,875.6 3,637 13,512.7 20.78 42.41 25.94 1993 11,662.5 3,486 15,148.4 18.09 (4.16) 12.1 1994 15,371.5 4,209 19,580.9 31.8 20.74 29.26 1995 19,660.0 4,945 24,605.1 27.9 17.49 25.66 1996 21,668.0 6,225 27,893.1 10.21 25.88 13.36 1997 24,424.3 5,949 30,373.5 12.72 (4.44) 8.89 1998 25,939.8 6,998 32,937.9 6.2 17.63 8.44 1999 28,752.9 8,498 37,251.3 10.84 21.44 13.1 2000 33,152.1 9,742 42,893.7 15.3 14.64 15.15 2001 38,865.1 10,030 48,893.9 17.23 2.96 13.99 2002 39,330.6 11,110 50,445.5 1.2 10.77 3.17 2003 42,587.0 13,642 56,229.7 8.3 22.79 11.47 2004 48,173.0 14,158 62,331.0 13.12 3.78 10.85 Annual Growth Rate 1990-2004 14.71 15.67 14.78
%= percentage Note: Figures are in current prices. Source: Various issues of Economic Survey, Ministry of Finance, Government of Nepal.
(iii) Receipts from sale of Government education, forestry, transportation, electricity (iv) Dividends. Dividends from property and services. It includes receipts and others. The revenue head under others financial institutions comprise more in lieu of services rendered and sale of include rental charges, film screening and than 85% of the revenue from dividends Government commodity and property and license fee, Government’s income from and Nepal Rastra bank has contributed receipts from rental services. Revenue is printing press, sales of gazette and other more than 90% of this amount. Other collected from services rendered for drinking Government publications and services of sources of dividends are trading water, postal services, food and agriculture, bureau of standards and metrology. concerns, industrial undertakings,
Table 2 : Ratio of Non-Tax Revenue to Total Revenue among South Asian Countries (in NRs million)
SAARC Countries 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Average Bhutan 69.72 64.65 60.77 63.57 60.81 56.52 61.41 58.01 63.03 55.33 59.95 56.54 60.86 India 20.16 22.83 25.46 23.31 23.78 24.42 24.46 25.3 25.94 25.36 22.68 NA 23.97 Maldives 35.42 33.98 36.5 45.16 40.25 45.93 47.56 48.76 52.42 53.87 54.82 57.86 46.04 Pakistan 27.15 27.69 29.58 27.14 23.07 20.94 19.48 20.78 16.69 27.35 20.99 26.03 23.91 Sri Lanka 10.82 10.98 11.32 9.65 12.93 10.97 13.49 15.77 15.25 13.66 11.53 NA 12.4 Nepal 21.26 23.79 18.25 18.17 14.7 18.38 16.43 17.08 16.96 17.66 15.62 16.36 17.89
NA = not available, SAARC = South Asian Association For Regional Cooperation Source: Khatiwada Yubaraj, 2003. Report of Fiscal Improvement Task Force 2059.
2 service oriented institutions and other the framework to review such rates is and achieving sectoral targets, rather public enterprises. also haphazard. than recovering costs and working to (v) Interest. Government’s investment rationalize rate. through soft loans and grants in financial ! Special acts and its regulations govern institutions, industrial enterprises, trading rate of charges and fees. Without ! Inefficiency and underutilization of concerns and service oriented industries amendment of these regulations and Government enterprises is another sets rate of interest, grace period and notification to the public through constraint in mobilizing non-tax revenue. repayment schedule. The amount of gazettes, the amendment of existing Furthermore, an inefficient administration interest earned from public enterprises is a rates can often be questioned. would also result in inefficient mobilization major source of revenue and is deposited of non-tax revenue. under this revenue head. ! Due to lack of proper guidelines,
(vi) Royalties and sale of Government different Government departments have ! Return on Government investment in property. This includes royalties received fixed their legal fees, penalties, charges public enterprises is less than what from survey, excavation and use of natural and royalties without much these enterprises owe to the resources like mining, hydroelectricity etc, consideration to the total cost of Government. It is difficult to determine and also includes royalties from casinos. rendering services, the inflation rate or the liabilities of public enterprises to the It also includes sales receipts from sale of the ability to pay. Government resulting in difficulties in Government property like land, house, assessing Government investment and machineries, vehicle, maps, botanical ! Amending acts and regulations return. products etc. governing fees, charges, penalties and (vii) Principal repayment. Repayment royalties is a time consuming and Recommendations of principal is a major source of revenue, complex process. ! An effective way of expanding non-tax which had been increasing from 1990 till 1999, revenue is to review and adjust the rate after which it has shown a decline. Service ! There is no institutional mechanism to of fees charged. However, in the long oriented industries have almost 66 to 78% review and monitor (i) rationalization of run efforts should be made on effective shares in this subhead. Repayment by Nepal the existing rate, and (ii) performance service delivery rather than increasing Telecom has contributed the most to total and procedure in relation to non-tax rates. principal repayment, while other public revenue mobilization. enterprises have insignificant contribution. ! Ensure efficiency of administration and
(viii) Miscellaneous income. Special ! There is an absence of a special public enterprises for effective tax imposed by the Government and other mechanism to achieve the targets mobilization of resources. incomes deposited fall under this revenue outlined in the Tenth Plan in relation to subhead. Despite a sharp increase in laying out the prices of goods and ! Rationalize existing rates across all contribution from this revenue head in 2002 services on the basis of costs and institutions, departments and offices and 2003, a reduction in the rate of special prevailing market prices. In addition, the located all over the country for tax from 1.5% to 0.5% in the import of Tenth Plan states that dividend policy collecting non-tax revenue. goods caused revenue to decline in 2004. will be reviewed and principal, interest
and royalty due from enterprises will be ! Improve efficiency of postal service Constraints claimed on a planned basis. department and forest department. ! The Government has at least 40 non-
tax revenue raising institutions, which ! There is a lack of understanding ! Invest in training and extend money have hundreds of offices located all between Government and public order services to benefit from the over the country. Different institutions enterprises on resolving issues of growing remittance market. Also have their own rules and regulations exchange rate, rate of interest and invest in postal savings schemes, to follow while collecting revenues. repayment schedule. introduce revenue stamps and Thus, there is lack of cohesiveness and reorganize departments under postal
consistency in fixing rates and the ! Ministries and Government departments services and forestry to compete with basis for fixing rates is unclear, while are more concerned about expenditure private sector.
3 ! Invest in equipment and vehicles for also be a good way of mobilizing examine the prospects of non-tax revenue the forestry sector to better utilize resources. and suggest proposals accordingly. forestry products and to improve its
performance as an industry. ! Conduct studies on issues concerning ! Monitoring and evaluation unit should fiscal devolution and act on the be constituted in the Revenue Division
! Provide incentives to private sector to recommendations of those studies to of the Ministry of Finance to monitor invest in the forest industry. resolve the ongoing debate on revenue collection of revenue, identify constraints sharing between central and local level and suggest proposals for improvement.
! Government should declare performance Governments. This unit should serve as secretariat of criteria for all public sector enterprises the Revenue Advisory Committee.
and treat them on a reward and punish ! The National Planning Commission
basis. should outline objectives, targets, ! Principle and guideline for Revenue programs, procedures and time frame Advisory Committee should be based
! Government should ensure ways to make for monitoring and evaluating non-tax on (i) recovering costs from investment dividend payment more broad based. revenue when presenting its rolling in public enterprises and services Non-Tax Revenue Plan. rendered, (ii) expanding and maintaining
! Effectively utilize Government land for Government services, (iii) ensuring a
commercial purposes. Government ! Since Revenue Advisory Committee is return on investment, and (iv) making should carry out an in depth study to constituted in the last quarter of the certain that public enterprises are develop a detailed land use plan of all fiscal year, a study team should be commercially and financially viable in a public land. Leasing out of land could constituted in the interim period to competitive environment.
The Economic Policy Network is an undertaking of the Ministry of Finance with Asian Development Bank support. It supports the preparation of policy papers based on participatory dialogue in the areas of (i) macroeconomic management; (ii) international trade, investment, and employment; (iii) infrastructure development; and (iv) tourism, agriculture and regional development. This policy brief is an abstract of the policy report Measures For Expanding Non-Tax Revenue prepared by Mr. Madhab Prasad Ghimire on behalf of the Federation of Nepalese Chambers of Commerce and Industries. It has been edited for clarity and brevity. Please refer to the original report for a comprehensive discussion on issues and recommendations. Full version available at: www.mof.gov.np/economic_policy/pdf/measures_expand.pdf
Economic Policy Network Ministry of Finance, Singha Durbar Kathmandu, Tel: 4211353, E-mail: [email protected] Website: www.mof.gov.np
EPN Team: Advisory Committee Chairperson: Mr. Vidyadhar Mallik Focal Unit Chief: Mr. Bimal Wagle Team Leader: Mr. Dipendra Purush Dhakal
ADB Project Officer: Mr. Shahid Parwez Edited by: Mr. Samtenla Sherpa and Mr. Arun S. Rana
© 2006 Government of Nepal/Asian Development Bank
4 Government of Nepal Ministry of Finance ECONOMIC POLICY NETWORK PUBLIC PRIVATE PARTNERSHIP FOR POLICY FORMULATION POLICY BRIEF No. 6 November 2006
Bringing Efficiency in Supply Management of Essential Commodities
fficient supply of essential com- basic essential drugs, salt or food grains (iii) salt, (iv) rice and pulses, (v) edible oils, modities is not only important for due to high transport costs. While private and (vi) essential drugs. maintaining effective supplies sector has been getting more involved in Petroleum products. It is estimated that but equally important to maintain supplying consumer goods in urban areas, per capita consumption of petroleum Eprice stability, thereby protecting their role in supplying in rural and remote products in Nepal is around 35 liters per consumers. However, despite liberalization areas of the country is not encouraging. annum, which is less than half of India’s (82 in the supply systems of consumer goods liters) and a fifth of China’s (170 liters) in Nepal since the 1990s, optimal pricing Demand of consumption. However, demand is estimated of most commodities through free and Essential Commodities to be growing at around 12–13% annually. competitive practices have not been seen and Supply System The current storage capacity of the state as desired. Frequent shortages and hikes While a variety of consumer goods may owned Nepal Oil Corporation (NOC)—the in prices are often faced by consumers in be argued as being “essential,” this report sole importer and distributor of petroleum urban areas, whereas in remote areas, the includes the following as “essential” com- products in Nepal—is around 65 million liters problem is one of supplying even the very modities: (i) petroleum products, (ii) sugar, for petrol, diesel, kerosene and aviation fuel;
Table 1: Consumption of Petroleum Products (FY2004)
Petrol Diesel Kerosene Aviation fuel LPG (kiloliters) (kiloliters) (kiloliters) (kiloliters) (Metric tons)
Total Annual Consumption 67,586 299,730 310,826 64,041 66,142
Kathmandu Valley (% of total consumption) 85 45 35 90 85
Outside Kathmandu(% of total consumption) 15 55 65 10 15
%= percentage, FY= fiscal year, LPG = liquid petroleum gas. Source: Nepal Oil Corporation
1 which is sufficient only for one month’s The deficit is imported mainly from India. cholesterol soybean, sunflower, and corn national consumption. An additional 2,650 Private sector is a major supplier of sugar oil which are imported. The supply of ed- petroleum dealers have a combined storage in the market although the National ible oil is dominated by private sector. capacity of about 40 million additional liters. Trading Limited (NTL) and STC are also Essential drugs. While 70% of The bulk of petrol, aviation fuel, and liquid involved in sugar supplies. medicines demanded have to be imported, petroleum gas (LPG) is consumed in Rice and pulses. With an estimated per 30% is produced by around 40 domestic Kathmandu valley alone, while the bulk of capita consumption of rice at 122 kg per private pharmaceuticals and the publicly kerosene is consumed outside of Kathmandu year, the total annual demand of the nation owned Nepal Drugs Limited. In terms of (table 1). The consumption of diesel is more is about 3 million t and domestic production consumption, the Central Development evenly distributed between Kathmandu and is estimated to be about 2.9 million t— Region consumes around 30.7% of the the rest of the country. creating a shortage of about 100,000 t (table total consumption, with Kathmandu valley Salt. The Government has given Salt 2). Similarly, at an estimated per capita alone consuming about 26.3%. All Trading Corporation (STC) exclusive rights consumption rate of pulses at 9.1 kilogram medicines are supplied through private to supply and distribute salt in Nepal. STC per year, the total national requirement is sector wholesalers and retailers. is a Public Private Partnership (PPP) entity, around 272,000 t, while the overall where the Government owns 21% of its production is estimated to be around Constraints shares and private sector owns the 286,000 t. The private sector is the major Legal remaining 79%. It has a wide network importer and supplier of rice and pulses in ! In spite of the existence of Black-Market- spread all over 75 districts of the country Nepal. In addition, the National Food ing and Certain Other Social Crimes and with 93 branches/sub-branches, depots, and Corporation (NFC) is also involved in the Punishment Act 1975—which provides for contact offices; 6,000 dealers; and 400 chain import and supply of food grains, especially detention in cases of black-marketing and retail outlets. STC imports about 150,000 in the remote districts of the country. For hoarding—unscrupulous hoarding and metric ton (t) of ionized salt per year from 20 this, the Government of Nepal has been black marketing are not adequately moni- salt manufacturers in Gujarat and Rajasthan providing subsidy to NFC to transport and tored and enforced by the Government. states of India. Market surveys reveal that distribute food grains to remote areas. price of salt in Nepal at NRs9.00 per kilogram Edible oil. Per capita consumption of ! In spite of the existence of Consumer’s is the cheapest in the region. Besides salt, edible oil is estimated to be around 4.18 Right Protection Act 1997, and STC also imports and distributes sugar, liters per year leading to a national annual Consumer’s Right Protection Rule 1999, wheat flour and a few other edible items. demand of about 103,000 kiloliters. While consumer awareness programs, informa- Sugar. The annual domestic demand low income consumers depend predomi- tion collection and dissemination have not is estimated at 160,000 t, while domestic nantly on domestic mustard and ground been effectively administered for the pro- production is approximately 100,000 tons. nut oil, high income households prefer low tection of consumer’s rights and welfare.
Table 2: Projected Demand and Import Requirements of Essential Commodities
Commodity Projected Demand Estimated Domestic Production Surplus/(Deficit) FY2005 FY2006 FY2005 FY2006 FY2005 FY2006
Rice ('000 tons) 3,025.0 3,092.7 2,894.0 2,930.0 (131.0) (162.7)
Grams ('000 tons) 266.2 272.2 270.0 286.0 3.8 13.8
Sugar ('000 tons) 133.1 136.1 115.0 127.0 (18.1) (9.1)
Salt ('000 tons) 118.6 121.2 0 0 (118.6) (121.2)
FY=fiscal year. Source: Department of Commerce, Government of Nepal
2 ! The movement of consumer’s goods is to undertake these activities in the ab- Development Bank to Women’s Groups constrained at times due to existing acts, sence of subsidies. eager to run cooperatives in remote and which empower the district administra- rural areas.
tors to restrict the movement within and ! NOC is incurring huge losses due to outside the districts. political considerations overshadowing Administrative Measures
economic rationalization in pricing of ! Government should announce its long
! Although the metric system of weights petroleum products. term supply policy spelling out private and measures was introduced since sector’s role in supply management.
1968, non-metric and non-standard mea- ! Lack of an effective mechanism to collect
sures prevail in the market, leading to information on production and price of ! Carryout Strength, Weakness, undue exploitation in local transactions. commodities. Opportunity, Threat (SWOT) analysis of all public sector agencies involved
Institutional ! Retailers in rural and remote areas are in supply of essential commodities and
! Public sector undertakings lack output not registered with designated study prospects for privatization or PPP. oriented performance and competitive- authorities thereby limiting the prospects
ness and also suffer from excessive po- of managing supplies and effective ! Form a high level National Supply litical and administrative interferences. monitoring by the regulatory agencies. Coordination Committee under the chairpersonship of the secretary in the
! Nepal lacks organized marketing sys- Geographical Connectivity Ministry of Industry, Commerce and
tems, especially in remote areas. The ! Overall lack of geographical connectivity Supply (MoICS) to help formulate policies, existing wholesale markets, mandis and compounded by scattered settlements in rules and regulations, fix support prices, stalls are inadequate and ill equipped the hills and mountains—especially in the ensure smooth supply, encourage and municipalities lack due attention for 30 remote districts of Nepal—is the main production of indigenous essential developing markets and marketing strat- problem in supply management of essen- products, and maintain good relations egies for agricultural products. tial commodities. between Government, private sector and all other concerned agencies and ! Specialized cooperatives and fair price Recommendations individuals. This mechanism should also shops do not exist for distribution of Monetary and Fiscal Measures be extended to zonal and district levels.
essential commodities at subsidized ! Implement open tender system with full
prices in rural areas. transparency to encourage private ! Form a functional Unified National sector in supplying essential Supply Action Committee consisting of
! Lack of proper storage facilities to commodities like rice, sugar, mustard oil public sector agencies involved in maintain adequate stocks of essential and kerosene to remote districts with supply management—chaired by a high commodities. provisions of subsidies in par with NFC. level official looking after supply sector at MoICS and chief executive officers
Administrative/ Policy ! Sales price of essential commodities should of public agencies as members.
! Imposition of local taxes on essential be fixed on the basis of their cost price,
commodities causes prices to rise. which should also take into consideration ! Facilitate the adoption of best offer the prevailing prices in border markets. received by any of the public
! Government lacks effective interven- corporations across the board. For
tionist policies to stabilize shortages ! Provide tax break on upto NRs200,000 example, NTL, STC and NFC should go and escalating prices. capital to traders and firms dealing in together for procurement of rice, pulses essential commodities in remote areas and sugar at the best cost received by
! NFC lacks resources to procure and and also deduct 50% in taxable income any of these entities. In terms of store adequate stocks of food grains to those selling on discounted price. distribution, infrastructure of one and to provide transport subsidies to agency should be shared by another to
supply food to remote districts. The ! Provide capital seed money through save cost and provide efficient delivery private sector is also not encouraged Grameen Banks and the Agriculture of services under a one window system.
3 ! Form a Unified Valley Supply Action prices of food items, especially during and Cooperatives, Federation of Committee to manage supply of essential shortages. Nepalese Chambers of Commerce and commodities in Kathmandu valley under Industry (Agro Enterprise Center) and
the convenorship of Nepal Chamber of ! Maintain atleast two months buffer Nepal Chamber of Commerce. Commerce with adequate representation stock of essential food items and one
of civil/security administration, related month of petroleum products. ! Create a website with daily updates on public corporations and concerned market prices of essential commodities
commodity associations. ! Rent out underutilized warehouses of NFC across the country. to private traders for storing essential
! Constitute a Consumer Protection commodities during emergency situations. ! No restrictions should be imposed on Council through PPP in all five domestic transportation of essential
Development Regions. ! Carry out regular monitoring of supply goods from one part of the country to situation, price, and quality through the another.
! Appoint a supply commissioner at the Department of Commerce, Nepal Bureau
regional, zonal and district levels for of Standards and Metrology, Central ! Form consumers’ cooperative stores, fair systematizing and monitoring the supply Food laboratory, Office of the Supply price shops, and rural cooperative shops situation of essential commodities. Commissioner, and District Level Supply in urban and accessible rural areas. Office.
! NFC should maintain adequate buffer ! Carry out detailed study on setting
stock of food items and play the lead ! Establish a Data Bank in MoICS with the minimum support price to protect interventionist role to control market cooperation of Ministry of Agriculture domestic farmers.
The Economic Policy Network is an undertaking of the Ministry of Finance with Asian Development Bank support. It supports the preparation of policy papers based on participatory dialogue in the areas of (i) macroeconomic management; (ii) international trade, investment, and employment; (iii) infrastructure development; and (iv) tourism, agriculture and regional development. This policy brief is an abstract of the policy report Supply Management of Essential Commodities prepared by Mr. Rajendra Bahadur Shrestha on behalf of the Nepal Chamber of Commerce. It has been edited for clarity and brevity. Please refer to the original report for a comprehensive discussion on issues and recommendations. Full version available at: www.mof.gov.np/ economic_policy/pdf/Supply_Management.pdf
Economic Policy Network Ministry of Finance, Singha Durbar Kathmandu, Tel: 4211353, E-mail: [email protected] Website: www.mof.gov.np
EPN Team: Advisory Committee Chairperson: Mr. Bharat Bahadur Thapa Focal Unit Chief: Mr. Bimal Wagle Team Leader: Mr. Dipendra Purush Dhakal
ADB Project Officer: Mr. Shahid Parwez Edited by: Mr. Samtenla Sherpa and Mr. Arun S. Rana
© 2006 Government of Nepal/Asian Development Bank
4 Government of Nepal Ministry of Finance ECONOMIC POLICY NETWORK PUBLIC PRIVATE PARTNERSHIP FOR POLICY FORMULATION POLICY BRIEF No. 77No. November 2006
Public Private Partnership in Transport Infrastructure
nfrastructure development in most infrastructures, called Public export credit agencies, institutional developing countries suffers from in- Infrastructure Build Operate and Transfer investors, and special investors. sufficient funds. Thus, joint efforts policy 2001/02 (BOT policy). Thereafter, BOT projects have been successful in between the Government and private on 22 August 2003, BOT ordinance named many countries, such as, Malaysia, France, Isector in infrastructure development has Private Investment in Infrastructure Build People’s Republic of China and India. In been a trend in many countries. Public and Operate 2003/04 (BOT Act) was India, due to various policy initiatives for Private Partnership (PPP) in infrastructure promulgated and was updated in 14 attracting private sector investments, development can take place in the February 2004. Furthermore, in 2004, the several PPP/BOT projects have been following forms: Build Operate Transfer Ministry of Local Development (MoLD) completed, while many are going on, and (BOT), service contract, management issued PPP policy 2003/04 for local bodies. others are in the pipeline. contract, annuity contract, special project Thus, a common framework for Successful BOT projects in foreign vehicle (SPV) contract, and community or infrastructure development under BOT countries have also shown a greater user group or Nongovernmental system was established in Nepal. participation of governments of host Organizations (NGOs) based contracts. The objective of BOT policy is to countries, and both private and There are several variants of BOT, such attract domestic and international government agencies share risks as: Build and Transfer, Build Own Operate investors for infrastructure development. associated with a project. and Transfer, Build Transfer and Operate Similarly, the objective of BOT Act is to (BTO), Lease Operate and Transfer (LOT), provide reliable services to the people by Past Efforts on Lease Build and Operate, and Develop involving private sector in the build, Transport Infrastructure Operate and Transfer (DOT). However, the operate and transfer of infrastructure in Related BOT in Nepal discussion here focuses more on BOT accordance with the liberal economic ! In 1994, the Government’s endeavor to projects. policy adopted by the Government. involve private sector in Kathmandu- In Nepal, the concept of BOT first BOT projects involve many agencies Hetauda fast-track road and to emerged in 1994. It took another five years and companies, which include: government construct an international airport at till 1999 for the Government—at the agencies, consultants, contractors, toll Simra did not bear any results. cabinet level—to first approve BOT companies, suppliers, experts, investors, and policy in the roads sector. In 2001, BOT operation and management companies. ! Efforts to award the development of policy was followed by a comprehensive Financing for BOT can be made available Lumbini International Airport on BOT policy covering all kinds of public from commercial banks, multilateral banks, basis was ineffective.
1 ! Even after six years of completion of a high speed surface transportation Constraints the cargo complex at Tribhuvan system, which could either be an PolicyPolicyPolicy International Airport, Civil Aviation expressway or a railway; (ii) ! The National Transport Policy 2001 Authority of Nepal has been unable to international airport at Nijgadh in Bara encourages private sector involvement award operation of the complex to a district. in the development of transport private party owing to a lack of well infrastructure, but the policy is yet to
outlined BOT rules. ! In 2001, the Ministry of Physical be fully implemented. Planning and Works (MoPPW) long
! The Manakamana Cable Car is a very listed seventeen BOT projects in the ! The prevailing rules and requirements successful private sector venture road sector. Five of the long listed of the Public Works Directives are too related to transport infrastructure. projects—shown in table 1—were demanding and inhibit domestic identified to have attractive financial contractors and consultants from
! In the year 2000, Kathmandu results. Toll charge was indicated as the participating in the International Municipality awarded two contracts: (i) main source of revenue. Competitive Bidding contracts. a 45-year contract—on the basis of
DOT system—to develop and operate ! Periodic maintenance of the Strategic ! Policy constraints concerning the a bus park, and (ii) a 20-year contract to Road Network can be based under consulting industry are (i) absence of build overhead bridges in Kathmandu DOT. legal instruments to deal with under the LOT system. consultancy services, (ii) nonexistence
! Where traffic is heavy, local bodies can of a focal ministry or a consultancy Potential PPP/BOT Projects apply BOT approaches in case of Local industry promotion center, (iii) in the Transport Sector Road Network (LRN). Whereas in low inadequate representation of ! PPP model can be applied to the traffic LRN, PPP based on annuity consultancy firms in national forums, (iv) following prospective mega projects: (i) contract or BOT with central or local lack of quality based selection system, Kathmandu-terai link—that could be government grants or financial and (v) a higher level playing field for constructed using various routes—by incentives could be applied. Government owned consultancy firms.
Table 1: Summary of Financial Analysis of Short Listed BOT Road Projects (in NRs millions)
S.N.S.N.S.N. RoadRoadRoad LengthLengthLength Analysis Period Construction Cost FIRRFIRRFIRR B:CB:CB:C Payback Period (km)(km)(km) (years)(years)(years) (%)(%)(%) (years)(years)(years)
1 Kanti Rajpath 60 25 1,137 29 5.5 5
2 Birgunj-Jitpur 19 25 270 26 4.9 6
3 Kathmandu, Outer Ring Road 72 25 5,680 26 4.7 6
4 Janakpur-Jayanagar 25 25 355 20 3.1 9
5 Sitapaila-Dharke 25 25 605 27 4.8 6
%= percentage, B:C= benefit/cost ratio, FIRR=financial internal rate of return, S.N= serial number Source: Nepal Engineering Consultancy Services Center Limited, 2001.
2 ! BOT policy and BOT Act have several Institutional Aspects and scope of work will have to be
differences, which need to be ! There is an absence of a full time BOT clarified; (ii) potential BOT projects harmonized to make BOT more attractive Committee at each ministry and a will have to be identified; and (iii) to private sector and NGOs. dedicated BOT Project Office for each information on BOT projects will have BOT/PPP project. The existing high to be disseminated.
! PPP policy 2003/04 is very generic and level nine member Coordination does not address practical issues Committee is not adequate for BOT Recommendations concerning (i) maximum period of projects. ! Start at least two to three BOT concession agreement, (ii) procurement projects—which would serve as model
process, (iii) financing mechanisms, and ! The Coordination Committee lacks projects—at the central level, and three (iv) facilities and protection from the proper coordination with various to five PPPs at the local level. Government. government agencies, and the BOT
Project Office is not sufficiently ! Prepare a list of potential PPP projects Legal Aspects empowered to implement, evaluate and at the central and local level, and ! Even though BOT Act was expedite BOT projects. publicize the importance of PPPs at both promulgated to promote transparency, levels.
competition and to minimize risk, the ! Agencies, such as Department of
Act could lead to non-transparent Roads, Department of Local ! Amend BOT policy and Act to form an procurements. Infrastructure Development and umbrella PPP policy and Act, and Agriculture Roads that are related to the include PPP under the local body. The
! Hydropower BOT projects are not maintenance of roads are not oriented umbrella policy should encourage covered under the comprehensive BOT towards functioning in a flexible, involvement of private sector. Also, policy, which does not include income autonomous and commercial regulations pertinent to specific sectors tax holidays, tax and duty rebates. environment. may be prepared by related sectoral These concessions are required to ministries under the umbrella PPP/BOT
attract foreign investment in transport ! After a few BOT projects are awarded, policy and Act. infrastructure. necessity for a regulatory agency will
arise. The proposed agency will (i) ! Define public transport infrastructures
! Updated BOT Act is intended for adjust toll charges or concession in the PPP policy and Act. central level works and does not periods, (ii) regulate tariff of
involve private sector in local bodies. transportation services, (iii) support ! Formulate BOT/PPP regulations and On the other hand, despite its development of surface transport include all concessions that are granted incomplete framework, the Local Self infrastructure, and (iv) prepare standard by the Government in the Act itself. Governance Act 1999 has provisions procurement documents for central and
for involving private sector, NGOs and local level works. ! Prepare strict guidelines for (i) BOT user committees. Thus, the BOT Act awards and memorandum of lacks a separate chapter for issues Administration understanding agreements so that all
relating to local bodies. ! BOT projects are constrained by lack private parties are treated in a fair of annual planning and budgeting. manner; and (ii) model concession
! BOT agreements signed by some Other constraints include a lack of agreements for BOT, Build Operate municipalities do not conform to the regulations, guidelines, documentation and Own, BTO, SPV, annuity, shadow normal BOT process and principle. and monitoring. toll, request for proposal, expression
Besides, civil servants avoid BOT ! The following steps will need to be of interest and PPP projects. procurement because BOT Act has not taken as confidence building
developed standard regulations, measures to successfully award BOT ! Make provisions for BOT/PPP in Local guidelines and documentation. projects: (i) Government’s objective Body Financial Rules.
3 ! Model concession agreements should ! Form a separate regulatory agency Ministry of Culture, Tourism and Civil have provisions for the following: (i) responsible for all types of surface Aviation, Ministry of Finance and give full compensation to the transport infrastructure. National Planning Commission. concessionaire if the Government Similarly, extend trainings to selected
terminates an agreement; (ii) develop a ! Establish a separate Road Development municipalities, district development formula for toll rate revision every three Fund with provisions for collecting user committees and village development years based upon consumer price index, charges for LRN. committees. traffic volume and actual costs; (iii)
grant permission to investors to ! Strengthen the existing road agencies ! Address concerns of consulting and commercially develop areas so that they can (i) identify contracting agencies. surrounding the project site; and (iv) maintenance needs, (ii) appraise BOT/ assure investors of attractive financial PPP projects, (iii) identify type of PPP ! Relax—on a case to case basis—Single returns. and the need for funding, (iv) make Borrower Limit imposed by Nepal Rastra business plans, and (v) contribute to Bank to facilitate domestic financing of ! Create a full time BOT Committee in sustainability of transport PPP. MoPPW and MoLD, and delegate it infrastructure. with necessary authority and budget. ! Policy makers should take into account
Also, establish a separate BOT Project ! Organize regular trainings on BOT remittance from abroad for financing of Office for each BOT project. system for the officials of MoLD, short term PPP projects.
The Economic Policy Network is an undertaking of the Ministry of Finance with Asian Development Bank support. It supports the preparation of policy papers based on participatory dialogue in the areas of (i) macroeconomic management; (ii) international trade, investment, and employment; (iii) infrastructure development; and (iv) tourism, agriculture and regional development. This policy brief is an abstract of the policy report Prospects and Approaches to Public Private Partnership in Transport Infrastructure prepared by B.B. Deoja, R.P. Adhikari, and B.R. Pande on behalf of the Federation of Contractors' Associations of Nepal. It has been edited for clarity and brevity. Please refer to the original report for a comprehensive discussion on issues and recommendations. Full version available at: http://www.mof.gov.np/economic_policy/pdf/ Prospects_Approaches.pdf
Economic Policy Network Ministry of Finance, Singha Durbar Kathmandu, Tel: 4211353, E-mail: [email protected] Web: www.mof.gov.np
EPN EPN TTTeam:eam:eam: Advisory Committee Chairperson: Mr. Narayan Silwal Focal Unit Chief: Mr. Bimal Wagle Team Leader: Mr. Dipendra Purush Dhakal
ADB Project Officer: Mr. Shahid Parwez Edited by: Mr. Samtenla Sherpa and Mr. Arun S. Rana
© 2006 Government of Nepal/Asian Development Bank
4 Government of Nepal Ministry of Finance ECONOMIC POLICY NETWORK PUBLIC PRIVATE PARTNERSHIP FOR POLICY FORMULATION POLICY BRIEF No. 8 November 2006
Strategic Approach for North-South Connectivity
epal's topography causes con- network. In 1994, there were major policy Likewise, the Tenth Five-Year Plan siderable impediment to the changes regarding road development, (FY2002–FY2007) emphasizes (i) prioritizing development of an efficient following which road networks were the construction of north-south roads, and modern transportation classified as shown in table 1. (ii) developing railways to integrate the system.N Yet, by the end of 2004, Nepal's In 2001, the National Transport railway system of India, (iii) implementing transport system, including village roads, Policy, which classified roads into central the 20-year Road Plan under Public Private comprised of more than 22,000 kilometer level transport system and local transport Partnership (PPP), (iv) developing roads (km) of roads and 50 airports, of which 34 system, was promulgated and the that connect district headquarters, and airports are presently under operation and development and maintenance of the road (v) maintaining roads. 11 are blacktopped. The mountains and system were decentralized. hills in the north and the terai in the south The 20-year Road Plan for 2002–2022, The North-South are now connected by 15 national high- published in 2002, envisages construction Connectivity ways and more than 51 feeder roads. Thus, of an additional 4,040 km of Strategic Road The nation should take advantage of the the share of transport, communication, Network (SRN), and the investment existing transport network and further and storage subsector to gross domestic required is estimated to be NRs36,153 develop a strategic approach for north- product (GDP) at current market price grew million. Furthermore, in 2004, the south connectivity to uplift social, cultural, from 5.7% in fiscal year (FY) 1990 to 9.4% Department of Roads (DoR)—covering the and economic development with an in FY2005.1 Similarly, the total length of 20-year plan period—came up with a master emphasis on agriculture, trade, industry, roads also increased from 6,706 km in 1989 plan for SRN, which stressed on and tourism. The north-south road to 17,182 km in 2004. (i) extending SRN, (ii) effectively connectivity should be developed keeping In the early 1970s, the north-south maintaining road networks through asset in view the following approaches: road plan was emphasized under the preservation, (iii) providing improved (i) Links to large settlements and growth axis strategy conceived with the access to all district headquarters, and (iv) access for agriculture centers of trade and objective of socioeconomic integration of developing roads to complement the tourist destinations. Effective the country. As a result, the 1970s and poverty reduction program and improve development of roads such as highways 1980s witnessed an expansion of road access to the mid hills and terai. and feeder roads will (i) connect different
1 The fiscal year (FY) of the Government ends on 15 July. Fiscal year before a calendar year denotes the year in which the fiscal year ends. For example, FY2002 ended in 15 July 2002.
1 Table 1: Road Classification and Responsible Agency
Road Class Description Road Length (km) Responsible Agencies
Strategic Road Main routes connecting major towns and 4,859 Department of Roads (DoR) Network (SRN) administrative centers and feeder roads that connect to national highways
District Roads Roads connecting groups of villages within a 9,775 District Development Committees district to roads of a higher class (DDC). Coordinated by the Department of Local Infrastructure Development and Agricultural Roads (DoLIDAR).
Urban Roads Roads within municipal boundaries except SRN 2,200 Municipalities and coordinated by DoLIDAR
Village Roads Roads linking villages to roads of a higher class > 20,000 Village Development Committee (VDC) and DDC and coordinated by DoLIDAR
Source: Department of Roads. 2004. Transport Connectivity Sector Project. Inception Report, Asian Development Bank TA 4347-NEP. Prepared by Oriental Consultants, Kathmandu.
settlements of people; (ii) reduce supply two giant and growing economies provide highways—AH1, AH2, AH5, AH42— side constraints—improve market further opportunities to expand the trade and the Chinese Highway G219 can be access—and contribute to poverty sector. Though there are nine official connected as planned, and if Nepal is alleviation; (iii) increase production, crossing points with the People’s Republic able to negotiate a favorable trade and employment, economies of scale, and of China (PRC), the only vehicular road transit treaty with the PRC, Nepal’s productivity; (iv) lower the cost of existing at present is through Kodari. The location will be of strategic importance production; (v) boost investment and Syabrubesi-Kerung (18 kms) road is going in the international trade route, and facilitate the growth of special economic to be the second road connecting to TAR constraints arising from Nepal’s land- zones; and (vi) not only provide access to of China. A few other road projects that locked location will be resolved. many identified tourist destinations in the are in the offing are (i) Jomsom-China (iv) Links to district headquarters. remote mountain regions, but would also border, (ii) Khandbari-Kimathanka, Currently, 10 district headquarters are not promote religious tourism in important (iii) Simikot-Hilsa, (iv) Darchula-Tinkar, connected by the SRN. Nevertheless, Hindu and Buddhist pilgrimage sites. (v) Taplejung-Olangchungola, and construction is ongoing with the help of (ii) International connectivity. (vi) Lamabagar-China border. donor support and the Nepal Army. While Historically, Nepal has been an entrepot (iii) The Asian highways. Interna- some district headquarters are expected to for commerce between Tibet Autonomous tional links through several Asian high- be connected in a couple of years, progress Region (TAR) of China in the north and ways are envisioned connecting Birganj, has been slow in others. India in the south. Trade between Nepal’s Narayanghat, Kathmandu, Kodari, (v) Fast-track connection between two neighbors is expected to increase from Lhasa, Kakarbhitta, Mahendranagar, Kathmandu and the terai. The proposed $13 billion at present to over $30 billion a Dhaka, Kolkatta, Barahi, Varanasi, 90 km fast-track route will substantially year by 2010. Nepal’s open border with Kanpur, Delhi, Islamabad, Lanjhau, and reduce the distance, time, and costs of India and its geographic position between Shanghai. Thus, if the proposed Asian transport between Kathmandu and the
2 terai. Furthermore, the proposed route growth as projected in the Tenth Plan. road sector policy that integrates the would increase transport capacity and However, for FY2005, the Nepal connectivity plans with wider could facilitate an effective transit link Government allocated only NRs5.5 development considerations such as between the PRC and India. The project billion. inclusive development, poverty cost is estimated to be $80 million and the reduction, and transport access to economic internal rate of return (EIRR) at ! The recent conflict has stalled the relatively large settlements—with 23.38%. The different route options—for expansion of road network. population more than 2,500—along the fast-track connection—that have been completed SRN routes. studied are the (i) tunnel route via Hetauda, ! Lack of coordination among sectoral
(ii) Bagmati corridor route to link to the ministries and departments has made it ! Revise the existing Act and rules to East-West highway, and (iii) railway link difficult to implement reforms and include major elements of transport to Birganj. achieve the desired results. Similarly, the development and management. Also (vi) Construction of broad gauge Medium Term Expenditure Framework develop operational standards, railway link with Indian Railway system. (MTEF), instituted by the Government, manuals, and directives to be included The proposed link is essential to reduce has not been implemented seriously. in the Act. inland transport costs and to increase the effectiveness of international trade. It is ! Government agencies are not results ! Include "expressway" and "interna- important to enter into meaningful oriented and do not provide incentives tional highway" categories in the discussions with India to increase the to improve efficiency. Government's road classification. efficiency of the existing broad gauge link via Birganj Inland Clearance Depot. ! DoR does not have adequate skills to ! Reform and strengthen implementing (vii) Upgrading of mountain airports. carry out effective community level organizations like DoR, Department of Most of the 40 airports in the mountain participation in road building operations. Local Infrastructure Development and and hill regions are short takeoff and Agricultural Roads (DoLIDAR), and landing strips with unpaved runways, and ! There could be environmental impacts, Civil Aviation Authority of Nepal. do not have dependable communication which may result from road and navigational equipment. Airport construction, consumption of local ! Prepare a realistic MTEF for the upgrading is essential not only to boost resources, lack of proper drainage transport sector and a 10-year Road tourism and connection but it is also critical systems, and increased parking space. Sector Investment Plan revealing for safety reasons. financial implications of the proposed
! Traffic safety can become a challenge Road Sector Program. since north-south road connectivity will Constraints and Challenges significantly increase volume of traffic ! Ensure necessary provisions and ! The paucity of funds available for de- and speed along Nepal's highways. environment to attract private sector veloping the road sector is a signifi- participation and donor funds in
cant constraint. The Roads Board ! Construction of north-south highways transport development. Nepal—established with the objective will require land acquisition and
of mobilizing domestic resources for resettlement of local people. Thus, ! Upgrade mountain airports and road maintenance—was able to gather appropriate resettlement plan should be establish satellite communication and less than a third of the required prepared to reduce damages and Geographic Positioning Systems to amount. Therefore, the condition of grievances. make air travel safe and dependable. SRN has been deteriorating since 2001. Recommendations North-South Connectivity ! Nepal needs to invest around NRs12 General ! Upgrade and maintain the Arniko billion a year on road expansion and ! Review National Transport Policy 2001 Highway to an international highway maintenance to facilitate a 6% GDP and prepare a coherent and integrated level. Also, improve Galchhi-Trisuli-
3 Syabrubesi road to an international Indian Railway system and plan for an SRN that provide connectivity to highway level. east-west electric railway system. For agriculture, tourism, trade, and industry this, establish a railway cell in the related growth centers.
! Expedite completion of the 18 km long Ministry of Physical Planning and
Syabrubesi-Kerung link and the Works. ! Adopt policies to promote domestic pri- Jomsom-Mustang-Korala link. vate sector to assume the lead role for
! Make build-operate-transfer laws developing the growth centers.
! Conduct a comprehensive feasibility attractive to ensure private investment in
study of Kathmandu-terai fast-track infrastructure development—including ! Prioritize the development of key north- route and complete the Detailed Project the proposed international airport. south infrastructure in phases over the Report of the selected model route short, medium, and long term. Sequencing
within 18 months. The selected project ! Prioritize on economic objectives while of the development and implementation should be considered solely on the investing loan money to link of these infrastructures is recommended. basis of EIRR. unconnected district headquarters.
! Carry out negotiations with the PRC and
! Conduct a detailed study on the ! DoLIDAR and District Development India on the possibilities of making implications of developing Nepal as a Committees should identify feasible Nepal a transit country for trade transit country. road links, which could enhance between the two growing economies. agriculture, tourism, trade, and industry. Also, negotiations will need to take
! Initiate the development of broad Similarly, DoR should also emphasize place before the construction of a direct gauge railway connections with the completing the continuing works on railway link between the two countries.
The Economic Policy Network is an undertaking of the Ministry of Finance with Asian Development Bank support. It supports the preparation of policy papers based on participatory dialogue in the areas of (i) macroeconomic management; (ii) international trade, investment, and employment; (iii) infrastructure development; and (iv) tourism, agriculture, and regional development. This policy brief is an abstract of the policy report Strategic Approach for North-South Connectivity prepared by Mr. Iswer Raj Onta on behalf of the Nepal Engineers' Association. It has been edited for clarity and brevity. Please refer to the original report for a comprehensive discussion on issues and recommendations. Full version available at: www.mof.gov.np/ economic_policy/pdf/Strategic_Approach.pdf.
Economic Policy Network Ministry of Finance, Singha Durbar, Kathmandu, Tel: 4211353, E-mail: [email protected] Website: www.mof.gov.np
EPN Team: Advisory Committee Chairperson: Mr. Narayan Silwal Focal Unit Chief: Mr. Bimal Wagle Team Leader: Mr. Dipendra Purush Dhakal
ADB Project Officer: Mr. Shahid Parwez Edited by: Mr. Samtenla Sherpa and Mr. Arun S. Rana
© 2006 Government of Nepal/Asian Development Bank
4 Government of Nepal Ministry of Finance ECONOMIC POLICY NETWORK PUBLIC PRIVATE PARTNERSHIP FOR POLICY FORMULATION POLICY BRIEF No. 99No. November 2006
Building Confidence in Tourism Through Crisis Management
ourism is an industry and order situation of the country, (iii) Nepal has been one of the world’s characterized by a high degree pollution, (iv) deteriorating condition of most popular tourist destinations. The sta- of vulnerability to many kinds national heritages, (v) unplanned tus of tourism in Nepal is measured in terms of crisis such as individual, urbanization of Kathmandu, and (vi) of number of tourist arrivals. Table 1 shows Tsocial, political, economical or ecological; deteriorating condition of Nepal Airlines the number of tourist arrivals in the past and at many levels—national, regional and Corporation (NAC). decade: the number of arrivals increased international. Recognizing the vulnerability Hence, crisis management in tourism to 491,504 in 1999 and then started declin- of tourism, the World Tourism cannot be reduced to simply rescue ing. After 2002, tourism has been showing Organization has identified consumer operations. Appropriate projection of signs of revival but at a slower pace. confidence in the safety of air travel, possible crisis, proper planning and In an average, a tourist spends nine uncertainty of the near future and global effective management are necessary to ten days in Nepal. Nepal Tourism Board economic recession as three main measures for reducing the impact of crisis (NTB) has estimated visitor expenditure at damaging factors for the industry. Since in tourism, besides enhancing the industry $31 per day. It is widely believed that rise the late 1990s, Nepal has been and national economy. and fall of total revenue generation from experiencing, with increasing frequency, tourism follows the same trend as the num- the effects of crisis in tourism. Furthermore, Present Status ber of visitors in the country. However, disturbances of any form— whether social, of Tourism in Nepal Table 1 shows that the highest jump in third economic or political—in the originating The basic objectives for tourism promo- country tourism income occurred in the country, equally affects tourism in the tion set forth in the Tenth Plan (2002–2007) year 2003, an increase in 80.5% from the global level. are (i) advancement of sustainable and previous year; while increment in third Nepalese tourism experienced a record qualitative tourism; (ii) conservation of country tourist arrival was only 20.6% in high with half a million tourist arrival in historical, cultural, religious and archaeo- the same year. Furthermore, third country 1999. The increasing trend of tourist arrival logical heritages; and (iii) security and tourists continued to increase by 17.2% in was soon reversed after tourism started quality enhancement of air transport. 2004 but income decreased by 6.7%. undergoing crisis in the year 2000. Some Accordingly, a set of strategy to examples of crisis generating factors at the achieve these objectives has been devel- Causes of Crisis national level are (i) political unrest such oped. Involvement of Nongovernmental in Nepalese Tourism as frequent street demonstrations and the Organizations (NGOs) and private sector ! Tourism has increasingly become a recent insurgency, (ii) negative and is envisaged in all major tourism related centralized industry and its benefits are exaggerated media coverage about the law activities. concentrated in limited areas and
1 Table 1:Tourist Arrival and Receipts
YYYearearear Third Country IndianIndianIndian TTTotalotalotal ReceiptReceiptReceipt Income Per Capita No.No.No. %Change%Change%Change No.No.No. %Change%Change%Change No.No.No. %Change%Change%Change $('000)$('000)$('000) %Change%Change%Change $$$ %Change%Change%Change
1998 320,455 143,229 463,684 152,500 44.2
1999 350,843 9.5 140,661 (1.8) 491,504 6.0 168,100 10.2 39.0 (11.8)
2000 367,731 4.8 95,915 (31.8) 463,646 (5.7) 166,847 (0.8) 38.2 (2.1)
2001 296,917 (19.3) 64,320 (32.9) 361,237 (22.1) 140,276 (15.9) 39.6 3.7
2002 208,691 (29.7) 66,777 3.8 275,468 (23.7) 106,822 (23.9) 64.8 63.6
2003 251,769 20.6 86,363 29.3 338,132 22.7 192,832 80.5 79.1 22.1
2004 294,971 17.2 90,326 4.6 385,297 13.9 179,941 (6.7) 45.1 (43.0)
%= percentage, No.= number of tourist arrival Source: Ministry of Culture, Tourism and Civil Aviation, Government of Nepal
groups. In addition, lack of involvement ation increased the risk perception of (SARS) in South East Asian countries; of local communities in tourism related the country. and (ix) increasing tension and conflict
services has also added to centralization ! Besides the critical condition of NAC, between India and Pakistan, after the and concentration of ownership. volatility in the aviation sector has re- attack in the Indian Parliament in 2001.
! Tourism’s share in total foreign sulted in five airlines of international exchange earnings peaked at 21.4% in repute ending their operations. Initiatives Taken fiscal year (FY) 1996 and then declined ! The following incidents have had a to Mitigate Crisis to 7.1% in FY2005. negative impact on tourism: (i) hijacking In 2003, the Government established a high
! Increased and unplanned settlement of one Indian Airlines flight from level Tourism Crisis Management Committee around archaeological and heritage Tribhuvan International airport in 1999, under the chairpersonship of the Minister of sites threaten the survival of cultural followed by suspension of all of its Culture, Tourism and Civil Aviation tourism—a principal product of flights to Nepal for six months; (ii) royal (MoCTCA). The committee is comprised of Nepalese tourism. palace massacre of 2001, which representatives of ministries whose activities
! Rapid growth of service infrastructure contributed to spread of negative news are related to security and tourism, and and a proliferation of service providers to the outside world; (iii) attack on the representatives of security agencies and has deteriorated the quality of service World Trade Center in 2001, resulting private sector. The functions of the and negated the value of the industry. in a decline in American and European committee are as follows: (i) formulate and
! The recent armed conflict had posed a tourist travel; (iv) the Gulf war and the approve rules and regulations regarding serious threat to the law and order situ- war in Afghanistan; (v) the recent tourism related crisis management; (ii) ation resulting in declining tourism rev- global economic slow down; (vi) natural coordinate with Government agencies, NGOs enue—tourist arrivals increasingly catastrophe such as the Tsunami; (vii) and other concerned actors to resolve crisis; declined during the years when the con- declaration of state of emergency in the (iii) provide directives and support to related flict intensified. country and frequent strikes; (viii) the subordinate organizations; and (iv) monitor
! Negative national and international Bali bombings of 2002 and the outbreak crisis situations and actions taken during media coverage on Nepal’s security situ- of Severe Acute Respiratory Syndrome such situations.
2 Similarly, MoCTCA has also amended rules and regulation making them ! Private sector organizations have not established Tourism Crisis Response more friendly towards trekkers and been able to self regulate and maintain Action Unit under NTB. The chief mountaineers; and (iii) visa regulations quality. executive of NTB is the convener of the have also been relatively relaxed and visa ! Frequent demands for wage hikes have unit and the functions of the unit are to (i) fee waived for visitors from People’s shrunk profits to operating cost levels. coordinate with concerned principal and Republic of China and SAARC countries. Moreover, increased competition in a subordinate agencies whenever tourism limited market has further reduced the related crisis situation arises, (ii) collect Other Major Issues chances of making a desired level of and update information concerning ! Nepalese mountain tourism is facing profit. Thus, many companies have tourism related crisis, (iii) disseminate increasing competition from neighbor- adopted cost cutting strategies. crisis related information, and (iv) monitor ing countries that are also coming up ! Government’s policy measures have not activities related to crisis management. with equally attractive mountain tour- been successful in reviving the Both the high level committee and the ism packages. deteriorating condition of NAC. action unit have not been able to deliver ! Nepalese tourism has weak backward ! Even though a national policy to promote effective services. linkages—the primary beneficiaries of private sector in the airline business On the other hand, NTB—formed tourism are centered in Kathmandu, exists, their growth in the provision of under a joint public-private initiative— while tourism as a product is based in external services is still very slow. besides playing an important role in rural areas. ! Although NTB has developed a 15-year promoting tourism has taken initiatives to ! Unplanned and area focused tourism marketing strategy for tourism mitigate tourism related crisis in the development has caused unequal promotion, resource constraint is a major country. In that context, despite budgetary tourism distribution in different but hurdle in implementing the proposed constraints, NTB has been coordinating equally potential destinations within the strategy. It is estimated that NTB the movement of special bus services country. requires at least $5 million annually for between the airport and major hotels ! Undue competition, especially during delivering effective market growth. during closures (bandhs). crisis situations, has deteriorated the ! Revenue generation for marketing is The Government and the private quality of services provided. from tourist arrivals, and the volume of sector have joined hands to promote Nepal ! Tourism promotion is overwhelmingly tourist is dependant upon an effective in neighboring countries and in major focused on increasing the number of marketing strategy, thus forming a vi- tourist generating markets so that the tourist arrivals. Thus, issues related to cious cycle. country’s international image is upgrading the quality of services and ! The current tourism tax policy—to repositioned in a positive light. Some of undertaking effective promotion to at- collect NRs500 from every tourist at the the promotional campaigns launched were tract high spending tourists are not paid point of departure—may not help to Festival of Light in June 2000, South Asian enough attention. meet marketing costs, unless tourist
Association for Regional Cooperation ! There is a lack of prompt, reliable and arrivals increase exponentially. (SAARC) summit in January 2002, accessible media center for disseminat- ! Restoration of peace in the country is Destination Nepal Campaign in 2002/03, ing correct information to not only vital for reviving tourism industry and Fly-n-Win scratch card scheme, Summer counter negative propaganda, but also increasing the volume of tourist arriv- Getaway program, Pasupati Darsan and to provide accurate information. als both for urban and rural areas.
Mt. Everest Golden Jubilee. Similarly, the ! Regardless of the Government’s policy Government has taken the following reform initiatives taken to boost Recommendations additional measures to mitigate crisis: (i) tourism, it still lacks an effective crisis ! Develop products that not only meet launched community based tourism management policy to respond to crisis the needs of priority markets, but also program called Tourism for Rural Poverty situations both at the national and help to evenly distribute visitors geo- Alleviation Program (TRPAP) to reduce international level. graphically and seasonally. rural poverty; (ii) opened new peaks for ! Government needs to formulate a policy ! Make tourism promotion a national pri- climbing, relaxed restrictions to many to deal with both national and interna- ority and develop tourism into a national protected areas of the country, and tional media. industry. For that, the Government
3 should initiate dialogue with foreign Kathmandu, Pokhara, Chitwan and in poverty alleviation and reduce the tour operators and international media Lumbini. crisis caused by poverty at the national
on Nepal’s improved situation, and even ! Amend the current aviation policy to level. invite foreign media and tour operators provide incentives to airlines operating on a familiarization trip. in Nepal to increase their operations. In High Level Crisis ! Support partnership based marketing to addition, apt policies should be Management Cell reduce cost of promotion and to market formulated to strengthen NAC. Institutionalized joint efforts among
Nepal aggressively. ! Promote tourism investment in Small stakeholders need to be undertaken to
! Initiate more programs like TRPAP to in- and Medium Enterprises (SME) to develop approaches to solve crisis. Thus, volve local communities for nature con- boost local level investment, capital the following organizational structure is servation and sustainable development. formation and value added from recommended for the High Level Crisis
! Direct funding agencies to programs tourism. SME in tourism will also help Management Cell: related to alleviation of rural poverty and integrate local development programs with tourism promotion activities. High Level Crisis Management Cell ! Mobilize Nepalese embassies in different countries to disseminate positive news, respond to adverse news Crisis Management Action Unit and promote tourism and economic development.
! Establish tourism information center on Research & Preparedness Unit Action UnitUnitAction Media UnitUnitMedia the trunk routes connecting Observation Unit
The Economic Policy Network is an undertaking of the Ministry of Finance with Asian Development Bank support. It supports the preparation of policy papers based on participatory dialogue in the areas of (i) macroeconomic management; (ii) international trade, investment, and employment; (iii) infrastructure development; and (iv) tourism, agriculture and regional development. This policy brief is an abstract of the policy report Building Confidence In Tourism Through Crisis Management prepared by Mr. Rabindra Adhikari on behalf of Nepal Association of Tour Operators. It has been edited for clarity and brevity. Please refer to the original report for a comprehensive discussion on issues and recommendations. Full version available at: www.mof.gov.np/economic_policy/pdf/Building_Confidence.pdf
Economic Policy Network Ministry of Finance, Singha Durbar, Kathmandu, Tel: 4211353, E-mail: [email protected] Website: www.mof.gov.np
EPN EPN TTTeam:eam:eam: Advisory Committee Chairperson: Dr. Madhav Prasad Ghimire Focal Unit Chief: Mr. Bimal Wagle Team Leader: Mr. Dipendra Purush Dhakal
ADB Project Officer: Mr. Shahid Parwez Edited by: Mr. Samtenla Sherpa and Mr. Arun S. Rana
© 2006 Government of Nepal/Asian Development Bank
4 Government of Nepal Ministry of Finance ECONOMIC POLICY NETWORK PUBLIC PRIVATE PARTNERSHIP FOR POLICY FORMULATION POLICY BRIEF No. 1010No. November 2006
Enhancing Economic Diplomacy for Trade, Investment and Employment
epal began to open up to the complement such an effort both at home Ministry of Foreign Affairs (MoFA) to international community in and abroad. Unfortunately, economic political activities overshadows economic the 1950s. Until then, eco- diplomacy has been all along a typically necessities, and the sectoral ministries nomic interactions with the “on and off” issue, discussed at times and responsible for economic affairs relevant Noutside world in aid, trade, tourism and ignored quite often. There has been no to their ministries have no mechanism for investment were limited. Even in the late coordination among the concerned coordinating with the economic units of 1960s, Nepal’s trade with neighboring agencies. MoFA. Hence, a lack of coordination has countries like India were limited— in fiscal In the recent past, the two steps been a major impediment for embassies year (FY) 1968 exports to India and imports related to economic diplomacy deserve and missions abroad to articulate the from India were limited to about NRs400 consideration: one is the High Level Task economic interest and needs of Nepal in million and NRs440 million, respectively. Force constituted by the Government in a clear manner. Only 6,000 tourists visited Nepal in 1962. November 1995, and the other a Policy Therefore, the underlying approach Since then Nepal has come a long way: Study Group on Nepal’s Economic to Nepal’s economic diplomacy in future (i) total trade with as many as 120 countries Diplomacy constituted by the Institute of should be guided by several now runs into over NRs204 billion—as per Foreign Affairs in March 2002 “to considerations based on past the figures from FY2005, (ii) 953 industries recommend to the Government what experiences and the changing economic have been approved for foreign investment practical measures are needed to make environment both at home and abroad. by the end of the review period in FY2005, economic diplomacy a reality”. These considerations are (i) economic and (iii) the number of tourist arrivals Unfortunately, the recommendations from diplomacy is not a central issue in increased to about 491,504 in 1999. these studies have not been seriously foreign policy; (ii) currently, there exists The liberalization of the economy after implemented. no workable mechanism between the 1990 accelerated Nepal’s economic MoFA sectoral ministries, private sector interactions with the world, which is likely Approaches to Enhance and civil society groups; (iii) issues to intensify in the future. There is an urgent Economic Diplomacy concerning restructuring of MoFA; (iv) need to articulate and implement The main constraint in Nepal’s economy the problem of feedback system within appropriate economic policy to utilize the diplomacy is its inability to mainstream MoFA; and (v) embassies and missions potential economic opportunities. economic diplomacy into the total foreign have not played a satisfactory role in Economic diplomacy can and should policy of the country. The limitation of economic diplomacy.
1 Once, economic diplomacy becomes Planning Commission as members is Economic Affairs Division: A new an integral part of foreign policy, it is suggested. The secretary of the MoFA Economic Affairs Division is suggested important to ensure that it is not should serve as member secretary of this as a division responsible for compartmentalized into one division or Council. The proposed EPCC will be an coordination both within and outside section of MoFA. The entire ministry in effective mechanism for mainstreaming MoFA. The division will also be coordination with other sectoral ministries development policies and priorities into the responsible for the systematic should be a part and parcel of the economic foreign policy of the country, and for processing and analysis of information, units. Furthermore, to make economic steering economic diplomacy both at home and will serve as secretariat of the diplomacy effective and result oriented the and abroad. foreign secretary to help discharge his ministry would need additional staff and duty as member secretary of EPCC and resources to ensure regular Consultative Committee (CC): This as chairperson of the Private Sector communication and cooperation between Committee will comprise of ministers of Partnership Forum (PSPF). the ministry and its missions abroad. finance and foreign affairs as Above all, coordination and cooperation chairpersons and should include Embassies and Missions: Embassies is necessary for missions and sectoral secretaries of: MoF, MoFA, MoLTM, and missions should expand their activities ministries to facilitate and support the role MoICS, and Ministry of Culture, Tourism, beyond routine consular matters, internal of private sector who constitute the key and Civil Aviation as members. The joint administrative works and social and players of economic diplomacy. secretary of the proposed Economic ceremonial activities. Embassies and The following section makes Affairs Division of MoFA serves in this missions should (i) collect and compile recommendations on institutional committee as member secretary. The CC latest information and data on Nepalese structure and mechanisms for the smooth serves as secretariat to EPCC and other economy from Economic Affairs Division functioning of economic diplomacy and to functions of CC is to provide a forum for and directly from sectoral ministries; (ii) resolve the above discussed constraints. mutual consultation and review of collect and compile information on the Government policies and programs of economy of the host country with an Recommendations national interest, and to establish good objective to identify potential areas for Institutional Structure and Mechanisms communication among concerning promotion of trade, tourism, investment The following institutional structure and ministries. Additionally, it should and employment; (iii) prepare annual mechanisms for integrated functioning identify problem areas at the political programs to be implemented by the of economic diplomacy are level. missions independently and with recommended: cooperation of Nepalese private sector; Economic Units: Currently, the (iv) project Nepal as a country with Economic Policy and Coordination existing organizational structure of opportunities for expansion of economic Council (EPCC): This high level body is MoFA is compartmentalized without ties; (v) present progress report of program recommended to review and evaluate, on mutual interactions either among implementation to Economic Affairs a regular basis, external assistance and themselves or with other sectoral Division on a quarterly basis; and (vi) seek commitments made by the Government to ministries. Thus, there is hardly any instructions from MoFA to pursue and international institutions and division or unit responsible for expedite official request for development governments. It is important that the intersectoral issues such as economic assistance. Government abide by its commitments diplomacy. For this, it is recommended made at the international level to maintain to dovetail the Economic Unit with the Private Sector Partnership Forum: credibility and predictability. For this, an existing four divisions of MoFA. The PSPF will bring private sector into the apex body with the Prime Minister as its primary functions of the Economic Unit mainstream of economic diplomacy under chairperson and ministers of: Finance in each relevant division is to act as a meaningful partnership with the (MoF); Foreign Affairs; Industry, economic intelligence unit, keeping track Government. PSPF represents private Commerce and Supplies (MoICS); Labor of relevant changes and development in sector organizations such as Federation and Transport Management (MoLTM); economic policies of countries, regions of Nepal Chamber of Commerce and and the vice chairperson of National and territories each division represents. Industries, Confederation of Nepalese
2 Industries, bilateral chambers and among the various agencies of the scope for promotion of Nepal’s economic commodity organizations. The secretary Government and private sector, concerned interests in trade, tourism, foreign of MoFA will head the forum with with economic affairs both at home and investment and employment. In foreign representation from relevant sectoral abroad. It is a schematic presentation that trade, currently, India alone accounts for ministries. The major functions of PSPF clearly shows the flow of information more than half of our exports and almost will be to (i) identify policy and between and among all the relevant half of imports. operational issues related to trade, agencies both within and outside the Similarly, out of the total foreign tourism, investment, employment, Government. It establishes an all inclusive investment of NRs54 billion in the form of technology etc; (ii) provide concrete information networking system essential authorized capital in operating joint venture suggestions for addressing identified for the effective conduct of economic industries numbering about 400 as of May issues with options for further promotion diplomacy. The schematic presentation 2003, India alone accounted for 28.6%— of national economic interests; (iii) also shows that the information between NRs13.9 billion—while that of People’s present outcomes to CC and EPCC for embassies and sectoral ministries is Republic of China, South Asian necessary decision and action; and (iv) normally communicated through the Association for Regional Cooperation formulate annual joint promotional Economic Affairs Division of MoFA. This countries other than India, and the activities. ensures an institutionalization of the Association of South East Asian Nations system. accounted for only 7.0%, 2.5%, and 2.7%, Promotional Approaches respectively. Information Networking Modality TTTrade and Investment: Nepal’s Clearly, economic diplomacy can be Figure 1 is a two-way traffic for economic relations with the world remain used for expansion of trade and information dissemination between and concentrated to a few countries. There is investment, initially focusing on those
Figure 1: Schematic Presentation of Information Networking and Dissemination
Economic Policy and Coordination Council (EPCC)
Sectoral ministries Consultative Committee MoFA
Embassies and missions Economic Affairs Division Economic units of MoFA
Consulates of Nepal Private Sector Partnership Forum (PSPF) Consulates in Nepal
Arrows indicate the flow of information
3 countries and regions with great facing impending labor shortage due to an consular and ceremonial activities, the latter potentials. ageing population. is denied a few more million rupees for Wherever possible, attempts should be promotion of trade, investment, employment Foreign Employment: Remittance made for some sort of bilateral agreement or and tourism. Therefore, it is necessary to give earned from foreign employment allows (i) memorandum of understanding with up such “penny wise pound foolish” policy for the displaced to gain employment, (ii) governments of host countries to safeguard in favor of giving a chance to embassies and acts as a major source of household Nepalese interests against unfair practices. missions for playing their overdue role in income, and (iii) has provided a cushion to In countries like Saudi Arabia, Qatar economic diplomacy. If properly mobilized, the economy largely compensating the and Malaysia the position of labor attaché resources may not be a constraint for much of growing trade deficit. should be created in our missions and either the needed promotional activities. Besides So far, only Saudi Arabia, Qatar and a Government employee proficient in the making budgetary allocations for embassies Malaysia have provided employment to local language or a qualified local person and missions under the regular budget, more than 80% of Nepalese youths should be appointed. allocations can also be made under the employed abroad in the last decade.1 development budget and a small fraction of Effective and aggressive diplomatic Generation of Resources total allocated budget to trade, tourism, initiatives are needed to explore further While the Government spends as much as investment and employment related ministries possibilities in Arab countries, Korea, NRs600 million or more every year in running could be earmarked for undertaking Japan, Malaysia and some other countries the embassies and missions mainly for promotional activities.
1 India’s case is not considered here because Nepal does not earn foreign exchange from Nepalese labor in India.
The Economic Policy Network is an undertaking of the Ministry of Finance with Asian Development Bank support. It supports the preparation of policy papers based on participatory dialogue in the areas of (i) macroeconomic management; (ii) international trade, investment, and employment; (iii) infrastructure development; and (iv) tourism, agriculture and regional development. This policy brief is an abstract of the policy report Enhancing Economic Diplomacy For Trade, Investment and Employment prepared by Dr. Badri Prasad Shrestha. It has been edited for clarity and brevity. Please refer to the original report for a comprehensive discussion on issues and recommendations. Full version available at: www.mof.gov.np/economic_policy/ pdf/Enhancing_Economic.pdf
Economic Policy Network Ministry of Finance, Singha Durbar, Kathmandu, Tel: 4211353, E-mail: [email protected] Website: www.mof.gov.np
EPN EPN TTTeam:eam:eam: Advisory Committee Chairperson: Mr. Bharat Bahadur Thapa Focal Unit Chief: Mr. Bimal Wagle Team Leader: Mr. Dipendra Purush Dhakal
ADB Project Officer: Mr. Shahid Parwez Edited by: Mr. Samtenla Sherpa and Mr. Arun S. Rana
© 2006 Government of Nepal/Asian Development Bank
4 Government of Nepal Ministry of Finance ECONOMIC POLICY NETWORK PUBLIC PRIVATE PARTNERSHIP FOR POLICY FORMULATION POLICY BRIEF No. 11 November 2006
Policy Reform Networking in Nepal: A Suggested Framework
epal’s attempt to Besides, even though a mobilized civil Moreover, research will need to find subtle develop networking policy society has been demonstrating an elevated ways to link with policy by enhancing the reform was initiated during level of political awareness, they are still quality of knowledge and by focusing on the beginning phases of lacking as a constituency in supporting advocacy. Above all, research capacities Neconomic liberalization in the early 1990s, economic reforms. should be built to influence policy by with an objective to accelerate the pace of Therefore, a vehicle enabling experts, drawing on the huge potential of Information economic development and reduce the civil society members, stakeholders and Communication Technology (ICT). level of poverty. The National Planning policymakers to form a broad policy network Policy networking avails an interactive Commission (NPC) spearheaded the reform constituency would build and strengthen a process providing opportunities for process identifying sectors to be reformed, coalition for reforms. sharing information among stakeholders sequencing and adjusting speed of reforms, Policy reform networks can serve to identify problems and reduce time lags and monitoring, evaluating and several functions in terms of strengthening between problem identification and implementing the reform agenda. In this research capacities and will (i) provide a appropriate policy response. This exercise process, NPC worked in coordination with critical mass for professional peer review, (ii) helps in designing and formulating the Ministry of Finance (MoF) and the help in keeping pace with rapidly changing appropriate policies, which takes into Nepal Rastra Bank. frontiers of knowledge, (iii) provide a medium account most of the features that are The reforms implemented through for exchange of comparative research and supported by stakeholders. policy networking were successful in ideas, (iv) offer specialized training and Policy verification or appraisal is a improving trade, balance of payment, development not available nationally, and (v) crucial step, which helps to check the foreign exchange reserves, Government not only enhance the profile of a given effectiveness of prescribed policies and revenue mobilization, fiscal balance, private discipline but also professionalize it. appraises investment proposals. sector investment, economic growth and Above all, the main objective of policy Translating policy design into policy employment generation. Furthermore, networks and research is to influence policy implementation involves long time intervals policy reform networking enabled making, which is a process that entails several and the process entails strong and smooth homegrown policy reform agenda and stages discussed in the following section. functioning partnerships between policy fostered a participatory approach among analysts, designers and formulators on the a variety of stakeholders. Policy Making Process one hand, and Government decision makers Notwithstanding the above mentioned in Nepal on the other. In order to ensure the effective improvements in economic indicators, Policy making itself is a process that entails implementation of policies, evaluation and policy reform process is still characterized identifying problems, recommending impact assessment are carried out at specific by impediments and implementation delays. solutions and obtaining political consensus. intervals.
1 Notwithstanding the above policy bilateral and government agencies to broad principal objectives: (i) build a processes and their significance in making develop and strengthen research capacities credible local capacity for policy research; policy reform a success, policy execution by supporting research centers in various (ii) generate research results for use by and its effectiveness depends primarily on disciplines to not only establish networks, policy makers; (iii) promote links between three factors: (i) political factor—the ability but also to seek for effective solutions to researchers, stakeholders and policy to win political support for the proposed domestic problems. These networks can formulators; and (iv) promote the retention policy; (ii) bureaucratic support, without include academia, Nongovernmental of high quality researchers in the continent. which beneficial policies may never get Organizations (NGOs), research institutions To carry out the above objectives, NPRN implemented; and (iii) funding, which plays and media. It is recommended that the will first provide small grants to hub a significant role in policy reform and program be supported by donor agencies institutions relating to research on topics implementation. Similarly, the following for an initial period of five years, after which from selected areas. Secondly, NPRN will section reviews the factors that were crucial it should be run independently. Thus, the ensure a support system through its ICT during the reform process of the mid-1980s following section recommends portals and network institutions. and the early 1990s. institutionalization of the network. A key goal of policy networking is to NPRN’s Main Activities Constraints in Nepal’s support implementation of the The following are the main activities of Policy Reform Process Government’s policy reform agenda for NPRN as envisaged in the initial stage of In Nepal, the reform process started in the achieving poverty reduction and human its creation: mid-1980s, mainly due to external pressure. development. These goals can be achieved (i) Institutionalizing NPRN. This step The reform process of the 1990s by institutionalizing PPP in policy making is essential not only for broadening contributed to attaining substantial by establishing Nepal Policy Reform support for policy reform, but also to changes in Nepalese policy making Network (NPRN)—a national level policy generate a sense of ownership towards practices. Reforms were widely accepted network. policy. Creation of NPRN will initiate the by Government officials, research institutionalizing process of policy making institutions, university departments, NPRN Strategy in Nepal. professionals and private sector. However, NPRN’s core strategy is to build a national (ii) Identifying reform areas and reforms were not free of weaknesses and network of policy research and (i) creating thematic policy groups. Based on lapses during the course of their institutionalize policy research network; (ii) the long term objectives of poverty implementation. Shortcomings identified create a thematic network board which will reduction and Millennium Development during the economic reform process are (i) identify issues of common concern, Goals, five thematic areas are prioritized. It the process was a top down approach, commission study, design policy reform, is recommended that the thematic areas be mostly ad hoc and supply driven; (ii) conduct policy discourse and suggest policy grouped as follows: (i) macroeconomic inadequate consultation with implementation; (iii) promote and enhance policies, governance, financial and fiscal stakeholders; (iii) the process lacked capacity of hub institutions to carry out reform; (ii) economic policy on international appropriate implementation arrangements; quality research in thematic areas; and (iv) trade, regional integration and private sector and (iv) insufficient groundwork was establish a permanent monitoring mechanism development; (iii) economic policy on conducted while designing policy. These for policy reform implementation. agriculture, forestry and rural development; shortcomings were due to lack of research Based on the above outlined strategy, (iv) economic policy on energy and capacity and institutionalized policy reform it is recommended that NPRN work in a infrastructure; and (v) economic policy on networks among various stakeholders. framework depicted in figure 1. poverty reduction and human development. Thus, a Public Private Partnership (PPP) in The research program and results of (iii) Capacity building of research policy making is recommended to meet the NPRN should facilitate knowledge sharing networks. The challenges involved in this objectives of the policy making process. and research partnerships between process are building capacity, retaining it professional networks, end users, policy and then linking it to policy. The following Recommendations makers, university instructors, civil society measures are recommended for capacity Nepal Policy Reform Network members, and private sector. NPRN’s building of the network: (i) clearly define There is consensus among multilateral, research program must have these four the mission and objective of the network,
2 Figure 1: Nepal Policy Reform Network’s Suggested Framework
ICT support and capacity building
Policy research link Policy context Thematic Thematic advisory advisory board A board B Media -Hub center -Hub center
Thematic Policy Bridge Policy Makers NPRN advisory - Web portal - Problem identification Policy secretariat board E - Research - Solution selection impact -Hub center dissemination - Political consensus
Thematic Thematic advisory advisory Policy monitoring board C board D -Hub center -Hub center
Thematic research support
(ii) create an appropriate Government online interactive web based portal will the trust between private sector and the structure to support the mission, (iii) create dynamic linkages among Government and would help build a public- management structure should be responsive participants of the network and will help private interface for economic policy dialogue. and supportive of the network, (iv) broaden the coalition for reforms. The The main output of policy reform networking emphasize on innovation, (v) disseminate portal will (i) post priority research areas, process is policy papers that will serve as network research and training output, (vi) research outputs and provide a platform the basis for policy dialogue. promote internships and exchange for discussion and feedback among The following framework is recommended programs, (vii) distribute publications participants; (ii) act as a medium for two for executing policy networking in Nepal. targeted at specific audiences, (viii) support way communication between researchers (i) National Steering Committee the use of ICTs among members of the and user communities; (iii) provide links (NSC). This committee will explore the network, (ix) provide grants for research and to other Nepalese, regional and formation of NPRN as a legal entity and network, and (x) offer appropriate incentives international research portals and will provide strategic direction and oversee for research. networks; and (iv) provide training and the operations of NPRN. NSC will also have (iv) Support for prioritized themes. support materials. a key role in identifying reform needs, There should be support for research in sequencing its implementation, selecting selected themes that have been prioritized Institutional Set Up and Capacity themes and recommending policy by donor agencies and funding will need Enhancement implementation. While the vice chairperson to be made available for the research Institutional and organizational aspects of of NPC will chair NSC, members of the institute and for research work. policy networking are highly recommended committee will include members of NPC, (v) Building an electronic platform to to maximize the role of participants in the governor of Nepal Rastra Bank, the chief integrate policy and development. An policy process. This would also increase secretary, and secretaries of MoF, Ministry
3 of Industry, Commerce and Supplies (iv) NPRN Secretariat. A full time joint Resources, Chief of Research department, (MoICS) and representatives of private secretary level official will be put in charge Nepal Rastra Bank and other invitee sector umbrella organizations, independent of the secretariat. NPRN secretariat will work secretaries of other ministries. This committee policy experts and research institutions. as an independent unit directly under the will review the implementation status of (ii) Thematic Advisory Board. This supervision of NSC. In addition, the policies and will take up issues to NSC. body will coordinate all activities in the secretariat will (i) support all activities related (vi) Building networks. A network of thematic policy groups. The respective to the Thematic Advisory Board; (ii) assist individuals and institutions capable of member of NPC will chair the body and in measures for capacity enhancement; (iii) tackling current problems in research and members will comprise of secretaries of build, maintain and update ICT web portal training is recommended. This would build respective ministries, representatives from and disseminate information; (iv) arrange for capacity for both policy analysis and Nepal Rastra Bank, university peer review and discourses; and (v) act as a advice and would help to retain that departments, independent researchers, focal unit—coordinate donor funding, capacity in Nepal. Networking would also experts and representatives from private consolidate progress reports for NSC and help to identify channels through which sector organizations. disburse funds. the capacity communicates to policy (iii) Hub Center/Institution. Hub (v) Policy Implementation Monitoring makers, and would come up with ways to center selected in each thematic area will Committee. This committee will be created provide appropriate incentives for research work under the supervision of the Thematic in NPRN framework under the and capacity retention. Above all, it would Advisory Board and will commission chairpersonship of the chief secretary of the facilitate knowledge sharing and research policy studies. It will also organize Government of Nepal. The members of the partnerships between professional workshops and seminars and will work committee will comprise of secretaries of networks, policy makers, institutions of towards building consensus for policy and MoF, NPC, MoICS, Ministry of Physical higher learning, civil society organizations institutional capacity. Planning and Works, Ministry of Water and private sector.
The Economic Policy Network is an undertaking of the Ministry of Finance with Asian Development Bank support. It supports the preparation of policy papers based on participatory dialogue in the areas of (i) macroeconomic management; (ii) international trade, investment, and employment; (iii) infrastructure development; and (iv) tourism, agriculture and regional development. This policy brief is an abstract of the policy report Policy Reform Net-Working In Nepal: A Suggested Framework prepared by Mr. Prithvi Raj Ligal. It has been edited for clarity and brevity. Please refer to the original report for a comprehensive discussion on issues and recommendations. Full version available at: www.mof.gov.np/economic_policy/pdf/Policy_Reform.pdf
Economic Policy Network Ministry of Finance, Singha Durbar Kathmandu, Tel: 4211353, E-mail: [email protected] Web: www.mof.gov.np
EPN Team: Advisory Committee Chairperson: Mr. Vidya Dhar Mallik Focal Unit Chief: Mr. Bimal Wagle Team Leader: Mr. Dipendra Purush Dhakal
ADB Project Officer: Mr. Shahid Parwez Edited by: Mr. Samtenla Sherpa and Mr. Arun S. Rana
© 2006 Government of Nepal/Asian Development Bank
4 Government of Nepal Ministry of Finance ECONOMIC POLICY NETWORK PUBLIC PRIVATE PARTNERSHIP FOR POLICY FORMULATION POLICY BRIEF No. 1212No. November 2006
Effective and Efficient Utilization of Contractual Savings
he basic objective of any Employment Provident Fund provide loan facilities and social security financial system is to mobilize OverviewOverviewOverview to members during their service period, savings and allocate resources to EPF, also called the Karmachari Sanchaya and (iv) conduct research activities. high yielding projects. Financial Kosh was established in 1962 through the Tdevelopment increases financial deepening, enactment of the Karmachari Sanchaya Financial Status savings and investment, and also helps Kosh Act. Its primary role was to An increase in membership, salary scale increase productivity and growth. But, professionally manage funds mobilized of employees and capitalization of interest development of financial structures has been from the coverage provided to civil earned on deposits have resulted in an a rather slow process in Nepal. The year 1937 servants, army personnel and police increase in EPF deposits. Thus, EPF marked the beginning of the development of personnel. deposits increased from NRs10.99 million banking sector in Nepal with the The sixth amendment of the EPF in 1962/63 to NRs3,7401.99 million in 2003/ establishment of Nepal Bank Limited. The Act, 1991 broadened the coverage to 04. Similarly, EPF deposits increased at an Nepal Rastra Bank, the central bank of Nepal include employees from private annual rate of 17% from 1995/96 to 2003/ was established in 1956, the Nepal Industrial enterprises that employ at least ten 04. EPF has emerged as the largest non- Development Corporation (NIDC) in 1959, permanent staff. In addition, the Act bank financial institution in Nepal. Table 1 Employee Provident Fund (EPF) in 1962 and requires all contributors to contribute at shows the aggregate deposits of banks the Citizen Investment Trust (CIT) in 1990. least 10% of their salary to their and financial institutions, EPF and CIT. The liberalization of the financial provident fund account and employers The four major sectors where EPF has sector and the economy after 1984 has been are required to contribute an equivalent invested most of its resources are deposits the primary factor in the growth of financial amount. The total membership of EPF in commercial banks, government institutions in Nepal. However, their growth increased from 40,000 in 1962 to 380,000 securities, corporate and other loans, and has not been without their share of in 2006. Besides managing the provident loans to EPF employees. problems. Currently, one of the biggest fund of government, public and private An overview of EPF’s sector wise challenges in the financial sector is sector employees and helping them investment allows us to make the mobilizing adequate resources, and financially, other specific objectives of following observations: (i) investment ensuring adequate liquidity and EPF are to (i) update records and mobilize in time deposits have declined over the profitability while making reasonable trade funds, (ii) refund provident fund years—70.98% in 1962/63 to 41.05% in offs between return and risk. deposits along with interests, (iii) 2003/04; (ii) EPF’s investment in
1 Table 1: Aggregate Deposits of Banks and Financial Institutions, EPF and CIT (mid July, 2004) (in NRs million)
S.N.S.N.S.N. ParticularParticularParticular AmountAmountAmount PercentPercentPercent
1 Commercial Banks 233,707.79 71.4
2 Finance Companies 19,380.65 5.9
3 Development Banks 30,211.00 9.3
4 Cooperatives 1,710.06 0.5
5 EPF 37,402.00 11.4
6 CIT 4,923.4 1.5
TTTotalotalotal 327,334.9327,334.9327,334.9 100100100
CIT = Citizen Investment Trust, EPF = Employment Provident Fund, S.N. = serial number Source: Nepal Rastra Bank
government bonds decreased from competition, EPF has devised several activities are to mobilize savings, invest in 27.73% in 1962/63 to 13.26% in 2003/04; benefit packages for its members. In securities and make corporate loans. It also (iii) loans to EPF employees increased addition to the lump sum amount entitled underwrites and manages public offerings from NRs186 million in 1998/99 to NRs342 at the time of retirement, contributors are and provides trustee, escrow agent and million in 2003/04; (iv) despite an increase also entitled to the following social custodian services. in EPF funds in commercial banks, security schemes that provide additional The Government, Nepal Rastra interest earnings from time deposits have benefits to its members: (i) additional Bank, Nepal Stock Exchange limited and decreased in absolute terms; (v) in 2003/ benefit scheme, (ii) accident indemnity four other banks and 4,200 public 04 EPF invested a total of NRs431 million scheme, (iii) funeral grant scheme, (iv) shareholders make up CIT’s 4,207 in land, building construction and employees welfare scheme, (v) special shareholders. CIT is listed in the Nepal completed buildings; and (vi) EPF’s loan, (vi) home loan, (vii) education loan, Stock Exchange Limited and has rental income increased from NRs15.9 and (viii) low cost housing. authorized capital of NRs80 million and million in 1989/99 to NRs36 million in paid up capital of NRs40 million. Of this, 2002/03 and NRs40 million in 2003/04 Citizen Investment Trust 10% is directly owned by the from its commercial complexes. Since its OverviewOverviewOverview Government, Nepal Rastra Bank owns new complex in Sundhara, Kathmandu CIT started its operation with Employees 40%, the Stock Exchange holds 10% of has recently started operation, a similar Savings and Growth Scheme (ESGS) that ownership, commercial banks and jump in rental income is again expected requires mandatory contribution from financial institutions hold 20% and the in 2006/07. public and private sector agencies and is public owns the remaining 20%. In order to retain existing the only institution that has limited its An overview of CIT’s performance in contributors amidst increasing activities to capital markets. CIT’s primary the last decade from 1993/94 to 2003/04
2 shows an impressive improvement in (ii) Challenges in investment (vi) Lack of clear cut policies. Clear performance: (i) shareholder’s fund is portfolio management. Selecting an asset cut policies are lacking in case of growing at 11.86% per year, (ii) net profit portfolio that makes the correct trade off connected lending, single borrower limit almost doubled from NRs7.53 million in between return and risk is a key issue in or group of borrowers, consortium 2002/03 to NRs15.02 million in 2003/04, (iii) Nepalese investment industry. While financing, risk minimization measures and net income is growing at an average of relatively risk free government securities corporate governance. 45.22% per year, and (iv) return on equity are difficult to obtain, inefficiencies in the is increasing by 11.27% annually. The capital market cause difficulties in (vii) Problems with Government improvement in CIT’s overall performance assessing risk of assets. Furthermore, there ownership.ownership.ownership. Majority of CIT’s shares are is also a result of the savings schemes that are inadequate rules, regulations and owned by the Government, which often have become popular. procedural aspects as well as institutional leads to problems concerning poor internal overlapping in securities market, which governance, weak management, fragile Investment Portfolio impede new securities from entering the financial health and unhealthy Majority of CIT funds are collected market. In addition, there are no guiding politicization of the institution. through savings schemes. Average growth principles for issuing debentures, bonds rate of funds mobilized by CIT is 66.7%, and convertible securities. (viii) Problems with loan recovery. EPF which indicates that people are has to recover NRs1,660 million as principal overwhelmingly responding to CIT’s (iii) Absence of regulatory and NRs613 million in interest payment. savings schemes. Moreover, CIT funds instruments.instrumentsinstruments Institutions like CIT, EPF, provide a fair return compared to Postal Savings Banks and savings and (ix) Lack of specific policies for interest commercial banks interest on fixed loan cooperatives do not have a regulatory income and suspension. CIT treats income deposits. These funds should be invested body. All these institutions deal with and expenses on accrual basis, which is in a manner that would cover costs and public money in one way or the other and explicitly disclosed in the annual report. provide a fair return to contributors and failure of any one of these institutions However, no specific policies are devised for shareholders of CIT. could have serious implications on the interest suspension in case interest is not CIT’s earning assets are government financial system. Also, there is a lack of a realized within a specified period of time. securities, fixed deposits, citizen unit scheme, separate act to guide institutions like CIT loans and investment in equity securities. and NIDC Capital Market that manage unit (x) Absence of a separate Act to CIT’s investment portfolio from 2000 till 2004 schemes in mutual fund operation. regulate Savings Unit Schemes. shows (i) 34% of CIT’s investment is in the Notwithstanding the popularity of CIT’s form of fixed deposits with commercial banks, (iv) Lack of disclosure. It is important savings unit schemes, there is lack of a (ii) 27% of investment was loans to corporate that accounting of income and expenses, separate Act to guide the related sector and 17% was invested in government valuation of assets and liabilities and institutions managing such unit schemes. securities, (iii) there is a continued drastic disclosure of all relevant financical reduction in the portion of fixed deposits, activities are consisitent with international Recommendations and (iv) loans and investment in equity is practices. However, CIT lacks in disclosure ! The Government has prioritized the increasing. requirement, accounting policies and execution of small hydropower projects consistency in the structure of financial with private sector participation. Constraints and Challenges statements. Also, CIT’s accounting Furthermore, Nepal Electricity Authority (i) Constraints in savings mobilization. practices do not adhere to international provides market gurantee by entering Institutions such as EPF and CIT are facing standards. into an agreement to purchase power. a serious challenge to provide a reasonable EPF should take the initiative to form a return to fund contributors during periods (v) Inadequate loan provisioning consortium of resourceful non-bank of economic downturn and interest rate policies.policies.policies. CIT’s loan provisioning policies institutions to appraise small scale decline resulting in difficulties in savings are not in conformity with international hydropower projects and possibly mobilization. practices. invest in such projects.
3 ! EPF could form partnerships with other in new ventures with minimal risks and financial agency and give it more freedom institutions and private sector to higher returns. to serve a wider range of clientele. finance toll highways, tunnel ways and
construction of airports, overhead ! An efficient regulator should be ! Nepal Rastra Bank can be delegated the bridges, bus parks, cable car, ropeways established to ensure corporate responsibility of regulating EFP and CIT and other projects that have an assured financial governance in these and to facilitate the necessary changes return. institutions. in these institutions.
! Invest in moderation in government ! Non-bank financial institutions like EPF, ! CIT should involve itself in papers since it is unlikely that yields on CIT and Postal Savings Bank should establishing a credit rating agency, government bonds will increase since join hands to open a non- bank financial deposit insurance and other net internal borrowing as a proportion institution, which would provide funds institutional facilities to create a of GDP has declined over time. for high yielding development projects. healthy investment environment. Furthermore, the rating agency should
! Investment in time deposits should be ! The Government should acknowledge the grade securities in order to facilitate reduced, instead prioritizing investment need to evolve EPF into a specialized investors to identify risk.
The Economic Policy Network is an undertaking of the Ministry of Finance with Asian Development Bank support. It supports the preparation of policy papers based on participatory dialogue in the areas of (i) macroeconomic management; (ii) international trade, investment, and employment; (iii) infrastructure development; and (iv) tourism, agriculture and regional development. This policy brief is an abstract of the policy report Effective & Efficient Utilization Of Contractual Savings (Employee Provident Fund and Citizen Investment Trust) prepared by Dr. Tilak Rawal on behalf of Nepal Economic Association. It has been edited for clarity and brevity. Please refer to the original report for a comprehensive discussion on issues and recommendations. Full version available at: www.mof.gov.np/economic_policy/pdf/Effective_Efficient_Utilization.pdf
Economic Policy Network Ministry of Finance, Singha Durbar Kathmandu, Tel: 4211353, E-mail: [email protected] Website: www.mof.gov.np
EPN EPN TTTeam:eam:eam: Advisory Committee Chairperson: Mr. Vidyadhar Mallik Focal Unit Chief: Mr. Bimal Wagle Team Leader: Mr. Dipendra Purush Dhakal
ADB Project Officer: Mr. Shahid Parwez Edited by: Mr. Samtenla Sherpa and Mr. Arun S. Rana
© 2006 Government of Nepal/Asian Development Bank
4 Government of Nepal Ministry of Finance ECONOMIC POLICY NETWORK PUBLIC PRIVATE PARTNERSHIP FOR POLICY FORMULATION POLICY BRIEF No. 1313No. November 2006
Strategies For Promoting Industrial Property Licensing In Nepal
he basic feature of Industrial significance in the field of legal licensed rights in the territory covered Property Licensing (IPL) is to jurisprudence. Besides recognizing the by the license. An exclusive license grant intellectual property right. exclusive right of the owner to exploit excludes all other persons, including the This right is a mechanism to privileges of ownership of property, IPL owner from the right to intellectual Tsecure legal ownership on sources of also allows the public a better access to property. Thus, only a single licensee intellectual property. Intellectual property intellectual property—enabling a system has exclusive rights to intellectual right can also be understood as (i) legal of efficient distribution of goods and property. recognition of human creative knowledge, services. These IPL determine the limits when and (ii) licensing to form business The processes involved in it comes to owners of IPL exercising their relationships and transfer technology. establishing IPL include identification and rights to intellectual property. Besides Similarly, IPL is characterized by two classification of industrial property, setting the parameters of IPL, it is also major functions: (i) the provision to exploit identification and establishment of necessary to include certain provisions to one’s industrial property as a basic right ownership and finding the limitations on establish IPL in an effective manner. to private property, and (ii) it provides an ownership. The following are three different enabling environment for technology kinds of IPL: IPL Provisions transfer and economic growth by (i)(i)(i) Nonexclusive IPL.IPL This is a kind Certain provisions should be included encouraging and protecting innovation of IPL where the licensor grants any in IPL to allow owners of IPL to exploit for increasing productivity. number of licenses to work on his or her their intellectual property, form business The changing dynamics of world intellectual property. It allows the licensor relations and transfer technology. The trade has necessitated multilateral to compete with the licensee by granting provisions mentioned in this section will organizations such as the World Trade many other licenses. enable effective establishment of IPL. Organization to come up with Trade (ii)(ii)(ii) Sole IPL.IPLIPLSole This is a type of license (i)(i)(i) Subject matter.matter It is important to Related Aspects of Intellectual Property where the rights are exercisable only by accurately define the subject matter that is Rights (TRIPS) to secure ownership of the licensor and the licensee. It prevents being licensed. products, resources, plant varieties, micro people, other than the owner from using (ii)(ii)(ii) Rights granted.granted IPL needs to organisms, biological and nonbiological the intellectual property. be clear about the rights granted, processes etc. As a result, intellectual (iii)(iii)(iii) Exclusive IPL.IPL This kind of IPL otherwise it will be assumed that the property right has gained much allows only the licensee to exercise license covers all rights such as
1 reproduction rights, distribution rights, Since there is no other form of industrial Trademarks were previously understood manufacturing, marketing, selling property recognized in Nepal’s legal as exclusively for identifying source of rights, etc. system, there is no licensing provision goods. Use of mark by a licensee, other (iii)(iii)(iii) Payment.PaymentPayment The mode and amount available for patents, confidential know- than the proprietor of the mark, was of payment should be included in a clear hows, integrated circuit etc. The deemed deceptive since the license no and detailed manner in every IPL. following section discusses licensing longer designated the source of goods. (iv)(iv)(iv) Degree of exclusivenessexclusiveness. The provision for various forms of industrial On the other hand, the modern notion notion of degree of exclusivity is important property. of trademark accepts its function of in licensing. advertisement, goodwill creation and (v)(v)(v) Degree of protection.protection The degree Patent License assurance of a consistent expectation of protection for one’s industrial property A patent may be granted for an invention of quality. Nepalese trademark law does provided by law is another important factor that is novel, non-obvious in comparison not include the notion of trademark for in licensing. to prior art, constitutes a genuine advertisement and good will creation, (vi)(vi)(vi) State of development. It is creative advance and is capable of hence Nepalese trademark licensing important that licenses state clearly the industrial application. Patent license provision does not allow use of state of development of an intellectual allows the proprietor of the license—the someone else’s trademark without the property. For example, in patent licensing inventor or owner of the patent—to approval of the Department of it is important to state whether the exploit the exclusive rights granted by Industries (DoI). technology is in the process of being the patent for a fixed period of time. The completed or if it is already running foundation of a patent license is the Design License successfully. provision for the proprietor to permit a Industrial designs include industrial (vii)(vii)(vii) Future developmentdevelopment. When a third party to exploit the invention for drawings and industrial models. While licensor upgrades technology, the licensee commercial or technological purposes in industrial drawings are any combinations should be prepared to pay more to utilize exchange for payment, usually in the of figures, lines or colors incorporated to the upgraded technology. form of royalties. The licensee may an industrial product, industrial models are (viii) (viii) WWWarranties, liability limitations terminate any contract for license to use tri-dimensional models that serve as and indemnitiesindemnities. Licenses should state the patent at any time, after the patent special appearance. Once granted a clearly provisions of warranties, liability has ceased to be in force. registered design, industrial designs can limitations and indemnities. Even though the Nepalese Patent Law be transferred and exploited through (ix)(ix)(ix) Dispute settlementsettlement. It is important provides provisions of transfer of patent license. to clearly spell out governing laws and right, it does not provide a clear To assign a registered design license dispute resolving mechanisms in the mechanism for patent licensing in Nepal. to another person, a joint application will agreement. Hence, persons with patents registered need to be submitted to DoI. Licensing (x)(x)(x) TTTermination.erminationermination Conditions for in their names still cannot acquire a patent provision for registered design is the same termination and procedures for doing so license and can only transfer their patent as provisions available for trademark in have to be clearly mentioned in the rights. Furthermore, patent license Nepal. license. mechanism in Nepal is a subject of Even though the above mentioned contract law rather than intellectual Technology Transfer provisions are necessary and significant property law. Therefore, the Patent, and Foreign Investment for proper establishment of IPL, the Design and Trademark Act, 1965 needs Foreign direct investment (FDI) is Industrial Property Law of Nepal does not to be reviewed and amended to make it important for a country like Nepal have specific provisions for IPL. compatible with existing forms of patent experiencing a low rate of savings. Besides transaction in Nepal. increasing the growth rate by increasing IPL in Nepal the level of investment, an inflow of FDI The Industrial Property Law of Nepal Trademark License would also increase the growth rate by makes very brief statements on IPL in Trademark license allows the trademark increasing competitiveness and terms of recommendations, and owner to permit usage of licensed productivity resulting from import of provisions for trademark and design. trademark on goods and services. technology and international best
2 practices that would accompany FDI. in reduced research and development ! Nepalese proprietors cannot exploit Increase in competitiveness of products and increasing the possibility of brain the design and goodwill because of and services would also cause an increase drain. lack of provisions to lease the in exports. Technology increases labor design. Furthermore, goodwill in productivity, cuts overall costs and ! Compulsory licensing cannot be design cannot be given to foreign increases the quality of products, granted or enforced under the Nepalese investors, consequently reducing consequently increasing the level of Patent Law because licensing joint venture. competitiveness in the international administration is not controlled by the market. Now, most technologies for concerned patent office. Recommendations improving product and processes ! National policies on trade and originate in developed countries. FDI On TTTrademark Licensing economics should be clear about inflows from developed countries usually ! As mentioned above, Nepalese intellectual property and compatible also accompany technology transfer. In Trademark Law considers only the with changing international scenario. this context, it is important to have a strong source of identification function of intellectual property rights regime to trademarks and does not consider its ! Legal provisions on intellectual ensure that the technology being other functions such as advertisement, property should be compatible with transferred will not be imitated so that it goodwill creation and quality control. international policies on intellectual can allow a higher rate of return from property and TRIPS. investment. ! Lack of registered user provisions in The most basic form of technology Nepalese Trademark Law can create an ! Develop concrete industrial transfer arrangement is the licensing environment that fosters monopoly in property protection mechanism and agreement, which covers patents, trade trademark because it does not facilitate systematic licensing provisions secrets, copyrights and trademarks. competition through licensing. under the framework of intellectual Technology transfer agreement will also property law. need to include provisions for research ! Inadequacies in licensing provision and development, purchasing and discourage foreign investment in joint ! Campaign to increase public manufacturing, distribution and joint ventures and impede goodwill awareness on intellectual venture. promotion. property—its potential growth and worth—and include curriculums in Constraints On Design Licensing high schools and colleges on On Patent Licensing ! The Patent, Design and Trademark Act, intellectual property. ! The Patent Law does not have a 1965 does not have design licensing licensing mechanism for patents in provisions in Nepal. Thus, designers ! Include complete patent licensing Nepal. are not sufficiently protected and have provisions by amending the Patent, inadequate bargaining power with Design and Trademark Act, 1965.
! A lack of transparency in patent users, hence inhibiting domestic Licensing provisions should provide licensing has caused usage of patents design. (i) basic licensing requirements, (ii) without registration, resulting in a lack registration procedure and license of transparency in transfer of ! Nepalese Design Law does not accept administration, (iii) proposals for technology and exploitation of patents the owner plus user right on a single particular forms of patent license, (iv) for more than the granted term of design. aspects related to taxation on patents, protection. and (v) provision of compulsory ! Nepalese trademark licensing provision licensing.
! Government has been losing revenues has the effect of inhibiting joint venture from taxes on patent licensing. investment in design since lack of ! The amended Patent, Design and owner plus user right on a single design Trademark Act should also include
! The Patent Law in Nepal does not obstructs foreign investors from provisions for registered users in adequately protect inventors resulting working on the same design. trademark and design.
3 ! Amend Sec. 21 of the Patent, Design ! Create a database system to exclusively ! Government should create a research fund and Trademark Act so that licensees do record patents of all kinds and to display to increase research and development of not have to surrender ownership of the status of patents. The database system intellectual property. Government can also trademark or design. will allow businesses and individuals to provide incentives such as tax holidays access information regarding patent and to businesses or individuals that are able
! Increase resources and staff at DoI and its benefits. It will help foster the use of to secure invention or other useful know- strengthen the department by intellectual property and will promote hows through research. increasing the number of skilled and licensing strategies in Nepal.
technical staff to better administer IPL. ! Government should waive the intellectual
! The number of registered industrial property licensing fee to small and
! Create an autonomous intellectual property and license agreements recorded medium industries. In addition, provide property authority to prioritize in DoI can be used as an indicator to income tax deduction on royalty payment promotion of IPL. measure the success of IPL in Nepal. for use of technology.
The Economic Policy Network is an undertaking of the Ministry of Finance with Asian Development Bank support. It supports the preparation of policy papers based on participatory dialogue in the areas of (i) macroeconomic management; (ii) international trade, investment, and employment; (iii) infrastructure development; and (iv) tourism, agriculture and regional development. This policy brief is an abstract of the policy report Strategies For Promoting Industrial Property Licensing In Nepal prepared by Mr. Sajjan Bar Singh Thapa. It has been edited for clarity and brevity. Please refer to the original report for a comprehensive discussion on issues and recommendations. Full version available at: http://www.mof.gov.np/economic_policy/ pdf/Strategies_Promoting.pdf
Economic Policy Network Ministry of Finance, Singha Durbar, Kathmandu, Tel: 4211353, E-mail: [email protected] Website: www.mof.gov.np
EPN EPN TTTeam:eam:eam: Advisory Committee Chairperson: Mr. Bharat Bahadur Thapa Focal Unit Chief: Mr. Bimal Wagle Team Leader: Mr. Dipendra Purush Dhakal
ADB Project Officer: Mr. Shahid Parwez Edited by: Mr. Samtenla Sherpa
© 2006 Government of Nepal/Asian Development Bank
4 Government of Nepal Ministry of Finance ECONOMIC POLICY NETWORK PUBLIC PRIVATE PARTNERSHIP FOR POLICY FORMULATION POLICY BRIEF No. 1414No. November 2006
ICT Enabled Services In Rural Nepal
nformation and communication services in urban areas have been led by computer, which was used for processing technology (ICT) is widely private sector. These services include call the 1971 national population census. This recognized as a vehicle for centers, medical transcription services, was also the year when the first telecom economic growth and the digitization, e-commerce, e-publications, project was executed to modernize Nepal’s Iimportance of ICT infrastructure and its cyber cafes, audio-visual broadcasting and telecommunication sector. potential to promote socioeconomic teleconferencing. On the other hand, private Although Nepal entered into the development is also well established. sector participation in extending ICT Information Technology (IT) arena almost at Furthermore, it also underpins one of the services to rural areas is almost nonexistent. the same time as in other countries, real basic rights of human beings, that is, the Since ICT enabled services are quite progress did not trigger until 1995. After right to seek, receive and impart information. capital intensive and market for ICT in rural which rapid growth took place in ICT. Development in ICT is seen in the form Nepal does not guarantee high returns as Following are some of the notable of land and mobile telephone, multimedia, compared to urban areas, it would be difficult developments that have taken place in the radio, cable television, computers, internet, to ensure effective private sector ICT sector in the past decade: (i) computer wireless technology, optical fibers, satellite participation. Even though there is demand hardware and software businesses connectivity and much more. Its utility is all for several ICT based services, private developed during this period; (ii) policy, acts the more significant for servicing rural and sector participation is inhibited due to low and regulatory measures were implemented remote areas by providing connectivity and level of literacy in rural areas and inability in the ICT sector; (iii) distribution of telephone bringing them in the development to pay for services. Thus, the current lines increased from about 65,000 in 1992 to mainstream. These services may be in situation warrants Government to provide over 422,000 at the end of 2004; (iv) half the healthcare, education, agriculture and the required infrastructure and enhance the Village Development Committees (VDC) of marketing, entertainment, property records, capacity of rural people to use ICT services. the country have telephone connectivity; (v) improving economic conditions, gainful When sufficient demand for services exist the first internet along with e-mail services employment or simply dissemination of news. and when the capacity to pay for such was provided by Royal Nepal Academy for Development of infrastructures including services also prevail, then private sector Science and Technology in 1993; (vi) number ICT through Public Private Partnership (PPP) would be encouraged to participate. of e-mail users increased from around 150 in involves participation of private sector and Extension of ICT services in rural areas for 1995 to 15,000 in 2002 and presently it is local communities in the operation and catalyzing the development process is estimated that there are around 200,000 maintenance of infrastructure. indeed a big challenge. internet and e-mail users in the country; and Private sector participation is (vii) optic fiber network has been considered imperative for economic Development of ICT implemented along the East-West highway. development because of their capacity to Enabled Services In Nepal The above mentioned development provide capital, managerial and The year 1970 marked the beginning of was possible through the intervention of technological innovativeness. Hence, Nepal’s entry into the world of modern ICT private sector in the ICT sector. Similarly, successful capital intensive ICT enabled with the introduction of IBM 1410 the Government has taken certain
1 measures to make ICT services universally centers were established for the empowerment (ii)(ii)(ii) National Communications accessible to rural areas in Nepal. This of rural population with information and PolicyPolicyPolicy, 1992.1992., This is a broadcasting would also require effective private sector delivery of services. These information centers specific policy, which calls for specific participation to yield the desired results. possess the key elements of the Multipurpose legislation to regulate television, radio, and Community Telecenter (MCT) concept as satellite and cable television. It also seeks ICT Enabled Services envisaged by International Telecommunication to allow private sector to establish radio in Rural Nepal Union. There are three types of telecenters in and television systems for broadcasting. ICT enabled services have the potential to Nepal operating in different modalities: (i) (iii)(iii)(iii) Information TTTechnology Policy,,, facilitate and expedite the process of Government sponsored telecenters, (ii) 2000.20002000 The main objective of IT policy is to development. Examples of services International Nongovernmental Organization make IT accessible to the general public. relevant to rural population are (i) timely sponsored telecenters, and (iii) private and non- The policy seeks to declare IT a prioritized and useful information on markets, prices, business organization sponsored telecenters. sector and to create a conducive access to raw materials, credit to local The Tenth Plan envisages setting up environment to attract private sector farmers, artisans, traders etc; (ii) access to 1,500 rural information centers during the plan investment. With regard to IT useful information on improving period (2002–2007). However, only about 60 development in rural areas, it highlights agriculture; (iii) efficient services for health, telecenters have been established in 23 the following policies: (i) provide internet education and literacy; (iv) information on districts of the country. Out of the 60 facilities to all the VDCs in phases; and (ii) employment opportunities; (v) news telecenters, the Government established 21 use IT to promote e-commerce, e- delivery via voice mail, e-mail or e-postal telecenters, 9 were set up the United Nations education, e-health and transfer of service; (vi) access to information on civic Development Program and transferred to the technology. The Government has rights and responsibilities; and (vii) Government, various International committed to make an investment of statutory records collection such as filing Nongovernmental Organizations established NRs100 million initially for public and taxes, household information, property 32 telecenters and the private sector has private joint venture capital fund. records etc. established only one telecenter. (iv)(iv)(iv) Long TTTerm Policy on To deliver the above mentioned Besides the Tenth Plan, there have Information and Communication Sector,,, necessary services the Government of Nepal been a number of other policy initiatives 2002.20022002 The policy highlights the need for has taken an approach of universal access to undertaken to incorporate ICT in the conducting study of different options for rural areas for telecommunication services in development mainstream. A review of joint ventures between the public and all the VDCs by the end of the Tenth Plan policies and regulatory instruments on ICT private sector broadcasting companies. It period. The objective is to make ICT affordable demonstrates that there is a plethora of such is also designed to assist formulation of for the rural poor and to apply ICT for rural policies that favor the development of ICT clear policy on ownership issues development. These objectives are targeted in Nepal. Despite a favorable policy considering the integration of ICT in both to be achieved through the following environment, problems still exist in initiating Government and private sector. programs: (i) increased usage of ICT by private sector participation in rural areas. (v)(v)(v) Information TTTechnology Policy,,, Government and Nongovernmental 2004 (Draft).(Draft)(Draft)2004 The revised IT policy, besides Organizations (NGOs); (ii) content Policies and Regulatory reiterating a number of previous provisions development in Nepalese language; (iii) Instruments on ICT has a few additional features such as computer networking of Government (i)(i)(i) The TTTenth Plan.Plan.enth Although the (i) capacity strengthening of IT institutions, ministries, departments and offices; (iv) Tenth Plan’s objective for ICT development (ii) tax breaks and customs duty breaks for application of ICT in health, education, is linked with the overall poverty IT imports, (iii) establishment of multimedia agriculture, postal services, planning alleviation strategy, there is much to be community telecenters at VDC level, (iv) processes and office systems; and (v) creation achieved in this regard. The Tenth Plan waiver on Very Small Aperture Technology of Rural Telecom Development Fund for highlights the policy of (i) extending (VSAT) and other licensing fees on services developing ICT infrastructure in rural areas. information and communication to rural to rural areas, (v) easy access to credit for Recognizing the important role of areas in a coordinated and competitive establishing Internet Service Provider (ISP) extending ICT services in rural areas, the rural manner, and (ii) initiating legal and and income tax exemption, (vi) ICT information center was highlighted for the first procedural reforms to promote private development activities to be coordinated time in the IT Policy, 2001. The rural information sector investment in rural areas. through the Ministry of Information and
2 Communication (MoIC) and the Nepal Technology, (iii) National Information ! There is lack of clarity in developing Telecommunication Authority (NTA), and Technology Center, and (iv) Nepal connectivity, content, computing and (vii) special facilities to private sector IT Telecommunication Authority (NTA)—the capacity (four Cs) for ICT enabled companies through tax holidays. number of license provided by NTA is services.
(vi)(vi)(vi) TTTelecommunication Policy, 20042004.2004, shown in Table 1. ! Absence of coordinated policy effort This policy seeks to extend to make electric power available for rural telecommunication services through fixed Constraints and Challenges ICT enabled service delivery. and mobile telephones and satellite ! A low level of awareness exists, ! Current broadband policy does not systems, and provide ICT based on radio, especially among the rural poor, on the reflect today’s fast developing television and telephones in collaboration importance of information in our daily technology and does not allow for with private sector. lives. adequate private sector growth.
Besides the above policies on ICT, ! Participation of local literate manpower ! Inadequate coordination among following are the legislations on ICT: (i) is important to efficiently carry out ICT various policy level institutions for National Broadcasting Act, 1992; (ii) enabled services in rural areas. promoting private sector participation Telecommunication Act, 1997; (iii) However, brain drain from rural to urban in ICT enabled services.
Electronic Transactions Ordinance, 2004; areas has left rural areas with a dearth ! Absence of a responsible institution to and (iv) Directives of Public Private of literate people. supervise mobilized funds in a
Partnership, 2004. ! The recent conflict was a major barrier concerted manner.
Similarly, the following are ministries for the extension of ICT enabled ! Government supported telecenters are and institutions established for the services and the development of ICT at a risk of financial sustainability and development of ICT and its application in infrastructure in the country. Similarly, difficulties persist in maintaining the country: (i) Ministry of Environment, it was difficult to extend ICT based equipment, providing easy and Science and Technology and MoIC, (ii) services using security sensitive affordable connectivity, and technical High Level Commission for Information telecommunication technology. and managerial support.
Table 1: Number of Licenses Provided by NTA Till 2004
TTType of Service Number of License Provided
Basic telecommunication service 2 Cellular mobile 1 VSAT network provider 10 Internet 26 Radio paging 8 VSAT user 70 GMPCS service 2 Fax mail 6 Local data network 1 Video conferencing 1 Rural telecommunication services 1 Total 128
GMPCS= Global Mobile Personal Communications by Satellite, NTA= Nepal Telecommunication Authority, VSAT= Very Small Aperture Technology Source: Nepal Telecommunication Authority
3 ! Processes to obtain licenses to Government, private sector and local ! Rural Telecommunication Fund (RTF) establish ICT enabled services are communities have established can be used to cross-subsidize IT usage complicated and time consuming. innovative programs in rural areas such in rural areas.
! Government has imposed restrictions on as Drishtee, E-Chaupal, Bhoomi and N- ! Where there is scope for substantial the usage of cheaper technology such Logue. private sector participation, Government
as Voice Over Internet Protocol (VOIP). ! Detailed study should be carried out to should provide incentives such as waiver
! Provisions of the prevailing identify economically feasible rural of license or user fee on VSAT and rebate Telecommunication Act do not areas for private sector to establish on import custom duty.
complement with provisions of the telecenters. ! Periodically review ICT policies to
Telecommunication Policy. ! Since postal services have wide incorporate new developments not coverage, adequate infrastructure and covered by current ICT policy. Recommendations manpower; prospects of involving ! Policies should be prepared to ! PPP approach to establish telecenters private sector in the operation of post encourage development agencies, civil should mobilize NGOs, Community Based offices as MCTs should be studied. society and private sector to increase
Organizations and interested private ! One comprehensive Broadband ICT their ICT usage in rural areas.
groups. Government should make space Policy needs to be brought out by ! Effectively utilize RTF mobilized funds available and provide connectivity, while integrating existing IT policies. by setting up a responsible institution
partners should be responsible for ! Design policies to (i) enhance to use those funds for developing ICT.
providing staff and operating costs. connectivity, (ii) encourage ! Reengineer the process of licensing to
! Policies should incorporate learnings development of local content, (iii) shorten the time taken to obtain a license.
from successful ICT enabled services support research on computing ! Immediately revoke the prevailing in rural areas of developing countries. technology, and (iv) facilitate capacity restriction on VOIP so that this service In India, partnerships between building. can be initiated in rural areas.
The Economic Policy Network is an undertaking of the Ministry of Finance with Asian Development Bank support. It supports the preparation of policy papers based on participatory dialogue in the areas of (i) macroeconomic management; (ii) international trade, investment, and employment; (iii) infrastructure development; and (iv) tourism, agriculture and regional development. This policy brief is an abstract of the policy report PPP Led ICT Enabled Services in Rural Nepal prepared by Prof. Dinesh P. Chapagain. It has been edited for clarity and brevity. Please refer to the original report for a comprehensive discussion on issues and recommendations. Full version available at: www.mof.gov.np/economic_policy/pdf/PPP_led.pdf
Economic Policy Network Ministry of Finance, Singha Durbar Kathmandu, Tel: 4211353, E-mail: [email protected] Website: www.mof.gov.np
EPN EPN TTTeam:eam:eam: Advisory Committee Chairperson: Mr. Narayan Silwal Focal Unit Chief: Mr. Bimal Wagle Team Leader: Mr. Dipendra Purush Dhakal
ADB Project Officer: Mr. Shahid Parwez Edited by: Mr. Samtenla Sherpa
© 2006 Government of Nepal/Asian Development Bank 4 Government of Nepal Ministry of Finance ECONOMIC POLICY NETWORK PUBLIC PRIVATE PARTNERSHIP FOR POLICY FORMULATION POLICY BRIEF No. 1515No. November 2006
Public Private Partnership for Urban Waste Management
aste management primarily responsibility of municipalities biodegradable in nature, changing involves a series of and closure of several Government and circumstances also caused a change in activities such as municipality managed operations is composition of urban waste, which now generation, collection, evidence that limiting management of includes a mix of solid waste, liquid waste Wprocessing and transport of waste. waste to public sector only is not the best and gaseous waste. The global effects of Likewise, waste management also involves approach. Even though past failures can waste hazards makes it important to review minimizing waste production and be attributed to a lack of effective policy the above three forms of waste and their rethinking waste as an economic resource, and political will, poor infrastructure and management approaches to better reduce, and mobilizing and motivating inadequate resources; the major reason for reuse and recycle waste. communities to better manage waste. The such failures is the insufficient regard problems and issues concerning Urban given to the role of private sector and Waste and Its Current Waste Management (UWM) in communities in UWM. Public Private Management Practices Kathmandu were first addressed in 1970 Partnership (PPP) in waste management Solid waste. It is composed of domestic and the Solid Waste Management Center would (i) facilitate easy access to private waste, municipal mixed waste, business was first established in 1980 under the capital, (ii) promote efficient management and industrial waste, hospital waste etc. Ministry of Housing and Physical systems, and (iii) ease access to know how Over 64% of solid waste is biodegradable Planning. Prior to 1970, almost all waste and improve technical skills of staff. While and can be composted. Another 20% of was of organic nature, which was easily lack of PPP approach is considered to be solid waste are recyclable and marketable biodegradable and either used as animal the major reason behind ineffectiveness waste and comprise of packaging feed or largely recycled as compost manure. in UWM, increase in waste hazards and materials, plastics, glass, paper, wood, For this, every household had a compost change in composition of waste is a result cans, and metal. The remaining 16% of pit where most of the waste got recycled of rapid urbanization. solid waste comprises of inert materials into compost manure. As the years advanced, Nepal’s cities such as construction debris, earth, sand A review of past practices in UWM experienced rapid urbanization, change in and dust that need to be sent to landfill suggests that management of waste by the consumption habit and deterioration of sites or to land reclamation sites. Government or municipalities alone is an attitude towards environmental Solid waste has a direct effect on urban impossible task. Currently, UWM and conservation. While waste in earlier infrastructure that pollutes and degrades mostly solid waste management is the periods was almost exclusively organic the aesthetics of the surrounding
1 environment. It also has a damaging effect Treatment of liquid waste, particularly nationally and the effectiveness of PPP on human health causing diseases such domestic waste is limited to Kathmandu approach adopted in waste management. as hepatitis, typhoid, asthma, diarrhea, skin valley and Pokhara. Similarly, treatment of Furthermore, a review of past efforts in cancer, soar throat and eye problems. industrial wastewater is limited to Hetauda. UWM will show failures arising from Thus, proper management of solid waste Thus, water treatment is found to be given ineffective institutions, inadequate policy is imperative. the least priority and is grossly neglected. implementation , poor management and a The current practice of managing Methods involved in wastewater treatment lack of PPP approach. solid waste consists of at least seven are dumping, usage of septic tank, oxidation stages of mixing activities beginning at the pond and wetland. Of these four methods, Review of UWM in Nepal household level, where solid waste is usage of septic tanks and oxidation ponds Policy and Regulatory Instruments. The mixed, and finally unloading and spreading are considered most effective in terms of Government has formulated several policies of the waste at landfill sites. It is reducing hazards to human health, source and acts for UWM such as (i) the National recommended that this system be replaced water, earth surface air quality and Policy on Solid Waste Management, 1996; by the Waste Management at Source environment. Similarly, among the four (ii) the Solid Waste Management and (WMS) method which entails production methods, treatment method using oxidation Resource Mobilization Act, 1987; (iii) of clean waste at source including pond is considered cost effective. Drinking Water Corporation Act, 1989; (iv) composting, recycling and reducing the Gaseous waste. It is composed of Nepal Standard for Mass Emission Euro I, amount of waste sent to landfill site. emission from different sources such as 1999 and Euro II, 2005; and (v) the Above all, WMS is considered most firewood, fuel consumption, industries etc; Environment Protection Act, 1997. effective in terms of reducing hazards to and from dust pollution from various Furthermore, the Tenth Plan has come up the earth surface and environment, and is activities such as construction, industry and with clear policies and strategies related to more cost effective. Best practices in solid cement plants etc. These emissions include UWM; and environmental protection and waste management is evaluated on the black carbon, green house gases—carbon UWM have been cited as important goals basis of the following factors: (i) dioxide, carbon monoxide, methane, Nox, in several other acts and policies. Nepal has contribution to reducing pollution, (ii) Sox—and dust pollution. Besides causing also ratified international conventions and reduction of Government and hazards to health, vegetation and air quality; treaties on environmental protection and Municipality’s work load and costs in terms these emissions are believed to be the prime waste management such as the Kyoto of waste management, (iii) cost savings for cause for global climatic changes resulting Protocol, Rotterdam and Stockholm customers, and (iv) further opportunity for in global warming, ozone layer depletion, convention, Basal convention and reforms. ice melting in the polar regions and brown Millennium Development Goals Agenda 21. Out of the total estimated solid waste cloud formation. The treatment methods of Despite the above plethora of policies generated in the country—3.1 million ton gaseous waste are dumping, reduction of and acts, problems continue in UWM. per year—around 29% is believed to have waste at source and closure of source. Of Thus, (i) major wastewater treatment plants originated in Kathmandu. these three treatments reduction at source and sewerage systems remain defunct; (ii) Liquid waste. It is composed of is considered most effective in terms of land fill sites face severe problems; (iii) wastewater, industrial sludge, sewage and reducing hazards to environment, health vehicle emission control measures are not drainage. Liquid waste is generated from and plant and animal life. Works that have applied for majority of polluting vehicles; wastewater disposal at the household level been accomplished in emission control are and (iv) emission control in majority of and industries. Subsequently, the (i) alternative energy projects, (ii) use of solar industries are not practiced. These wastewater is diverted to the natural river energy, (iii) introduction of electric vehicles, problems continue because (i) plans and system without proper treatment. and (iv) eco labeling of industrial projects. programs are not followed up and Wastewater contaminates ground water, All these projects are based on PPP. implemented, (ii) the political will necessary surface water and farmlands. It is a serious The effectiveness of treatment of for implementation of plans is very weak, hazard to plant and animal life, and is the waste and the overall waste management (iii) utter negligence of environmental prime source of spread of water borne system is influenced by the overall guidelines, and (iv) the municipalities are diseases. strategy adopted locally, regionally and primarily responsible for solid waste
2 management and not enough incentives Constraints markets should be sought for (i) waste are available for private sector ! Current legislative and regulatory products as recovered materials, (ii) participation. context for UWM does not facilitate carbon trading, and (iii) marketing of Institutions. UWM was never formation of cross-sectoral alternative energy. It should be noted recognized on par with water, electricity, partnerships and does not have any that lack of funds could become an roads and telecommunication. Thus, provision for PPP. Even if cross- additional marketing constraint, different ministries deal with solid waste, sectoral partnerships are formed, especially for small scale entrepreneurs. wastewater and air pollution and there existing legislation provides few tools ! There are certain socioeconomic is a lack of a single institution to deal for coordinating and managing them. barriers within the formal waste with UWM in a comprehensive manner Specific legislative barriers that management system—working with causing further difficulties for private frustrate formation of cross-sectoral urban waste is stigmatized as dirty and sector involvement and investment. In partnerships are (i) mandates for public low status. addition, there are no independent delivery of services that impede institutions responsible for monitoring contracting out services to private Recommendations and auditing environmental sector, and (ii) lack of legislative and ! Solid waste management practices in performance. regulatory infrastructure to manage Pokhara, Biratnagar, Bharatpur, Mismanagement of waste. contract related risks. Kathmandu and Lalitpur have shown Ineffective public sector management of ! Existing laws and Financial that PPP based models are best suitable urban waste is the reason behind the Administration Regulation does not for UWM. Furthermore, UWM demands following failures: (i) closure of the recognize the advantage of partnership the participation of all stakeholders, compost plant in Teku and the landfill site with private sector. The existing Public which is best addressed by PPP. in Gokarna; (ii) wastewater plants in Contract Laws do not favor smaller ! Adopt a PPP modality that always Dhobighat, Sallaghari and Hanumanghat private sector entrepreneurs. includes civil society as a third party to are defunct; (iii) collector piped sewerage ! Involving private sector in public maintain checks and balances. Also, systems in Kathmandu valley is mostly enterprises is almost always a define the community/producer leaking due to poor construction; (iv) controversial issue that has to deal with responsibility approach as a future wastewater generated is dumped into public employees fearing loss of jobs. approach for UWM. rivers and ponds or underground septic On the other hand, the Government ! Develop legislative and regulatory tanks and has permanently polluted the owned UWM organizations are framework for UWM based on PPP. rivers in Kathmandu—threatens human, overstaffed with workers who lack in UWM issues should be incorporated aquatic, wild and plant life in Kathmandu training and qualification. within the scores of acts and regulations valley; and (v) closure of electric trolley ! While the actual costs incurred for in order to make it an inherent part of bus system that prevented air and noise UWM is unknown, formal or informal other corresponding sectors. pollution. private sector is starved of funding ! Establish the National Council for Diversion of resources. The annual since the fees collected are hardly UWM. scrap tax collected by various District adequate to fully cover costs. In ! Bring the management of solid waste, Development Committees (DDCs) exceeds addition, informal private sector wastewater and air pollution under the NRs16 million annually. However, these tax entrepreneurs have limited access to same ministry and department. revenues are diverted to administrative and financing. ! Formulate a comprehensive policy for staff costs instead of spending it on ! UWM fails to look at projects in a UWM and recognize UWM as an developing capacity for UWM. localized manner and the attitude important infrastructure. Private sector participation. The behind policy making is too technology ! Encourage private sector participation Ministry of Local Development’s effort in centric. in high level organizations, and in policy
1999 to outsource solid waste management ! Lack of access to national and and decision making process. Also, services to a capable private sector never international markets inhibits private strengthen working relationships with materialized. sector participation in UWM. Thus local communities.
3 ! Introduce a human resource sectors to take initiatives in UWM. In Establishment of the National Council development program for waste this context, motivating factors such as for UWM is proposed to deal with UWM management to foster essential giving awards and incentives for in a comprehensive and integrated manner. knowledge and skills. practicing WMS should be exercised or The major role of the proposed National
! Create an UWM fund with the appropriate fees can also be imposed. Council will be to (i) develop PPP for contribution of various financial providing cost effective services in UWM; resources such as savings of Prospects for PPP in UWM (ii) function as a medium for coordination municipalities and Government, taxes The primary purpose of PPP is to identify and consensus building among and revenues, contribution from pragmatic ways in UWM. The broad scope stakeholder organizations; (iii) provide various funds, internal trading of of partnership would be related to the policy guidance and regulation, capacity waste, and revenue from waste following activities: (i) investigation, enhancement and technology transfer; (iv) generators, polluters and research, documentation and analysis; (ii) support research, marketing and promotion beneficiaries. capacity building, enabling and of enterprise; (v) function as a data bank,
! Borrow successful international models empowering; (iii) building infrastructures; information and knowledge center; and (vi) to motivate and encourage and (iv) motivating the public and facilitate clearance of documents, communities, and formal and informal rewarding and giving incentives. procedures and projects.
The Economic Policy Network is an undertaking of the Ministry of Finance with Asian Development Bank support. It supports the preparation of policy papers based on participatory dialogue in the areas of (i) macroeconomic management; (ii) international trade, investment, and employment; (iii) infrastructure development; and (iv) tourism, agriculture and regional development. This policy brief is an abstract of the policy report Prospects and Constraints Of Public Private Partnership For Urban Waste Management prepared by Mr. Badan Lal Nyachhyon on behalf of the Society of Consulting, Architecture and Engineering Firms. It has been edited for clarity and brevity. Please refer to the original report for a comprehensive discussion on issues and recommendations. Full version available at: www.mof.gov.np/economic_policy/pdf/Prospects_Constraints.pdf
Economic Policy Network Ministry of Finance, Singha Durbar, Kathmandu, Tel: 4211353, E-mail: [email protected] Website: www.mof.gov.np
EPN EPN TTTeam:eam:eam: Advisory Committee Chairperson: Mr. Narayan Silwal Focal Unit Chief: Mr. Bimal Wagle Team Leader: Mr. Dipendra Purush Dhakal
ADB Project Officer: Mr. Shahid Parwez Edited by: Mr. Samtenla Sherpa
© 2006 Government of Nepal/Asian Development Bank
4 Government of Nepal Ministry of Finance ECONOMIC POLICY NETWORK PUBLIC PRIVATE PARTNERSHIP FOR POLICY FORMULATION POLICY BRIEF No. 1616No. November 2006
Developing Market Access and Vertical Linkages in High Value Agriculture
epal is largely an agricultural crops and commodities and their 600 t to 663 t, while domestic supply would country—more than 76% of commercialization to attain economies of be 583 t and 644 t respectively. Increased the population’s livelihood is scale. Similarly, marketing efficiency has productivity in fruit production could be dependent on agriculture and been envisaged through agribusiness one way of making domestic supply meet Nit contributes to 36% of gross domestic promotion and development of market domestic demand, as Nepal’s current level product (GDP). Despite the importance of infrastructure. of fruit productivity is rather low at 10 t/ha agriculture and notwithstanding the The promising high value agriculture compared to India at 20 t/ha. priority given to this sector in the five-year commodities identified by APP and other plans, the overall performance of studies are fruits, vegetables, vegetable seeds, Marketing Channel and Costs agriculture in terms of output and non-timber forest products, livestock Nepal is an overall importer of fruits and productivity is still bleak. Nepalese products, flowers, herbs and plantation crops. surplus production is mostly marketed in agriculture is characterized as mostly domestic markets. subsistence farming with low productivity, Fruit Production and The marketing cost and overall cost output and per capita income. Development of fruit production is related to (i) access Acknowledging the paramount Production Status to road and markets, (ii) transportation importance of agriculture in Nepalese Tropical fruits make up the largest share costs, (iii) high cost of damage incurred economy and livelihood, the Agriculture of fruit production in Nepal, followed by during transportation, (iv) post harvest Perspective Plan (APP) was brought out in citrus fruits and deciduous or winter fruits costs related to methods applied in the mid 1990s as a blue print for agriculture respectively. While the total fruit harvesting, packaging and storage of development vision for Nepal. This plan, production in 2000 was 456,000 metric ton fruits. A study conducted by Marketing which would work as the road map for all (t), the total domestic demand in the same Developing Directorate (MDD) in 2000 to other future plans for the next two decades, year —as per a study conducted by JICA assess the cost of marketing mandarin has identified the need to increase study team—was 505,000 t, clearly orange and apples from Birgunj and competitiveness in Nepalese agriculture. indicating that domestic demand is greater Bhairawa to Patna and Gorakhpur in India The two ways of improving than supply. Furthermore, the study revealed that marketing costs vary competitiveness is (i) by enhancing reported that domestic demand for fruits between 39% to 40% of total costs of fruits. comparative advantage in production, and was expected to grow and that it has the Similarly, transportation costs was between (ii) by increasing marketing efficiency. potential to absorb expansion in domestic 14% to 16%, while losses caused due to Comparative advantage in Nepalese production—this study projected demand damage incurred during transportation was agriculture entails producing high value of fruits in 2010 and 2015 to increase from 8% to 9%. Thus, improvement in marketing
1 structure and costs could significantly processed category include pickles, Constraints in VVVegetable Seed lower the cost of fruit production in Nepal. tomato sauce, green peas, peanut butter, Development dried vegetables and canned beans etc. ! This industry is characterized by Constraints in Fruit Development Import of these processed products was inadequate technical and skilled people
! The nonavailability of raw materials, worth NRs6.1 million in FY1987. and insufficient sophistication in high price of domestic raw materials, developing hybrid seeds.
scarcity of inputs, and small scale and Constraints in VVVegetable Development ! Absence of accredited seed laboratory
scattered production are constraints in ! Lack of effective transportation for quality certification of seeds.
fruit production. infrastructure to facilitate access to ! Plant quarantine check posts do not
! There is a lack of agricultural marketing markets and timely availability of have adequate facilities for testing extension services to improve vegetables. imported seeds.
harvesting and post harvesting ! Lack of appropriate policy and ! While the seeds are sold at high prices handling. institutional support, and lack of market in terminal markets, producers receive
! Quality regulation, assurance of varietal information on prices and supply low prices.
purity of fruit saplings and appropriate situations. Similarly, the appropriate ! Public sector lacks a plan of action to selection of location has not been environment to attract foreign investors supplement pocket area approach for effective for quality fruit production. and traders is also lacking. quality seed production.
! Levies charged for transport and entry ! Transportation of seeds to major Vegetable Production and at certain municipalities increase the markets in India is very expensive Development price of vegetable products affecting because India does not allow entry of Production Status their competitiveness. propagating materials such as Nepal’s diverse climatic conditions favor vegetable seed from any of the Indo- cultivation of all types of vegetables Vegetable Seed Production Nepal border points. Vegetable seeds throughout the year. Since vegetables are and Development are only allowed entry through perishable in nature, they require greater Production Status Amritsar, Kolkatta, Chennai, Mumbai attention during harvesting, packaging Nepal’s varied climatic zones and relatively and New Delhi, which are only and transportation. cheap labor are factors conducive for accessible by air transport from Nepal. Similar to fruit production, domestic vegetable seed production. Vegetable demand for vegetables in Nepal exceeds seeds are high value and high price Production and supply. The total demand for fresh fetching commodities with increasing Development of Non- vegetables was 1,382 t in 2000 and the total domestic demand and export potential, Timber Forest Products supply was 1,342 thousand t in the same especially to India and Bangladesh. Production Status and Prices year. Furthermore, demand is expected to Studies reveal that demand both domestic Nepal’s total export of non-timber forest gradually increase to 1,765 thousand t by and for exports is increasing rapidly. In product to India alone is worth $8.6 million, 2010 and imports are also expected to 1998/99 domestic demand for vegetable which is around 4% of Nepal’s total income expand accordingly. Similarly, the import seeds reached 900 t. The increase in from the forest sector. Thus, non-timber value of fresh vegetables has also importance of quality seed and the increase forest products are an important source of increased from NRs551.4 million in fiscal in demand for fresh vegetables are factors income for the country and are supposed year (FY) 1999 to NRs638.7 million in contributing to the increase in demand. to play a significant role in poverty FY2004. MDD has reported the potential The vegetable seed industry is relatively alleviation. However, researchers have prospect of exporting vegetable items like new but growing at a rapid pace—total identified non-timber forest products as an pole beans, tomato, capsicum and cabbage production grew from 10 t in FY1976 to 700 underutilized resource. The annual harvest to markets in India. t in FY2002. The growth of the industry and trade of these products is around In addition to the above demand for will primarily depend upon the quality of 10,000 to 15,000 t—mostly coming from the vegetable products, demand for processed seed produced in terms of varietal purity, remote midwestern districts of Nepal. The vegetable products is also substantially germination rate, genetic stock and major issues surrounding non-timber high. Major vegetable items under packaging. products are the unequal distribution of
2 benefits from the sale of non-timber followed by meat at 23% and poultry at ! The Government has not made enough products and the deteriorating quality of 7%. While production of milk, meat and attempts towards product diversification. these products. poultry for the years between 1999–2004 While the price harvesters receive have been increasing with a simultaneous Recommendations compared to Indian factory gate price is increase in per capita availability of the Overall Recommendations largely dependant upon market demand for same items; demand for these items are also ! Develop an agribusiness policy that these products, harvesters usually receive increasing at a rate of 5.5% per annum. provides a comprehensive framework, as high as 50% of Indian factory gate price. Therefore, there is ample space for clear strategies and a regulatory Studies have also shown that competition expansion of production of livestock framework for agribusiness development.
increases the price of non-timber forest products. For this, an increased supply of ! Link all stakeholders in an effective value products. high quality feeds, green fodder, chain to not only improve the value of productive breeds, improved veterinary their activities but to improve and Constraints in Non-Timber Forest services and better livestock management maintain a high level of competitiveness. Product Development practices are imperative. ! Establish market information system or ! Non-timber forest products are over networks to provide information on exploited, which adversely affects their Marketing Channel and Costs prices and supply situation. regeneration and is a threat to their for Milk and Meat Products ! Develop transport infrastructure to survival. Although private sector is emerging as a reduce costs, provide access to markets
! Planning, research and development potential investor in milk production and and increase competitiveness.
activities are constrained due to supply, milk marketing in Nepal is largely a ! Products with comparative advantage need inadequate stocktaking. Government regulated market and the Dairy to be identified and promoted for exports.
! The system of royalty collection, ban Development Corporation (DDC) is one of ! Focus on technology and skill on collecting some non-timber products the key players in the milk marketing development, quality control, and and selling those products could lead channel. maintenance of reliable database and to underutilization of resources. The most common chain of activities information dissemination.
! Existence of rent seeking behavior at involved in meat marketing are the ! Provide appropriate technology to checkpoints and customs and following: meat animals are generally sold processing plants to reduce cost of collection of taxes at multiple places is to intermediaries and these intermediaries production.
a major constraint on costs. sell to traders who then sell to stakeholders ! Promote public private partnership to
! Other supply related constraints are at the live animal marketing centers. Finally, develop local capacity. poor harvesting and post harvesting these animals are sold to butchers who practices, adulteration of the product, make the final sale to consumers. The cost Fruit Development lack of sustainable production practices, of production of buffalo meat—which ! The strategy for fruit marketing should unavailability of price information and comprises 70% of total meat production— be import substitution vis-à-vis India poor marketing infrastructure. makes up 98% of its retail price. The cost and export promotion vis-à-vis Tibet also includes labor costs. and Bangladesh. Production and ! Select appropriate commercial scale Development of Constraints in Livestock Product pockets for commercial production. Livestock Products Development ! Create vertical linkages by establishing Production Status ! Inadequate chilling centers and processing plants in the vicinity of Livestock farming plays a major role in refrigerated trucks for milk preservation. production pockets.
agriculture development: (i) It is a major ! Limited procurement of milk by DDC is ! Ensure quality regulation and assurance source of employment and household limiting the supply of surplus milk to of varietal purity of fruit saplings. income, and (ii) contributes more than 30% the markets. Furthermore, livestock to agriculture GDP. Among the livestock farming is mostly subsistence in nature, VVVegetable Development
products, milk is the largest produce and resulting in high cost of production and ! Minimize nontariff barriers on vegetable comprises 43% of GDP from livestock, prices. and fruit exports.
3 ! Make appropriate site selection and size Non-Timber Forest Products ! Carry out effective promotional
of commercial pockets and adopt ! Establish research institutions and activities to increase per capita appropriate measures to smoothen the involve current research councils to consumption of milk.
value chain system. conduct studies on non-timber forest ! Establish linkages with Indian markets
! Develop cool storage systems in products. to sell surplus Nepalese milk.
appropriate locations including airport ! Promote commercialization by promoting ! Restructure DDC to achieve smooth terminals. private/community involvement. cooperatization in the supply of raw milk.
! Establish competitive pricing systems ! Select appropriate pocket areas for VVVegetable Seed Development and develop wholesale markets along livestock cultivation such as nearby ! Establish and maintain laboratory strategic market corridors. community forests to reduce cost of
facilities to match international ! Develop a scientific system to deal with buff meat production.
standards. the ban on collection of some non- ! Conduct programs for prevention of
! Critically assess the subsidy on seed timber products and their sale. infectious and contagious diseases.
production to increase competitiveness. ! Establish live animal markets in
! Initiate necessary discussions with Livestock Products strategic locations providing basic Indian authorities to settle issues ! Increase the supply of high quality facilities.
concerning export points, quarantine, feeds, green fodder, improve veterinary ! Ensure appropriate animal transport fumigation, supervision requirements services and livestock management mechanisms, as overloading animals in and treatment fees. practices. trucks can be stressful for animals,
! Develop mechanisms to restrict import ! Adopt the Pocket Package Strategy and resulting in decline of meat quality and of low quality seeds. reduce cost of milk production. price.
The Economic Policy Network is an undertaking of the Ministry of Finance with Asian Development Bank support. It supports the preparation of policy papers based on participatory dialogue in the areas of (i) macroeconomic management; (ii) international trade, investment, and employment; (iii) infrastructure development; and (iv) tourism, agriculture and regional development. This policy brief is an abstract of the policy report Constraints and Approaches for Developing Market Access and Vertical Linkages in High Value Agriculture prepared by Mr. Jagan Nath Thapliya on behalf of Confederation of Nepalese Industries. It has been edited for clarity and brevity. Please refer to the original report for a comprehensive discussion on issues and recommendations. Full version available at: www.mof.gov.np/economic_policy/pdf/Constraints_Approaches.pdf
Economic Policy Network Ministry of Finance, Singha Durbar Kathmandu, Tel: 4211353, E-mail: [email protected] Website: www.mof.gov.np
EPN EPN TTTeam:eam:eam: Advisory Committee Chairperson: Mr. Madhav Prasad Ghimire Focal Unit Chief: Mr. Bimal Wagle Team Leader: Mr. Dipendra Purush Dhakal
ADB Project Officer: Mr. Shahid Parwez Edited by: Mr. Samtenla Sherpa
© 2006 Government of Nepal/Asian Development Bank
4 Government of Nepal Ministry of Finance ECONOMIC POLICY NETWORK PUBLIC PRIVATE PARTNERSHIP FOR POLICY FORMULATION POLICY BRIEF No. 1717No. November 2006
0perational Modality for Pocket Package Approach to Implement Agriculture Perspective Plan
he objective of the Agriculture (ii) APP is also a regional development plan in APP. So, the success of implementing PPA Perspective Plan (APP) is to practice since it is the only comprehensive under a common framework is paramount expedite the process of plan that incorporates a regional framework to carry out APP at the field level. commercialization of agriculture into its operational strategy; (iii) while the throughT the implementation of the strategy for the terai is technology driven, the Pocket Package Strategy following measures: (i) development of strategy for the hills and mountains is demand or Approach agricultural roads and electrification, (ii) driven and is centered around high value OverviewOverviewOverview expansion and improvement of irrigation crops, which use less land and more labor; At the conceptual level, Pocket Package mainly system, (iii) research focused on dynamic (iv) APP’s focus on high value crops is indicates the integration of road, irrigation, technological systems and appropriate use compatible with small scale farming; (v) market electricity, technology and marketing in a fairly of fertilizers, and (iv) promotion of high accessibility and north-south transport large area or along corridors, with a focus on value crops, livestock, forestry and agro- connectivity has been given a high priority; primary commodities. However, in practice industries. APP is an interactive and (vi) APP has brought a change in the mind set PPA is operating mostly at a disaggregated interdependent plan crossing many of policy makers and others involved in level due to a lack of holistic approach interrelated sectors, private and public implementation to think of agriculture in a between departments and ministries. agencies, civil society and farming much more broad manner and to include roads, Furthermore, it is limited in scope to much communities; and the plan is designed to rural electrification, irrigation and marketing smaller areas than envisaged in APP and increase productivity and raise income. as inputs or parameters in agriculture production is narrowed to cereal crops or to Contrary to the criticism that APP is only development planning; and (vii) Prioritized livestock or horticulture enterprise. a growth based plan for agriculture, it focuses Productivity Package (PPP) is the vehicle for The Ministry of Agriculture and on poverty reduction through employment implementing APP, which focuses on Cooperatives (MoAC) has issued an generation and increase in agricultural prioritizing scarce resources. Implementation Guidelines on PPA for productivity. APP is an employment Prioritization is based on three Agriculture Development 1998 to guide the generation plan to increase income of small principles: (i) all the priorities must be applied operational aspects of PPA at the field level. farmers and create employment opportunities together, (ii) rate of return on investment, and The different stages of activities involved in for marginal and landless farmers. The (iii) a continuous effort must be made to PPA are (i) selection of production pockets following are APP’s other salient features: (i) ensure that the full package is implemented. based on certain criteria as shown in Table 1 it is a growth plan—it aims to increase The Pocket Package Approach (PPA) and Table 2; (ii) determination of size of agriculture growth from 3% to 5% per annum; is a strategy used for the implementation of pockets for both crop and livestock 1 production; (iii) formation of farmers groups; Implementation of PPA of PPA raises concerns of equity. However, and (iv) after constraints and needs of PPA’s explicit concern to concentrate these concerns are not substantiated since livestock and agriculture development are agricultural inputs in high potential areas is there are significant numbers of small identified, an effective program is developed induced by the necessity to increase farmers who live in those potential pocket to fulfill the targets of each pocket program. productivity and employment. On the other areas. Above all, the significant numbers of The success of the pocket programs hand, this strategy has come under criticism small farmers, marginal farmers and landless depends on correct identification of all the on the notion that the selection of priority people would benefit from an intensive important components of the package production areas is likely to focus program agricultural program through income and namely agricultural inputs and the activities and inputs on wealthier farmers employment generation. implementation of PPA in compatibility with with better access to land and other Another significant criticism of PPA is the objectives of APP. resources. Accordingly, the implementation that the strategy as implemented by MoAC
Table 1: Criteria for Selection of Production Pockets
S.N.S.N.S.N. TTTypeypeype CriteriaCriteriaCriteria
1 Crop Production 1. Area with access to road, and availability of irrigation and electricity. 2. Area with availability of irrigation and road 3. Area with irrigation facilities 4. Area with access to road 5. Other feasible sites (traditional agricultural area)
2 Livestock production 1. Area with road access, and availability of electricity and animal feed. 2. Area with road access 3. Other feasible sites (traditional agricultural area)
Source: Ministry of Agriculture and Cooperative, Government of Nepal
Table 2 : Minimum Size of Pockets for Agricultural Crops
RegionsRegionsRegions ActivitiesActivitiesActivities Size of areaareaSize
Terai ! Food and Cash/Industrial Crops 1000 hectares of irrigated area or a command area of 400 shallow tubewells. ! Fruits 150 hectares ! Vegetables 100 hectares ! Fisheries 10 hectares
Hills ! Food crops 100 to 150 hectares ! Fruits 60 to 70 hectares ! Vegetables 30 to 40 hectares
Mountains ! Fruits 40 to 50 hectares.
Source: Ministry of Agriculture and Cooperative, Government of Nepal
2 is not compatible with PPP approach as productivity enhancing technologies and and should be able to provide technical proposed by APP since APP must be to change production patterns to knowledge from on farm research activities implemented on a large scale, rather than as specialize in specific products. APP has to extension personnel. a pilot program in a few favorable locations indicated that government’s role in market (iii)(iii)(iii) Road development and as practiced by PPA. The pockets adopted development should be catalytic rather development of north-south transport in the field by the Department of Agriculture than full involvement in marketing farmer’s corridors. Carry out appropriate transport and the Department of Livestock are too products. On the other hand, private analysis for road development since roads small compared to PPP requirements. Hence, sector is encouraged to take a lead role in are the key constraints to marketing high PPA is not consistent with the objectives of the market development process. Private value products in the hills and mountains. APP, which is to implement an integrated sector marketing can be achieved by In addition, development of north-south approach to achieve a large aggregated increasing competitiveness of small traders corridors will facilitate access to markets, increase in production and income. and by building countervailing power both domestic and international. PPA is also criticized for not being able through producer associations. (iv)(iv)(iv) Adoption of the Project approach. to create linkages among a set of inputs Following are the different stages of This approach reinforces the functioning and technology as required by APP. PPA activities to be conducted simultaneously for of farmer organizations, linkages among pockets have not been able to take full market development: (i) the first stage to research and extension activities, and advantage of existing roads and irrigation market development is bringing farmers collaboration of farmers with infrastructure because the pockets are together with traders, (ii) build production and Nongovernmental Organizations (NGOs). extremely small to create synergy or any marketing associations into an integrated Under this approach, APP has significantly significant impact on production. structure with an apex organization so that its influenced the mindset of public sector Notwithstanding the above negotiating strength with other markets is players towards commercialization of mentioned criticisms, there have also been increased, (iii) establish trading centers in agriculture in Nepal. some successful cases in PPA. Some of border areas, and (iv) conduct surveys and (v)(v)(v) NGO’s involvement in commercial the successful cases of PPA are as follows: research of potential markets in India and agriculture. Many International (i)(i)(i) Poultry development in Chitwan. identify potential markets in Tibet Nongovernmental Organizations and NGOs A minimum of 5,000 birds is a set for Autonomous Region of China, Bangladesh, are now involved in promoting commercial commercial scale of production. Its Pakistan and the Middle Eastern countries. agriculture through introduction of high development is led by private sector with Besides the above mentioned approaches, value vegetables and fruits in farming. necessary access to developed markets. the most effective way of achieving market Similarly, a legal framework for contracting (ii)(ii)(ii) Dairy development and tea access is by increasing competitiveness of out agricultural services to private sector farmingfarmingfarming in IlamIlam.Ilamin Farmers have started to small traders and agriculture products. and NGOs is required. shift land from food crops to tea, ginger (vi)(vi)(vi) Dairy development. Illam, Kavre and potato, which are high value crops. This Activities Required to and Syangjia are predominant areas in became possible due to favorable Make Agriculture Products dairy and milk development. Linkage to biophysical and socioeconomic conditions More Competitive transport facilities and market access are of the area as well as road access to the The following support activities are key factors in development of dairy terai and Darjeeling in India. necessary to make agriculture products industry. One of the common key features in both more competitive: (vii)(vii)(vii) Government’s new agricultural the above successful cases in PPA is (i) TTTechnology generation. policies. The Government recently access to developed markets for both the Improvement in technologies related to announced a new national agricultural above cases. Likewise, market development high value commercial crops and livestock policy, which is largely based on APP and is paramount for the successful will provide means to reduce cost of has added certain policies to make Nepal’s implementation of APP under PPA. production and increase competitiveness agriculture policies consistent with World of Nepalese products in international Trade Organization requirements. Essential Elements for markets. (viii) TTTarai and hill packaging Market Development (ii)(ii)(ii) TTTechnology dissemination. approach priorities. Priorities of Tarai Without assured markets there is no Specialists and Department of Agriculture packaging approach and hill packaging rationale or incentive to invest in staff in the field should have sound skills approach should both be emphasized to
3 increase competitiveness of products of chairpersonship of the Minister of ! Establish a high level commission for both regions. Agriculture. administrative and management
! There is no provision of establishment purpose, for fast track implementation Constraints of APP secretariat in MoAC. of APP and to resolve any problems ! Operational aspects of PPP has ! There is limited market research and concerning coordination. Also, establish remained largely within MoAC, in study of commodities produced in Nepal. APP secretariat in MoAC.
contrast to the integrated package ! Create appropriate environment, incentives approach conceptualized in PPP, which Recommendations and conditions for commercial production requires all relevant line agencies to act ! Implementation of APP must be and marketing of high value products.
together. decentralized and adopt PPP in APP ! Assure irrigation facilities all year round,
! Lack of proper identification of potential implementation. also provide facilities for electricity,
areas with road and irrigation and less ! Replace PPA by project approach as roads, farm inputs and commodity price potential areas without road and described above. information to farmers.
irrigation. ! Carry out surveys and research of ! Adopt cost reducing production
! A serious oversight in terms of failure potential markets and create full technologies to lower costs, increase to establish APP National partnership between research and production and to make agriculture Implementation Committee under the extension activities. products more competitive.
The Economic Policy Network is an undertaking of the Ministry of Finance with Asian Development Bank support. It supports the preparation of policy papers based on participatory dialogue in the areas of (i) macroeconomic management; (ii) international trade, investment, and employment; (iii) infrastructure development; and (iv) tourism, agriculture and regional development. This policy brief is an abstract of the policy report Operation Modality For Pocket-Package Approach To APP Implementation prepared by Dr. R.P.Yadav. It has been edited for clarity and brevity. Please refer to the original report for a comprehensive discussion on issues and recommendations. Full version available at: www.mof.gov.np/economic_policy/pdf/ Operational_Modality.pdf
Economic Policy Network Ministry of Finance, Singha Durbar Kathmandu, Tel: 4211353, E-mail: [email protected] Website: www.mof.gov.np
EPN EPN TTTeam:eam:eam: Advisory Committee Chairperson: Mr. Madhav Prasad Ghimire Focal Unit Chief: Mr. Bimal Wagle Team Leader: Mr. Dipendra Purush Dhakal
ADB Project Officer: Mr. Shahid Parwez Edited by: Mr. Samtenla Sherpa
© 2006 Government of Nepal/Asian Development Bank
4 Government of Nepal Ministry of Finance ECONOMIC POLICY NETWORK PUBLIC PRIVATE PARTNERSHIP FOR POLICY FORMULATION POLICY BRIEF No. 18 November 2006
Study on Excise Duties
xcise duties are indirect taxes or cascading effect. However, a review of easier than collection of direct taxes. The levied upon goods produced for the structure of excise duties in Nepal recent insurgency was a major impediment home consumption as distinct demonstrates that the inflationary effect to direct tax mobilization and had an effect from customs duties, which are of imposing excise duties mostly fall on of shrinking the tax base. On the other Elevied on goods for export and import. This cigarettes, liquor and beer, which—as hand, the ease of collection of excise duties traditional definition of excise duties has shown in Table 1—comprised around 90% allowed it to increase from 13.9% of total been widened to include the service sector of total excise duties during 1995–2005. indirect tax in FY1999 to 15.7% in FY2005. and import of selected commodities. Notwithstanding the Government’s main Hence, while the Government is unable to Whereas the Excise Act 1959 authorized objective of levying excise duties for widen the tax base, excise duties is an the Government to impose excise duties revenue mobilization, another main effective mechanism for everybody to pay on domestic industrial products, the Act objective is also to discourage taxes. was revised in 2002 to impose excise on consumption of products that are Until recently, excise duties were the service sector as well as on import of hazardous to health. In contrast to the imposed as countervailing duty on selected goods. Currently, excise duties in argument against excise duties having an imported products to help protect Nepal are administered by the Department inflationary effect, excise duties in Nepal domestic industry from unfair outside of Inland Revenue, which has been are progressive because they are not competition. However, WTO entrusted with the administration of value imposed on basic and essential commitments, which discourage added tax, income tax and excise duties. commodities and their inflationary effects discrimination against foreign products, Excise duties as a proportion of total are only limited to products that are have eroded the role of excise duties as a taxes have been increasing over the recent hazardous to health. mechanism for protection of domestic years. Moreover, it has been Besides the above mentioned industry against international competition. compensating revenue loss from customs progressive feature of excise duties, they Still, excise duties on import of vehicles tariff adjustment resulting from Nepal’s also play a significant role in revenue and motorcycles have increased from 4% commitment to World Trade Organization mobilization. The share of custom duty to of total excise duties in FY2003 to 16.8% (WTO). The changing tax structures in total indirect tax has fallen resulting from in FY2005—as shown in Table 1. Nepal warrants a review of the significance Nepal’s commitment to WTO—custom of excise duties in the overall tax duty fell from 44.8% in fiscal year (FY) 1999 Review of Status framework. to 38.3% in FY2005. Against this backdrop (i) Excise duties collection. As of falling share of custom duty, the onus mentioned above, the total revenue from Significance of Excise Duties falls on excise duties to maintain the level excise duties has consistently increased The theoretical argument against indirect of indirect tax and overall tax revenue. since 1990. In seven years, total excise taxes is that they are regressive because Another significant characteristic of duties more than doubled from NRs1,095.0 indirect tax levied on one good will spill excise duties is that the mechanism for million in FY1990 to NRs2,298.2 million in onto other goods, thus having a spill over collection of excise duties is much more FY1997. There was a consistent increase
1 of excise duties by almost six times from amended tariff structure reduced customs Similarly, excise duty on molasses increased FY1990 to FY2005. Also, excise duties tariff from 130% to 80% and correspondingly from NRs13 per quintal to NRs35 per quintal increased from 11.2% of total tax revenue imposed excise duty of 32% on imported in seven years. in FY2003 to 12.9% in FY2005. Similarly, vehicles. (v) Production trend of excisable the proportion of excise duties to gross (iii) Excisable products. The number of products. Production of excisable products domestic product (GDP) increased from selected excisable products increased from such as beer, liquor and cigarettes has 1.09% in FY2003 to 1.26% in FY2005. The 14 in 1964 to more than 100 in 1990. Excisable fluctuated over the years. Beer production increase in excise duties can be products then decreased to 30 in 2006. The increased from 1995 to 2002 and then attributed to the following factors: (a) reform in excisable products in the 1990s increased only marginally in the following introduction of excise duties on import applied excise duties on five major years. Liquor production that showed a of vehicles and motorcycles, (b) increase Harmonized Code (HC): HC17 for sugar, HC21 fluctuating tendency from year to year is in rates of excise duties for most excisable for edible preparations, HC22 for beverages, now showing signs of stability. Similarly, products, and (iii) increase in volume of HC24 for tobacco, HC25 for cement, and cigarette production had declined over the production of major excisable products. HC87 for vehicles and accessories. years and is again showing signs of (ii)Composition of indirect tax. The (iv) Rate of excise duties. Excise duties revival. The instability in the law and order contribution of excise duties to indirect are considered easiest to apply because the situation disrupting domestic distribution tax increased from 13.2% in FY2002 to number of manufacturers is limited and tax and the social movements advocating a 15.7% in FY2005. The relative burden is passed on to consumers. One of ban on liquor are considered the primary contribution of excise duties to indirect the reasons behind the growth in annual reasons for fluctuating tendency in tax increased in comparison to revenue collection from excise duties is the production. contribution from customs duties after frequent increase in the rate of excise duties. (vi) Specific vis-à-vis advalorum tax. the Government changed the tariff The duty on beer increased from NRs20 per While specific taxes are simple to structure in import of vehicles. The liter in 1996 to NRs45 per liter in 2006. administer because tax is imposed on the
Table1: Structure of Excise Duties (in NRs million)
Description FY1994 FY1995 FY1999 FY2003 FY2004 FY2005 Amt. % of Total Amt. % of Total Amt. % of Total Amt. % of Total Amt. % of Total Amt. % of Total Excise Excise Excise Excise Excise Excise Duties Duties Duties Duties Duties Duties Industrial Production 1,592.2 100.0 0.0 Liquor Contract0.3 0.0 0.0 Cigarettes 746.7 45.1 1,373.6 46.5 2,052.5 42.9 2,393.1 38.4 2,472.9 38.4 Bidis 10.7 0.6 46.4 1.6 4.7 0.1 3.3 0.1 3.4 0.1 Liquor 469.2 28.3 865.0 29.3 1,179.9 24.7 1,266.6 20.3 1,395.9 21.7 Beer 314.2 19.0 589.1 19.9 1,032.5 21.6 982.5 15.8 1,164.4 18.1 Other Industrial Production 116.5 7.0 79.1 2.7 324.7 6.8 296.2 4.8 325.2 5.0 On Import 0.0 190.8 4.0 1,285.1 20.6 1,084.1 16.8 Total 1,592.5 1,657.3 100.0 2,953.2 100.0 4,785.1 100.0 6,226.8 100.0 6,445.9 100.0
%= percentage, Amt.=amount Source: Economic Survey 2006, Ministry of Finance, Government of Nepal
2 number of products, it has low buoyancy excise duties without giving importance ! Despite Government efforts to reduce because taxes don’t rise as price rises. On to the future of the industry and consumption of products that are the other hand, advalorum taxes are deduction of excise duties on raw hazardous to health, demand for such imposed on the value of a product and are materials. products is increasing. much difficult to administer. The
Government applied advalorum taxes ! Awarding contracts for import and ! Nepal will loose an estimated NRs3.80 before 1990 in a majority of products. This distribution of stickers is a challenging billion due to revenue loss from tariff policy has changed and today a large task for administrators. Delays in supply adjustment, elimination of other duty number of excisable products—except of stickers can cause problems in and charges and a shortfall in value vehicles and motorcycles—are based on production and distribution of liquor added tax collection resulting from specific rates. and beer. Nepal’s commitment to WTO. The onus (vii) Legal provisions on excise falls on excise duties to make up for duties. Section 7 of the Excise Act has ! Excise policy is not an integrated part revenue losses. made provisions for price fixation of of the national revenue policy. domestic manufactured products, imported Recommendations products and services. Products that are ! Excise Act is not clear about its ! Formulate a three year rolling plan to exported or sold in bonded warehouses or provisions that delegate discretionary indicate annual targets, strategies and duty free shops are exempted from excise authority to excise officials. For review mechanisms covering policy, duties. Section 8 of the Act enables the example, the Act states that excise legal and administrative components. Government to issue license charging fee officials have the authority to issue to applicants for production, distribution, warrant and arrest the accused if there ! Amend the Excise Act and the Liquor import and storage of excisable products. is an adequate basis to do so. Act to make them compatible with Without license, excisable products However, the Act does not clarify the changing socioeconomic situation and cannot be produced, distributed or sold. meaning and content of adequate curtail the discretionary authority of basis. excise officials. Constraints ! Despite excise duties being the fourth ! Despite legal and administrative ! Add a deputy director general and a largest revenue contributor, it gets provisions to control revenue leakage, financial analyst and recruit a liquor minimal priority in the Department of Department of Inland Revenue believes expert in the Department of Inland Inland Revenue. After the that leakage amounts to more than 40% Revenue. The added staff should have organizational change in excise duties, of revenue annually. Leakages are capability to carry out analytical the staff size was brought down to 98 attributed largely to illegal production exercises and monitor performance of from 555 in 1993, when the Department of low quality liquor at the domestic manufacturers at frequent intervals. of Excise was functioning. level, smuggling of foreign liquor and cigarettes and lack of effective ! Ministry of Finance should review
! The number of staff in excise function monitoring. performance of the proposed is inadequate and has not been trained organizational arrangements in three to carry out research and analytical ! The Auditor General’s Report states years time frame, and if the above functions. Furthermore, officials that some of the manufacturers have arrangement is not satisfactory a new assigned to work in the excise section not renewed their license for five years. Department of Excise should be formed. are not motivated as they aspire to work Also, exemption claims by in the income tax section. manufacturers are largely not verified ! 71 positions that remained vacant in the by the Department of Inland Revenue. Department of Inland Revenue in
! Government’s excise policy appears to FY2005 should be filled immediately. be working on an ad hoc basis, which ! There is rampant controversy can be observed in the organizational regarding duplication of stickers and ! Application of excise rate on petroleum structure, frequent increase in rate of crown corks. products and production and supply of
3 timber should be considered as ! Establish a press in collaboration with administrative, technical and legal compensation for loss of revenue from the private sector to make timely supply aspects as well as revenue implications custom duty. of stickers. Government should of the proposed changes. standardize the size and quality of ! Existing excise rates should be stamps and ask manufacturers to make ! Government should support industries revised in an interval of three years arrangements for its supply. manufacturing excisable products by (i) taking into account the consumer conducting a national market survey on
price index. ! The problem of revenue leakage liquor, (ii) encouraging industry should be addressed through an participation while formulating Acts and ! Correct the irregularities in excise duties integrated approach. Effective Regulations regarding excise duties, (iii) for liquor, wine and raw materials used monitoring of factories should be collecting information on illegal domestic for liquor. complemented by community production of low quality liquor, and (iv) participation to create awareness of providing bank guarantee for a limited ! Ensure consistency of product the health hazards of harmful period in lieu of excise duties payment. nomenclature with the nomenclature in products.
the Harmonized System Code to make ! Increase the budget for the Department
comparison with international trade ! Form a committee to introduce of Inland Revenue so that trained and more scientific and to control Harmonized System Code in excisable qualified staff can be recruited and the corruption. products and to examine the department’s capacity can be upgraded.
The Economic Policy Network is an undertaking of the Ministry of Finance with Asian Development Bank support. It supports the preparation of policy papers based on participatory dialogue in the areas of (i) macroeconomic management; (ii) international trade, investment, and employment; (iii) infrastructure development; and (iv) tourism, agriculture and regional development. This policy brief is an abstract of the policy report Study on Excise Duty by Mr. Madhab Prasad Ghimire. It has been edited for clarity and brevity. Please refer to the original report for a comprehensive discussion on issues and recommendations. Full version available at: www.mof.gov.np/economic_policy/pdf/Study_Excise_Duty.pdf
Economic Policy Network Ministry of Finance, Singha Durbar, Kathmandu, Tel: 4211353, E-mail: [email protected] Website: www.mof.gov.np
EPN Team: Advisory Committee Chairperson: Mr. Vidyadhar Mallik Focal Unit Chief: Mr. Bimal Wagle Team Leader: Mr. Dipendra Purush Dhakal
ADB Project Officer: Mr. Shahid Parwez Edited by: Mr. Samtenla Sherpa
© 2006 Government of Nepal/Asian Development Bank
4 Government of Nepal Ministry of Finance ECONOMIC POLICY NETWORK PUBLIC PRIVATE PARTNERSHIP FOR POLICY FORMULATION POLICY BRIEF No. 1919No. November 2006
Investment Priority For Mid And Far Western Nepal
he Mid and Far Western poverty levels in the mountain and hill regions are investment deficient. A low regions of Nepal fall districts of the Mid and Far Western level of investment in potential sectors behind other development regions—poverty levels were 44.8% and such as forestry, hydropower, eco-tourism regions in almost all aspects of 41% respectively in 2003/04. and herbal products have obstructed the Thuman development indicators. These Lack of road connectivity is a major multiplier effect from generating further regions fall behind the national average in impediment to development—around investment and savings and has caused overall literacy, female literacy, life seven districts in these regions are without sluggishness in the entire economy of expectancy, access to safe drinking water motorable road. It takes months of walking these regions. and overall Human Development Index. On to reach some of the mountain districts Therefore, the Mid and Far Western the other hand, poverty and chronic from the terai districts of the same region. development regions require a well malnutrition are highest in these regions. This has caused difficulties in market thought out strategy and policy The wide level of disparity in the level of access for agriculture, livestock and non- formulation for investment of human and development between different regions in timber forestry products—the main financial resources to bring these regions Nepal is a result of the sectoral bias sources of income of these regions. Of the to the mainstream of development. A exhibited in the five-year plans and 24 districts of these regions, almost 14 are development strategy based on Public national development budgets. Whereas food deficit requiring food grains to be Private Partnership (PPP) model is the Government prioritized Central and airlifted from the terai districts, resulting in proposed. PPP will (i) facilitate and Eastern regions for development, Mid and increased Government spending, chronic encourage private sector participation in Far Western regions remained neglected. malnutrition and perpetual dependence on development activities, (ii) enhance Absence of regional development imported food. Furthermore, lack of road efficiency of resource allocation, (iii) strategy in the medium term plan, low connectivity isolates these districts from improve quality of services provided, and priority in designing sectoral programs other parts of the country, increases the (iv) allow for risk sharing on a proportionate and weak and unclear regional costs of development, weakens basis. administrative set up has resulted in governance and hinders delivery of significant spatial disparity between and services such as security, education, Review of within regions. Additionally, it has caused health, banking and communications. Government Policies low economic activity, insufficient Besides inadequate road The Fourth Five-Year Plan introduced the employment opportunities and high development, Mid and Far Western concept of regional planning. Accordingly,
1 districts were grouped into five is lacking necessary leadership to mobilize regions possess immense potential in the development regions and administrative people for development activities. following areas: (i) hydropower; (ii) centers were changed to accommodate the biodiversity for growing high value crops role of regional centers. However, the Review of Government such as Keshar; (iii) non-timber high value absence of clear-cut hierarchical Expenditure Pattern herbal products such as Yarshagumba, relationships between districts, regions and Priorities Panch Aule, Sheelajit etc; (iv) the largest and the center constrained the role of The recent years have shown a significant pasture land in the country for rearing high regional offices to mere coordination and increase in Government’s budgetary value animals; (v) high quality apples and monitoring. Moreover, subsequent plan allocation to the Mid and Far Western dry fruits; (vi) tourism; and (vii) close periods lacked sufficient commitment development regions—development geographical proximity to New Delhi, towards regional planning and regional budget increased at an annual rate of Himanchal Pradesh and Uttar Pradesh in offices lacked authority in carrying out 13.5% per annum between fiscal years (FY) India, and to Mt. Kailash, a popular tourist planning and programming of its sectoral 1996 to FY2006. Thus, the two regions have destination in the Tibet Autonomous activities. Consequently, most of the received highest priority for both Region of China. regional offices closed down or became infrastructure and socioeconomic Government should encourage private redundant. This was seen as a failure at development. Also, budgetary amount in sector to participate and invest in the the policy level to narrow the gap between absolute terms has gone up by about four above mentioned sectors. Currently, development activities in different regions. times from NRs1.51 billion in FY1996 to Government investment in these regions It was only since the Eighth Five-Year NRs5.49 billion in FY2006. Yet, the is prioritized in the following key programs: Plan that the Mid and Far Western increasing share is insufficient to help (i) 23 road sector projects of which the development regions got emphasis on these regions catch up with other regions Karnali road project is the biggest; (ii) five development activities. The Ninth Plan in the country. irrigation projects that are at different (1996–2001) emphasized implementation of A review of sector wise classification stages of completion; (iii) hydropower— a comprehensive program called Special of district budgets in the Mid and Far this region is second in the world in terms Area Development Program in the mid and Western development regions shows that of hydropower potential; (iv) Special area far western districts as well as other the amount designated for programs to development program for agriculture similarly deprived districts. It was a alleviate poverty, health and improve other production, livestock rearing, better comprehensive program comprising of socioeconomic indicators is clearly collection and sale of non-timber products, income generating activities, development insufficient. Most of the budget is set aside especially of high value herbs; (v) of non-timber forestry products, livestock for administrative purposes—28% of transmission lines; (vi) agriculture; and (vii) rearing, ensuring food self-sufficiency and budget in FY1996 and 31.8% in FY2006. poverty alleviation programs. infrastructure development. However, the By contrast, budget allocation for All the projects mentioned above are above mentioned program and other education in FY2006 was 20.6%, irrigation significant for the development of the two programs related to education, health, child was 14.8%, agriculture and cooperatives most backward regions in the country. The and maternal mortality, malnutrition, was 8.8% and intra district road network Government should expedite development drinking water and electrification received only 5.6% of the total budget of these projects by assuring increased implemented after the restoration of allocated to these districts. Similarly, resources and speed in implementation. democracy in 1990 experienced a setback budget allocation for health, forestry, rural due to the recent insurgency. The Mid and electrification, women and child welfare are Constraints Far Western regions were the most marginal and clearly insufficient to improve z Resources are thinly distributed disturbed regions as far as the the socioeconomic conditions of these two resulting in uncertainty in program implementation of Government programs regions. completion. and private sector investment is Notwithstanding the grim state of concerned. In addition, absence of elected development of the Mid and Far Western z Absence of government officials in the representatives in the local bodies for a development regions, these regions are districts—particularly in the upper hills long period has affected decision making, rich in natural resources and their potential and mountain districts—cause difficulty program selection and implementation, and can be exploited for development. These in implementing programs and projects.
2 z Costly and less effective service subsidized rates to selected farmers z Adopt community based cooperative delivery arising from thinly scattered to increase production of local cereal programs that are labor intensive to population in the hill and mountain grain, (ii) Nepal Food Corporation eradicate poverty in the poverty districts. should make arrangements to buy concentrated hill and mountain districts. back seed grown by these selected Also, programs should focus on z Government lacks a short and long term farmers, (iii) provide credit facilities agriculture and livestock rearing to regional centric development plan and to farmers, (iv) facilitate farmers by make these districts food sufficient and strategy. providing necessary market access, for income generating purposes. and (v) ensure irrigation facilities and z Lack of educated and skilled human promote usage of locally produced z Launch programs to generate non- resources in most of the districts in the biomanure. traditional sources of energy for region. every household within five years.
z Consider the following points to increase These programs should comprise of z Most of the hill and mountain districts the number of livestock in these micro hydropower, solar and wind are inaccessible due to lack of regions: (i) invest in research and energy, biogas and energy efficient motorable road and other physical development of local variety of water mills. infrastructure. livestock, (ii) develop pasture land and introduce better variety of grass seed, z Mobilize foreign, domestic private and Recommendations (iii) train local farmers and educated public resources to invest in large scale z Work out a medium to long term strategy youths on animal husbandry, and (iv) hydropower generation for domestic to provide road services in the districts build a mechanism to subsidize farm consumption and for export to India. and to expedite completion of the 12 grazing in community forests without road projects in the short, medium and harming development of those forests. z Establish community information long term. centers in all Village Development
z Create backward and forward linkages Committees (VDCs) to facilitate internet, z Prioritize on the following activities to for high value herbs such as media, telecommunication, weather realize tourism’s full potential in these Yarshagumba, Panch Aule, Sheelajit forecasting, agriculture price regions: (i) construct and upgrade and Keshar. Provide necessary information, telemedicine and distant airports in all inaccessible districts, (ii) technology for primary processing of learning. Dhangadi airport should be developed these herbs.
as a future hub airport connecting z Resettle scattered population of thinly
northern districts, (iii) construct z Invest in the social sector in a massive populated VDCs of northern districts trekking routes to the Rara and scale to uplift and help these regions in appropriate places for efficient Phoksundo lakes, (iv) provide access achieve the Millenium Development delivery of basic services and to save to credit for local entrepreneurs to start Goals. For this, Government will need on cost of service delivery. tourism related businesses, (v) to invest in education, female literacy, Government should provide necessary health posts, illaka level health z Complete at least some of the irrigation provisions to encourage tourists to centers, district hospitals, drinking facilities within the short to medium term travel to Mansarover area through water projects, social safety programs to help improve food production Simikot, and (vi) conduct tourism for the old, widows and disabled, and especially in the mid and far west terai. promotion campaigns to highlight programs to rehabilitate victims of the tourism potential of these regions. insurgency. z Immediately launch programs to rehabilitate damaged infrastructures z Develop a packaged program in the z Campaign against caste based such as government offices, schools, following line to make these regions discrimination and expose the health posts, transmission lines, food sufficient: (i) provide high disadvantages of existing social taboos communication towers and power yielding variety of seeds at such as Chaupadi. generating plants.
3 z A Four Plus Two Pillar Strategic Framework is recommended to Figure 1: Priority Areas for Investment mainstream development. The in Mid and FarWestern Region suggested Four Pillars of development are (i) completion of the north-south road connectivity, (ii) harnessing of Tourism development programs hydropower and other natural Livestock/pasture Hydro power/ endowments, (iii) social sector programs alternative energy development, and (iv) social inclusion and programs safety nets. The suggested Plus Two Pillars of development are strengthening Social inclusion and systems of governance, and development poverty alleviation Mid and far west Social sector of non-conventional energy and programs districtsdistrictsdistricts development information communication technology. programs
z Government should accelerate the Herbs program process of decentralization and should Roads and other delegate additional tasks and functions infrastructure programs to local level. Community and civil Industrial and trading Cereal grain, vegetables society organizations should be zone programs and seed programs encouraged to play a crucial role in development activities.
The Economic Policy Network is an undertaking of the Ministry of Finance with Asian Development Bank support. It supports the preparation of policy papers based on participatory dialogue in the areas of (i) macroeconomic management; (ii) international trade, investment, and employment; (iii) infrastructure development; and (iv) tourism, agriculture and regional development. This policy brief is an abstract of the policy report Investment Priority For Mid And Far Western Nepal by Mr. Prithivi Raj Ligal. It has been edited for clarity and brevity. Please refer to the original report for a comprehensive discussion on issues and recommendations. Full version available at: www.mof.gov.np/economic_policy/pdf/Investment_Priority.pdf
Economic Policy Network Ministry of Finance, Singha Durbar, Kathmandu, Tel: 4211353, E-mail: [email protected] Website: www.mof.gov.np
EPN EPN TTTeam:eam:eam: Advisory Committee Chairperson: Mr. Madhav Prasad Ghimire Focal Unit Chief: Mr. Bimal Wagle Team Leader: Mr. Dipendra Purush Dhakal
ADB Project Officer: Mr. Shahid Parwez Edited by: Mr. Samtenla Sherpa
© 2006 Government of Nepal/Asian Development Bank
4 Government of Nepal Ministry of Finance ECONOMIC POLICY NETWORK PUBLIC PRIVATE PARTNERSHIP FOR POLICY FORMULATION POLICY BRIEF No. 20 June 2006
Policy Reorientation Study on Transit Trade of Nepal
etter and improved transit China and Bangladesh. The Chinese ports 2003/2004 Birgunj was the major cargo han- transport can play a are too far and economically unattractive dling point of Nepal. B significant role in delivering at present and road conditions are not good The study has specified the import faster growth to Nepal. for frequent use. Transit through (Kolkata to Birgunj) and export time frame However, this can only be achieved, if there Bangladesh needs trilateral transit (Kathmandu to Kolkata) as shown in Table is joint coordination between the agreements. The transit transport cost has 1 and Table 2 respectively. The study esti- governments’ of the transit providing and highly affected the export competitiveness mates that the transit cargo for import cargo receiving countries. The single most of Nepal. The additional transit cost, takes not less than 14 days for final ship- important macro constraint on Nepal’s sometimes, is exorbitantly high, up to 40% ment from Kolkata to Kathmandu whereas economy is the archaic transit facilities for in Nepal’s case that inflates the price of the export takes 7 days for shipment to trading with neighboring countries for its both imports and export. All of these factors Kolkata, the final destination. The unnec- foreign trade. However, the transit make transport costs high, and create near- essarily long time taken by transit trans- providing countries generally impose very complete dependence on India for transit portation causes extra cost to import and cumbersome transit procedures, time routes. export. There is direct relationship be- consuming customs formalities, charges The time taken in transit and the tween time frame and the transit cost of and safety measures, for example, which charges incurred can directly affect the the cargoes. Thus the transportation sys- create hurdles and extra burdens for the foreign trade of any landlocked country tem also plays role to increase the cost of receiving country. This makes it more such as Nepal. According to a recent study, transit transport of the goods in transit. costly and difficult to compete in the world in 2004 (for couple of months) the average The United Nations has called upon market. train rake arrived in Raxual seemed to be its members to realize the development Nepal’s geography is a major 30/rakes/month and their weight to be need of landlocked countries and provide constraint to realizing its trade potential. It 76454 tons. In year 2004, the total number adequate transit facilities. The United is a landlocked country bordering China of railway containers arrived in Birgunj was Nations General Assembly has passed to the North and India in all other 2862 (2764 Twenty feet Equivalent Unit + various resolutions to reaffirm the right directions. Most of the country’s terrain is 98 Forty feet Equivalent Unit). The aver- of access of land locked countries. The mountainous or hilly. The geographical age Twenty feet Equivalent Unit per an- resolution 1028 (11) of 1957 recognized situation of Nepal provides scope of num was anticipated to be 20,000 in Birgunj the need of freedom of transit to all such transit through three countries - India, Inland Container Depot (ICD). In year states. The United Nations Conferences
1 on Trade and Development has been promotion of their bilateral trade. In this that provides technical or specific training trying to address the problems of regard, Department of Roads has identified to the transit operators, freight forwarders landlocked countries like Nepal. eight potential north-south road corridors or importer or exporters in the country. Therefore Nepal’s transit policy is based and is willing to construct them on priority Infrastructure: Lack of reliable and on securing freedom accorded by basis. The opportunity of being the transit affordable infrastructure plagued with international law and conventions for the points not only connects both neighbors unnecessary delays at different stages is most convenient, less-time consuming but also open access to central Asia and the single most important bottleneck. There and cost-effective routes with Russia that are rich in natural resources are poor road conditions between Kolkata appropriate facilities. such as petroleum and natural gas. (India) and Bangbandh-Fulbari The transport connectivity is very Nepalese and Indian Governments have (Bangladesh) to Nepal borders causing important for the nations at regional or sub- entered into an agreement to develop significant delay of traffic movement. There regional level. As Nepal is the member of facilities, infrastructures and support at is a lack of high-speed railways and regional groups namely South Asia Free four major custom points of Nepal roadways for transit transportation. In Trade Arrangement (SAFTA), Bay of corresponding custom stations of India. India and Bangladesh side there is Bengal Initiative for Multi Sectoral ADB has agreed under the Sub-regional incompatibility of rail gauge and varying Technical and Economic Co-operation Transport facilitation Project, to support load bearing standards of vehicle. (BIMSTEC) and the South Asian Sub- construction of road based Inland Administrative: Cumbersome and regional Economic Cooperation (SASEC), Container Depot (ICD) at Kakarvitta with corrupt bureaucracy adds time and cost to it is seeking regional cooperation in modern facilities. Nepal can also take almost every transit goods to and from economic, trade and tariff matters through advantage of transit points provided by Nepal. The illicit payment in transit entry multilateral mechanism so as to improve Bangladesh through a tripartite agreement and exit point exceeds 10% of the total the efficiency in terms of speed and quality with India and Bangladesh. transport cost along Kolkata/Haldia- of movement across intra-regional level. Raxual-Birgunj-Kathmandu corridor. SAFTA and BIMSTEC both are Review of Transit Trade Further the transit transport are chained concentrating on the increase of regional Facilitations down by multiple checking agencies, with trade. Similarly, SASEC members (Nepal, Policy: Being a transit receiving country, only one lane roadways, demurrage Bangladesh, Bhutan and India) are Nepal bears prohibitive transit costs which charges taken at Kolkata port for transit working together to enhance and improve obstructs the flow of trade. There remains goods lying unclear due to labor strikes. their potential trade and economic linkage. a lack of Government policy and action Co-ordinations in Information Development of direct linkage for transit plan of transport development inside the Sharing: There is an absence of transport is one of the core areas of country and achieving the easiest and appropriate systems of transmission of cooperation of SASEC members. The cheapest route for facilitating foreign trade customs data between Nepalese and possible development of high speed cross such as in the north-south corridors. Indian Customs. Advanced cargo border rail and road systems in the regional Institutional: There is a lack of joint information systems have not been and sub-regional level will boost sub- institutional set up such as Inter implemented properly which has impeded regional trade and save transportation Governmental Committee meetings, the transit clearance in time. costs as it provides a link route between custom co-operation mechanism or other Procedural: Transit documents and the subcontinent and also to the proposed committees between transit providing and other procedures are not compatible with Asian Highway (linking Singapore in the receiving countries. Any improvements international standards. At the regional southeast with Turkey in the northwest). towards transit trade facilitation will be level, transit documents do not have any Furthermore, the possible short-lived without joint arrangement of common standard. Although SAARC has development of transit corridors might the use of electronic information. Customs made provisions of Bilateral Agreement on facilitate transit facility to India and China. and commercial organizations and freight Customs Cooperation; it is not practiced The Government of Nepal has accorded forwarders also need to be reoriented to by its member states. high priority to develop connectivity in the facilitate transit trade. Another constraint Legal Aspects: The legal framework region and is positive towards offering is lack of competent human resources of Nepalese Customs is not updated in line transit facility to India and China for because of absence of specific institutions with WTO system of Customs Valuations
2 so far. Nepal has yet to adopt the On Institutional Strengthening and other safety measures. The procedures of harmonization of legal system as per enhancing trade facilitation capacity: transit as well as the customs clearance at international practices. Further, issue of Simplified custom procedures are essential customs should be simple, uniform and as unilateral notification from Indian side on for smooth operation of transit goods. per international standards. Priority should transit and customs matters effects transit Proposed Customs Co-operation be given for bilateral or trilateral agreement transport of Nepal. Agreement with India should be finalized. with China and India and Bangladesh. Cost and Time: Handling charges and Joint efforts on exchange of information of On Legal Arrangements: There is a transit transport cost are known as major the transit goods should be done need for the laws or rules on transit trade cost components before running Birgunj beforehand. Every official and other related and customs to be developed in a common ICD, destuffed cargo used container institution should be reoriented to facilitate language such as English, particularly for trucks. The longer the time taken in transit the transit trade. Establishment of an China. The transit legislation should be implies higher cost to the cargo. Institute of Foreign Trade for developing harmonized with a view of cross-country Transit Transport Route: The two human resources in transit transport and transit and reduction of non-tariff barriers. existing transit transport routes in India foreign trade sector is recommended either A multi modal transit Operation Act must are full of hurdles and are highly time in public sector or with public-private be promulgated by the concerned states. consuming making it very expensive. partnerships. Trade facilitation should On Reducing Transit Cost and Time: Similar is the case with the transit route concentrate on port efficiencies; customs The transit transportation cost can be from Bangladesh. Although there exist environment; regulatory environment and reduced by the application of reform in many new routes, no attempt has been e-business usage. Custom control should transit transport situation as per the made so far to identify these routes, which be hassle free, waiving of demurrage international conventions and the cost can save time and money. charges and state tax and less paper oriented components can be reduced by the Transit Treaty: The present transit processes with emphasis on electronic infrastructural reform. Duty insurance rate treaty between Nepal and India seems media. These form a coherent strategy for may be lowered as there is no claim, in to be control driven and completely one- customs reform and modernization. practice. Excessive time taken for exports sided favoring India and is full of On Improving Infrastructures: and imports can be reduced by improving arbitrary conditions. It keeps the transit Urgent action is needed to improve the procedures and documents with the co- receiving countries at risk of termination, load bearing quality of existing roads in operation of customs and ports including without financial justification and Nepal. Bypass roads should be developed private sector institutions like Freight thereby political reason, which is against to reduce the time and cost of transit. There Forwarders’ Association. the spirit of international convention and is a need for additional transit transport On Identification of New Transit practices. infrastructures, customs infrastructures, Transport Routes: A new route Kolkata – Mobilization of Private Sector in and railways connection and upgradation Dunlopbridge – Barrackpore – Krishnagar Transit transport: There is absence of between Nepal, India and China. – Malda – Raigunj – Dalkola – Purnia – engaging the private sector in handling On Increasing Cooperation: Mutual Muzafarpur – Motihari – Raxual is transit transport due to lack of policy. cooperation should be increased to suggested to facilitate transit transport. To Government involvement in transit facilitate transit transport. There should be have a hassle free route from Bangladesh, transport should be only promotional. an institutional arrangement to look after Rohanpur - Shinghabad railway line can the problems which arise in customs, port be developed as an alternate route which Recommendations or in dry port. A mechanism should be will be easy to reach Mongla port in On Policy: A harmonizing tariff policy developed by concerned authorities to Bangladesh. A comprehensive study is between Nepal and India could control the monitor unnecessary hassles created recommended for the identification of deflection of goods in transit barring few during transit clearance for the faster alternate air-sea-bridge route from items of sensitive nature which may not movement of cargo. Biratnagar to the nearest airport Sayedpur, be possible to harmonize their tariff rates. On Improving Procedures: Emphasis Bangladesh. A study on the negotiation The transit policy should mainly focus on should be made on the fast movement of and development of a new transit route transporting of goods through least cost freight vehicle which depends on the from ICD Dhaka to ICD Birgunj is corridors. custom procedures, service charges and suggested.
3 On the Provision of Transit Treaty: of the treaty on transit. collaborative approaches for All provisions of transit treaty should keep On Providing Transit Facilities to India infrastructure development by taking balance with transit facilitation and control and China: It is recommended to provide responsibilities of managing transit deflection of trade or pilferage. The right transit facilities to India and China for their transport and land port facilities and of transit should be protected by the simple bilateral trade. This will help promote other financial and operational services and automatic continuation of the treaty. investment and service sectors, develop at the border and inside the country. As transit facility to a land-locked country infrastructure in remote areas and reduce Public sector should facilitate private is of a permanent nature as mentioned in poverty in these neglected areas hitherto. sector capacity building task to handle multi-lateral resolutions and agreements On Private Public Partnership in transit transport and should make bilateral there should not be any kind of “if”, “but” Transit Transport Operation: Private and multilateral or trilateral negotiations and “unless” to provide automatic renewal sectors should be engaged through to improve transit infrastructure.
The Economic Policy Network is an undertaking of the Ministry of Finance with Asian Development Bank support. It supports the preparation of policy papers based on participatory dialogue in the areas of (i) macroeconomic management; (ii) international trade, investment, and employment; (iii) infrastructure development; and (iv) tourism, agriculture and regional development. This policy brief is an abstract of the policy report Policy Reorientation Study on Transit Trade of Nepal prepared by Vidya Nath Nepal. It has been edited for clarity and brevity. Please refer to the original report for a comprehensive discussion on issues and recommendations. Full version available at: www.mof.gov.np/economic_policy/pdf/Policy_Reorientation.pdf
Economic Policy Network Ministry of Finance, Singha Durbar Kathmandu, Tel: 4211353, E-mail: [email protected] Website: www.mof.gov.np
EPN Team: Advisory Committee Chairperson: Mr. Bharat Bahadur Thapa Focal Unit Chief: Mr. Bimal Wagle Team Leader: Mr. Dipendra Purush Dhakal ADB Project Officer: Mr. Shahid Parwez Edited by: Mr. Sunil Sharma
© 2006 Government of Nepal/Asian Development Bank All rights reserved
4 Government of Nepal Ministry of Finance ECONOMIC POLICY NETWORK PUBLIC PRIVATE PARTNERSHIP FOR POLICY FORMULATION POLICY BRIEF No. 21 June 2006
Strategy for Promoting Business Incubation Centers in Nepal
usiness Incubation (BI) is shown by government agencies. A private programs are closely linked to delivery primarily a tool to facilitate sector led BIC ‘Lotus Holdings’ also could system as its success is dependent on B enterprise creation and not survive and was closed with only few the mechanism, organization structure, development. Incubators private sector small enterprises promoted capabilities and efficacy of the efficacy of facilitate entrepreneurs with the expertise, through its initiatives. It is thus a right the services delivered. This requires a and tools they need to operate the time to pursue an appropriate model of demand-driven approach to be adopted. enterprises successfully. BI programs can BICs to avoid failures and adopt right This underscores the need to identify the support the entrepreneurs and small strategies to progress ahead. underlying mechanisms leading different enterprises by providing a proper ladder In Nepal, small enterprises are mostly policy mixes, that create successful BIC to technology-led start-ups as they move managed on intuitive basis without hav- models in the first place in Nepal. out of prototyping into production. The ing required knowledge and proper busi- Another major issue observed in the empirical evidence seems to provide firm ness information. These enterprises need present industrial structure in Nepal, is guidance for the universal efficacy and professional support and counsel in de- the growing divergence between manage- advocates pursuing BI programs. ciding what, where and how to manage ment of large scale enterprises and small Business Incubation Centers (BICs) the challenges; explore unexplored mar- scale enterprises. Efforts should be made concept is new to Nepalese environment. ket segments and ways to tap markets; to develop proper alliances amongst these An attempt has been made to establish BIC where and how to get need based train- enterprises. Business incubation practice models for development such as one in ing, information and services on technol- can be a successful mechanism to en- Kathmandu under the supervision and ogy, products; accessing finance; and hance networking and building alliances management of Department of Cottage and enhancing networking for acquiring vital between the big and small enterprises. Small Industries, Government of Nepal and cooperation from other enterprises. In this Countries like Japan, South Korea, Ma- another Information Communication and regard, BI approach can play a key role in laysia and India have successfully Technology Park at Banepa, both to run introducing and delivering promotional launched sub-contracting exchange pro- with the fund from the government. and extension services. gram through business incubation ap- However, there are serious questions on The BIC model in Nepal is supply proach. To replicate this approach, the its implementation partly due to resource driven which fails to take into account major problems foreseen in the context of constraints and non-committal attitude entrepreneur’s traits and needs. BI Nepal are the absence of policy and in-
1 centives packages; undeveloped stage of of BIC is more likely to attract potential BI information have embedded traditional BICs; lack of proper coordination between and thus facilitate and enhance system of management government agencies, financial institutions entrepreneurship capability and and academia; and existence of limited competitiveness. l Domination of outmoded technology number of Research and Development In- Empirical evidences have shown that and general lack of trained and skillful stitutions. BICs as an effective model to promote in- human resource The current Tenth Five-Year Plan has novative enterprise and entrepreneurial set the target to reduce unemployment to talent in a country. After graduation the l Absence of marketing know-how and 4.1% and underemployment to 22.3% in incubates like other business enterprise general unawareness and accesses to Nepal which could be achieved through can create jobs and invigorate local econo- information related to input supply, the implementation and support policies mies by mobilizing local natural and hu- technological know and other that aid growth and development of small man resources. Development of BICs resources and linkages enterprises. Since, main thrusts of BICs therefore, calls for a close coordination and relate to entrepreneurial development and mobilization between multitude of devel- l Weak implementation of policy employment creation, it is regarded as an opment partners in the government and provisions and frequent withdrawal of important economic development tool. The private sector, colleges and universities, facilities in general government’s hands-off approach to the banking and financial institutions. BICs would unleash powerful forces for Establishment of successful Business l Difficulties in access to credit from the overall economic growth and reduction in Incubators in the economy needs formal financial sector especially in rural unemployment rate. The fact that BIC integrated approach by appropriate and areas models can help in reducing unemployment timely government policies and acts to has strong policy implications. facilitate operation professionally in close l Ineffective implementation of regulation Deliveries of services for the collaboration and support of business and policy provision development of successful enterprises communities, policy makers, local private would require substantial resources and and public agencies etc. l Limited and inappropriate business efforts which fails to make its mark in development services Nepal’s policy and plans. It is right time to Constraints and Challenges pursue and develop an appropriate BIC l The development of industrial and l Negligible support for innovation and model based on international success business enterprises in Nepal is highly innovative ideas and continuation of stories of BIC model. This policy skewed and activities are concentrated supply driven enterprise programs by underscores that public-private approach in and around few urban centers and government promotional agencies of BIC is best suited in the context of Nepal district headquarters as it is more likely to attract potential l Lack of trust and coordination between incubates and thus facilitate and enhance l The continuing discretionary role of government and private sector entrepreneurship capability and bureaucracy has generated unnecessary competitiveness. hassles and hindrances in entry and l Informed sources maintain that more BICs are an important element to smooth operation of enterprises; sales than 60% of the government registered strengthen Nepalese entrepreneurial and distribution; export and import trade cottage and small enterprises are not potential and innovation system. They in operation and more than 50% of give fledgling Nepalese entrepreneurs an l The continuing discretionary role of those in operation are characterized opportunity to develop their innovative bureaucracy has generated by under utilization of capacity, ideas and set up new businesses in order unnecessary hassles and hindrances in sickness and non-competitive to commercialize them. Nepal should push entry and smooth operation of operation for autonomous and professionally enterprises; sales and distribution; managed BICs capable of innovating new export and import trade l Inadequate infrastructure and inordinate and competitive products and services. delays in delivery of utility services The public-private partnership approach l Inadequate start- up exercise and particularly electric power has affected
2 enterprises and they are burdened with needed to independently manage and operate and manage the Business high transaction cost deliver the BICs services Incubators by giving status of service enterprises l Alliances and linkages between smaller l Facilitate the BICs location by extending and larger enterprise are not getting assistance of leasehold land for l Develop High School level curriculum encouragement under any policy development of BI complex / to include entrepreneurship Technology and Science Park development and business start-up l Bank’s and financial institution’s more cases focus towards bigger borrower, l Facilitate through policies and Acts to cumbersome documentation requirement, enable credit mobilization by BICs l Create an investment fund for bureaucratic hassles and delay in promoters from the banks and financial assessing potential incubation processing loan requests have restricted sector for BI infrastructure development activities, evaluating appropriate credit access to smaller enterprises and recurring expenses, as well as candidate agencies and desirable financial need of the incubatee’s location, awareness creation and Steps to Promote BICs enterprises (tenant enterprises) by capacity building of BICs l Identify and assess potential activities extending the recognition to BICs as for incubation and promote them service industries l Investment policy of the banks and financial institutions should facilitate l Encourage and motivate private sector l Initiate loan guarantee scheme to cover easy flow of credit for the purpose of (such as Federation of Nepalese BICs incubatees to encourage and infrastructure development and Chambers of Commerce & Industry’s facilitate banks and financial institutions capital investment and recurring and Youth Entrepreneur Development by making more loans to small long term investment needs of tenant Forum) to initiate and develop business enterprises enterprises development services based on the fundamentals of BICs l Essentially, the operation of BICs l Commercialize innovative entrepreneurial should be on business philosophy of ideas, venture capital as an essential tool. l Enhance tie-up between the university cost plus. Hence for meeting the The government should initiate and the corporate private sector to recurring and development cost during establishment of sizeable fund for nurture internship from colleges. initial phase of establishment, venture capital and extend its scope to Embrace policy to encourage networking mobilization of donors/International cover BICs, and its tenants (incubates) and alliance amongst colleges/ Non-Governmental Organizations through a well established and capable universities and the private business support and assistance (both for bank and financial institution sector for beneficial relationship through sourcing of professional services, access to testing and laboratory facilities providing seed capital and venture l Ensure credit and seed fund need of and qualified faculty for product testing capital in the form of revolving fund and small incubates, easy flow of credit, loan and development myriad of technical assistance) will be guarantee scheme venture and seed highly essential fund to BICs incubates l Facilitate and encourage development of BICs by larger corporate sector to Policies l Offer proper incentives (tax incentive support sub-contacting exchange on l Emphasize in the National Five-Year at least for 10 years), local tax credits, the model of industrial estate, Plans and announce national level exemptions, and refunds to encourage technology and Science Park policy to encourage and promote BICs small enterprise creation l Identify appropriate institutions (such l Identify and deliver demand driven BI l Adequately address the provisions as Federation of Nepalese Chambers of services required for BI promotion in relevant Commerce & Industry) having Acts, policies, directives including that potentiality to develop the capability l Encourage private sector to establish, of Nepal Rastra Bank
3 l Establish a “BICs Entrepreneur Award” location so that the barriers are minimized competencies could be some viable ac- as such an award, especially if properly tivities for incubation services publicized, can reap tremendous rewards Suggestions by getting people excited about the idea l Successful incubators are found in pub- l In Nepalese context, incubators may not of starting a successful business lic-private partnerships organizational be a viable commercial venture in terms of set up independent of bureaucratic tangible financial return in the short run l Provide incubator services on commercial hassles terms for ensuring financial sustainability l Business incubation can flourish l Products showing prospect for com- with close collaboration and support l Study the entrepreneurial climate to se- petitive edge, high value and high-tech of business communities, policy mak- lect the potential activities and suitable products, and growth sectors with core ers, local private, public agencies, etc
The Economic Policy Network is an undertaking of the Ministry of Finance with Asian Development Bank support. It supports the preparation of policy papers based on participatory dialogue in the areas of (i) macroeconomic management; (ii) international trade, investment, and employment; (iii) infrastructure development; and (iv) tourism, agriculture and regional development. This policy brief is an abstract of the policy report Strategy for Promoting Business Incubation Centers in Nepal prepared by Dr. Chiranjibi Nepal on behalf of Nepal Economic Association. It has been edited for clarity and brevity. Please refer to the original report for a comprehensive discussion on issues and recommendations. Full version available at: www.mof.gov.np/economic_policy/pdf/Strategy_Promoting.pdf
Economic Policy Network Ministry of Finance, Singha Durbar Kathmandu, Tel: 4211353, E-mail: [email protected] Website: www.mof.gov.np
EPN Team: Advisory Committee Chairperson: Mr. Bharat Bahadur Thapa Focal Unit Chief: Mr. Bimal Wagle Team Leader: Mr. Dipendra Purush Dhakal ADB Project Officer: Mr. Shahid Parwez Edited by: Mr. Sunil Sharma
© 2006 Government of Nepal/Asian Development Bank All rights reserved
4 Government of Nepal Ministry of Finance ECONOMIC POLICY NETWORK PUBLIC PRIVATE PARTNERSHIP FOR POLICY FORMULATION POLICY BRIEF No. 22 November 2006 Pattern Of Local Governance Expenditure In The Context Of Rural Poverty Alleviation
overty in Nepal is attributed Decentralization as a system of governance among the local people, consequently to lack of infrastructure is widely favored not only in Nepal but is ensuring sustainable development. Thus, Pdevelopment, access to also overwhelmingly approved in the a decentralized system envisages local basic services and assets, social international level. A detailed analysis of people in the decision making level, exclusion, gender inequality and disparity local governance in Nepal shows that the demanding investment, democratizing and in development between and within regions. level of devolution of responsibilities from strengthening governance by increasing The geographic and social basis of central to local governments is insufficient the level of participation and poverty in Nepal and its widespread and overall level of capital expenditure accountability. Finally, it is widely believed phenomena warrants government required to alleviate poverty is inadequate. that local governments are not only more intervention for poverty alleviation. Before reviewing details of local apt to effectively provide basic services However, poverty got precedence in policy governance expenditure patterns and their such as education, health, access to planning only since the Sixth Plan (1981– relation to poverty alleviation, it is drinking water etc, but the cost of 1985), and the subsequent plan period important to outline its salient features and delivering these services is also reduced. sought elimination of poverty in Nepal the relevance of this system to poverty Additional economic advantages of over a 15-year period. The Tenth Plan alleviation. local system of governance are (i) various (2002–2007) has made poverty alleviation studies have shown that higher levels of its sole objective and has designated local Rationale for local spending is associated with higher bodies as one of the four partners— three Local Governance growth rates in per capita income, (ii) of which are central Government, private One of the reasons for primacy of local decentralization is cost effective, and (iii) sector, nongovernmental organizations— governance in current development it increases welfare gains and is more responsible for carrying out measures and discourses comes from a general responsive to the needs of the poor. programs for poverty reduction. Hence, consensus that local governments have It is important to note here that the decentralization has become the ongoing the advantage of location to better identify Government of Nepal in favor of a policy initiative for poverty alleviation needs for human and infrastructure decentralized system promulgated the Local measures. development. Similarly, a decentralized Self Governance Act (LSGA), 1999. This Act Therefore, an analysis of decentralized system of governance is considered more has made provisions for a local system of system of governance in the context of Nepal capable of alleviating poverty because it governance by explicitly assigning 16 is relevant and allows us to measure the is better effective in fostering a sense of categories of expenditure responsibilities to efficacy of this model in poverty alleviation. ownership of development activities District Development Committees (DDCs) and
1 11 categories of responsibilities each to expenditure and program expenditure. It above—aggregate expense was 12.3%. Village Development Committees (VDCs) assumes that program expenditure covers Average aggregate total capital expenditure and municipalities. These responsibilities all five expenditure variables included in of all the 18 districts is 21.7%. Hence, the cover almost all public services. capital expenditure. A further analysis of size of capital expenditure in total budget is However, the number of patterns of administrative and capital too small for alleviating poverty. responsibilities assigned is insufficient to expenditure of DDCs and VDCs conducted (iv) Devolved service expenditure in not only effectively carry out by the study will provide a better insight of DDCs. The central Government has devolved development activities, but is also less in the role of local governance expenditure in certain expenditure responsibilities for comparison to other countries that assign poverty alleviation. agriculture, livestock, education and health responsibilities to local governments. to local bodies. Average expenditure for the While average sub-national government Pattern of Expenditure above sectors from FY2000–FY2003 shows expenditure shares are 34% in developed in DDCs the education sector with the highest countries and 15% in underdeveloped (i) Administrative and program expenditure at around 78%, health sector countries, Nepal’s share of local expenses. The share of program expenses and expenditure at 14% and agriculture and government expenditure as a percentage administrative expenses to total expenditure is livestock at only 5% and 3% respectively. of total budget was a meager 5.8% in fiscal around 56% and 44% respectively. However, This shows that Government has not made year (FY) 2004. Similarly, local government the trend is varying in different regions. sufficient devolution of responsibilities to expenditure as a percentage of gross Expenditure from FY2002 and FY2003 show the local bodies. domestic product (GDP) was only 1.06% that program expenses are higher than in the same year. It is important to study administrative expenses in relatively developed Pattern of Expenditure the pattern of these expenditures to regions such as the Eastern Development in VDCs measure the efficacy of local governance Region and the Central Development Region. (i) Administrative and program expenditure in poverty alleviation. By contrast, administrative expenses are higher expenditure. VDC expenditure pattern on than program expenses for the less developed a regional basis shows the Central Local Governance Mid and Far Western Development regions. Development Region with the highest Expenditure Pattern As mentioned earlier, poverty is concentrated expenditure followed by the Western For analytical purpose, expenditure can in the less developed regions, but program Development Region, the Eastern be divided into capital and recurrent expenses—the poverty alleviating expense Development Region and the Mid Western expenditure. Capital expenditure, which component—is clearly insufficient for serving Development Region. The Far Western plays a much more significant role in its purpose. Development region where poverty is most terms of poverty alleviation includes (ii) Source of income and expenditure concentrated has the least amount of expenditure on infrastructure, basic pattern. Out of the grants received and expenditure. An analysis of composition services, empowerment, institutional internal source of revenue, grant money is of expenses shows 49% of expenses on reform and security from vulnerability. mostly spent on administration whereas administration and 51% on programs. Further, infrastructure development has internal source of revenue is spent on Administrative expenses are greater for the greatest significance in poverty program activities. Thus, 58% and 42% of Mid Western and Central Development alleviation because of its contribution to grant amount is spent on administration and Regions. growth. An analysis of capital program expenses respectively, whereas (ii) Source of income and expenditure of local bodies in FY2003 25% of internal revenue source is spent on expenditure pattern. Data from FY2003 shows that local capital expenditure was administration and 75% of the same is spent shows 43.6% of grant amount of VDCs around 17.4% of total capital expenditure on program expenses. spent on administration and 56.4% spent of the center and 5.2% of total budget. (iii) Capital expenditure pattern. A on programs. In the same year, out of the This implies that capital expenditure from study of capital expenditure pattern of 18 total internal source of revenue of VDCs the local level is very small in terms of districts in Nepal show that in aggregate 0.6% 69.2% was spent on administration and what is needed for poverty alleviation. of total budget is spent in services, 8.7% is 30.8% was spent on programs. Out of the A study conducted by the Local spent on infrastructure, 0.1% in total VDC income, while 48.8% was spent Bodies Fiscal Commission classified total empowerment, and under miscellaneous— on administration 51.2% was spent on expenditure under administrative expenses other than those mentioned programs.
2 Table1: Administrative and Program Expenditure in DDCs and VDCs for FY2003 (in Percentage)
DDCs VDCs Development Regions Adm Program Total Adm Program Total EDR 44.1 55.9 100 41.3 58.7 100 CDR 27.6 72.4 100 58.2 41.8 100 WDR 50.5 49.5 100 35.1 64.9 100 Mid-WDR 50.8 49.2 100 65.1 34.9 100 Far WDR 72.0 28 100 47.7 52.3 100 Total 49 51 100 48.8 51.2 100
Adm=administration, CDR=Central Development Region, DDC= District Development Committee, EDR=Eastern Development Region, FY=fiscal year, VDC=Village Development Committee, WDR=Western Development Region Source: Analysis of the Fiscal Position of DDC and VDC. Secretariat of the Local Bodies Fiscal Commission, 2004, Government of Nepal.
(iii) Expenditure pattern of some development, region, and fiscal and Implementation and Monitoring VDCs in Kathmandu. A study of six VDCs administrative capacity. Committee is inactive. in Kathmandu district shows VDCs with higher income spend more on programs l Local governments, especially the VDCs l One of the reasons why 58% of projects and program expenditures vary from 44% do not have adequate sources of revenue operating in DDCs are not completed to 90% of expenses, which is proportional for expenditure. Moreover, they have within time is because of lack of adequate to the income base of its own source. limited staff to collect revenue efficiently. infrastructure and professional staff.
Constraints l Absence of effective poverty l VDCs and DDCs lack a strong database l The 1990 Constitution of Nepal does monitoring provisions to have a good for reliable data on income and not make any mention of neither the impact on poverty alleviation. expenditure. responsibilities nor of the revenue sources of local bodies. Further, there l VDCs are too small and therefore not l Government does not have sufficient is lack of initiative at the policy making viable administratively, politically and information on poverty to conduct level for decentralization, hence economically. The service delivery units effective poverty alleviation programs. responsibility of key areas such as are not sufficient and are not health, electricity, water, telephone, economically viable to establish. l There is inadequate private sector and education etc still lie with the central civil society participation in local bodies. Government. l Absence of an expenditure tracking system causes irregularities in l One of the reasons VDCs and DDCs l There is overlapping responsibilities expenditure and increases the chances are in short of capital expenditure is between local bodies and the central of siphoning of funds. Also, local because they do not have the right to Government. Further, there is lack of governments are not transparent and borrow neither from international market coordination between central do not provide income and expenditure nor from domestic sources. Government and local governments. audit reports to the public. l There are many Acts that contradict l Distribution of responsibilities and l There is insufficient monitoring of VDCs LSGA inhibiting effectiveness of local revenue is same for all VDCs and DDCs from the center. LSGA bodies. Also, LSGA has not been fully regardless of their level of provision for Decentralization implemented.
3 l The recent insurgency and the absence l Devolve revenue sources and the right l Maximize efforts to reduce of elected representatives in local to determine tax rates. administrative expenses and increase bodies for the past four years have program expenses at the local level. adversely affected poverty alleviation l Enhance overall human capability of programs in local bodies. local bodies and provide appropriate l Restructure local bodies to make them staff to VDCs. politically, administratively and Recommendations economically viable. l Road development should be prioritized l Strengthen the public auditing system because it has the highest rate of return and improve database of local bodies. l Encourage DDCs and VDCs to in infrastructure development. Similarly, prepare periodic plans and review education, improvement in agriculture l Introduce the technique of expenditure those plans after preparation. Link research and extension in services tracking at the local level and Ministry of period plan with annual plan of local should be prioritized. Local Development and other oversight bodies. agencies should monitor local bodies. l Responsibilities for education, health, l Fully implement LSGA and amend all agriculture services etc should be fully l Increase participation of women, Janajatis, laws that contradict LSGA. devolved to the local level. Madhesis and underprivileged groups. l Institute the system of appraising and l Line agencies should be internalized into l Develop uniform classification of local evaluating projects at the local level as local governments as early as possible. expenditures and make them more per LSGA Article 211. poverty oriented. Also, develop l Increase autonomy and direct funding poverty mapping at the household l Activate Decentralization Implementation to local bodies. level. and Monitoring Committee.
The Economic Policy Network is an undertaking of the Ministry of Finance with Asian Development Bank support. It supports the preparation of policy papers based on participatory dialogue in the areas of (i) macroeconomic management; (ii) international trade, investment, and employment; (iii) infrastructure development; and (iv) tourism, agriculture and regional development. This policy brief is an abstract of the policy report Patterns Of Local Governance Expenditures In The Context Of Rural Poverty Alleviation prepared by Dr. Puspa Raj Kandel. It has been edited for clarity and brevity. Please refer to the original report for a comprehensive discussion on issues and recommendations. Full version available at: www.mof.gov.np/economic_policy/pdf/ /Local_Governance.pdf
Economic Policy Network Ministry of Finance, Singha Durbar, Kathmandu, Tel: 4211353, E-mail: [email protected] Website: www.mof.gov.np
EPN Team: Advisory Committee Chairperson: Mr. Madhav Prasad Ghimire Focal Unit Chief: Mr. Bimal Wagle Team Leader: Mr. Dipendra Purush Dhakal
ADB Project Officer: Mr. Shahid Parwez Edited by: Mr. Samtenla Sherpa
© 2006 Government of Nepal/Asian Development Bank
4 Government of Nepal Ministry of Finance ECONOMIC POLICY NETWORK PUBLIC PRIVATE PARTNERSHIP FOR POLICY FORMULATION POLICY BRIEF No. 23 November 2006
Service Enhancement of Sanitary Sewerage System in Nepal
anitary sewerage systems were aesthetics; wastewater is the reason for of donor support resulting in confined to Kathmandu, Lalitpur increase in several water borne diseases environmental hazard and damage to Sand Bhaktapur districts till the such as hepatitis, typhoid, asthma, human health. The major problems 1970s and 1980s. As the years diarrhea, dysentery, skin cancer, eye and concerning sanitary sewerage system in advanced, Nepal’s cities experienced rapid throat problems. Nepal are management, issues of urbanization, change in consumption habit Despite the need for wastewater ownership, institutional capacity, inability and deterioration of attitude towards treatment plants to deal with the above to expand these systems, and policy, environmental conservation. Despite mentioned hazards, the total installed legislation and institutional failures. significant effort, majority of the capacity of existing treatment plants is less Absence of policy. Nepal has municipalities could not manage the than 10% of total demand for 58 formulated a plethora of policies growing volume of wastewater. Over the municipalities in Nepal. Moreover, concerning water and is signatory to years, problems related to wastewater treatment of domestic liquid waste is international environmental conventions generation kept aggravating due to (i) concentrated in Kathmandu and Pokhara, including the Kyoto Protocol. However, till unplanned urban growth, (ii) shortage of and treatment of industrial waste is limited date policy relating to wastewater drinking water supply, and (iii) inability to to Hetauda. Out of the six wastewater management has not been formulated. extend sanitary sewerage system. To make treatment plants, the ones in Dhobighat, Overlapping responsibilities. While matters worse, in a majority of urban and Sallaghari and Hanumante are defunct. To sewerage systems are located within the semi-urban areas, wastewater generated understand the cause of the above failure judicial arena of various municipalities, the from households and industries is mostly and to enhance services and develop responsibility of operating and maintaining diverted to the natural river system better systems, it is important to review these systems is vested on Nepal Water without any kind of treatment. the status of past services of sanitary Supply Corporation (NWSC). Hence, the Such untreated wastewater has sewerage system. problem of overlapping responsibilities contaminated ground water, surface water exists between Department of Water Supply and farm lands and is the main cause of Review of Past Status of and Sewerage, NWSC, municipalities and foul smell in several neighborhoods. Sanitary Sewerage System lower level of Government. Besides affecting infrastructure, polluting The sanitary sewerage system in Nepal fell Infrastructure constraints. the environment and degrading the short of expectation with the withdrawal Wastewater management was given least
1 priority in development planning and was design and construction that mixes up the United Nations Park Project. It was never recognized on par with water supply system with surface water drainage. developed with the objective of and electricity. Furthermore, existing sanitary sewerage conservation of the Bagmati, Bishnumati Operation and maintenance of system and technology resulted in and Dhobi Khola river corridor. It existing sewerage systems. Difficulties overloading of the system causing damage envisages development of recreational persist in operation and maintenance of to pumping stations of major treatment parks, green belt parks and sewage sewerage systems. plants. treatment plants. Negligence towards environmental Reed Bed treatment plants. These Bagmati Area Sewerage guidelines. None of the wastewater project treatment plants are incomplete in design Improvement Project. Its objective is to was subject to environmental impact for treating wastewater because they are improve quality of water in the Bagmati assessment and environmental audit, actually meant for treatment of sludge from river basin by constructing trunk sewers resulting in environmental and health wastewater. In addition, they do not along the Bagmati river with 12 wastewater hazards. function well during monsoon since it treatment plants at the confluence points. Wastewater dumping into rivers. cannot retain rainwater. The Reed Bed It envisages phase wise construction of Bagmati, Bishnumati and Manohara river treatment technology is in a pilot stage of sewerage system, implementation of green corridors have been turned into dumping development and requires further research. belt and road along the Bagmati river. yards, as garbage is disposed and Reconsideration of Reed Bed Plant Sludge removal from septic tank. wastewater discharged. The river system technology is also necessary and its This is the only service provided by the in Kathmandu valley is permanently economic sustainability should be proven informal private sector. The sludge from polluted and ground water permanently before application. septic tanks is collected in mobile tanks contaminated. The rivers in the valley have Lack of Public Private Partnership and disposed off at Teku wetland plant or threatened both aquatic and wildlife in (PPP) in wastewater management. in the rivers. Kathmandu and is the cause for various Wastewater management is considered the water borne diseases. domain of the central Government and PPP in Wastewater Insufficient resources. Wastewater municipalities only. Thus, the role of Management management is short of financial citizens, businesses and industries is not The major objective of PPP in wastewater resources to implement and operate highlighted in this sector. management is to create intersectoral programs. Revenues for wastewater Notwithstanding the above partnership in support of a long term vision management collected by NWSC at the constraints and failures in wastewater for sustainable management of wastewater rate of 30% of water tariff is mostly spent management, there are also several current systems. This would entail identifying on administrative and staff costs and is practices that are successful. The following stakeholders and partners currently only partially used for developing are some of the successful projects in involved in wastewater management, capacity. wastewater management: defining partnership models, defining the Disposal mechanism. 95% of Save the Bagmati Campaign. role of each partner in wastewater wastewater generated is disposed into Launched in 1991 with the objective to management, exploring the ways of rivers, ponds or into the underground restore the Bagmati river into its natural commercial sustainability of managing through septic tanks. This is the major environment, the campaign mainly focuses wastewater and exploring the methods of reason behind water borne diseases and on mobilizing civil societies and local waste management to decide on the best environmental damage. groups. It also advocates for a central high approach to prevent waste disposal in Delays in rehabilitation. Defunct powered organization and implements public places. wastewater plants mentioned above have still small scale cleaning campaigns, trains local Similarly, the primary purpose of not been rehabilitated. Huge investments groups active in the area and encourages partnership is to (i) identify pragmatic ways made in these plants remain idle. neighborhood watch schemes. Milestone for wastewater management, (ii) implement Poor construction. The pipe sewerage achieved by this project is the construction the proposed activities to achieve the system in Kathmandu, Lalitpur and of the wastewater treatment plant in objectives of PPP in wastewater Bhaktapur are mostly leaking due to poor Guheswori. management, and (iii) provide better
2 access of wastewater services in an For semi-urban and rural areas, onsite sewage; (v) encourage private sector efficient and cost friendly manner. sanitation comprising of pits, septic tanks, participation and develop cost effective Furthermore, the scope of the eco-san toilets, cesspool are and environment friendly solution for partnership would be related to the recommended for basic sanitation system. wastewater management. While the above following activities: (i) investigation, Whereas development of independent mentioned activities are recommended for research, documentation and analysis; (ii) sanitary system to treat wastewater within existing system of sewerage management, capacity building and empowerment of the premise itself is recommended for big the following activities are proposed for local communities; (iii) creation of institutions and organizations such as any new system for sewerage infrastructure and institutions; and (iv) hospitals, housing complexes, management: (i) establish final authority generating incentives, awards and universities etc. By contrast, densely for consensus building, and (ii) review motivation for best practices in wastewater populated urban areas should develop a policy in relation to particular location and management. separate system for sewerage project based on centralized policy A review of current institutional management and if necessary may making and decentralized execution, models for dealing with waste management combine septic tanks with small bore operation and maintenance. In addition, and the overall environment shows that plastic sewers. The combined sewerage a few more recommendations are given organizations are shifting in favor of system with mixed sanitation and surface below. private sector participation in policy and drainage is the least preferred system, decision making. It is recommended that which should be gradually improved to a Recommendations high level authorities not chair councils separate system. l Create a wastewater management related to wastewater management because Treatment method should be fund from wastewater tax, grants from it is very likely that time constraints would determined by the ability of the system to central and local governments, con- not allow these officials to prioritize issues handle sludge volume. The application of tributions from various funds and concerning wastewater management. Reed Bed plants is suggested only for revenue from outsourcing of ser- Furthermore, it is recommended that the tertiary treatment. vices. execution, operation and maintenance Similarly, the choice of service issues of wastewater management be dealt category for sanitary sewerage services l Develop mechanisms to motivate and at the local level following the Local Self will be based on (i) soil appropriateness, encourage communities and formal and Governance Act. level of ground water and flooding informal sectors to take initiatives in One of the primary reasons for PPP in conditions for onsite sanitation; (ii) wastewater management. Provide moti- wastewater management is to provide level of contaminants to be disposed in vating awards and incentives for prac- efficient, cost effective and extended the natural water bodies; (iii) ticing wastewater management at sanitary sewerage system. Selection of affordability and cost effectiveness; and source. appropriate technology and services are (iv) environmental and performance key factors in enhancing services of audit. l Resolve institutional issues related to sanitary sewerage system. Once the type of service has been wastewater management by consider- chosen, the following activities are ing all three components of urban Enhancement of Sanitary recommended to enhance the chosen waste—solid, liquid and gas—in a com- Sewerage System Services service: (i) prepare inventory of sewerage prehensive manner. The approach for selecting Sanitary systems, (ii) rehabilitate the existing Sewerage system should be based on the system based on choice of sanitary l Consider wastewater management a following principles: (i) waste management sewerage system, (iii) rehabilitate or necessary semi-urban and urban infra- at source; (ii) choice of technology, which upgrade existing wastewater treatment structure on par with water, roads, elec- should be based on environmental plants to accommodate wastewater loads tricity etc. standards;(iii) consensus among based on separate sanitary sewerage stakeholders; and (iv) follow up, system,(iv) separate storm water and l Establish an exclusive organization monitoring and evaluation. sewage flow to allow proper treatment of dedicated to wastewater management,
3 which will represent PPP at the apex level l Incorporate wastewater management l Generate more water for cleaning the and will comprise of representatives of within the scope of Acts and Regula- river systems by (i) implementing water institutional stakeholders including tions to make it an inherent part of cor- conservation programs, (ii) preventing Government ministers, municipalities, responding sectors such as housing, urban development in ground water re- associations and formal and informal water supply, sanitation etc. charge zones, (iii) treatment of gray wa- private sector. ter and recycling, (iv) limiting urban l Define wastewater management as a so- development and population growth on l Develop legislative and regulatory cial and corporate responsibility of the basis of water supply capacity, and framework for wastewater management households, businesses, industries and (v) allowing at least 25% natural river based on PPP. institutions. flow on a permanent basis.
The Economic Policy Network is an undertaking of the Ministry of Finance with Asian Development Bank support. It supports the preparation of policy papers based on participatory dialogue in the areas of (i) macroeconomic management; (ii) international trade, investment, and employment; (iii) infrastructure development; and (iv) tourism, agriculture and regional development. This policy brief is an abstract of the policy report Service Enhancement And Development of Sanitary Sewerage System In Urban And Semi-Urban Setting In Nepal prepared by Mr. Badan Lal Nyachhyon. It has been edited for clarity and brevity. Please refer to the original report for a comprehensive discussion on issues and recommendations. Full version available at: www.mof.gov.np/economic_policy/pdf/Service_Enhancement.pdf
Economic Policy Network Ministry of Finance, Singha Durbar, Kathmandu, Tel: 4211353, E-mail: [email protected] Website: www.mof.gov.np
EPN Team: Advisory Committee Chairperson: Mr. Narayan Prasad Silwal Focal Unit Chief: Mr. Bimal Wagle Team Leader: Mr. Dipendra Purush Dhakal
ADB Project Officer: Mr. Shahid Parwez Edited by: Mr. Samtenla Sherpa
© 2006 Government of Nepal/Asian Development Bank
4 Government of Nepal Ministry of Finance ECONOMIC POLICY NETWORK PUBLIC PRIVATE PARTNERSHIP FOR POLICY FORMULATION POLICY BRIEF No. 24 June 2006
Sustainable Approach to Road Transport Maintenance Practices for Effective Service Delivery
oads are the highest value requiring reconstruction at three times or instance, India has achieved 100 km per public assets in most countries more the cost on average of maintenance 100 sq km. As of 2002, the road density in in the world. Although the cost. According to an estimate, the repair Nepal is 19.9 km per 100 sq km. According need for road maintenance is costs rise to six times maintenance cost to an estimate made by the Master Plan of Rwidely recognized; it is often neglected and after 3 years of neglect and 18 times after 5 Department of Roads (DoR) at the end of not as politically attractive as road years of neglect. Developing countries are year 2022 there will be around 43,600 km of construction. Industrialized countries losing between 1%–3% of their annual all types of road networks. Even after spend 0.4% of gross domestic product gross national product due to an achieving the target of master plan, density (GDP) on road maintenance and 1.3% on unnecessary increase in vehicle operating will be 29.7 km per 100 sq km, which will new construction. Developing and costs and loss of road asset value alone. still be very low. At present the asset value transition countries spend mere 0.75% of Even roads constructed with good quality of road in Nepal is at the range of NRs100 GDP on road maintenance. Therefore, there materials and workmanship deteriorates billion. is no adequate and stable allocation of due to environmental factors (terrain The road networks in Nepal are funds for road maintenance through climate and local practices), traffic volume, divided into three categories: Strategic regular government budget. Only limited and additional axle load. It is unlikely that Road Network (SRN), Rural Road Network developed countries in the world have under the prevailing system substantial (RRN), and Urban Road Network (URN). allocated adequate resources to road and sustainable improvements can be There are 7,534.8 km of operational maintenance on a sustained basis. made unless and until new approaches are strategic roads which will be 8,038 km after The prevailing financial and introduced and implemented to eradicate completion of the roads currently under institutional system of road maintenance aforementioned problems. construction. Similarly, there are 21,695 km has been clearly identified as the root of RRN in Nepal out of which many rural problem. Without regular maintenance, Status of Road Networks roads (about 10,000 km) are not operational roads fall into disrepair. Delayed in Nepal due to inadequate geometric compliance maintenance results in high direct and Nepal’s road network is extremely and lack of supervision during indirect costs. If defects are maintained underdeveloped in comparison with other construction. According to DoR, there are promptly, maintenance cost is modest and countries, both in terms of area and 2,259.9 km of urban road network in the if neglected, road sections may fail, population, even in South Asia. For country.
1 Out of the overall total roads of approaches for road maintenance. In 1995, carrying out the actions, that are necessary 31,489.8 km the operational road DoR introduced its new strategy and to comply with the service quality levels network of the country including rural proposed maintenance action plan stated in the contract. This type of roads is presently at the range of 22,000 emphasizing on planned maintenance contract makes it necessary for the km. Only 17% roads are blacktopped, program of integrated, routine, recurrent, Contactor to have a good management 20% gravel surface and remaining 63% and periodic activities. The action plan capacity. PBMC “management” means the roads are earthen surface. This implies established the Strengthened capability to define, optimize and carry out that 5,280.9 km of roads are black topped Maintenance Development Program in a timely basis the physical interventions including highway, feeder, rural, and (SMDP) which was introduced first in that are needed in the short, medium and urban roads. Almost all the rural roads Lalitpur and Bharatpur as Division Road long term, in order to guarantee that the are unpaved, thus are operational Offices (DROs) pilot projects. SMDP’s roads remain above the agreed service during fair weather only. support to DROs helped to a great extent quality levels. in many aspects, which were difficult in A positive part of PBMC in Nepal is Road Maintenance and government mechanism because of that it has multi-annual budget against the Existing Policy financial regulation. Moreover, SMDP was annual budgetary process of DoR helping In the early 90s, maintenance of road instrumental in introducing planned timely interventions for recurrent networks was carried out in ad-hoc manner. maintenance system in DoR, especially the maintenance activities like pothole repairs. The practice was normally beset with routine maintenance by introducing the Therefore there should be no delays in problems such as inadequate budget and length person system, which is regarded addressing the recurrent maintenance human resources. Negligence in as a major achievement of Strengthened (potholes repair). In 2004, these endeavors maintenance resulted in heavy loss of the Maintenance Divison of DoR. The planned resulted into 87% of good and fair road road asset. In 1988, a study on maintenance maintenance system is the execution of length. The maintenance of roads received of roads found that road asset loss in Nepal routine maintenance, recurrent further emphasis with the establishment was between NRs1,000 to 2,000 million maintenance, and periodic maintenance. of Roads Board Nepal (RBN) as annually. In 1992, majority (about 52%) of This approach makes the best use of autonomous body in 2002, which strive to the SRN were in poor conditions. However, available resources and provides a high improve road maintenance system in the conditions of roads started to improve from level of management control over country. It allocates 70% of its resources the early 90s as leading financial maintenance operations so that they can to SRN through DoR and 30% for Local institutions the Asian Development Bank, be easily modified to suit changing Road Networks (LRNs) through World Bank, Overseas Development conditions on the roads. In Nepal, planned Department of Local Infrastructure Administration, Swiss Development maintenance involves organizing routine Development and Agriculture Roads Cooperation supported various road and recurrent activities on a responsive (DoLIDAR). Road Agencies have to maintenance projects such as the Second basis during the monsoon period (July to provide a minimum counterpart fund of and Third Roads Improvement Projects, September, inclusive) and in a systematic 30% (Municipalities) and 20% (District Road Maintenance and Rehabilitation manner for the rest of the year. The aim of Development Committees). Project, Eastern Region Road planned maintenance is to provide an Funds for road maintenance and Maintenance Program, and Arniko agreed level of serviceability on each road improvement are likewise in extremely Highway Improvement Project such that total road transport costs are kept short supply. Even after the establishment respectively. After the implementation of a minimum. of RBN, the fund availability is a problem these projects, road condition of SRN was Another new concept designed to mainly because of limited sources of improved significantly. Poor condition of increase the efficiency and effectiveness revenue: toll tax (road user tax), fuel levy road reduced from 52% in 1992 to 12% (31% of road maintenance operations is known on diesel and petrol and vehicle in good condition and 57% in fair as Performance-Based Maintenance registration fee. Road user tax is directly condition) in 1999. Contracts (PBMC) for the maintenance collected by RBN, whereas the fuel levy The Nepal Transport Policy along management of road networks. A is collected in central treasury in Ministry with various other transport policies related fundamental feature of PBMC is that the of Finance and channeled to RBN. Current with transport sector, has set different contractor is responsible for designing and fund disbursement from RBN is only
2 about 16% of total required budget for all ! Backlog maintenance is increasing ! Contractors tendency carry out types of roads causing backlog in road every year due to inadequate fund recurrent maintenance at one time, not maintenance. Solving the financing allocation addressing the cyclic order problem calls for a new approach. Given these conditions, a proper management ! Lack of database on commercially viable ! The achievement of 20 years Road of user charges is a key area of roads and social (baby) roads requiring Master Plan and District Transport consideration, which should not be subsidy Master Plans are unknown treated as a tax. Backlog in road maintenance has more ! Absence of rationalized fuel levy Recommendations multi-dimensional and chain implication General that are indirect. Periodic maintenance is ! Lack of proactive maintenance ! Funding mechanism between not taking place in Nepal as planned due initiatives from Road Agencies (RAs) commercially viable and to inadequate budget. At present, there is commercially non viable roads a backlog of 800 km of SRN. If it could not ! Emergency preparedness system in should be separated be addressed on time, length of SRN SRN is inadequate requiring rehabilitation will increase every ! Process of delineating the DoR year. Rehabilitation cost is roughly three ! PBMC pilot phase application is yet to responsibility to SRN should be times higher than periodic maintenance and be judged completed reconstruction cost is three times higher than rehabilitation cost. Cost of periodic ! Farmers, who contributed their land for ! RBN should have full responsibility to maintenance is about NRs1 million per km, rural road are still paying land tax regulate the user charge mechanism cost of rehabilitation is about NRs3 million and cost of reconstruction is NRs9 million Institutional ! Carryout the study to examine the per km. ! RBN and user charge concept is not current fuel levy and toll tax rate, The maintenance issue of rural roads fully understood by road users institutionalize the process and is indeed very complex. In 1997, DoLIDAR implement accordingly was established to look after the rural road ! Inadequate facilitating role from maintenance. DoLIDAR estimates that DoLIDAR in guiding, monitoring RAs ! Provide training to RBN and DoR staff roughly about 10,000 km of roads are not (DDCs & Municipalities) to enhance the skill and capacity in operation. Most of the RRNs are undertaken without provisioning the ! Absence of RA willingness in ! Coordinate with traffic management for adequate budget. About 60%–80% of the maintenance especially in LRNs regulating the axle load fund transmitted to VDCs is used in roads without technical knowledge. DoLIDAR ! Inadequate maintenance of urban roads Strategic Roads receives NRs40 million annually for under municipalities ! Provide adequate fund for periodic maintenance and disburse it to DDCs. maintenance to minimize the backlog
Besides, RBN provides its 30% of budget ! Confused general perception that for the maintenance of local roads paved (gravel or blacktopped) road is ! Training should be provided to the DoR including few urban roads through not economically justifiable for RRNs staffs and contractors before piloting DoLIDAR. the PBMC and review the pilot PBMC
! Frequent digging of urban roads are implemented in SRNs Constraints creating congestion and inconvenience Policy ! Regularly monitor the length workers
! Lack of awareness and seriousness at and continue the reward system. the decision making level on reviewing Administrative and Others
and preserving the asset invested in ! Road maintenance is not in accordance ! Vulnerable area identification of roads infrastructures to PBMC agreement for emergency preparedness
3 Rural Roads ! Adopt mountain and settlement ! Explore the alternative financing
! Avoid erratic funding mechanism and management, provide technical back mechanism to RRN maintenance. investment in RRNs up, avoid political interference and develop roads in planned manner Urban Roads
! New construction and maintenance ! Adopt a policy of separate utility lane to
should be separated ! DoLIDAR should educate politicians manage outside the road in urban area and of districts and municipalities on make it mandatory in new construction
! Establish a separate road maintenance maintenance
unit in the districts under District ! Establishing a strong coordination unit
Technical Officer (DTO)/DDC ! Transfer of ownership of the land falling among the service agencies in RRN should be promptly addressed
! Adopt phase-wise institutional by the local bodies ! Strengthen municipalities in terms of strengthening to DTO/DDC capacity building of road maintenance
! Comprehensive study of rural roads is
! Length persons for routine maintenance required to take proper action to ! Establish a separate road maintenance unit should be replicated in rural and urban commensurate with prevailing social, in municipalities and provide support for roads political and economic situation taking up systematic maintenance system
The Economic Policy Network is an undertaking of the Ministry of Finance with Asian Development Bank support. It supports the preparation of policy papers based on participatory dialogue in the areas of (i) macroeconomic management; (ii) international trade, investment, and employment; (iii) infrastructure development; and (iv) tourism, agriculture and regional development. This policy brief is an abstract of the policy report Sustainable Approach to Road Transport Maintenance Practices for Effective Service Delivery prepared by Mr. Hare Ram Shrestha. It has been edited for clarity and brevity. Please refer to the original report for a comprehensive discussion on issues and recommendations. Full version available at: www.mof.gov.np/economic_policy/pdf/Sustainable_Approach.pdf
Economic Policy Network Ministry of Finance, Singha Durbar Kathmandu, Tel: 4211353, E-mail: [email protected] Website: www.mof.gov.np
EPN Team: Advisory Committee Chairperson: Mr. Narayan Prasad Silwal Focal Unit Chief: Mr. Bimal Wagle Team Leader: Mr. Dipendra Purush Dhakal ADB Project Officer: Mr. Shahid Parwez Edited by: Mr. Sunil Sharma
© 2006 Government of Nepal/Asian Development Bank All rights reserved
4 Government of Nepal Ministry of Finance ECONOMIC POLICY NETWORK PUBLIC PRIVATE PARTNERSHIP FOR POLICY FORMULATION POLICY BRIEF No. 25 November 2006
Macroeconomic Stability: Contributing Factors and Their Sustained Management
he importance of macroeconomic FY2006, the current account and balance of In brief, although liberalization has stability is paramount not only for payments were still at a surplus, largely brought about improvements in Nepalese economic stability but also for the owing to the inflow of remittances. Similarly, economy, the process of structural change overall political and social even though there exists a widening gap is taking place rather slowly, hence the Tdevelopment of any country. Instabilities between total expenditure and public sluggishness in growth rates. arising from rising inflation and revenue resulting in increasing budget unemployment, and fiscal and balance of deficit, the fiscal deficit has gradually Review of Current payment crisis have caused the fall of many decreased to a sustainable level—ratio of Macroeconomic Framework governments. Consequently, structural fiscal deficit to GDP decreased from 5.3 in (i) Structural change. The share of changes in the economy are warranted to FY1999 to 3.4 in FY2005. Decrease in fiscal agriculture sector to GDP declined from bring back stability. In this backdrop, deficit can be attributed to concessional 39.4% in 2001/02 to 38.8% in 2005/06 and Nepal’s macroeconomic performance is loans and long-term loans with favorable the non-agriculture sector’s share to GDP reviewed with a consideration for overall interest rates. Notwithstanding the above increased from 60.6% in 2001/02 to 61.2% economic, social and political development. improvements in balance of payment and in 2005/06. Macroeconomic stability of Nepalese fiscal deficit, the recent political impasse in (ii) Economic growth. The Tenth Plan economy is determined by the following the country caused the slowing down of (2002–2007) has a target of increasing the factors: (i) discrepancy between investment implementation of liberalization policies. As annual growth rate at 6.2%. This seems and savings, (ii) inflation and price stability, a result, Nepalese economy experienced highly unlikely given that the growth rate, (iii) balance of payment situation, (iv) fiscal various shortcomings: (i) a recorded rise in which was a negative 0.3% in FY2002, condition, and (v) unemployment. inflation of 5.3% during FY2003–FY2005, (ii) increased to only 2.4% in FY2006. The liberalization of the economy in the the growth rate of the economy was rather (iii) Investment. Investment creates early 1990s encouraged policies that have sluggish at 2.9% during FY2003–FY2006, jobs and causes economic growth. Total helped macroeconomic parameters remain and (iii) rising unemployment. In addition, investment to GDP increased from 24.2% compatible with fiscal and monetary policies. the vicious circle of low income, low in FY2002 to 30.3% in FY2006. Investment Hence, even though the trade deficit rose savings, low investment and low growth could have been higher if public and from 14.6% of gross domestic product (GDP) still remain the characteristic feature of private sector investment had not been in fiscal year (FY) 2002 to 17.0% of GDP in Nepalese economy. sluggish.
1 (iv) Consumption. Consumption resulting from re-enforcement of the value Broad money supply increased by 8.8% growth has shown a steady increase from added tax system and surge in imports— during 2001–2005, as a result of increased 87.8% of GDP in FY2002 to 88.8% in FY2006. revenue generation increased from 11.9% foreign exchange holding of the banking With significant amount of remittances of GDP in FY2002 to 13.3% in FY2005, (ii) system. A high monetary growth rate has coming in, the proportion of private gradual increase in inflow of foreign grants, increased demand for imported goods and consumption is likely to further increase. (iii) decline in the magnitude of foreign and services but has not caused price (v) Savings. Nepal is a low savings domestic debt and a decline in deficit instability owing to improved domestic country with savings at 12.1% of GDP in financing, and (iv) a decline in fiscal deficit supply situation, declining international FY2002, which further declined to 11.1% to a much more sustainable level. commodity prices and inflow of foreign in FY2006. Decline in savings rate is (viii) Foreign aid and debt. The major capital. attributed to lower GDP growth rate, high source of foreign capital inflow in Nepal is In addition to the above mentioned inflation, poor government revenue foreign aid. Foreign aid commitment factors, internal and external economic collection and low per capita income. amounted to NRs33.23 billion in FY2002, forces mentioned below also influence (vi) Inflation. The annual average which increased to NRs38.15 billion in macroeconomic stability. inflation based on national consumer price FY2005. While foreign aid is a major source index, recorded a rise of 5.3% during of financing development activities and Internal and External Factors FY2003–FY2006. This increase is due to (i) meeting the budget deficit, the utilization Internal forces that affect slow growth in agriculture production of aid is not as efficient as desired. In 2005, macroeconomic stability in Nepal affecting the prices of both agriculture and a policy document on public debt originate from (i) pervasive poverty that non-agriculture commodities and services; management revealed that Nepal’s public not only pushes down the per capita (ii) rise in prices of Indian commodities, debt is at a sustainable level and suggests savings to a low level but also reduces which automatically affects Nepalese that debt to GDP ratio over the next five the level of aggregate demand, (ii) low commodity prices; (iii) increase in prices year period is likely to be stable at the economic growth rate and absence of of essential commodities such as current level of 66%. Sustainability is broad based growth, (iii) growing petroleum products, electricity and attributed to long term loans at favorable unemployment and underemployment, fertilizer, which consequently increased the interest rates. On the other hand, debt and (iv) political instability. cost of production and prices of other sustainability is facing severe challenges Likewise, external forces that commodities; and (iv) the vulnerability of from increasing domestic debt. With influence macroeconomic stability the economy to price distortions and domestic debt outstanding at NRs90.2 originate from (i) inconsistency in the inflation resulting from asymmetric billion in mid July 2005, a significant portion amount of foreign assistance for different information, lack of competition and of government resources are being fiscal years that could squeeze capital inadequate regulatory mechanism. siphoned off for debt servicing. spending and adversely affect economic (vii) Fiscal policy. Fiscal imbalance (ix) Remittance. Nepal received an growth; (ii) stability of the Nepalese leads to instability in the overall economy. estimated $908 million in remittances in rupee, which is largely dependant on the The increasing trend of government 2004/05, which comprised 12% of GDP. The exchange rate movement of the Indian expenditure continues largely because of inflow of remittances have helped (i) offset rupee; (iii) rise in petroleum product prices, increase in recurrent expenditure and bulk of the trade deficit resulting in a current which not only causes a rise in the import principal repayment of debt. Furthermore, account surplus of $225 million, (ii) bill but also increases the cost of Nepal’s fiscal structure remains weak owing generated a steady stream of foreign production and overall inflation; (iv) the to a low level of revenue generation, high exchange earnings helping to maintain a growing trade deficit, which increased dependence on foreign and domestic balance of payment surplus, (iii) boosted from 14.3% of GDP from FY2002 to 17.0% financing and continued budget deficit. national income and consumption and in FY2005. However, Nepal’s fiscal situation is improved credit worthiness for external Besides the above mentioned factors improving and is able to maintain stability borrowing. that affect macroeconomic stability, there due to the following factors: (i) an (x) Monetary policy. Nepal’s are other constraints to stability that are improvement in revenue generation monetary sector continues to expand. briefly discussed below.
2 Constraints external market. While garments, one percent of GDP, (iii) contain ! The capital budget is under spent, only pashmina and carpets account for more recurrent spending, (iv) streamline 80–85% of the targeted budget is spent. than 60% of the country’s total exports; subsidy and transfers; and (v) Similarly, there exists a gap between aid more than half of total trade is with India. improve the built in elasticity of the commitment and disbursement, aid tax system.
disbursement is only 60–65% of aid ! Import elasticity of GDP is very high
commitment. and export elasticity very low implying ! Establish Public Debt and Foreign Aid that fast GDP growth would further Coordination Committee to undertake
! Even though grant aid utilization deteriorate trade balance necessitating debt management at an executive level increased from 28.6% of committment structural change in production. and to make clear the responsibilities in FY2002 to 56.7% in FY2005, the grant of Controller General’s Office and the utilization rate is still lower than the Recommendations Foreign Aid Coordination Division of loan utilization rate, which was 72.6% ! The following measures are the Ministry of Finance. in FY2005. recommended for effective
management of public resources: (i) ! Ascertain the linkages between
! The budgetary allocation during the widen the tax base and empower local remittance inflows and the poverty four year period FY2004–FY2007 for the authorities to effectively mobilize level. Also, workout a plan to make use Tenth Plan strategies is not only low resources at the local level; (ii) of growing remittances for investment but also inconsistent. minimize revenue leakages; (iii) and employment generation. contain defense and security ! The Tenth Plan’s objective to reduce expenditure; (iv) maintain a strong ! Explore alternative sources of resource poverty to 10% by the end of the Twelfth fiscal position; (v) improve revenue flows to compensate for possible future Plan seems highly unlikely given the administration in terms of efficiency reduction in remittances. insufficient level of intervention from and competency; (vi) undertake civil both public and private sector for service reforms; (vii) revisit the ! Nepal Rastra Bank should develop a achieving this objective. criteria of P1 projects and eliminate system for efficient collection and P3 projects to make additional repatriation of remittances through ! The growth in economic activities is resources available for P1 projects; formal channels. Also, formulate unable to absorb the growing labor (viii) reduce the level of non programs to make beneficial use of the force resulting in rising unemployment performing assets and operational repatriated money. and poverty. expenses of the financial sector; and (ix) accelerate the process of ! Evaluate the implementation of Foreign ! Low growth in agriculture sector at 2.8% privatization of public sector Aid Policy 2002 to accomodate changes average annual growth rate during enterprises, especially those running taking place in the management of FY2003—FY2006 has not helped at a loss; foreign aid. improve the employment situation.
Agriculture is a labor intensive sector ! Enact the Fiscal Transparency Act and ! Review the Industrial Enterprises Act, providing employment to 66% of the Public Procurement Act to ensure that Trade Policy Act and Foreign labor force. allocation of resources is growth Investment and Technology Transfer oriented and in favor of social Act to make them compatible with other ! The Gini coefficient, a measure of development. policy instruments. inequality rose from 0.34 in 1995/96 to
0.41 in 2003/04. ! Undertake fiscal restructuring to (i) ! Enhance agriculture productivity and maintain fiscal deficit at less than per capita domestic food supply to ! Both commodity and geographic five percent of GDP, (ii) contain increase employment, ensure food concentration is pretty high for Nepal’s domestic debt financing at less than security, reduce poverty and increase
3 aggregate demand. For this, the support obtained on a public private health, literacy, skill development, forestry, following measures will need to be partnership basis. environment and agro-marketing. undertaken: (i) increase the share of
resource allocation to the agriculture ! Ensure effective implementation of the ! The two way informal trade between India sector, (ii) ensure the smooth availability Poverty Monitoring and Analysis and Nepal ranges between $368 million of agriculture inputs, (iii) either diversify System conceptualized by the National and $408 million. Take strong measures the cropping pattern or reintroduce Planning Commission. to bring this trade under the tax net. subsidy to small farmers so that they can compete with Indian farmers who ! Extend the coverage of micro finance ! Increase the focus on Nepal’s comparative still receive subsidies. institutions to ease access to credit for the advantage to boost exports. Comparative rural population and poor households. advantage lies in labor and resource
! The activities of the Poverty Alleviation Also, introduce credit programs targeted intensive industries such as hydropower Fund need to be expanded to cover to the poor. Credit programs can also development, tourism, carpets, textiles, paper increasing number of districts with incorporate other programs related to products and agro-processing industries.
The Economic Policy Network is an undertaking of the Ministry of Finance with Asian Development Bank support. It supports the preparation of policy papers based on participatory dialogue in the areas of (i) macroeconomic management; (ii) international trade, investment, and employment; (iii) infrastructure development; and (iv) tourism, agriculture and regional development. This policy brief is an abstract of the policy report Macroeconomic Stability: Contributing Factors and Their Sustained Management by Dr. Rabindra K. Shakya. It has been edited for clarity and brevity. Please refer to the original report for a comprehensive discussion on issues and recommendations. Full version available at: www.mof.gov.np/economic_policy/ pdf/Macroeconomic_Stability. pdf
Economic Policy Network Ministry of Finance, Singha Durbar Kathmandu, Tel: 4211353, E-mail: [email protected] Website: www.mof.gov.np
EPN Team: Advisory Committee Chairperson: Mr. Vidyadhar Mallik Focal Unit Chief: Mr. Bimal Wagle Team Leader: Mr. Dipendra Purush Dhakal
ADB Project Officer: Mr. Shahid Parwez Edited by: Mr. Samtenla Sherpa
© 2006 Government of Nepal/Asian Development Bank
4 Government of Nepal Ministry of Finance ECONOMIC POLICY NETWORK PUBLIC PRIVATE PARTNERSHIP FOR POLICY FORMULATION POLICY BRIEF No. 26 June 2006
A Policy Study on Urban Housing in Nepal
n spite of limited investment, urban Urbanization refers to the process of Urbanization in Nepal is considered a areas in Nepal contribute more than growth in a higher proportion of popula- process of migration by people from I60% to the country’s gross domestic tion living in urban areas. The concept of inaccessible villages to accessible places. product (GDP). In fact, the urbanization has been related to special- This offers opportunities for employment, development of urban areas has the potential ization, industrialization, and consequent education and health. Whilst 81.5% of the to contribute to the country’s economy and economic development. It is found that people are migrants from Village can serve as a means to eradicate poverty. In there is a general consensus that a funda- Development Committees, only 5% are the this sense, urbanization should be considered mental characteristic of urbanization is the migrants from the municipalities. 75.2% of as an asset, rather than a liability. If structural shift in employment from agri- the migrants had left their place for family urbanization can play a positive role in culture to non-agriculture pursuits. It can reasons, 11.6% had done so for better life poverty eradication, what can Nepal then do be stated that urbanization is often taken and 6.8% migrated seeking for to facilitate this process? This question does as a proxy for the level of development in employment. Over the period of 40 years, not have an easy answer. general. there has been a steep increase in the
Percenteage and Growth Rate of Urban Population
Census Year % of Urban Population % of rural population Annual growth rate Urban Rural
1952/54 2.9 97.1 - - 1961 3.6 96.4 4.53 1.56 1971 4 96 3.23 2.03 1981 6.4 93.6 7.55 2.40 1991 9.2 90.8 5.89 1.79 2001 14.2 85.8 3.44 1.85
Source: Nepal Population Report, Ministry of Population and Environment: 2061
1 urban population about 40% as show in Kathmandu and Lalitpur, this concept has the company. The housing companies the table below. been weakly enforced. The obsolete have very often provided the housing loan Increased housing construction is legislation has itself become a major factor from the financial institutions. Usually a also associated with the process of in retarding housing development in the user committee is formed for the solid waste urbanization. Every year in Nepal, city. Appropriate changes in the disposal and maintenance of the areas. approximately 14,000 houses are institutional structures and government People feel that the buildings that are constructed in the urban areas. Of these roles are the only means available to constructed by the housing companies are houses, one-third are constructed in the address these issues. costly and the owners can construct such urban areas of Kathmandu and Lalitpur. The most popular mode of buildings in much lesser cost. The housing There is a need for 200 ha of land in the construction in urban areas is the owner colonies only cater to rich segments of the country every year. About 50% of the built housing mode. Housing activity in society and therefore neglect a focus on people have plot sizes varying from 1,000 Nepal begins with the purchase of a the poor who, live in cities. Still, housing to 5,000 sq ft that is similar for the lowest building plot, followed by construction companies are way out to deliver organized and the highest 50% of the households. A and the reception of services. This is a housing making urban area to be more recent study revealed that in the traditional approach to housing. The more habitable only if they implement existing Kathmandu Valley, the government has scientific and the modern approach are rules and regulation. only supplied about 10% of the developed believed to begin from the plot, the Emerging trends in urban hous- land. The rest of the land has been supplied provision of infrastructure and then the ing conditions in Nepal: by brokers (landowners and private construction of the dwelling unit. Almost l The squatter population has almost parties). The land supplied by the private 63% of the houses in Nepal continue to be reached 10% in the urban areas The sector lacks the quality of space due to built in this mode which are major temporary housing type is more than the presence of meandering roads, the responsible factor in creating urban half of the total housing absence of the natural drainage systems housing problems. and a lack of public open space. Since house owners are not well l The number of renters is quite Moreover, housing development in versed in housing design, there has been significant at 23% Nepalese cities are beset with many increase in number of modern houses problems: these include an increasing without taking any adequate earthquake l 17% of people still defecate in the open numbers of people living on rent; resistant measures. This problem is further overcrowding, infrastructure which is compounded by lack of financial resources, l 30.6% of urbanites still use wood as the incompatible to the needs of the people; unavailability of land and significant primary cooking fuel rising numbers of squatters and slum number of people living on rent in cities areas; urgent need to upgrade the creating more demand for houses. l Only 87.4% of the people use electricity dilapidated housing stock; houses being Attempts have been made to develop for lighting purposes prone to earthquake and flood; private housing in an organized way unavailability of serviced land plots; the through housing companies. Currently, 15 l Only 53.3% of urbanites have access to lack of optimally efficient building materials companies are operating in Kathmandu piped water. Buildings with damp walls and construction technology; the lack of Valley in supplying the readymade houses. and leaky roofs are close to 10% suitable legislation about rental housing; In terms of the quality of dwelling needing for the up-gradation of the lack of housing for disadvantaged groups units most of the housing colonies are existing houses, 21.6% of the people such as the old, orphans and street made up of the frame structures. All of them feel that the housing that they are using children. Complicating all these issues have provision of electricity and telephone; is inadequate mentioned above is the lack of recent and for the water supply they have been housing data. relying upon the underground water. l Buildings are vulnerable to earthquakes In addition, Nepal faces clear-cut House owner can directly transfer the ten- and floods segregation between the industrial and the ure of the house by full payment at a time residential zone. Although the zoning or pay money in installment basis and get Nepal had announced a Shelter Policy concept has been implemented in the tenure ship after the all bills are paid to in the year 1996 whose main objective was
2 to fulfill the needs of housing by the year The urban areas are very important on the poor people. 2006 in two phases. The first phase virtue of their higher contribution to the Unavailability of serviced housing spanned from the year 1996 to 2001 and economy of the country. Despite this, very plots: About 67.5% of people purchase the second from 2001 to 2006. little investment is made in the urban areas land from the landowners, which is seldom compared to their rural counterpart. furnished with the required services. As a Its policies were to Increase the avail- Various studies have shown that the result, people are generally compelled to ability of dwelling units and repair and investment in the urban areas is only 2%. construct buildings first and make maintain the existing stock by The urban areas have capacity to bolster arrangement for the necessary services l increasing the supply of serviced land the economy by producing a multiplier afterwards. In recent times, scientific effect, which eventually trickles into the mechanisms have been applied (site and l increasing the necessary basic infra- rural areas. The Twelfth Five-Year Plan service approach and land pooling), structure services envisages a 75% contribution from the however at the present is responding urban areas. However, it would be a far- modestly to the requirements. l improving the use of building material fetched proposition to seek higher Lack of regulations favoring the poor and construction technology contribution from the urban area if the and deprived: Unlike India, Nepal lacks urban housing is not given due attention regulatory mechanisms ensuring modest Promote effective mobilization and al- in plans and policies. accommodation for poor people. In India, location of financial resources by The Tenth Five-Year Plan had the this has been made possible through cross- l mobilizing the land and building credit twin objectives: providing safe and cost subsidy. Few attempts have been made in delivery mechanism effective houses by promoting the recently drafted Real Estate Act by systematic settlements and to construct providing 10% of the housing plots of l developing the process of cost recov- and develop safe, cost effective, between 50 to 70 sq m in a price affordable ery of public investment environment friendly buildings that can for the poor, however, there is no provision display indigenous architecture. The for construction of building as well. l increasing the financial self sufficiency strategy was to engage private sector for Unaffordable housing sold by the of the shelter sector this purpose. This has at the best housing companies: In generally, flats minimally achieved. The lack of sound made by housing companies are beyond Improve the organizational structure by urban housing policy could constitute a the reach of ordinary person. These prices l mobilizing clarifying the role of public significant impediment to development of are certainly unaffordable for the average and private sectors for implementing Nepal that cannot be easily overcome. urban dweller. Such houses are only for the National Shelter Strategy Hence it is of utmost importance that limited upper classes and not for the urban housing be accorded the attention masses. l introducing the appropriate and effec- it deserves in order to devise sound urban Lack of housing for the disadvantaged tive laws and regulations housing policies. groups: There are significant numbers of senior citizens, infants, and special need l making arrangement for data base Constraints persons who need housing but their Lack of financial resources: According requirement are hardly addressed in Nepal. According to the Shelter Policy some to one estimate, it takes 84.8 years to own As a result, increased numbers of persons 2.5 million dwelling units had to be con- a house and a land in an urban area. are seen lying on the streets creating an structed, 17% of them being in the urban Therefore, house owners pool their unpleasant situation. areas. Similarly, 732,000 houses had to be financial resources through cash saving, Increased number of squatters: upgraded of which 60,000 were in the ur- selling land and through taking out loans. Squatters cannot be totally wished out of ban areas. In the process, the government Almost 23.2% of the people in the urban existence. There are such settlements in had switched its role from that of an ex- areas take loans in lieu of collateral against all the countries whether developed or ecutioner to that of a facilitator. land and housing. The interest rate of such developing. The main problem of such As mentioned, urbanization should be loans is exorbitant which automatically settlement is that they contribute to the considered as an asset and not as a liability. makes modest dwelling out of reach from degrading environment.
3 Loss of identity and vulnerability to l Draft the required laws to facilitate housing areas through upgrading of the squatter earthquake: The historic core of Nepali for the poor in the Housing Companies colony cities, of the valley cities in particular, is fast loosing its identity as modern houses l Make the urban core earthquake Long term (3 years) are emerging everywhere around the cities. resistant and identifiable by investing l Make use of efficient building materials These cities are also vulnerable to in one core area to show that the Project and recent housing data through disasters such as earthquakes. is profitable entering into a Memorandum of Understanding with academic Policies Intermediate (2 years) institutions and by reviewing the Immediate (1 year) l Ensure availability of housing loans by Shelter Policy l Enforce the Building Code and creating a consortium of financing initiating construction of dikes in the agencies l Focus on constructing homes, rivers passing through the urban dormitories for disadvantaged people areas in order to avoid flooding and l Make land available for housing (senior citizens, infants and street have buildings resistant to construction for low-income households children) in the city earthquakes through Government of Nepal sponsored land development projects l Upgrade the existing houses by l Draft the required laws to assist the introducing home improvement poor, the tenant and the landlord l Improve the environment of squatter programs
The Economic Policy Network is an undertaking of the Ministry of Finance with Asian Development Bank support. It supports the preparation of policy papers based on participatory dialogue in the areas of (i) macroeconomic management; (ii) international trade, investment, and employment; (iii) infrastructure development; and (iv) tourism, agriculture and regional development. This policy brief is an abstract of the policy report A Policy Study on Urban Housing in Nepal prepared by Prof. Dr. Jiba Raj Pokharel. It has been edited for clarity and brevity. Please refer to the original report for a comprehensive discussion on issues and recommendations. Full version available at: www.mof.gov.np/economic_policy/pdf/Policy_Study.pdf
Economic Policy Network Ministry of Finance, Singha Durbar Kathmandu, Tel: 4211353, E-mail: [email protected] Website: www.mof.gov.np
EPN Team: Advisory Committee Chairperson: Mr. Narayan Prasad Silwal Focal Unit Chief: Mr. Bimal Wagle Team Leader: Mr. Dipendra Purush Dhakal ADB Project Officer: Mr. Shahid Parwez Edited by: Mr. Sunil Sharma
© 2006 Government of Nepal/Asian Development Bank All rights reserved
4 Government of Nepal Ministry of Finance ECONOMIC POLICY NETWORK PUBLIC PRIVATE PARTNERSHIP FOR POLICY FORMULATION POLICY BRIEF No. 27 June 2006
The Nexus between Natural Disasters and Development: Key Policy Issues in Meeting the Millennium Development Goals and Poverty Alleviation
epal is a highly disaster prone fire outbreak in 2002 were the most of lives by landslide and floods alone country exposed to various devastating natural disasters which not account for 304 per year. In South Asia, types of natural disasters. only caused heavy losses of human lives Nepal stands third in having highest This is mainly as a result of its and physical assets but also adversely number of average annual human deaths ruggedN and steep topography, extreme affected the development process of the i.e. 39 deaths per year per million living weather events and fragile geological country as a whole. population, only behind Sri Lanka and conditions. Nepal’s vulnerability to Study shows that 90% of Nepalese Bangladesh. Nepal has the highest ratio disasters is compounded by rapid people are constantly exposed to more than of number of affected persons to number population growth, migration, expansion two disasters at any time. According to of killed, i.e. for every 144 persons affected of settlements, urbanization, the United Nations Development Program by disaster one is killed. Nepal suffers a environmental degradation with low level study in 2004, Nepal stands at 11th and loss of hundreds of million rupees every of awareness, development of haphazard 30th position with respect to relative year due to disasters. In the last 23 years and unplanned settlements. A wide range vulnerability to earthquake and flood (1983 – 2005), over NRs28 billion were lost of physiographical, geological, ecological, respectively. It is estimated that there are due to disasters, an average of nearly 1,208 meteorological and demographic factors 1.06 reporting of natural disaster events million rupees per year. The year 2005 was contribute to the disaster vulnerability of per day on the average in Nepal. In the last a normal year without any large-scale major the country. The earthquakes in 1934, 1980, 23 years, on an average per year about 943 disaster; even though the estimated loss 1988, the flood in 1993, the landslides and persons lost their lives in Nepal. The loss reached over NRs100 million only within
1 the top 10 districts. This is a substantial financial loss is approximately US$20 natural disasters in Nepal. The current need amount of loss on annual basis to warrant million. Nepal also suffers from a different is to mainstream disaster management and serious attention for disaster reduction type of infrastructure damage often caused incorporate elements of risk reduction into plans and policies. by landslides and debris flows in filling up development plans and poverty alleviation of reservoirs from excessive sedimentation, programs, which requires a comprehensive Natural Disasters in Nepal thus rendering the reservoirs less effective disaster risk reduction policy at the national Common natural disasters that frequently or reducing the reservoir’s life causing level. Further, for mainstreaming the occur in Nepal are Landslides and Debris economic loss of hundreds of millions of disaster risk reduction with development Flows; Floods; Glacial Lake Outburst Nepalese rupees. projects, a wide range of existing Acts Floods; Earthquake; Epidemics; Fire; Weak socioeconomic standing need to be amended. For example, the Drought; Thunderbolt; and Others enhances vulnerability due to disasters Natural Calamity Relief Act 2039 B.S., (hailstorm, snow avalanches, cold waves, and limited resources, as poverty and enacted in 1982 with minor revisions in 1989 hot waves). vulnerability usually go hand in hand. and 1992, is the main legal instrument in Disaster is one attribution of poverty and Nepal in the field of disaster management Impact from Disaster creates instant poverty through the loss and has been helpful to improve the Disasters place a heavy burden on the of productive assets and lives. processes of handling the rescue and relief already fragile economy of Nepal. On an Furthermore, poverty accentuates natural operations during emergencies through annual average basis, Nepal spends 12.9% hazards through encroachments in the institutional arrangements, which used to of its development expenditure and 5.39% high-risk marginal areas. Hence, poverty be undertaken on an adhoc basis in the of its real gross domestic product (GDP) is both cause and consequence of past. The Act has provisioned the per year in disaster response and recovery. disasters in countries with high establishment of Disaster Relief In Nepal a small economic loss of vulnerability. In the past decades, Nepal Committees at different levels from the infrastructure and assets can be critically has been subject to some of the worst centre to the Village Development important when compared with its low disaster situations, causing great loss of Committee (VDC) levels to deal with relief GDP. life and tremendous damage to property. and rescue works. However, the Act does In the past disaster has spelled out Increasingly the links between poverty and not cover the complete cycles of the loss of lives and heavy economic impacts development strategies has been disaster risk reduction viz. pre-disaster, due to enormous destruction and damage recognized. In order to make a dent on during-disaster and post-disaster phases. of infrastructures and other development poverty, Nepal has embarked on meeting Besides, the Acts of related departments projects. As per the available data, a total the Millennium Development Goals such as the Department of Roads; Irrigation; of 143,554 houses in Nepal have been (MDGs) and has demonstrated substantial Water Supply and Sanitation; Water destroyed by floods and landslides during progress in the first five years of the Induced Disaster Prevention; Mines and a period from 1983 to 2003 which amounts millennium. The eradication of poverty is Geology; Hydrology and Meteorology; to an average of 7, 329 house destruction one of the goals of MDGs which is closely Forest, Soil Conservation and Watershed per year. It has been estimated that the linked to vulnerability to natural hazards. Management; Housing and Physical cost of reconstruction and rehabilitation Therefore, disaster risk reduction is Planning; and other agency like Nepal of roads damaged by landslides and floods essential for sustaining the achievements Electricity Authority have to be amended in Nepal between the periods 1979 to 1993 of all MDGs. The primary challenge is how in accordance to disaster management so was NRs 2,250 million (i.e., equivalent to to reduce the massive vulnerability of the that the infrastructures that are constructed US$50 million). An estimated 10%-25% of country to different types of hazards. are safe from disasters. Therefore, a new the hill roads in Nepal passing through Achieving a sustainable development and comprehensive Act covering all the disaster river valleys are completely washed out meeting MDGs will not be possible if phases should be amended and enacted as every four to five years by a combination disaster risk management strategies are left soon as possible. These legal documents of landslides and floods. Similarly, average outside the realm of development. will bring disaster risk reduction issues in annual infrastructure damage in Nepal due It is a great challenge to protect lives, the forefront and will help to ensure for a to landslides and floods in terms of infrastructure and property from frequent better risk management.
2 Constraints ! Lack of early warning system ! Prepare hazard maps for landslide/ ! Lack of a comprehensive national policy debris flows, flood and earthquake with
on Natural Disaster Risk Reduction ! Neglect of Mainstreaming of priorities for densely populated disaster reduction strategy in settlements in most hazardous districts
! Absence of relevant agency for Disaster development projects and poverty and important infrastructure locations. Risk Reduction alleviation The maps should be prepared at a regional scale as well as the VDC/
! Absence of Disaster Risk Reduction Act ! Inadequate number of hydro- Municipality level meteorological stations in the country
! Lack of appropriate amendments in Acts ! A comprehensive National Earthquake
related to disaster issues such as Local ! Inadequate capacity of hospitals in Preparedness Program should be Self-Governance Act, Irrigation Act, handling disaster victims at the time formulated and implemented with Road and Transport Act, Water of large disasters adequate regular budgetary support Resources Act, etc
! Poor bilateral and regional ! Institutional systems and administrative
! Lack of appropriate regulations related cooperation in disaster risk reduction arrangement that link public, private and to Disaster Risk Reduction Act civil society sectors and build vertical
! Neglect of information/ improvement ties between central, district, and local
! Lack of Policy and Act related to Land on age old traditional/indigenous national and global scale actors use practice knowledge/good practices on
disaster risk reduction ! Local people offer great potential for
! Lack of hazard maps on natural disasters increasing sensitivity and responsiveness of development ! Inadequate emphasis and programs on Recommendations planning to disaster risk through the watershed management ! Prepare National Policy on Disaster Community Based Disaster Management Preparedness projects
! Lack of Information and Documentation
Centre on disasters ! Prepare a new Disaster Management ! Joint initiatives of government, Act and Regulations International/Non-Governmental
! Inadequate coverage given by Organizations and private sectors for
government and private media on ! Timely preventive measures are rehabilitation. The resettlement and disasters required for which pragmatic rehabilitation program should be government policies and legal brought as a package program
! Lack of awareness among majority of instruments are needed. Therefore,
people about natural disasters vis a-vis the amendment of Act, improvement ! Develop more programs for watershed development of physical infrastructure, poverty management by providing more budget alleviation, change in the people’s to appropriate agencies for watershed
! Lack of policy for capacity building on perception, literacy campaign, public management programs disaster awareness raising programs and
capacity building are necessary ! Establish/designate an organization to
! Lack of enough national budget act as a National Information and
allocation specified for disaster risk ! Establishment of a separate Documentation Centre on disasters reduction autonomous agency, such as a
“Disaster Management Council”, to ! Conduct awareness programs and
! Inadequate budget for rehabilitation of be responsible for disaster disseminate information through infrastructures damaged and destroyed preparedness, mitigation and various media and encourage due to natural disasters rehabilitation works community based disaster management
3 ! Develop programs to enhance capacity ! Strengthen hospital capacity in terms ! VDCs particularly vulnerable to building also giving due attention to of physical facilities and training of disasters should be encouraged by include programs especially for women manpower the government to spend a certain and children proportion of the annual budget for ! Strengthen cooperation on bilateral and disaster preparedness ! All development projects should be multilateral levels with institutions of
approved only after they have produced other countries for cooperation in ! Carry out detailed study on how society a separate Disaster Impact Assessment disaster risk reduction is gradually developed by managing the report to ensure the safety of the various types of disaster and structures from future possible disasters ! The National Planning Commission emergences, what were the coping should review the disaster situation strategies in the past which can be still ! Modernize Department of Hydrology annually and propose appropriate policies viable to replicate. and Meteorology and plans to mitigate the disaster impacts
The Economic Policy Network is an undertaking of the Ministry of Finance with Asian Development Bank support. It supports the preparation of policy papers based on participatory dialogue in the areas of (i) macroeconomic management; (ii) international trade, investment, and employment; (iii) infrastructure development; and (iv) tourism, agriculture and regional development. This policy brief is an abstract of the policy report The Nexus between Natural Disasters and Development: Key Policy Issues in Meeting the Millennium Development Goals and Poverty Alleviation prepared by Prof. Dr. Bishal Nath Upreti. It has been edited for clarity and brevity. Please refer to the original report for a comprehensive discussion on issues and recommendations. Full version available at: www.mof.gov.np/economic_policy/pdf/Natural_Disasters.pdf
Economic Policy Network Ministry of Finance, Singha Durbar Kathmandu, Tel: 4211353, E-mail: [email protected] Website: www.mof.gov.np
EPN Team: Advisory Committee Chairperson: Mr. Narayan Prasad Silwal Focal Unit Chief: Mr. Bimal Wagle Team Leader: Mr. Dipendra Purush Dhakal ADB Project Officer: Mr. Shahid Parwez Edited by: Mr. Sunil Sharma
© 2006 Government of Nepal/Asian Development Bank All rights reserved
4 Government of Nepal Ministry of Finance ECONOMIC POLICY NETWORK PUBLIC PRIVATE PARTNERSHIP FOR POLICY FORMULATION POLICY BRIEF No. 28 June 2006
Focusing on Regional Tourism Markets: Prospect and Challenge for Nepal
egional tourism is a global Pacific. South Asia shares over half of the years (2006-2008). According to the PATA phenomenon. Within Africa, market for the tourist arrivals in Nepal. India Forecasts Report the dominant market for Asia and Europe, intraregional constitutes more than 50% in South Asia. Nepal will be India and it is expected to tourism has been shown to be This is followed by Northeast Asia and increase its share by 2008. Besides the main Ra major growth market in recent years. The Southeast Asia. Similarly figures from markets, visitors from India represent “the largest number of international tourists is Europe reveals that in 2004 Western backbone of Nepal’s tourism economy”. found to be from intraregional groups. The Europe constitutes 18.2% of total tourist Further, the report underscores that Sri World Tourism Organization forecasts that arrivals from Europe. This is followed by Lanka is expected to increase its market- international arrivals are expected to reach 8.2% of tourist arrivals from the Northern shares in Nepal. The report is optimistic in over 1.56 billion by the year 2020. Of these Europe. Asia occupies larger market share forecasting that both China and worldwide arrivals in 2020, 1.18 billion will relative to Europe. Although Europe is the Bangladesh will be moving up in tourism be intraregional and 377 million long-haul world’s most mature destination region, so market share. travelers. In 2004, Asia and the Pacific Nepal cannot reasonably expect the kind In Europe, the UK, France, Germany, received a record number of 145 million of growth rates enjoyed by some of the Italy and the Netherlands are the most tourist arrivals out of which intraregional emerging tourism regions such as Asia. It important markets in terms of total number tourism itself accounted for some 115 million should be noted that several of Europe’s of tourist arrivals. In Asia, India constitutes tourist arrivals, or 79% of the region’s total leading markets are mature markets that are the largest individual source of arrivals arrivals. In the case of Europe, intraregional fast reaching a ceiling in terms of overall followed by Sri Lanka, Bangladesh and arrivals are as high as 92%. travel intensity. Any growth from these China. Asia occupies larger market share In the context of Nepal arrivals from markets is due to more increased trip relative to Europe. The forecast of total intraregion (Asia and the Pacific) constitute frequency than to rising numbers of the number of visitors, during the period of over 55% visitor arrivals while in population choosing foreign destinations 2006 to 2008 from Asia and the Pacific is interregion it shares over 33%. It is for their travel. This evidence highlights encouraging (Table 1). Southeast and observed that in Asia and the Pacific the importance of regional tourism in Nepal. Northeast subregions are not included in subregion, visitors from India shares more Asia and the Pacific region is expected to the list of the destinations. As these than half of the total arrival from South be the fastest growing region in the world. regions are emerging markets and lack time Asia making South Asia as the most The travel and tourism market in Nepal series data of total tourist arrivals in Nepal important subregion in Asia and the is forecast to expand over the next three therefore it was difficult to forecast.
1 Table 1. Forecast Arrivals 2006-2008 - Asia and the Pacific
Asia 2006 2007 2008 Australia 9669 10878 11255 Bangladesh 18488 20217 22778 China 13852 14764 15847 Israel 8243 8887 9356 India 106845 114388 121644 New Zealand 1022 1231 1544 Pakistan 2366 2937 3468 Sri Lanka 22469 24910 27347 Total 182954 198212 213239
Source: Turner, L.W. and Witt, S.F. 2006. Asia Pacific Tourism Forecasts 2006-2008. Keen Publishing: Thailand
The economic situation in key outbound movements, easing of visa policy, as well tourists desire to visit Nepal could be travel source markets looks better than in as the increasing propensity to travel greatly enhanced by heavy publicity and earlier years of this decade in Western abroad, the total number of outbound aggressive marketing of Nepal as a Europe and is extremely robust in some visitors from these subregions would tourist destination. emerging markets such as Russia, South keep on growing during 2006-2008. Nepal should consider common Korea, Japan and Southeast Asia. There is Furthermore, increased workers’ benefits purpose for forming alliance with other hope from an influx of India and China’s accompanied by increased tourist tourist destinations and forging win-win nouveau-riche, who will largely drive facilities and marketing are stimulating partnerships. The new regional tourism growth in inbound travel to Nepal. their demand to travel abroad. Most policy should adopt two pronged While India would have a major role economies in the Southeast Asian region strategies: Territorial and Selective to play in the projected growth, most of have also devoted themselves to Regionalism. Territorial regionalism is the international arrival growth would promoting international tourism. The based purely on physical and geographical occur in the newly emerging economies combination of all these factors would proximity, which involves Nepal’s of Asia. In coming years, destinations result in a surge in outbound participation with neighboring countries. from Southeast and Northeast Asia will international travel. The rapid economic This is exemplified by South Asia play substantial role in Nepalese tourism. growth in Thailand, South Korea, Subregional Economic Cooperation and Asia and the Pacific tourism are mainly Singapore and Malaysia has lead to a Bay of Bengal Initiative for Multi-Sectoral helped by national government’s policy large increase in national income, and Technical and Economic Co-operation in to foster tourism as well as by the rapid hence disposable personal income. The which Nepal and its neighbor are involved economic growth in the whole region. Northeast and Southeast Asian in joint development projects. The process Along with the continuing growth of subregion have affluent sizeable middle of regionalization could be further national income in most countries, rising with disposable income and a strong accentuated by selective regionalism in population, rapid developments in desire to travel. Apart from these the which countries are selected, Asia and the transport and the substantial decline in purchasing power benefit afforded by Pacific in particular, from the strategic point the real costs of transportation, the the stronger currency also stimulates of view. For example, cultural linkages can liberalization of cross-borders desire to travel. The Southeast Asian be formed with Buddhist countries (China,
2 South Korea, Japan, Malaysia, Thailand, help to identify prospective destinations larger volume of tourists, ignoring Singapore) in Asia that will complement and regions, strategies to market in the scientific methods to assess the socio- the cultural wealth of Nepal while region, and the strategic partner. The economic impacts of each tourism benefiting from Buddhists visitors of the committee will also be responsible to seek segment. Hence, formation of the National region both in terms of increase in arrivals out alliance from strategic partners forming Tourism Research Organization (NTRO) and expenditure. The main benefits a broad range of working relationships with can facilitate in devising national tourism accruing from these strategies are pooling National Tourism Organizations, tour policy based on scientific methods. of resources, reduce competition among operators, corporations, airlines, that Establishment of NTRO could be useful to locales, collaborative planning, complement their marketing, technical help future demand forecasts, as well as enlargement of distribution channels, and capabilities and route structures. generating marketing intelligence consolidation of marketing mix for reasons Streamlining Visa Process: To avoid information and assessing the economic of economic of scales. time consuming immigration process, most of contribution of tourism industry. Intense competition from around the the countries have already started to offer Educational Trip: Attention should be region serves as a wake-up call to online visa application form. Quick visa paid to encourage educational trips to reposition the country and to redefine its clearances, at least, at airport immigration is Nepal from Northeast and Southeast Asia, image. Tourism policies and strategies required, which should not take more than 15 as these regions accord top priority to should largely correspond to global forces minutes per passenger. For this, online visa education. An important strategy should influencing trends in tourism and application form should be available at all the be to invite leading figures from Ministry economic development, as well as respond government Ministries, Embassies, Nepal of Education, Schools, Colleges, to local factors such as changing in the Tourism Board, Nepal and foreign based University to educational familiarization social conditions in the country. One such (those selling Nepal) tour operators’ website. trips in Nepal. policy should be making ‘regional tourism’ Partnerships with Credit Card: There Encouraging Film/Documentary as a main strategy for tourism promotion should be provision of accepting visa fee Shooting: Promoting Nepal as a much in Nepal. Regional tourism provides online through credit card via the Internet. sought after destination for filmmaking in opportunities for Nepal to transcend its Transaction through credit card is the way of liberal filmmaking policy is thus geographic limitations, partner booming and customers are encouraged a far more appropriate policy to woo neighboring countries blessed with to make payment through credit card. In Bollywood in particular as Indian advanced infrastructure networking, Southeast and Northeast Asian audiences get a chance to see the various stretch its spatial arrangement to create subregions, payment through credit card destinations that Bollywood movies have cultural alliances between distant countries is a norm. A partnership can be built up been shot and encourage them to visit for common purposes taking into account between Nepal and credit card companies destinations seen in Bollywood movies. wishes of all stakeholders. Also, the for online payment for visa fees. For this, scrap archaic laws and abolish process of regionalization provides an Open-Skies Policies: If Nepal is to film shooting fees in Nepal. Facilitate in ample opportunity for Nepal to partake in enter into regional market, then LCCs would obtaining film shooting permission in Asia’s economic boom, capitalize on rise be the effective channel. The Ministry of required areas through “one-window of Low-Cost Carriers and the disposable Culture, Tourism and Civil Aviation /Civil policy” and also provide logistic and income of middle-class. Aviation Authority of Nepal should ground support. enhance its policy support to create an E-portal: Major destinations in South Recommendations enabling environment for LCCs flying from Asia should strive to make a regional portal Fostering Regional Alliances: Nepal and India, Southeast and Northeast Asia. to enhance tourism through online. The other regional tourism groupings from the Consolidate Tourism Research: new regional portal will help regional travel region (Asia and the Pacific) can foster Nepal lacks the data on the assessment of and tourism industry understand better the strategic alliances to promote destinations tourism expenditure on the impact of needs of their customers, as well as raising jointly to penetrate further into the global/ national and regional economy resulting awareness of potential visitors. The portal regional market through the alliance itself. in tourism policy to follow conventional should be information cum reservation- It is advisable to form a committee that will wisdom and concentrates on attracting a oriented commercial travel website.
3 Destination Competitive Indicator: necessary information to build timely establishing of RMTs is being proposed. Nepal needs to develop a model based on tourism marketing plans, develop effective The RMTs would be unique in managing framework and indicators of destination tourist products and services and target regional tourism because it is solely based competitiveness so as it will help in these offerings to those destinations with on integration process between different determining the competitiveness of an entire most potential or enter into a regional ministries and department in which all country as a tourism destination. The model tourism bloc. policy matters and information circulates thus developed will assist in monitoring Formation of Regional Marketing horizontally. Related to this is the degree Nepal’s competitiveness over time in Teams (RMTs): A need exists for a of co-operation between the public and respect of particular types of travelers (by mechanism, which can bring in tourism private sectors, within the government origin, demographic characteristics or strategy and implementation of a tourism ministries and department as regards the motivation), or by comparison to a particular marketing plan and allocation of co-development and implementation of competitor destination or competitor set of responsibilities in carrying out specific unified and integrated regional marketing destinations. This should provide marketing activities and tasks. For this, strategies and tactics.
The Economic Policy Network is an undertaking of the Ministry of Finance with Asian Development Bank support. It supports the preparation of policy papers based on participatory dialogue in the areas of (i) macroeconomic management; (ii) international trade, investment, and employment; (iii) infrastructure development; and (iv) tourism, agriculture and regional development. This policy brief is an abstract of the policy report Focusing on Regional Tourism Markets: Prospect and Challenge for Nepal prepared by Mr. Sunil Sharma. It has been edited for clarity and brevity. Please refer to the original report for a comprehensive discussion on issues and recommendations. Full version available at: www.mof.gov.np/economic_policy/pdf/Focusing_Regional.pdf
Economic Policy Network Ministry of Finance, Singha Durbar Kathmandu, Tel: 4211353, E-mail: [email protected] Website: www.mof.gov.np
EPN Team: Advisory Committee Chairperson: Mr. Madhav Prasad Ghimire Focal Unit Chief: Mr. Bimal Wagle Team Leader: Mr. Dipendra Purush Dhakal ADB Project Officer: Mr. Shahid Parwez Edited by: Mr. Sunil Sharma
© 2006 Government of Nepal/Asian Development Bank All rights reserved
4 Government of Nepal Ministry of Finance ECONOMIC POLICY NETWORK PUBLIC PRIVATE PARTNERSHIP FOR POLICY FORMULATION POLICY BRIEF No. 29 November 2006
Revenue Implications Of World Trade Organization (WTO) Regime And Alternate Measures For Revenue Mobilization
s a multilateral organization would hurt Nepal’s effort towards revenue influencing trade revenue. It is also WTO’s major objective is to mobilization even more since custom duty influenced by the exchange rate regime, A safeguard and promote an has been a major source of indirect taxes economic growth, volume of trade and tax open, non-discriminatory and in Nepal. administrative reforms. While tariff rates equitable multilateral trading system with Secondly, it would be difficult to find and custom duty is one factor influencing the ultimate objective of moving towards replacement for a loss in trade revenue trade revenue, they are neither the sole a free trade regime by gradually reducing because Nepal lacks a broad based tax. factor nor the only determining factor trade barriers. As a member of WTO, Nepal Hence, the economy could face a severe influencing trade revenue. is obliged to certain commitments strain in the short run as a result of trade Similarly, even if trade revenue was to regarding relaxation of tariff barriers and liberalization. decline, the consequential strain on the reduction of tariff rates in a stipulated time The third argument states that even economy depends on the productivity of frame. though trade liberalization is supposed to trade tax and other likely replacement tax. Trade liberalization has significantly bring forth an increase in trade volume, On the other hand, trade revenue is not helped increase growth rates and has which could compensate for loss in trade the only determining factor on tax revenue, boosted economies of many countries revenue; it is unlikely in Nepal’s case due which is also a function of indirect and such as People’s Republic of China and to inadequate infrastructure, a weak, small direct taxes, growth rates and marginal tax India. Nevertheless, critics have three basic scale and uncompetitive industrial base, rates. Thus, an increase in value added arguments against trade liberalization. and low export potential. taxes and an increase in growth rate could Firstly, they argue that reduction in tariff However, the argument that revenues compensate for a loss of revenue from rates would have a downward effect on would decline resulting from reduction in custom duty. custom duty, other duty and charges and tariff rates is only partially true because Furthermore, it is evident in Nepal’s revenue mobilization in general. This tariff rates are not the only factor context that total trade has increased
1 during the WTO regime. It is important to alternative measures for revenue Notwithstanding the fluctuations in note that as a member of WTO, Nepal mobilization. growth rates, Nepal has made significant benefits from its Most Favored Nation structural changes in the compositional status and enjoys the Generalized System Revenue Implications of patterns of gross domestic product (GDP). of Preferences through which higher WTO Regime in Nepal Table 1 shows that the share of agriculture income countries grant preferential market Economic performance to GDP came down from 62.7% in the 1970s access. Similarly, as a member of WTO Some of the economic indicators such as to 38.8% in 2001–2005, while share of Nepal can have better access to foreign growth rates, inflation, trade volume, service sector to GDP increased from 24.6% investment, technology transfer, better revenue and budget deficit have shown a in the 1970s to 40.0% in 2001–2005. variety of products and prices. Finally, in mixed trend making it difficult to draw The Government has been able to contrast to the above argument that Nepal inferences on the effect of WTO regime. better contain inflation at the later periods will not benefit from opening up because While economic growth was as low of liberalization. Inflation as measured by of the lack of competitiveness, size and as 2.4% on average in the 1970s, it peaked consumer price index decreased from inefficiency of the Nepalese economy, trade to a record high 4.3% in the 1980s and double digits—10.2% in 1981–1990—to liberalization promotes economic 4.9% in the 1990s—as shown in Table 1. 3.7% in the first half of the current decade. efficiency, international competitiveness, Thus, the first decade of trade liberalization The export dependency ratio increased and trade expansion. was also a period of higher economic from 12.1% in the 1970s to 18.9% in 2001– An analysis of revenue implications growth rate. However, intensification of 2005. Thus, Nepal has been moving with a of WTO regime in Nepal will provide a the recent conflict during 2001–2005 greater degree of openness with an increase comprehensive understanding of the backtracked the growth rate to an average in total trade/GDP ratio from 29.4% in the above discussion and will provide of 2.8%. 1970s to 50.7% during 2001–2005.
Table 1: Selected Economic Indicators (Average in %)
1971–80 1981–90 1991–00 2001–05 GDP Growth 2.4 4.3 4.9 2.8 Share in GDP Agriculture 62.7 52.8 41.8 38.8 Industry 12.7 15.0 19.5 21.2 Services 24.6 32.2 38.7 40.0 Total Revenue/GDP 6.5 8.5 9.8 12.4 Tax Revenue/GDP 5.2 6.8 7.6 9.6 Expenditures/ GDP 11.0 17.6 16.8 16.6 Total Trade / GDP 29.4 34.0 56.9 50.7 Export / GDP 12.1 12.0 22.8 18.9 Import / GDP 17.3 22.0 34.1 31.8 Inflation 7.8 10.2 8.3 3.7 Exchange Rate (NRs/US$) 11.4 19.6 58.6 75.2
%= percentage, GDP= gross domestic product Source: Nepal Trade and Competitiveness Study, 2004, Ministry of Industry, Commerce and Supplies, Nepal Government, and Economic Survey, 2004/05, Ministry of Finance, Nepal Government.
2 Revenue Analysis not sufficiently responsive to changes in duties and charges will be completely Trade liberalization and relatively higher national income; (ii) domestic taxes are eliminated, the expected revenue loss is economic growth rates helped increase becoming more responsive than custom estimated to be NRs5,588 million. significantly the total revenue, which duty; (iii) the trend of both tax recorded an increase from 13.17% in the responsiveness and progressiveness is Recommendations 1970s to 21.67% in the mid 1990s. However, very weak in Nepal; and (iv) potential On Policy Implications Nepal witnessed a sharp deceleration in revenue loss due to tariff reduction can be l Estimates show that a relatively high almost all components of revenue after the compensated through trade creation, elasticity of tax-to-base exists in the mid 1990s, mainly due to (i) removal of tariff increase in VAT base and rate, and by case of VAT, excise tax and income tax barriers and rationalization of tariff rates, bringing informal trade into the formal indicating that tax yield could have (ii) intensification of the internal conflict channel. However, it is still important to been higher for these sources. Also, slowing down development and other estimate potential revenue loss from Nepal’s the elasticity of tax-to-base of custom economic activities, and (iii) slow down in commitment to WTO so that alternative duty remained relatively high in the economic growth rates. measures for revenue mobilization can be post liberalization period 1995–2005. Even though custom duty has identified and pursued. This indicates that reduction of tariff recorded a fall, measurements indicate that shows a positive response of import Nepal still has a trade based revenue Estimated Revenue Loss duty to increase in import. This implies pattern. Custom duty, which was about As per Nepal’s commitment to WTO, that tax reform with increase of other 31.7% of the total revenue and 48.7% of altogether 137 items are to be reduced to taxes can compensate for possible indirect tax in the mid 1970s, came down to zero tariff level by 2008. The highest binding revenue loss. 24.7% and 41.8% of the same during 2001– tariff will be 60% for cars, jeeps and vans. 2005. It should be noted that the fall in Using 2002 as the base year and assuming l Low tax-to-base elasticity shows that custom duty is also because of decline in that applied rates before accession to WTO there is further scope for reform on tax economic growth, consequently shrinking will continue to be applied and other duties exemption, evasion, administration and the level of overall trade. To compensate and charges will be completely eliminated, enforcement of related laws. for the loss in custom revenue, value added the trade effects for all Nepalese imported tax (VAT) has been emerging on par with products were estimated. As such, l There is ample scope for better custom duty occupying 41.5% share in potential revenue loss of about NRs4,322 collection of custom revenue by indirect tax. million could be expected, which is about bringing informal trade under the tax net After receiving the observer status in 25% of total custom duty. and by eliminating revenue leakages. WTO in 1995, Nepal was bound to look for Similarly, a study by the Custom alternate measures in indirect tax to Department of the Ministry of Finance l In the context of depreciated exchange compensate for possible loss in revenue estimated that reduction of tariff rates in rate system, policy makers should try from tariff and non tariff rationalization. accordance with WTO commitments will to promote exports. Hence, the dominant component of VAT reduce the import duty by NRs956 million. as 45.28% of indirect tax in fiscal year (FY) In addition, agriculture development On Alternate Measures for 2005 indicates the shift in Nepalese charges and local development charges Revenue Mobilization indirect taxes from trade tax to domestic would annually loose NRs556.4 million and l Direct tax is elastic to income and indirect tax. Besides the role of VAT in NRs1,846.1 million respectively. As a result, property level and it is easy to collect compensating custom duty, other features VAT would also be adversely affected by with minimal chances of tax evasion. of taxes in Nepal as outlined below will NRs436.6 million, resulting in a total Nepal’s heavy dependence on indirect also help analyze the influence of WTO revenue loss of NRs 3,795.3 million. tax should shift in favor of direct tax regime in revenue generation in Nepal. Based on available data, this study through a growth in the non agriculture Through estimated buoyancy and estimated potential impact on revenue from sector to enhance tax base. elasticity analysis of different components Nepal’s commitment. Assuming that of taxes in Nepal the following conclusions effective applied tariff rates of the base year l Strengthen broad based consumption have been derived: (i) tax system in Nepal is FY2005 will continue to be applied and other tax like VAT. Initially, VAT may be applied
3 for manufactures and imports, but over l Convert the custom valuation system products and to take advantage of WTO time it should be extended to distribution based on transaction prices into membership. sector and agriculture inputs. transaction value approach. Further, custom reforms should include taxpayer l Make industrial and labor laws more l Besides tobacco and alcohol, excise tax identification numbers, standard foreign investment friendly. should be imposed on timber and petroleum auditing, quality services to taxpayers related products. Excise tax should also be and automation. l In the context of Nepal’s accession to levied on domestic production and on WTO, its commitments in opening up similarly imported goods. l Establish efficient revenue patrolling of financial services by 2010 and its groups to minimize leakage of geographical proximity to emerging l Agriculture semi processed and revenue. markets; Nepal should prioritize on processed products such as milk, ghee, information communication technology butter etc should also be brought under l Lower the rate of VAT on small items and the creation of financial hubs. the tax net. imported from India to bring informal trade into formal channels. l There should be continuous reform of l Tax on property holding should be ex- domestic tax system in favor of sound tended to discourage the trend of prop- l Establish export processing zone to macroeconomic policies and erty holding. increase competitiveness of Nepalese appropriate exchange rate policy.
The Economic Policy Network is an undertaking of the Ministry of Finance with Asian Development Bank support. It supports the preparation of policy papers based on participatory dialogue in the areas of (i) macroeconomic management; (ii) international trade, investment, and employment; (iii) infrastructure development; and (iv) tourism, agriculture and regional development. This policy brief is an abstract of the policy report Revenue Implications Of WTO Regime And Alternate Measures For Revenue Mobilization by Dr. Dandapani Paudel. It has been edited for clarity and brevity. Please refer to the original report for a comprehensive discussion on issues and recommendations. Full version available at: www.mof.gov.np/economic_policy/pdf/ Revenue_Implications.pdf
Economic Policy Network Ministry of Finance, Singha Durbar, Kathmandu, Tel: 4211353, E-mail: [email protected] Website: www.mof.gov.np
EPN Team: Advisory Committee Chairperson: Mr. Vidyadhar Mallik Focal Unit Chief: Mr. Bimal Wagle Team Leader: Mr. Dipendra Purush Dhakal
ADB Project Officer: Mr. Shahid Parwez Edited by: Mr. Samtenla Sherpa
© 2006 Government of Nepal/Asian Development Bank
4 Government of Nepal Ministry of Finance ECONOMIC POLICY NETWORK PUBLIC PRIVATE PARTNERSHIP FOR POLICY FORMULATION POLICY BRIEF No. 30 June 2006
Constraints and Approach for Improving Fertilizer Supply for Meeting Domestic Demand
ccording to the Agricultural manufacturers (produce mix fertilizers from Policy of India would have added benefits Perspective Plan (APP), for the informal sources) of fertilizers. In the to Nepal and India because the formal A period 1994/95 – 2014/15, there process, the private traders have emerged restrictions on fertilizer export from India to is a strong correlation between as leading agencies in fertilizer imports. Nepal have costs in terms of relatively larger gross domestic product (GDP) and the The Fertilizer Policy of India has tax evasions due to unrecognized trade, and agriculture growth and use of chemical strong detrimental implication on Nepal. higher transaction cost to farmers due to fertilizers for the latter. The analysis has India bans fertilizer export because it smuggling and adulterations. shown that every 1% growth in the provides subsidized fertilizers to its farmers Over the years, Nepal has not been agricultural output would add to the GDP and fertilizer trade between Nepal and India successful in improving the supply of growth rate by a coefficient of 1.01. Further, is not allowed to take advantage of higher chemical fertilizers for meeting the domestic the APP has observed that the uses of the prices in Nepal. The fertilizer prices in demand. It should be remembered the chemical fertilizer would account as much Nepal are about 39% to 101% higher than existing fertilizer factories in Nepal (about as about 70% incremental growth in crop in India as shown in following table and five) do not manufacture/ create any output. Therefore APP has listed the uses figure. The size of fertilizer market in Nepal fertilizer. These firms rely in bringing the of chemical fertilizers as high priority input is about 1% of India; so Nepal cannot sustain fertilizers from India and mixing them in for increasing the agricultural income. such higher prices. Surprisingly, informal Nepal for delivery to farmers. Such industry Thus, the lack of smooth supply of imports (from India constitutes the major can survive only in the short-term. Firstly, chemical fertilizers could constitute a supply channel than the formal one (Gulf, Nepal has no raw feed stocks or materials significant impediment to agricultural China, USA, Eastern Europe and such as naphtha, petroleum, coal, natural development for Nepal. The government Bangladesh) attributing to 65.8% of gas, phosphates or potash minerals. had reduced subsidies on fertilizers and fertilizers supplied. The higher uses of Secondly, electric power in Nepal is very deregulated the sector in fiscal year (FY) fertilizer at the household level have been costly as compared to the neighbors. All 1997/98 upon which the subsidy was made possible by informal trade across the these factors make establishing a fertilizer completely eliminated later in FY1999/2000. Indo-Nepal border. Over the years, the role manufacturing factory as unfeasible. Since these reforms, there have appeared of informal imports of fertilizers has Although the liberalization of the some 15 importers of fertilizers and 3 increased. It is believed that proper Fertilizer fertilizer market has largely helped to
1 Comparison of Prices of Chemical Fertilizers in Nepal and India
S. No Fertilizers Indian Prices Indian Price Nepali price Differences (IRs/Ton) Feb. 2002 in NRs/Ton (NRs/Ton) (%)
1 Urea 4,830 7,742.4 15,560 101.0
2 DAP 9,350 14,960.0 20,860 39.4
3 Complex 6,890 - 9,080 12,776 19,300 51.1
4 Potash Varies by States - 14,330 -
Source: Government of India. 2006. Economic Survey 2005-06; Ministry of Agriculture and Cooperatives. 2005. Some Statistical Information on Nepalese Agriculture 2004/05
increase the supply of fertilizers as required volume of business is small relative to the Risk Exposure Ratio: The credit in APP’s projections, however, agricultural general scale of operations in the sector. finance has limitations with regard to the growth continues to be lower than There are only limited numbers of financial fertilizer imports. For example, the banks expected. In this situation, there is further institutions (only seven, between August have limited capital relative to the huge room to increase the quantity of fertilizer 2005 to June 2006) involved to established funds required by a few traders to import uses. This emphasizes the need for a more Letter of Credit (LC). It seems that the fertilizers. In other words, the banks have proper assessment of demand for fertilizers actual imports of fertilizer through LC may difficulty to maintain the risk exposure ratio and market clearances to support the be less than the imports recorded on the with respect to fertilizer traders. There is arguments for the supply side and ministry publications. It appears that the lack of mechanism for consortium finance accordingly frame a suitable policy. traders do not have the right marketing for such trade. conditions and capacity to supply Transportation: Traders face Major Constraints chemical fertilizer to meet the total domestic difficulty due to excess handling and on Fertilizer Supply market, which is around 400,000 metric ton transport charges because of presence of Limited Capacity: The private sector at present. transport cartels. There is lack of system traders have limited capacity vis-à-vis Low Profitability: Nature of fertilizers for destination delivery of fertilizers from public agencies for fertilizer trade and supply business is that it is high volume - the ports in Kolkata/ Raxaul to interior marketing activities in terms of size of low profitability activity. The suppliers regions in Nepal. equity finance, volume of bank guarantee, have low volume of transactions. Transit: There is lack of transport and and infrastructures to handle the Therefore, their unit costs of marketing are transit agreements with neighboring transportation and storage of fertilizer high as compared to the Indian Farmers’ countries. through out the year so as to maintain Fertilizer Cooperatives (IFFCO), Storage: The traders lack economies of scale. Bangladesh Chemical Industries Council warehousing and storage facilities to Limited Numbers of Traders: The and Metal and Mineral Trading keep the fertilizer for a long period. number of traders involved in fertilizer Corporation of India. The Agricultural Generally huge stocks are required to trade (only five traders, between August Input Corporation Ltd. Company (AICLC), meet the demand for fertilizer for paddy 2005 to June 2006) is fewer than expected private traders or government lack or wheat crops within a short period of to call it as a competitive business. The procurement maximize system. time.
2 l Enhance the use of storage activity. By legalizing it, supply costs, capacity by making available storage adulterations and informal payments to capacity to private sector on pay relevant agencies en-route to Nepal will basis. be checked.
l Encourage direct delivery of l Develop a mechanism to estimate the fertilizer from sea port/ railway actual uses of fertilizers (both formal stations to various destinations in and informal imports) at the farmers’ Nepal by reviewing the transport level and the farm gate prices of the transit, especially, Indian/Nepali fertilizers. Trucks movements between Nepal and India; study the existing l The macro decisions to supply handling costs and tariffs, and time fertilizers should be based on the farm Cash Flow: The cash flow from fertilizer lost under the transshipments along the households’ decisions on optimum trade is unsmooth over the seasons. This corridor due to non-allowance of Indian amount of input uses. In the absence of is because of long storage time period vehicular movement in Nepal by various such information, there should be a required against monthly concentrations Nepalese Truckers Associations. system to estimate farm household level in the demand for fertilizers applications. production functions by crops such Negligible National Demand: The l Explore possibility to avail financial that it is possible to know their optimum fertilizer manufacturing and marketing resources for private sectors from multi- points in relation to prices of chemical environment are becoming more lateral agencies. fertilizers, and prices of the farm competitive in the world because the outputs. suppliers’ are receiving larger and regular Immediate Term (1-2 years) order for fertilizers from big consumers l Review fertilizer policy and consider l The macro decisions to supply such as India, China, Pakistan, etc. In WTO provisions of aggregate measures fertilizers should be based on the farm contrast, the total size of national demand to support agriculture in the light of households’ decisions on optimum in Nepal for fertilizer is very small, to which international practice. The Ministry of amount of input uses. In the absence of the international suppliers would respond Finance and Ministry of Agriculture and such information, there should be a less enthusiastically. Cooperatives would be responsible system to estimate farm household level Informal Trade: Fertilizer prices in authorities in determining the right of production functions by crops such India are lower than in Nepal, so possible approach in availing fertilizer that it is possible to know their optimum fertilizer as commodity would naturally to farmers. points in relation to prices of chemical flow from India to Nepal. Both countries fertilizers, and prices of the farm have classified this as an unauthorized l The cost of importing fertilizer from outputs. trade. However, such trade is taking overseas could be reduced if the place but the transaction costs are very traders and AICLC pool their l Revisit the role of co-operatives in high. resources (unused human, logistic, fertilizer marketing in Nepal in the past, godowns/warehouses and financial present and future and study the Recommendations resources) for joint- procurement to operations of IFFCO and draw lessons Short Term (3-6 months) maximize the lot sizes, which would for Nepal to involve cooperatives in l Establish a separate unit in Ministry of give economies of scale in pricing and fertilizer distribution. Agriculture and Cooperatives engaging handling cost. private sector in the Fertilizer Unit to l Activate the AICLC and other public design a mechanism focusing on l The government should facilitate the undertakings like National Trading assisting fertilizer importer and dealers import of fertilizers from India by taking Limited to deliver services in line with from private sector. mutual actions by making it a legal its formation order.
3 l The Government and Federation of western parts of Nepal Long Term (5 years or more) Nepalese Chambers of Commerce & l Plan for regional factories of fertilizer Industry should arrange for consortium l Arrange for import of fertilizers for such as those in the Southeast Asia finance of large traders for overseas mountain region border areas via Tibet/ imports of fertilizers. China l Under the South Asia Free Trade Arrangement, make fertilizer a freely Medium Term (3-5 years) l Arrange for equity investment in the traded commodity in South Asia and l Arrange for fertilizer shipment through Bangladesh and Indian fertilizer harmonize the agricultural policies of Jawaharlal Nehru Port in Mumbai to factories the countries in the region.
The Economic Policy Network is an undertaking of the Ministry of Finance with Asian Development Bank support. It supports the preparation of policy papers based on participatory dialogue in the areas of (i) macroeconomic management; (ii) international trade, investment, and employment; (iii) infrastructure development; and (iv) tourism, agriculture and regional development. This policy brief is an abstract of the policy report Constraints and Approach for Improving Fertilizer Supply for Meeting Domestic Demand prepared by Mr. Y. B. Thapa on behalf of Nepal Economic Association. It has been edited for clarity and brevity. Please refer to the original report for a comprehensive discussion on issues and recommendations. Full version available at: www.mof.gov.np/economic_policy/pdf/Constraints_Approach.pdf
Economic Policy Network Ministry of Finance, Singha Durbar Kathmandu, Tel: 4211353, E-mail: [email protected] Website: www.mof.gov.np
EPN Team: Advisory Committee Chairperson: Mr. Madhav Prasad Ghimire Focal Unit Chief: Mr. Bimal Wagle Team Leader: Mr. Dipendra Purush Dhakal ADB Project Officer: Mr. Shahid Parwez Edited by: Sunil Sharma
© 2006 Government of Nepal/Asian Development Bank All rights reserved
4 Government of Nepal Ministry of Finance ECONOMIC POLICY NETWORK PUBLIC PRIVATE PARTNERSHIP FOR POLICY FORMULATION POLICY BRIEF No. 31 June 2006
Promoting Nepal as a Manufacturing Hub
epal’s manufacturing sector FY2057/58 by 12.63% per annum. a Dry Port in Birgunj connected by rail to plays an important role in the Nepal is one of South Asia’s most the seaport in India would enhance N industry in terms of its share open economies and has the potential to market access to regional countries and growth. The foreign attract significantly more FDI in including India and China. direct investment (FDI) is most highly manufacturing sector. Nepal offers The sea of opportunities that Nepal concentrated in manufacturing sector, enough reasons to be excited about the can exploit in the making of a which accounts for in an average 50% of possibility of turning into a regional manufacturing hub should overwhelm any approved FDI projects. For example, in the manufacturing hub. It has strengths, sorts of weaknesses (small and scattered fiscal year (FY) 2062/63 the manufacturing opportunities and prospects for domestic market; low purchasing power; sector accounted approximately 53.09% of promoting itself as a regional lack of abundance availability of raw the total number of industries registered. manufacturing hub. Nepal boasts of large materials; low labor productivity) that it Similarly, the project cost of these pool of young workforce estimated to faces. Nepal has China, India and industries has been recorded at have 60% of the total population below Bangladesh as its neighbors where both NRs225,055.70 million, of which 25 years. Further, an increasing pool of India and China are growing economic manufacturing sector accounted for about English speaking educated young work superpower. A large and accessible 46.42% of the total authorized capital. force in the urban area could support market is in the offing from Nepal and Nepal’s manufacturing sector grew more sectors like knowledge-based industries along with Bangladesh a huge market is rapidly at 32.33% per annum between the supported by a high quality available in Nepal’s immediate FY2046/47- FY2057/58 following communication infrastructure and neighborhood. Furthermore, Nepal is a widespread policy reforms. FDI in network in place. Since low-cost labor is member of international trade regimes industries recorded an all time high of available in abundance in Nepal, it could such as World Trade Organization, South NRs3102.56 million in the FY2057/58. prove to be a viable alternative industry- Asia Free Trade Arrangements and Bay Likewise, FDI in the manufacturing hosting zone. The transport sector is of Bengal Initiative for Multi Sectoral industries also peaked in the same FY when improving rapidly. The building of road Technical and Economic Cooperation it recorded NRs1816.01 million, networks in Terai region, linking of which increases its reach and access approximately 58.53% of the total FDI in existing roads to the Asian Highway substantially in the international market. industries. Since FY2057/58 the higher Network, the building of a railway line These advantages can make Nepal as an growth could not be sustained. The growth upto Nepal’s northern border by China attractive place to invest. However, there rate in manufacturing sector declined since and possible extension to Kathmandu and are certain constraints in policies,
1 institutional and legal provisions that There have been no cases of Labor Act: Nepal lacks a large labor warrant attention. nationalization of industries in Nepal. Also, force of skilled and educated workers. Open to Foreign Investment: It is widely there are no official policies either existing Besides, the Labor Act severely restricts agreed that the fundamental problem facing or planned that suggest official the employment of foreigners for all foreign investment is the implementation of expropriation should be of concern to positions except those at the very top of a policies that is often plagued by bureaucratic prospective investors. company or a project. delays and inefficiencies. Besides, the other Dispute Settlement: Nepal adopts Free Trade/ Export Processing/ Special significant problems remain including lack flexible approach to dispute settlement Economic Zones: Nepal has not established of direct access to seaports (currently all hence allows various options to dispute any FTZ (Free Trade Zones), EPZ (Export products imported by ship from third settlement through the Department of Processing Zones) or SEZ (Special Economic countries enter through Kolkata, India’s Industry, in accordance with the Arbitration Zones). However, any industry exporting inefficient river port), difficult land transport, Rules of the United Nations Commission 90% or more of its products is entitled to lack of trained personnel, scarce raw materials, for International Trade Law and stipulation enjoy certain extra facilities. inadequate power (especially outside the of legal jurisdiction other than Nepal in Nepal India Trade Treaty: Although Kathmandu Valley), non-transparent and shareholder agreements and contracts. the 1997 trade treaty provides free access discretionary tax administration, inadequate Performance Requirements/ for almost every product with “Made in and obscure commercial legislation, and Investment Incentives: Other than fulfilling Nepal” label to India the advantage the cumbersome administrative procedures and legal requirements to minimum investment treaty gave Nepal has now substantially archaic labour laws. Policies intended to amount, pollution parameters, restricted been reduced for following reasons: India establish a “one window system” and sectors, etc., no performance requirements has been increasingly opening its simplify necessary interactions between are imposed on foreign investments in Nepal. economy to outside world and has also investors and the host governments have On the other hand, Nepal does employ tax been signing treaties with other neighbor- produced limited results. incentives to encourage industries to locate ing countries allowing their products to Institutional Arrangements: outside the Kathmandu Valley. enter into Indian market at a concessional Although “one window servicing agency” Right to Private Ownership and rate. For example, India has already signed has been implemented for foreign Establishment: The Government of Nepal the Free Trade Agreement with Sri Lanka investment, however current is moving slowly towards open and Special Trading Relations with Bhutan administrative procedures do not allow for competition in most sectors of the and is preparing to sign similar one with automatic approval of foreign economy and does not have a law to Bangladesh. As a result Nepal is fast los- investments. Foreign investors constantly guarantee free competition or to restrict ing time to capitalize on the opportunity complain about complex and opaque unfair forms of competition. provided by the Nepal-India treaty. government procedures, working-level Protection of Property Rights: Nepal Holidays: Foreign investors mostly attitude and lack of transparency in does not automatically recognize foreign complain about frequent strikes and holi- procuring investment licenses. patents; these must be re-registered in days. The announcement of national holi- Conversion of Transfer Policies: The Nepal. Protection of intellectual property days by government for one reason or Government of Nepal permits foreign rights is inadequate while legal system other fails to make clear if these holidays investors to repatriate all profits and protects property rights. are meant for the industrial units as well. dividends, all money raised through the Transparency of the Regulatory This uncertainty has resulted into frequent sale of shares, all payments of principal System: Foreign investors often face a disputes between the management and and interest on any foreign loans, and any non-transparent legal system and complain workers, which could have been avoided amounts invested in transferring foreign that basic legal procedures are neither if authorities would have made it clear in technology. However, experiences of quick nor routine. their announcements about the nature of foreign investors suggest that there are Efficient Capital Markets and holidays. Some foreign investors also de- discrepancies between the government’s Portfolio Investment: There is no mand that the number of such holidays stated policy of repatriation and its regulatory system to encourage and facilitate should be fixed in advance. implementation. portfolio investment in the industrial sector. Duty Draw Back System: It takes a Expropriation and Compensation: Only direct investment is permitted. long time to implement duty draw back from
2 the government. The prevailing law says equal level playing fields for all the players being faced by the Nepalese banks. that the exporter has to apply for duty draw- back within a year of export. While trying l Enact effective Cyber Laws and an l Rationalize tax and duty rates and to file an application within stipulated pe- Acquisition, Merger and Takeover Act structures to reflect regional ground riod of time, exporters have to face lots of realities in line with, if not better than paperwork which is considered to be un- l Incentive and subsidy schemes must what is in place in the region, particularly necessary. The process can be expedited be put in place for Research and what the North - East States and with certain possible improvements. To Development Himachal Pradesh in India are offering make it simpler, a flat rate for export items should be incorporated. l Introduce a front loaded depreciation l Make it mandatory for all companies to Patent, Trademark and Know-how: system or write-off 50% of the costs be registered as public companies and Foreign equity investment also brings tech- against future payments to be made provide incentive to them to be listed in nical support along with it. However, the against VAT/Income tax etc the Stock Exchange term ‘technical support’ varies in its mean- ing for different industries. For example for l Make Tax Laws simple and easy to l In order to promote Nepal as a manu- a manufacturing unit it implies a formula, understand even by the layman facturing hub liquidating equity instru- patent, trademark, know-how, technical ments in the secondary market must be expertise, etc. The existing act does not l Introduce digital system of self-assessment existed in a speedier way. This could clearly spell out provisions regarding afore- and handover so that there is a minimum be done through a working integration mentioned matter. level of person to person contact of the Stock Markets of the South Asian Legislative: It seems that Nepalese ju- countries.Capital Market should sup- diciary deters foreign investment, as it does l Make clear, simple and unambiguous port international investments for which not set a timeframe to end legal disputes. laws and regulations so that there is no foreign companies should be allowed Many companies have left the country be- scope for interpretations to be listed in Nepal’s Stock Exchange cause of the weaknesses in the judiciary sys- and vice versa tem. These companies prefer to settle legal l Encourage banks to merge in order to disputes outside of Nepal. It is ripe time to create larger banks l Allow offshore banking like that in place review the judicial system in order to make it in Mauritius should be encouraged at par with international standards and prac- l Incentivize and motivate banks and tices and encourage foreign investment. financial institutions to work within l Encourage Venture Capital firms to set There is an urgent call to recognize the a smaller spread band. Banks with an up operations in Nepal to fund high risk importance of foreign investment, equity base of over 3 billion rupees and other Greenfield projects manufacturing sector in particular, in the could be given a discount of around development process and the policies 2% in its income tax rate l Formulate and enact an Foreign Direct necessary to make it attractive and Investment policy that would be sustainable. This policy underscores the l Allow foreign banks to set up branch exclusively designed to focus on crucial importance of legal and institutional offices in Nepal for banking operations, attracting investments to only those reform for promoting Nepal as a regional if not, at least in the SEZs that are to be sectors/products that Nepal can be manufacturing hub and makes certain created competitive on like Hydropower, recommendations on what needs to be done Tourism, Herbs and Herbal Products, in this regard. l It is essential to set up lending mecha- High Value Agriculture and Forest Based nisms in Nepal would help finance Products, Educational Outsourcing, Recommendations Mega Projects. Therefore foreign banks Medical Outsourcing, ICT and ICT l Revise Company Act, Bankruptcy Act, should be allowed to open branch of- enabled services Intellectual Property Act, Competition Act fices in Nepal, if not, at least in the to make them more effective and suitable SEZs that are to be created. This would l Design regulations specifically to promote to international investors and ensure help the single borrower limit problem external investments in these sectors
3 l Implement appropriate laws to allow with electricity wheeling facilities easily and conveniently so that they Portfolio investments should be enacted to promote setting can have in place a team of their up of hydropower projects by the pri- choice l Integrate the National Stock Exchange vate sectors to meet the corporate needs to the regional Stock Exchange network of itself or others. l Create and setup an independent, high- to provide a greater market for debt, powered body, in the form of Board of equity instruments l Encourage and incentivize Public- Investment, armed with adequate authority Private Partnership; Build, Own, to focus exclusively on promoting and l Draft and implement a forward thinking Operate, Transfer; and Build, Own, facility investments in Nepal Industrial Policy that would keep in view Operate for better connectivity with the policies enacted by regional Indian and regional market instruments l Designate special areas possibly to set competitive countries and ensure that up SEZ/FTZ/EPZ with special laws and continuity of policies is assured by the l Adopt open-sky policy that would make facilities for housing industries Policy document traveling to and from Nepal easy, quick and convenient providing greater l Introduce a special incentive package l Unbundle Nepal Electricity Authority traveling options to the business for industries setting up operations in into three companies to carry out the communities these areas. The special package function of Generation, Transmission should at least match if not be better and Distribution and privatize them. In l Provide residential visas to investors than incentives available around the case it cannot be unbundled special laws and their top management team region
The Economic Policy Network is an undertaking of the Ministry of Finance with Asian Development Bank support. It supports the preparation of policy papers based on participatory dialogue in the areas of (i) macroeconomic management; (ii) international trade, investment, and employment; (iii) infrastructure development; and (iv) tourism, agriculture and regional development. This policy brief is an abstract of the policy report Promoting Nepal as a Manufacturing Hub prepared by Mr Min Bahadur Karki. It has been edited for clarity and brevity. Please refer to the original report for a comprehensive discussion on issues and recommendations. Full version available at: www.mof.gov.np/economic_policy/pdf/Promoting_Nepal.pdf
Economic Policy Network Ministry of Finance, Singha Durbar Kathmandu, Tel: 4211353, E-mail: [email protected] Website: www.mof.gov.np
EPN Team: Advisory Committee Chairperson: Mr. Bharat Bahadur Thapa Focal Unit Chief: Mr. Bimal Wagle Team Leader: Mr. Dipendra Purush Dhakal ADB Project Officer: Mr. Shahid Parwez Edited by: Mr. Sunil Sharma
© 2006 Government of Nepal/Asian Development Bank All rights reserved
4 Government of Nepal Ministry of Finance ECONOMIC POLICY NETWORK PUBLIC PRIVATE PARTNERSHIP FOR POLICY FORMULATION POLICY BRIEF No. 32 November 2006
Tax Compliance Measures and Leakage Control
axes play a central role in VAT compliance rate decreased from 85.4% of 13% is considered very high; (iii) financing public expenditure. in FY2002 to 70.7% in FY2005. The knowledge of mismanagement of public T For the last five years, the percentage of non-filers increased from funds may induce resistance to comply revenue to expenditure gap 14.6% to 28.3% during the same period. with tax laws; (iv) ineffective tax varied from 5.5% to 7%. It indicates that Non-compliance with tax laws can enforcement; (v) complex tax structure; the volume of tax revenue collected is have adverse effects for the economy such (vi) non-acceptance of the tax system; (vii) insufficient to meet public financing. A as (i) loss of tax revenue and a consequent higher income groups have more primary reason for revenue insufficiency negative impact on the budget, (ii) loss of incentive to evade taxes; and (viii) tax is non-compliance with tax laws and its economic efficiency, (iii) non-compliance exemptions have a positive impact on tax consequent revenue leakages. is a cost to both evaders and taxpayers, avoidance. While non-compliance by taking (iv) unfair competition for businesses that Besides discussing the reasons advantage of existing loopholes in tax laws pay taxes, and (v) increase in inequity as behind tax non-compliance, it is also is called avoidance; under reporting of opportunity for evasion is not equally important to highlight the following taxable transaction and income as well as available to all. methods used in evading taxes: (i) evader exaggeration of expenditure is called tax Therefore, it is imperative to study the falsifies entries on the basis of falsified evasion. Whereas both tax evasion and motives behind non-compliance and the documents such as fictitious contracts; avoidance result in revenue leakages, tax method of evasion and avoidance so that (ii) evader falsifies accounting documents evasion is regarded as illegal while tax a proactive approach to revenue leakage to exaggerate business expenses while avoidance is considered legal. control can be developed. contracting revenue; (iii) smuggling, The rate of tax compliance in Nepal is valuation fraud, classification fraud, and not satisfactory. The percentage of income Rationale for Non- quality and quantity manipulation to tax return filed decreased from 46.7% in compliance and Modus evade customs; (iv) VAT evasion fiscal year (FY) 2002 to 35.4% in Operandi of Tax Evasion methods entail issuance of improper bills, FY2005.The level of non-compliance While the number of reasons for tax non- under valuation at customs point, fixation increased from 53.3% to 64.0%. compliance can be plenty, some are of low ex-factory price in internal Similarly, in the case of value added broadly described as follows: (i) rational production; and (v) excise evasion taxes (VAT), while the number of registration evaders who wish to maximize expected through illicit distillation and sale of under VAT has been increasing, the trend net income; (ii) perception that taxes are unlicensed liquor, and under reporting of in VAT compliance has been decreasing. unfairly high—in Nepal, current VAT rate production and sales.
1 Tax evasion is a significant part of collection in FY2004 was about 0.61% of GDP GDP ratio shows that it has been non-compliance with tax laws and their and estimated leakage of 0.52% of GDP. increasing over the years indicating implications on revenue makes it (iv) Excise evasion. The amount evaded improvement in tax compliance—table1. On necessary to discuss the details of tax by licensed distilleries is expected to be more the other hand, apart from Bangladesh, evasion. than NRs2.0 billion, while the magnitude of Nepal has the lowest tax/GDP ratio in South excise evasion from illicit distribution of Asia. Hence, Nepal is not only an under Tax Revenue Leakages liquor by unlicensed sellers is also expected taxed country but the possibility of tax (i) Customs evasion. Customs to be very high. Also, evasion from payment leakages and evasion must also be revenue leakage due to smuggling is of duty on foreign alcohol and cigarettes is comparatively higher. estimated at around NRs3.58 billion, expected to be very high. Besides, other indicators of tax which is about 25% of revenue collected. compliance are number of tax payers, Additionally, leakages in customs Indicators of number of tax filers, number of debit and revenue results in leakages of other taxes Tax Compliance credit returns, number of unsettled returns, and duties collected at customs. The basic indicator of tax compliance is the cost of collection, number of tax payers (ii) VAT avoidance and evasion. The comparison of taxable potential with actual registered, per capita tax payment, trade magnitude of VAT leakage increased from tax collection. Potential tax collection can be volume and compliance cost to tax payers, 38% in FY2002 to 42% in FY2005. The tax achieved if there is cent percent voluntary tax payer friendly system etc. base of VAT has been limited due to compliance of tax laws and rates. The exemptions on several items such as difference between potential collection and Constraints agriculture products and electricity. Also, actual collection is tax evasion. l Tax administration is ineffective due to people filing both debit and credit returns Another common method of measuring the lack of (i) continuous monitoring of have decreased. tax compliance is to estimate tax revenue as potential tax collection with actual tax (iii) Income tax evasion. An estimate a percentage of GDP. High tax revenue ratio collection, (ii) verifiable tax statistics, conducted in terms of expenditure shows as a percentage of GDP indicates that tax (iii) periodical review of rate structures, potential income tax collection in Nepal compliance is satisfactory, whereas a low (iv) automation in tax administration, to be around 1.14% of gross domestic percentage ratio indicates possible tax and (v) training and performance product (GDP). However, the actual leakages and evasion. A comparison of tax/ appraisal of employees.
Table1: Comparison of Tax/GDP Ratios (in NRs millions)
Description/ Years FY2002 FY2003 FY2004 FY2005
Customs duty 12,658.8 14,236.4 15,554.8 15,701.6 Excise 3,807.0 4,785.1 6,226.7 6,445.5 VAT 12,267.3 13,459.7 14,478.9 18,885.4 Land registration 1,131.0 1,414.3 1,697.5 1,799.2 Income /property, profit tax 9,463.7 8,691.5 10,215.1 11,272.6 Total tax 39,330.6 42,587.0 48,173.0 54,104.7 GDP (at current price) 406,318 457,546 474,919 508,651 Tax / GDP ratio 9.6 9.3 10.1 10.6
FY=fiscal year, GDP=gross domestic product, VAT=value added tax Source: Economic Survey 2005/06, Ministry of Finance, Government of Nepal
2 l The present Income Tax Act is complex lack in training in search, seizure and tax return, accurate calculation of tax and its legal design is poor resulting in raid. liability, timely tax payment, and a increased tax avoidance and reduced proactive approach to tax compliance tax liability. l Reliable performance based reward and besides the conventional approach of punishment system has not been leakage control by tax enforcement. l The Excise Act lacks development and established. incorporation of technical standards, l Make tax laws simple and improve their especially for controlling leakages. l Lack of Information technology usage legal design to ensure tax compliance. for tax information and services. l The Customs Act, 1962 has been l Automate tax administration systems to amended several times, still it is not l The central monitoring unit depends on increase efficiency. compatible with World Trade voluntary filing of complaints and is not Organization (WTO) systems. very systematically organized to control l Revise the threshold on VAT and leakages. reconsider the single rated VAT system l There isn’t enough tax policy reform to to expand the tax base. make compliance cheap, easy and non- l The customs houses do not have adequate compliance difficult. infrastructure and the presence of 143 sub- l Make tax audit effective by customs offices is not rationalized. systematically selecting enterprises l The exemption list has narrowed the tax worthy of tax audit. Also, conduct base and has caused inequity. l Absence of institutional mechanism to systematic classification of taxpayers compute tax potential indicators to based on specific criteria. l System of revenue leakage control is not determine revenue leakage. well designed as per international l Develop and apply tax wise, economic standards and the revenue administration Recommendations sector wise and geographical region is not able to carry out effective l Improve leakage control by increasing wise tax potential indicators. investigation to control leakages. frequency and quality of audit, probability of detection and by l Make arrangements with local bodies l Revenue administration is lacking minimum disciplining corrupt officials. to control illicit distribution and infrastructure such as office buildings and unlicensed sale of alcoholic products. testing labs. Also, it is not equipped with l Incorporate revenue leakage control well prepared working manuals for different provisions in Customs Act and make it l Educate taxpayers to increase their taxes and investigation systems. compatible with WTO requirements. knowledge of tax laws and procedures, which will help them comply with laws l Audit and investigation activities of l Legal provisions should be made for the and accurately calculate tax liability. Inland Revenue Department (IRD), establishment of Revenue Police. Effective ways of educating taxpayers investigation and smuggling control are (i) institutionalizing private sector activities of Department of Customs (DoC) l The Revenue Leakage Control and participation to formulate revenue and revenue leakage control activities of Investigation Act should be amended policies, and (ii) usage of various forms Department of Revenue Investigation to make tax compliance effective and of media to disseminate tax information. (DRI) have not been effective. non-compliance risky. l Provide practical accounting training to l Responsibility of revenue policing to l DRI should be allowed to file corruption tax auditors, custom officials and tax control leakages and smuggling keeps cases and revenue leakage cases in administrators. changing. special courts. l Employees need to be given credible l The employees of IRD, DoC and DRI l Ensure tax compliance by encouraging incentives and motivated are not sufficiently motivated and they timely registration of taxes and filing for appropriately to effectively enforce
3 tax laws and to increase efficiency in the revenue secretary and the creation of income tax, VAT, excise and customs tax administration. Similarly, taxpayers Revenue Security Force under the valuations and classifications. can be motivated to obey tax laws by Ministry of Finance. Information collected will be made educating them on the importance of available to Revenue Department and taxes and by deepening their l Investigate taxpayers who fall under to other investigating agencies. knowledge of tax laws. high revenue risk categories and start criminal proceedings against offenders. l Establish revenue intelligence unit, risk l The Revenue Administration Structural management unit and rationalize sub- Reform Task Force has recommended l Even though the existing monitoring customs offices. changes in the way each department system is focused mainly on revenue related to tax revenue is organized to make collection, it cannot estimate how much l Incorporate functional division in Excise revenue compliance effective. Also, it has has been left uncollected. There is a Department and redesign the functional recommended the establishment of an need for a central level information division as recommended by the autonomous Revenue Board headed by system to collect information related to Revenue Task Force.
The Economic Policy Network is an undertaking of the Ministry of Finance with Asian Development Bank support. It supports the preparation of policy papers based on participatory dialogue in the areas of (i) macroeconomic management; (ii) international trade, investment, and employment; (iii) infrastructure development; and (iv) tourism, agriculture and regional development. This policy brief is an abstract of the policy report Study For The Measures Of Tax Compliance Habit And Leakage Control prepared by Mr. Banshidhar Ghimire. It has been edited for clarity and brevity. Please refer to the original report for a comprehensive discussion on issues and recommendations. Full version available at: www.mof.gov.np/economic_policy/pdf/ Tax_Compliance.pdf
Economic Policy Network Ministry of Finance, Singha Durbar, Kathmandu, Tel: 4211353, E-mail: [email protected] Website: www.mof.gov.np
EPN Team: Advisory Committee Chairperson: Mr. Vidyadhar Mallik Focal Unit Chief: Mr. Bimal Wagle Team Leader: Mr. Dipendra Purush Dhakal
ADB Project Officer: Mr. Shahid Parwez Edited by: Mr. Samtenla Sherpa
© 2006 Government of Nepal/Asian Development Bank
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