Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth by Mott MacDonald International Development

Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth February 2022

Mott MacDonald 10 Fleet Place London EC4M 7RB United Kingdom T +44 (0)20 7651 0300 mottmac.com

Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth February 2022

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Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

Document reference Information class: Standard This document is issued for the party which commissioned it and for specific purposes connected with the abovecaptioned project only. It should not be relied upon by any other party or used for any other purpose. We accept no responsibility for the consequences of this document being relied upon by any other party, or being used for any other purpose, or containing any error or omission which is due to an error or omission in data supplied to us by other parties. This document contains confidential information and proprietary intellectual property. It should not be shown to other parties without consent from us and from the party which commissioned it.

Building back better from the earthquake 2015 under the Purnima programme funded by FCDO, managed by Mott MacDonald.

Mott MacDonald is a global engineering, management and development consultancy focused on guiding our clients through many of the planet’s most intricate challenges. Improvement is at the heart of what we offer: better economic development, better social and environmental outcomes, better businesses and a better return on investment. Asper is an independent research, consulting, advisory and delivery company that focuses on bringing sustainable agriculture and nature-based solutions to communities.

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Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

Contents Acknowledgements

Executive summary

Introduction

1.1 1.2 1.3 1.4

1 2 3 3

Respondents of the Study: Focus Sectors and Provinces 2.1

2.2

Global development context against the backdrop of COVID-19 The economy of Nepal and impact of COVID-19 Objectives of this study Methodology

Enterprise landscape in Nepal 2.1.1 Enterprises in the focus sector 2.1.2 Gender 2.1.3 Informality of businesses Profile of enterprise respondents 2.2.1 Distribution of respondents by sector and province 2.2.2 Sex of business owner/s 2.2.3 Years in business 2.2.4 Market orientation 2.2.5 Sources of working capital 2.2.6 Sources of funds for purchase of fixed assets 2.2.7 Sources of funds for business expansion 2.2.8 Providers of financial services

7 8 8 9 10 11 11 11 12 12 14 15 16 17

Economic profile of focus provinces

3.1 3.2 3.3

21 24 27

Province 2 at a glance Lumbini at a glance Karnali Province at a glance

Impact of Measures Undertaken to Curb COVID-19

4.1 4.2 4.3 4.4 4.5

32 35 36 39 41

Agribusiness: impact of measures taken to curb COVID-19 Manufacturing sector: impact of measures taken to curb COVID-19 Tourism sector: impact of measures taken to curb COVID-19 Construction sector: impact of measures taken to curb COVID-19 ICT sector: impact of measures taken to curb COVID-19

Cross-Sectoral Barriers to Growth

5.1 5.2 5.3

44 45 46

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High cost of transportation Poor accessibility to roads and financial services Unreliable electric/power utilities

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

5.4 5.5

47 47

Sector Specific Barriers to Growth

6.1

53 53 56 57 59 60 61 63 63 65 66 67 68 69 69 69 70 71 73 73 73 73 75 76 76 78 79 80

6.2

6.3

6.4

6.5

High cost of power utilities Weak price competitiveness

Agribusiness: barriers to growth 6.1.1 Customs and trade regulations 6.1.2 Lack of testing laboratories 6.1.3 Insufficient supply of raw materials 6.1.4 Limited access to storage facilities 6.1.5 Business development services (BDS) 6.1.6 Financial services Manufacturing: barriers to growth 6.2.1 Customs and trade regulations 6.2.2 Corruption 6.2.3 Business licensing and permits 6.2.4 Business development services 6.2.5 Financial services Information and Communication Technology (ICT) Sector: barriers to growth 6.3.1 Inadequately educated or skilled workforce 6.3.2 Weak market penetration 6.3.3 Business development services 6.3.4 Financial services Construction Sector: barriers to growth 6.4.1 Unstable supply, quality, and price of construction materials 6.4.2 High tax rates 6.4.3 Business development services 6.4.4 Financial services Tourism: barriers to growth 6.5.1 Decline in tourist spending/number of tourists 6.5.2 Limited internet connectivity 6.5.3 Business development services 6.5.4 Financial services

Systemic Constraints to Building Back Greener

7.1

82 82 83 83 83 85 85 86

7.2

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Infrastructure and Transportation 7.1.1 Limited and low quality of roads 7.1.2 High cost of transportation and logistics services 7.1.3 High cost and unreliable supply of energy 7.1.4 Underdeveloped SEZs Market access 7.2.1 Weak quality infrastructure system 7.2.2 Weak value chain governance and interfirm collaboration 7.2.3 Limited range of value-added products for export trade and concentration on a few markets 7.2.4 Sub-optimal utilization of digital technologies to boost market integration

86 87

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

7.3

7.4

7.5

7.6

Capacity building/Business development services 7.3.1 Weak market responsiveness and orientation of training providers. 7.3.2 Limited availability of quality strategic services Financial Services 7.4.1 Current financial products are not fully aligned to enterprise needs 7.4.2 Limited availability of long-term credit 7.4.3 Suboptimal utilization of financial products/loans Climate change resilience 7.5.1 Low uptake of innovative low carbon/climate smart infrastructure and technologies 7.5.2 Limited coverage of social protection Regulatory compliance procedures 7.6.1 High informality of enterprises 7.6.2 Complex customs/border trade procedures

88 88 88 89 89 89 89 90 90 90 90 90 90

Opportunities for Transformative Change

8.1 8.2 8.3

92 93 94 94 97 98 99

Prospects for transformative growth in Nepal Climate change resilience and transformative growth in Nepal Proposed enabling services and structure 8.3.1 Enabling Infrastructure and environment for business growth 8.3.2 Upgrading firm capacity to embrace growth 8.3.3 Innovative financing for growth 8.3.4 Linking businesses, markets and entering global value chains

Appendix

100

Appendix

101

A.1. Lessons Learned from Past Projects

102

Bibliography

104

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Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

Tables Table 1. Government of Nepal and World Bank definition of small and medium enterprises (SMEs)

Table 2. Breakdown of key informants

Table 3. GDI and GII of the seven provinces, 2019

Table 4. Breakdown of respondents by sector and province

Table 5. Breakdown of respondents by sex of business owner

Table 6. Breakdown of respondents by number of years in operation

Table 7. Breakdown of respondents by type of buyers/clientele

Table 8. Snapshot socio-economic profile of Province 2

Table 9. Number of enterprises located in Province 2 by focus sector, 2018

Table 10. Snapshot socio-economic profile of Lumbini Province

Table 11. Number of enterprises per sector in Lumbini

Table 12. Industrial estates in Lumbini Province

Table 13. Snapshot socio-economic profile of Karnali Province

Table 14. Number of enterprises by sector in Karnali Province

Table 15. Status of production of major commodities, 2017

Table 16. Agribusiness respondents: Satisfaction rating of BDS availed

Table 17. Agribusiness respondents: Satisfaction rating of financial services providers

Table 18. Manufacturing companies: Satisfaction rating of BDS availed

Table 19. Manufacturing companies: Satisfaction rating of financial services providers

Table 20. ICT companies: Satisfaction rating of BDS availed

Table 21. ICT companies: Satisfaction rating of financial services providers

Table 22. Construction companies: Satisfaction rating of BDS availed

Table 23. Construction companies: Satisfaction rating of financial services providers

Table 24. Tourism enterprises: Satisfaction rating of BDS availed

Table 25. Tourism enterprises: Satisfaction rating of providers

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Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

Figures Figure 1. Distribution of Tourism enterprises by province

Figure 2. Distribution of Agribusinesses and Manufacturing businesses by province

Figure 3. Distribution of Construction and ICT enterprises by province

Figure 4. Breakdown of registered and unregistered businesses in Province 2, Lumbini, and Karnali 10 Figure 5. Breakdown of respondents by major market

Figure 6. Sources of working capital

Figure 7. Sources of funds for purchase of fixed assets

Figure 8. Sources of funds for business expansion

Figure 9. Providers of financial services

Figure 10. Percentage contribution of each province to GDP, 2019/20

Figure 11. Percentage contribution to GDP of Province 2 by sector, 2018/19 and 2019/20

Figure 12. Percentage contribution by sector to GDP of Lumbini Province, 2018/19 and 2019/20

Figure 13. Percentage contribution by sector to GDP of Karnali Province, 2018/19 & 2019/20

Figure 14. Breakdown of agribusiness respondents by annual sales: 2017, 2019, and 2020

Figure 15. Breakdown of agribusiness respondents by number of workers: 2017 and 2021

Figure 16. Breakdown of respondents in manufacturing sector by annual sales: 2017, 2019 & 2020

Figure 17. Breakdown of respondents in manufacturing sector by number of workers, 2017 & 2021

Figure 18. Breakdown of respondents in the Tourism Sector by annual sales: 2017, 2019, and 2020

Figure 19. Breakdown of respondents in the Tourism Sector by number of workers, 2017 & 2021

Figure 20. International and domestic visitor spending (in US$ million) in Nepal: 2019 and 2020

Figure 21. Breakdown of respondents in the Construction Sector: 2017, 2019, and 2020

Figure 22. Breakdown of respondents in the Construction Sector by number of workers, 2017 and 2021

Figure 23. Extent that high cost of transportation hinders business growth in the three provinces

Figure 24. Extent that poor accessibility hinders business growth

Figure 25. Extent that unreliable electric utilities hinder business growth

Figure 26. Extent that high cost of power utilities hinders business growth

Figure 27. Extent that weak price competitiveness hinders business growth

Figure 28. Value added per worker in South Asia countries, 2015 to 2019

Figure 29. Indicative value added per worker per province

Figure 30. Extent that customs and trade regulations hinder business growth of Agribusinesses

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Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

Figure 31. Extent that lack of testing laboratories hinders business growth of Agribusinesses

Figure 32. Extent that insufficient supply of raw materials hinders business growth of Agribusinesses

Figure 33. Extent that limited access to storage facilities hinders business growth of Agribusinesses

Figure 34. Extent that customs and trade regulations hinder business growth in the Manufacturing Sector

Figure 35. Extent that corruption hinders business growth of enterprises in Manufacturing Sector

Figure 36. Extent that getting a business license is a problem for enterprises in the Manufacturing Sector

Figure 37. Extent that high tax rate hinders business growth in the Construction Sector

Figure 38. Extent that decline in tourist spending / tourist volume hinders growth of businesses in the Tourism Sector

Figure 39. Extent that limited internet connectivity hinders growth of tourism enterprises

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Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

A woman learning about action on climate change during the Farmer Field School programme in western Nepal as part of Nepal Climate Change Support Programme funded by FCDO, managed by Mott MacDonald.

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Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

Acronyms

ADB

Asian Development Bank

DoFTQC

Department of Food Technology and Quality Control

ESG

Environmental, social, and governance

FCDO

Foreign, Commonwealth and Development Office

FDI

Foreign direct investment

FNCCI

Federation of Nepalese Chamber of Commerce and Industries

GDI

Gender Development Index

GDP

Gross Domestic Product

GII

Gender Inequality Index

HDI

Human Development Index

ICD

Inland Container Depot

ICP

Integrated Check Post

ICT

Information, communication, and technology

ITC

International Trade Centre

MFIs

Microfinance institutions

MSMEs

Micro, small, and medium enterprises

NEA

Nepal Electricity Authority

NTIS

Nepal Trade Integration Strategy

OCR

Office of Company Registration

PPPC

Province Policy and Planning Commission

RBN

Roads Board of Nepal

SEZ

Special economic zone

SEZA

Special Economic Zone Authority

SMEs

Small and medium enterprises

SPS

Sanitary and phytosanitary standards

Technical assistance

United Kingdom

USA

United States of America

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Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

Acknowledgements

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Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

Acknowledgements COVID-19 was not only a health shock but also led to a major disruption to the global trade and economy. Nepal was fast progressing with a mid-income country status when the pandemic happened in 2020, impacting people’s lives and livelihoods. This study is part of Mott MacDonald’s Learn and Improve agenda to better understand how the pandemic has impacted the economy of Nepal, which sectors and geographic locations have a high growth potential and what can be done to catapult the economy into a growth mode. Asper Consulting joined hands with us to conduct this study. We would like to thank all the SMEs who were contacted for this study and all the key informant interviewees who provided useful information. Special thanks to the key stakeholders who joined a virtual Business Roundtable on 18 August 2021 where the initial findings from the study were shared. These include: • • •

Dr. Hari Bahadur K.C, Joint Secretary, Ministry of Agriculture, Livestock and Development, Government of Nepal Ekdev Adhikari, Under Secretary, Ministry of Industry, Commerce and Supplies, Government of Nepal Pradip Raj Paudyl, Officer, Ministry of Culture, Tourism & Civil Aviation,

Government of Nepal • • • • • • • • • •

Chandni Singh, Foreign Commonwealth and Development Office, Nepal Simon Lucas, Climate Portfolio, Foreign Commonwealth and Development Office, Nepal Bimal Ghimiri, Foreign Commonwealth and Development Office, Nepal Suvash Thapa, Department for International Trade, UK, Nepal Rabi Rayamajhi, Commonwealth Development Cooperation, Nepal Mim Hamal, European Union Delegation, Nepal Travis Guymon, United States Agency for International Development, Nepal Arun Raj Sumargi, Federation of Nepalese Chambers of Commerce and Industry Umesh Prasad Singh, Federation of Nepalese Cottage and Small Industries Jagannath Poudel, Federation of Nepalese Cottage and Small Industries

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Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

Executive Summary

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Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

Executive summary Nepal is struggling to realise its full economic potential due to several systemic barriers to growth. This document summarises findings from a Mott MacDonald study which assesses how the COVID-19 pandemic and the resultant measures impacted the growth of the private sector and identifies opportunities to support a greener and more resilient business-led transformation.

Nepal’s economy and COVID-19 COVID-19 came as a health and economic shock to the world. Developing economies such as Nepal were adversely impacted in a number of ways: rise of the financing gap to deliver the Global Goals, reduction in economic activity, demand reduction, low sales, business shutdowns, job losses, household incomes reduced. In 2018, Nepal’s GDP was estimated at 6.3%. However, as COVID-19 lockdowns continue to disrupt economic activity, especially tourism, the economy is now projected to grow by only 0.6% in 2021– inching up from an estimated 0.2%in 2020 as according to the World Bank (2020)1. Informal businesses make up around 50% of enterprises in Nepal and are the main source of income for most of the labour force (more than 80% jobs are created in this informal sector). In 2019, it was estimated that Nepal had around 3.8 million migrants and remittances contributed 28% of GDP. The ILO estimates that between 1.6 million to 2 million jobs have been disrupted by the pandemic. Out of this, 630,000 jobs for women are at risk. The tourism sector, which contributed 8% to the country’s GDP and enabled 570,000 jobs in 2018, is suffering a 47% reduction in profits. Three quarters of tourism employees are informal, making them further at risk. Other sectors severely hit by the crisis include manufacturing, with 446,000 jobs disrupted, and construction, with 404,000 jobs affected according to the ILO. In addition, the ILO estimates that 1.4 million home-based workers have been hit hardest. Almost all of whom are women and are involved in export products2.

Identifying opportunities for greener and more inclusive growth – a study It is against this backdrop that Mott MacDonald funded and conducted the Unlocking opportunities for the private sector in Nepal study. The study aimed to better understand the constraints and opportunities to build a greener and more resilient economy in Nepal. This study is part of the “Learn and Improve” agenda of Mott MacDonald, a global engineering, management and development consultancy providing integrated solutions to tackle extreme poverty and inequality. The research provides useful, valid and reliable data to help address the challenges faced by the private sector in Nepal and to help promote inclusive growth in a way that can lead to transformative change. Specifically, the study identified and assessed: ●

the binding constraints faced by the private sector in Nepal, despite a sustained effort to catapult small and medium enterprises (SMEs) toward the growth trajectory

●

major opportunities for greener transformative change, enabling services and support structures.

https://www.worldbank.org/en/news/press-release/2020/10/08/covid-19-impact-on-nepals-economy-hits-hardest-informal-sector

https://www.ilo.org/wcmsp5/groups/public/---asia/---ro-bangkok/---ilo-kathmandu/documents/briefingnote/wcms_745439.pdf

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Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

Methodology and demographics The study focused on Province 2, Lumbini, and Karnali and covered the following sectors: agribusiness, manufacturing, construction, tourism, and information and communications technology (ICT). According to the 2018 National Economic Census, these three provinces had 308,266 enterprises, which made up 33% of the 923,356 enterprises in the country. The study involved primary and secondary data collection, including a survey of 50 SMEs, as well as key informant interviews with government, business leaders and development partners. Respondents from the agribusinesses and manufacturing sectors mainly sold their products to other companies, while construction businesses had the government as their main client. On the other hand, tourism and ICT companies primarily sold their services directly to customers. Of the 50 SMEs, 96% primarily sold their products and/or services in the domestic market. Of these, 50% catered to the national market while the remaining 46% sold their products/services within the province. Nepal has a relatively small market size which is further aggravated by limited connectivity between and within provinces. This implies that growth in domestic demand will most likely be modest and achieved through import substitution. Only 6% of respondents were solely women-owned enterprises. On the other hand, men-owned enterprises accounted for 52% of respondents. Enterprises jointly owned by women and men comprised 42% of respondents. According to the 2018 National Economic Census, about 30% of the enterprises in Nepal were owned by women (CBS 2021).

Findings of the study Impact of COVID-19 crisis The COVID-19 pandemic has evolved from a health crisis into an economic and employment crisis, with a heavy toll on enterprises. While lockdown measures to contain the spread of the virus were necessary to protect lives and avoid the collapse of health services, these measures led to supply chain disruptions, caused demand for many goods and services to slump, and forced enterprises to suspend or scale down operations, with adverse impact on employment especially among daily wage workers. Except for companies in the ICT sector, all the survey respondents reported that they faced the following key challenges: liquidity problems; loss of sales and/or difficulties in accessing markets; inability to pay liabilities; shortage of workers; and difficulties sourcing materials, including steep increases in the price of goods and services. The COVID-19 crisis opened market opportunities for the ICT sector due to use of online systems and platforms during lockdowns but, at the same time, highlighted the inadequacy of existing ICT infrastructure in helping SMEs better cope with the new normal in doing business. Systemic constraints to SME growth prior to the COVID-19 pandemic including the fragility of the healthcare system made supply chains across sectors particularly vulnerable to movement restrictions and lockdowns. The COVID-19 crisis opened market opportunities for the ICT sector but, at the same time, highlighted the inadequacy of existing ICT infrastructure in helping SMEs better cope with the new normal in doing business.

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Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

iii

Systemic constraints to transformative growth Access to finance, market access and firm capacity are critical systemic barriers faced by the private sector. The study identified the following key systemic constraints faced by SMEs in all sectors: • • • • • • • • •

Reliance on informal credit Inadequate collateral and limited availability of financial products other than collateralised loans Limited availability of long-term credit Weak financial management and documentation among SMEs Limited availability of quality strategic services/ specialised services Low uptake of innovative low carbon/climate smart infrastructure and technologies Limited coverage of social protection High informality of enterprises Complex border procedures

• • • • • • • •

Poor road network/no roads High cost of transport and logistic services Underdeveloped Special Economic Zones (SEZ) Poor infrastructure Weak value chain governance and interfirm collaboration. Limited range of value-added products for export trade and concentration on a few markets Sub-optimal uptake of digital technologies to boost market integration Weak market responsiveness and orientation of technical vocational education and training (TVET) institutions and other training providers

Prospects for transformative growth in Nepal In order to catapult the economy of Nepal into growth mode, our overarching vision is to promote inclusive growth at scale in key industry sectors in Nepal which are characterised by the following features: Competitiveness Industry players including businesses are able to effectively innovate, upgrade, improve productivity and add value to their products to match market demand, maintain and/or grow market share in existing markets, and penetrate new markets especially in developed economies.

Inclusion Delivering a sustainable flow of benefits across all actors in supply chains and to society as a whole especially women and marginalised communities.

Resilience

GRID-alignment

Industry players including businesses are able to address, absorb, and overcome shocks including those brought about by climate change in the market, policy environment, resource base, and other aspects of the system.

Vision and interventions are aligned with the Green, Resilient, Inclusive Development (GRID)3, which represents a shift from crisis response to long-term green growth and sustainable development for all.

Development partners in Nepal have established GRID to scale up and align actions to implement this longer-term strategic approach to development.

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Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

The above vision is anchored on the following broad objectives: 1. Promoting the judicious and profitable use of resources through the adoption of the circular economy concept. This will add economic and social value by creating new opportunities for businesses to participate in supply chains and creating jobs. 2. Fostering continuous productivity and efficiency improvement across all functions in supply chains through improvements in physical and digital connectivity, regulatory compliance processes, technologies, and interfirm collaboration. This will lower the cost of production and transactions as well as mitigate the impact of price and demand fluctuations. 3. Improving access to financial and non-financial services will enable businesses to develop robust processes for managing assets (human capital; financial, social and physical assets; and natural resources) within the context of sustainability. A stronger ecosystem of service providers will foster sustainable development, help businesses to play a greater role in supply chains and obtain a larger share of the value generated. 4. Strengthening the ability of key economic sectors to penetrate diverse and differentiated markets on equitable terms. The participation of businesses in international and domestic growth markets will help to increase investment and trade while generating more jobs and opportunities for which will benefit all actors in the supply chains especially women and marginalised communities. 5. Making the economy resilient to climate change and mitigating environmental degradation without stifling growth.

Proposed enabling services and structure for prosperity in Nepal Centred around four key themes, our proposed interventions for kick-starting economic growth are transformative, build on ongoing projects and are aimed at systematically addressing the constraints faced by SMEs. Adequate and adequately reliable infrastructure, industrial finance, reinvigoration of SEZs and industrial estates, upgrading capacity of SMEs and diversification of markets are critical to catapult the economy into growth mode. Based on the findings of the study and taking into account the above suggested Approach and Objectives, we suggest a set of related but distinct interventions grouped under 11 main work streams, which are suggested in the order of importance mentioned by the respondents. The proposed interventions are transformative as these are aimed at systematically addressing the constraints faced by the firms. The proposed interventions also build on the lessons learned from previous projects.

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Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

A woman entrepreneur who has been able to build back better from the earthquake of 2015 and the COVID-19 pandemic due to the efforts of our private sector development team under the Purnima programme funded by Foreign, Commonwealth and Development Office of the UK and implemented by Mott MacDonald from 2017 to 2022 in Nepal.

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Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

Introduction

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Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

1 Introduction 1.1

Global development context against the backdrop of COVID-19

COVID-19 came as a health and economic shock to the world with developing economies including Nepal being adversely impacted in a number of ways. Financing gap to deliver the Global Goals has risen due to COVID-19. OECD estimates that the annual financing gap to meet Global Goals before the COVID-19 global health crisis was US$2.5 trillion (2014). The outbreak of coronavirus (COVID-19) has magnified the financing gap to achieve the sustainable development goals (SDGs) in developing countries, with threats to SDG progress across all countries. The SDG financing gap could increase by 7% to US$ 4.2 trillion. Aligning 1.1% of US£379 in global finance could fill that gap 4. Public sector alone cannot fill this gap. Private sector action is required. Measures to curb COVID-19 came at a price including reduction in economic activity, demand reduction, low sales, business shutdowns, job losses, household incomes reduced. Unprecedented contraction in the global economy. In June 2020, the World Bank projected that the world economy could shrink by 5.2% 5. According to OECD (2020) the outlook looked grim with the world economy shrinking to 4.5%, impacting inflows of private finance for sustainable development in emerging and developing economies, exceeding the impact of the 2008 Global Financial Crisis by 60%6. Loss of jobs and incomes. In January 2021, ILO estimated that 8.8 per cent of global working hours were lost for the whole of 2020, equivalent to 255 million full-time jobs. This is approximately four times greater than the number of jobs lost during the 2009 global financial crisis. Women have been more affected than men by the pandemic’s labour market disruptions. Globally, employment losses for women stand at 5 per cent, versus 3.9 per cent for men7. Recovery and the ensuing challenges. The global economic recovery is under way but although global GDP has now risen above its pre-pandemic level, the recovery remains uneven with countries emerging from the crisis facing different challenges. The economic and financial effect of the support provided by central banks is also not fully understood due to the unprecedented borrowing and money creation that has taken place in many countries.

https://www.oecd.org/development/global-outlook-on-financing-for-sustainable-development-2021-e3c30a9a-en.htm

COVID-19 to Plunge Global Economy into Worst Recession since World War II (worldbank.org)

The impact of the coronavirus (COVID-19) crisis on development finance (oecd.org)

COVID-19: ILO Monitor – 7th edition: ILO: Uncertain and uneven recovery expected following unprecedented labour market crisis

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Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

1.2

The economy of Nepal and impact of COVID-19

Nepal’s GDP. Nepal’s GDP was estimated at 6.3% in 2018 but COVID-19 impacted the country’s economy adversely. Nepal’s economy is projected to grow by only 0.6 percent in 2021, inching up from an estimated 0.2 percent in 2020 as lockdowns caused by COVID-19 disrupt economic activity, especially tourism, according to the World Bank (2020)8. Informality and Nepal’s economy. Informal businesses make up around 50 percent of enterprises in Nepal and are the main source of income for most of the labour force (more than 80% jobs are created in this informal sector). Within this group, urban informal sector workers and self-employed households in urban areas are more vulnerable than rural households who can fall back on subsistence farming. Most informal firms operate with limited savings, and owners may face the difficult choice of staying home and facing starvation during the lockdown or running their business and risking infection. These scenarios accentuate financial difficulties as well as the spread of COVID199. Migrants and remittances. In 2019, it was estimated that Nepal had around 3.8 million migrants and remittances contributed 28% of GDP. The World Bank estimates that 25% of workers are likely to return to Nepal. Remittances have been a major source to economically stabilize post- conflict communities in Nepal. But, today, while the oil economies in the Gulf region have faced crisis as the price of oil has plummeted, and migrant workers hailing from the developing and underdeveloped countries like Nepal have been repatriated, it has severely impacted the remittance-driven economies like Nepal10. Impact on jobs. The ILO estimates that between 1.6m to 2m jobs disrupted (ILO). Out of this 630,000 jobs for women are at risk. In addition, households have experience loss/no income as a result of the crisis. This situation was exacerbated by the absence of social security net in Nepal 11. Impact on the sectors. Sector wise, tourism, which contributed 8% to the country’s GDP, and enabled 570,000 jobs in 2018 is suffering a 47% reduction. ¾ of tourism employees are informal. Other sectors severely hit by the crisis include manufacturing, with 446,000 jobs disrupted, and construction with 404,000 (ILO). The ILO estimates that 1.4 million home-based workers hit hardest. Almost all are women and are involved in export products12. Text box 1: Last year in 2020, it was very strict lock down that has impacted many small holder farmers and entrepreneurs for their business. Farmers were unable to have access of their products and there was restriction of movement of agricultural inputs and marketing of agricultural outputs. Dr. Hari Bahadur K.C, Joint Secretary, Ministry of Agriculture, Livestock and Development

https://www.worldbank.org/en/news/press-release/2020/10/08/covid-19-impact-on-nepals-economy-hits-hardest-informal-sector

Ibid

Impact of COVID-19 on FDIs, Remittances and Foreign Aids: A Case Study of Nepal - Gaurav Bhattarai, Binita Subedi, 2021 (sagepub.com)

wcms_745439.pdf (ilo.org)

https://www.ilo.org/wcmsp5/groups/public/---asia/---ro-bangkok/---ilo-kathmandu/documents/briefingnote/wcms_745439.pdf

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Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

1.3

Objectives of this study

This study on private sector opportunities in Nepal is part of the “Learn and Improve” agenda of Mott MacDonald, a global engineering, management and development consultancy providing integrated solutions to tackle extreme poverty and inequality. The private sector in Nepal is dominated by a few large family-run businesses, but the bulk of firms are small. Only 18 percent of Nepal’s formal firms have more than 20 employees compared to 37 percent in India and 43 percent in Bangladesh. Estimates of productivity or value added per worker in Nepal are less than half those of Bangladesh and less than a third of India’s 13. Firm entry rates are low. Most firms do not grow much as they age, which suggests that they are not making investments that would increase their productivity or product quality. Very few firms engage in trade or technology transfer with foreign countries 14. Against this backdrop, a shift of economic activities into higher productivity sectors could attract investment, growth, and create jobs for women and men. The overarching objective of the assignment was to provide useful, valid and reliable data for informing the solutions pertaining to the challenges faced by the private sector in Province 2, Lumbini Province, and Karnali Province that would help promote inclusive and green growth in a way that can lead to transformative change, in the context of COVID-19. Specifically, the study identified and assessed: (i) binding constraints faced by the private sector in Nepal, despite a sustained effort to catapult the SMEs toward the growth trajectory; (ii) major opportunities for transformative change; and (iii) enabling services and support structures. The study covered enterprises in the following sectors: (i) agribusiness; (ii) manufacturing; (iii) construction; (iv) tourism; and (v) information and communication technology.

1.4

Methodology

The study was carried out in following sequence and used the following research tools. The study, data collection tools and instruments had a sharp focus on understanding the underlying causes of the binding constraints faced by the private sector. The research design included secondary data review, followed by primary data collection (SME survey and key informant interviews). Findings thereof were shared in a virtual roundtable on 18 August 2021 for feedback and validation with key stakeholders including government of Nepal, industry bodies and development partners. Details are available below. ● Secondary data review. Desk research of studies and reports of projects funded by the Foreign, Commonwealth, and Development Office (FCDO), as well as the work of other development partners in Nepal to identify what worked and did not work and why. The findings were summarised and formed the basis for the development of the questionnaires to respond to the line of enquiry in an incisive manner. ● Primary data collection. A survey of 50 small and medium sized enterprises (SMEs) in agribusiness, manufacturing, construction, tourism, and ICT in Province 2, Lumbini Province, and Karnali Province. Main objective of the survey was to identify the underlying reasons and barriers to growth despite a considerably focused efforts in the past. Identification of respondents was based on both the definitions of the World Bank and Nepal’s Industrial Enterprise Act 2020 (Table 1).

The World Bank, Nepal Development Update, 2019

International Finance Corporation: Creating Markets in Nepal, 2018

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Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

Table 1. Government of Nepal and World Bank definition of small and medium enterprises (SMEs) Size

Industrial Enterprise Act 2020

World Bank

Fixed capital

No. of Employees

Total Assets or Total Sales

Small

Up to NPR 150 million

10 < 50

US$100,000 < $3 million

Medium

NPR 150 million to 500 million

50 – 300

US$3 million < $15 million

•

The enterprise survey. The survey was sent to a list of SMEs provided by the Federation of Nepal Chamber of Commerce and Industry (FNCCI), as well as relevant SMEs found in the District Chamber of Commerce and Industry (DCCI), and other databases. A hyperlink to the survey was also posted on Facebook pages. Follow ups and direct survey were also conducted over the phone. The survey was conducted online using the Kobo toolbox.

•

Key informant interviews. The interviews were used for elaborating and/or vetting survey findings. Breakdown of key informants is shown in Table 2.

Table 2. Breakdown of key informants Category

Number of key informants

SMEs

•

Business membership organizations

Development agencies and programmes

Stakeholder Roundtable. The findings of the study were shared with a group of stakeholders in a virtual roundtable on 18 August to seek early responses from the industry players, government as well as development partners.

Table: Participants of the Virtual Stakeholder Roundtable organised on 18 August 2021 Category

Number of key participants

Government of Nepal (Ministries of Industry, Agriculture, Tourism)

Business membership organizations

Development agencies (CDC (1), DIT (1), FCDO (3), USAID (1), EU (1))

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

esea

econdary research

urvey

ey informant interviews

takeholder roundtable

es econdary research findings of the secondary research feed into the design of the primary research tools Primary research survey focuses on depth instead of breadth. What are the underlying reasons and barriers to growth of MEs despite considerably focused efforts in the past Primary research IIs findings of the secondary research and survey help design refine the research uestions for the ey informant interviews . The survey helps deduce the major themes for IIs focus takeholder roundtable findings of the study are shared with key stakeholders from public, private and development sectors in a virtual roundtable for feedback, validation and way forward

Mott MacDonald

Research Design. The research design is captured in the above infographic.

February 2022

3 anuary 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

Respondents of the Study: Focus Sectors and Provinces

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Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

2 Respondents of the Study: Focus Sectors and Provinces This section provides the contextual background of the enterprise survey respondents, focus provinces, and geographic distribution and density of enterprises. Key takeaways Low density of enterprises in the three provinces, which suggests the lack of depth and diversity of economic bases.

Formal enterprises derived most of their revenue from the domestic market with a significant percentage reliant on spot transactions, which implies weaknesses in supply chain collaboration and integration in global value chains.

Banks were the main sources of funds for working capital, purchase of fixed assets, and business expansion.

Enterprises who used retained earnings for business expansion were generally more than 10 years old and, in the manufacturing, agribusiness, and construction sectors. Tourism businesses in focus provinces appear to be the most dependent on banks for financing needs and, may be most unlikely to grow organically through the use of retained earnings.

Main users of moneylenders were respondents from the construction and manufacturing sectors. These were usually “ uick” loans to address temporary cash flow problems due to delayed payments, unexpected influx of orders or projects.

Economy in the three provinces tended to be dependent on upstream activities, which were not sufficient to generate productive activities that could help increase income and employment.

Economic growth in three provinces was generally narrow and concentrated in a few areas, leaving behind a broader segment of the populace.

The higher the number of enterprises in growth sectors, the lower the poverty incidence. This affirms the role of small and medium enterprises in alleviating poverty.

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Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

2.1

Enterprise landscape in Nepal

This section provides the contextual background of the enterprise survey respondents, focus provinces, and geographic distribution and density of enterprises. 2.1.1

Enterprises in the focus sector

As of the 2018 National Economic Census, the country had 923,356 enterprises and, of which, 308,266 (33%) were located in Province 2, Lumbini, and Karnali (CBS 2019). Among the three focus provinces, Lumbini had the highest number of enterprises across all sectors. The tourism sector accounted for 14% of the total enterprises in Nepal in 2018. The hotels and restaurants in the three provinces comprised 27% of the 130,540 tourism enterprises. Lumbini is a major tourist destination in the country and, as such, had the most number of hotels and restaurants among the three provinces. Agriculture sector. Nepal has 24,229 agribusinesses or just about 3% of the total enterprises, which is relatively low considering that Nepal is an agrarian economy. The three focus provinces had 29% of the agribusinesses with the highest number located Figure 1. Distribution of Tourism enterprises by in Lumbini. province Manufacturing sector enterprises comprised 11% of the total enterprises in the country in 2018. Of the 104,058 manufacturing enterprises, 32% were located in the three provinces. Lumbini had the highest number of manufacturing enterprises among the three provinces.

Figure 2. Distribution of Agribusinesses and Manufacturing businesses by province

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Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

Construction enterprises accounted for less than 1% of the total enterprises in the country. The three provinces had a percentage share of 22% of the total construction enterprises in the country. Among the three provinces, Lumbini had the highest number of construction enterprises. Information & Communication Technology (ICT). Enterprises in ICT sector comprised 0.3% of the total enterprises in the country. About 23% of the ICT enterprises were located in the three provinces. Similar to other sectors, Lumbini had the highest number of ICT enterprises among the three provinces.

Figure 3. Distribution of Construction and ICT enterprises by province

2.1.2

Gender

Women owned businesses. According to the 2018 National Economic Census of the Central Bureau of Statistics, about 30% of the enterprises in Nepal were owned by women (CBS 2021). The greater percentage of women owned enterprises were engaged in the following sectors: (i) wholesale and retail and repair of motor vehicles and motorcycles; (ii) accommodation and food services; and (iii) manufacturing. The wholesale and retail trade, which is generally characterized by low technology and productivity, had the highest number of women-owned enterprises. The female Human Development Index (HDI) value for Nepal is 0.549, compared to 0.619 for males. This results in a Gender Development Index (GDI)15 value of 0.886, which suggests that the degree of gender disparity in human development in Nepal as a whole is not very high. Among the three focus provinces and in the whole country, Province 2 had the highest gender disparity with a GDI of 0.786. The women’s education and income index, respectively, are 19% and 37% lower than those of men. (NPC; UNDP 2020) In terms of Gender Inequality Index (GII)16, which takes into account women’s disadvantages in reproductive health, empowerment, and economic activity, Karnali had the highest level. This was attributed to higher maternal mortality and fertility rates together with the lowest female shares in both secondary education and parliamentary seats. (NPC; UNDP 2020).

The greater the value of the GDI, the lower the gender disparity in human development.

The value of the GII ranges from zero (complete gender equality) to one (extreme gender inequality).

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Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

Table 3. GDI and GII of the seven provinces, 2019 GDI Value

GII Rank

Value

Rank

Nepal

0.886

0.479

Province 1

0.901

0.459

Province 2

0.786

0.503

Bagmati

0.929

0.457

Gandaki

0.896

0.460

Lumbini

0.901

0.474

Karnali

0.902

0.558

Sudur Paschim

0.903

0.522

Rank: 1 – top performer 7 – worst performer Source: (NPC; UNDP 2020)

2.1.3

Informality of businesses

In Nepal, almost half of the total number of enterprises fall in the informal sector by virtue of being unregistered (CBS 2021). This implies the need for support services that would help reduce the informality among enterprises. Formalization of businesses would lead to greater sustainability because of the economic and social benefits that legal visibility would bring. Likewise, informal enterprises are almost always excluded from formal finance mechanisms.

Figure 4. Breakdown of registered and unregistered businesses in Province 2, Lumbini, and Karnali Among the three focus provinces, Province 2 had the highest percentage of unregistered enterprises, based on the National Economic Census 2018. Province 2 had more unregistered enterprises than registered businesses. In Karnali, 49% of the enterprises were registered and the remaining 51% were informal. It was only in Lumbini where the percentage number of registered businesses was higher than unregistered enterprises.

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

2.2

2.2.1

Profile of enterprise respondents

Distribution of respondents by sector and province

Province 2 had the highest number of respondents followed by Lumbini and Karnali. Since the survey was conducted online using the Kobo Toolbox, this may be an indication of use of digital technologies among enterprises. In Lumbini, for example, only 1.3% of the population have access to the internet (MoHP; WHO Nepal 2020). Agribusinesses comprised 30% of the 50 respondents followed by tourism and manufacturing businesses at 26% each. Businesses in the construction and ICT sectors made up 12% and 6% of the respondents, respectively. All of the surveyed enterprises were registered businesses. In both Province 2 and Lumbini, enterprises engaged in manufacturing comprised the highest percentage of respondents. In Karnali, a greater percentage of the respondents were in the tourism sector. Table 4. Breakdown of respondents by sector and province Sector

Percentage number of respondents Province 2

Agribusiness

26%

Construction

26%

ICT

Lumbini

Karnali

29%

% share: sector

40%

30% 12%

12%

Manufacturing

30%

35%

26%

Tourism

13%

24%

60%

26%

% share: province

46%

34%

20%

100%

2.2.2

Sex of business owner/s

Only 6% of the respondents were solely women owned enterprises. On the other hand, men-owned enterprises accounted for 52% of the respondents. Enterprises jointly owned by women and men comprised 42% of the respondents. Table 5. Breakdown of respondents by sex of business owner Sector

Percentage number of respondents: Sex of owner of enterprises Women

Men

Women and men

Agribusiness

13%

53%

33%

Construction

67%

33%

ICT

100%

Manufacturing

77%

15%

Tourism

31%

69%

Total

52%

42%

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Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

2.2.3

Years in business

Among agribusinesses, 81% had been in business from 1 to 10 years. Construction enterprises had been in operations for more than 10 years. The ICT sector is relatively nascent and, as such, all respondents were between 1 to 10 years old. Age of manufacturing enterprises ranged from 6 years to more than 20 years. Respondents from the tourism sector consisted of newly established enterprises and those who had been in the business for more than 20 years. Table 6. Breakdown of respondents by number of years in operation Number of years in operation

Percentage number of respondents Agribusiness

Construction

1 - 5 years

47%

67%

31%

26%

6 - 10 years

27%

33%

23%

22%

11 - 15 years

50%

38%

20%

16 -20 years

23%

31%

16%

Above 20 years

50%

15%

14%

Less than 1 year

2.2.4

ICT

Manufacturing

Tourism

Total

Market orientation

Respondents from the agribusinesses and manufacturing sectors sold mainly their products to other companies while construction businesses had the government as its main client. ICT companies sold their services primarily to direct consumers/households. A greater percentage of the sales of tourism companies were generated from domestic tourists. A salient feature of Nepal’s tourism sector is the seasonality it faces due to the weather conditions. The peak seasons for tourism are March/April and October/November. The industry is generally not able to capture tourists for other activities during the off-seasons when mountaineering or trekking are not feasible. Table 7. Breakdown of respondents by type of buyers/clientele Sector

Percentage number of respondents by type of buyers (multiple answers) Direct consumers

Companies

Government

No answer

Agribusiness

27%

73%

Construction

17%

83%

ICT

67%

33%

Manufacturing

31%

69%

Tourism

69%

15%

Total

40%

46%

14%

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

Domestic sales. Of the 50 respondents, 96% sold their products and/or services mainly in the domestic market. Of these, 50% catered to the national market while the remaining 46% sold their products/services within the province. Nepal has relatively a small market size which is further aggravated by the limited connectivity between and among provinces. This implies that growth in domestic demand will most likely be modest and through import substitution. Export. Respondents intermittently exported their products to India. Only 4% of enterprises consisting of agribusinesses derived their sales primarily through export trade. Main export markets were India, European countries, and the United States. Key products exported were dried/ sliced ginger, cardamom, turmeric powder, and other spices.

Figure 5. Breakdown of respondents by major market

One of the exporters was a woman-owned enterprise. The other woman-owned enterprise also exported to India intermittently. It is said that due to migration, many women have been left behind as the head of the household and they have certain capital. An increasing number of these women have set up their own businesses and can be further developed and leveraged to strengthen Nepal’s integration in regional and global markets. Women are also the primary producers of about half of the 19 products prioritized in the National Trade Integration Strategy.

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

2.2.5

Sources of working capital

Across all sectors, main source of working capital was loans from banks. It should, however, be noted that only 87% and 62% from the agribusiness and manufacturing sectors, respectively, used loans from banks for their working capital. Only 18% of the respondents with none coming from the construction and tourism said that they used retained earnings for their working capital. This may be an indication that majority of the enterprises have low capital base and retained earnings making them more vulnerable to economic shocks such as extended lockdowns due to the COVID-19 crisis.

es e e

a s

ap al a

e a e ea

l ple a s e s e

s p

s ess

Figure 6. Sources of working capital

February 2022

aea

sae

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

2.2.6

Sources of funds for purchase of fixed assets

About 86% of the respondents used loans from banks for the purchase of fixed assets. All of the respondents in the tourism sector used bank loans to finance fixed assets. Among the five sectors, the construction sector had the least percentage of respondents who used bank loans for purchase of fixed assets followed by manufacturing and agribusiness sectors.

es e e

s p a

e a e ea

ase

e asse s s

l ple a s e s s p

aea

sa e

s ess 0%

20%

60%

80%

100%

120%

Figure 7. Sources of funds for purchase of fixed assets

All of the respondents in the ICT sector used bank loans and retained earnings in the purchase of fixed assets. The construction sector had the second highest percentage of respondents who used retained earnings to purchase fixed assets followed by manufacturing and agribusinesses.

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

2.2.7

Sources of funds for business expansion

Majority of the respondents funded their business expansion through bank loans followed by retained earnings. Enterprises in the manufacturing, agribusiness, and construction who indicated that they used retained earnings to finance business expansion were in the business for more than 10 years.

Based on the responses, it can be inferred that the tourism sector is the most dependent on bank loans to grow their businesses, purchase fix assets, and for working capital. The tourism enterprises are the most unlikely to grow organically through the use of retained earnings.

es e

s a

s p

s ess e pa s aea

sa e

l ple a s e s e

e a e ea

s ess

Figure 8. Sources of funds for business expansion

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Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

2.2.8

Providers of financial services

Respondents used multiple sources of finance rather than just one provider. About 96% of the respondents availed of financial services from the banks. The second top provider of financial services was non-bank financial institutions at 66% followed by moneylenders at 50%. Main users of moneylenders were respondents from the construction and manufacturing sectors. These were usually “ uick” loans to address temporary cash flow problems due to delayed payments, unexpected influx of orders or projects.

es a

s ess

a a

al se e

es e

l ple a s e s

ap al

e le

e s

Figure 9. Providers of financial services Venture capital was used mainly by respondents from the manufacturing and construction sectors. Microfinance institutions (MFIs), on the other hand, were utilized mainly by agribusinesses and a few from the manufacturing and tourism sectors. None of the respondents from the ICT and construction sectors were clients of MFIs. Although MFIs have higher coverage across the country, their loan size is too low for many of the small and medium enterprises.

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

Economic Profile of Focus Provinces

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Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

3 Economic profile of focus provinces This section provides the economic profile of the focus provinces, geographic distribution and density of enterprises. Key takeaways The three focus provinces contributed 32% of the GDP. Province 2 and Lumbini had a 14% share each while Karnali contributed 4%, which is the lowest among the seven provinces.

Agriculture and forestry is the main contributor to GDP in Province 2, Lumbini and Karnali followed by wholesale and retail trade and education

The eight districts of Province 2 are linked with the Indian Territory.

Wide disparity in per capita income among the eight districts in Province 2 indicates that that the economic benefits of the high output and gross value added are concentrated in just a few areas.

Lumbini has both temperate and tropical climates as well as irrigation facilities. The major crops are paddy, mustard, wheat, maize, sugarcane, vegetables, potato, lentils and cotton. Lumbini is self-sufficient in milk, cereal crops and pulses.

Lumbini has a special economic zone (SEZ). Locators in industrial estates can lease an industrial shed or warehouse.

Prior to the Covid-19 crisis, Lumbini had an average of 1.5 million visitors per year with about 75% of domestic tourists. It is one of the major pilgrimage destinations.

Karnali is the poorest province and is developmentally challenged because of complex topography and limited road connectivity. The province has the highest level of multidimensional poverty index.

Karnali is a producer of fruits like apples, oranges, pomegranate and walnut which are traded fresh all over the country. Maize

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

Federalisation. In 2015, Nepal shifted from a unitary system to a 3-tiered government that includes a federal government, seven provincial governments, 753 village and municipal levels governments, and 6,743 hamlets. The goal is to decentralize power and create opportunities for economic and political growth by overcoming various internal and external challenges. The country is federated into seven provinces. The Gross Domestic Product GDP at producer’s price of Nepal in 2019 20 amounted to Nepalese Rupee (Rs) 3,767.04 billion (MoF 2020). The three focus provinces contributed 32% of the GDP. Province 2 and Lumbini had a 14% share each while Karnali contributed 4%, which was the lowest among the seven provinces. Bagmati is the most developed province relative to the other provinces.

Figure 10. Percentage contribution of each province to GDP, 2019/20

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Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

3.1

Province 2 at a glance

Table 8. Snapshot socio-economic profile of Province 2 Province 2: Socio-economic indicators Contribution to national GDP 2019/20 (at base price); ranked 4th

13.8%

Percentage contribution of sectors to provincial GDP Agriculture and forestry

37.7%

Wholesale and retail trade

12.2%

Education

9.2%

Manufacturing

5.4%

Construction

5.2%

Hotels and restaurants

0.5%

Multidimensional Poverty Level (%) – 2nd to the highest Human Development Index

47.9% 0.510

Sources: (MoF 2020); (IIDS 2019) (PPPC 2020) (NPC 2021) Basic facts. Province 2 is about 9,661 s uare kilometres in size, which is about 6.6% of country’s total area. It consists of eight terai (plain) districts with a total population of 5,404,145 or about 20.4% of the total population as of the 2011 census. It is the most densely populated province in Nepal at 559 person per square kilometre compared to the national density of 180 persons per square kilometre (MoF 2020). GDP. The GDP of the province increased from Rs 471,120 million in 2018/19 to Rs 519,162 million in 2019/20 (MoF 2020). Top contributors to provincial GDP in 2019/20 were: (i) agriculture and forestry – 37.69%; (ii) wholesale and retail trade – 12.23%; and (iii) education – 9.17%. Percentage contribution of manufacturing and construction sectors to provincial GDP in 2019/20 was at 5.36% and 5.18%, respectively. Hotels and restaurants contributed less than 1% to the GDP. Transportation, storage, and communication contributed 7.61% to provincial GDP.

Figure 11. Percentage contribution to GDP of Province 2 by sector, 2018/19 and 2019/20

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Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

The number of enterprises in Province 2 by focus sector as of 2018 is outlined in Table 9. Percentage share of the province to total number of enterprises was less than 10% except for manufacturing. The relatively low density of formal enterprises in growth sectors sets limitations to the diversification and expansion of the economic base. Table 9. Number of enterprises located in Province 2 by focus sector, 2018 Sector Agriculture Manufacturing Construction Tourism ICT

Number of enterprises located in Province 2

% share to total number of enterprises (national)

1,231

12,654

12%

110

10,813

246

Source: (CBS 2019)

Province 2 has a sub-tropical to tropical climate and the most fertile plain area are suitable for agriculture, especially for growing major cereal, oilseed, and pulse crops and commercial tropical and sub-tropical fruits and vegetables. It is a major producer of rice, sugarcane, and wheat as well as the largest producer of farmed fish. Province 2 is engaged mainly in the primary production and trading rather than in value added processing. As can be seen in Table 10, only 5% of the agribusinesses in the country were located in Province 2, which was the lowest among the seven provinces. Industrial activity mainly involves the processing of agricultural produce including jute, sugarcane, tobacco, and grain. Proximity with India. The eight districts ((Bara, Parsa, Rautahat, Sarlahi, Mahottari, Dhanusa, Siraha and Saptari) in the province are linked with the Indian Territory. An important city in Province 2 is Birgunj Metropolitan City, which is dubbed as the “commercial capital of Nepal” as far as trade with India is concerned. Almost all of the country’s trade with India is via Birgunj and the Indian town of Raxaul. Products are transported to and from India via the dry port in Birgunj. In the manufacturing sector, the province had 12,654 enterprises or 12% of the total number of manufacturing companies in the country in 2018. Historically, the province has the highest GDP output per province in manufacturing. The Birgunj-Pathlaiya industrial corridor produces the following products: (i) food and beverages; (ii) tobacco/cigarettes; (iii) soap; (iv) industrial and consumer goods - fabricated metal products, nonmetallic mineral products, basic metals, cement, plastic and rubber products, textiles, apparel, furniture, electronics, leather and allied products. More than 50% of the production in this corridor is exported to India. The province has one industrial estate, the Gajendra Narayan Singh Industrial Estate, which is located in Saptari District. The estate can accommodate ten enterprises but currently has five locators. All the five enterprises have stopped operations due to failure of the estate management to address the following: (i) a separate feeder for power supply inside the industrial area; (ii) immediate construction of compound wall damaged by flood in 2017; (iii) arrangement of deep boring for clean drinking water; and (iv) arrangement of industrial security force (Setopati 2018). In the construction sector, Province 2 had 110 companies in 2018. Although the Province does not have its own limestone deposits, it has cement factories which source their raw material from neighbouring districts in Province 1 and Bagmati. Birgunj is the centre of tourism of Province 2. Visitors consist of domestic tourists and Indians. Hotels are mainly three stars. Other religious tourism sites in Province 2 are the Janaki Temple and Ram

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

Temple in Dhanusa, Janakpur Dham. These are among the holy places for Hindus. The province also has the Parsa National Park, which is its only ecological tourism site. The province had 10,813 enterprises in 2018. The 2020 provincial planning document described the flow and operation of tourism sector as unorganized and lacked destination management (PPPC 2020). There is no institutional mechanism within the province to coordinate product development and encourage private investment in tourism facilities. Likewise, coordination between tour operators and other supply chain actors is weak resulting to poor marketing. Province 2 had 246 enterprises in the ICT sector in 2018. In 2020, only 0.5% of the population had access to the internet (MoHP; WHO 2020). Similarly, 2.5% had access to landline telephone while 55.5% had access to mobile phone service. Impact of climate change. A baseline study conducted in 2020 by the Province Policy and Planning Commission (PPPC) with support from the Economic Policy Incubator, enumerated the following observed changes in climate condition in Province 2: (PPPC 2020) (i) shift or variability of seasonal concentration of rain with a reduction of winter rainfall such as significant increase in the pre‐monsoon rains and mixed trends in the monsoon seasons across districts; and b) general increase of maximum temperatures in pre-monsoon and monsoon seasons. The province has increasingly experienced torrential rains, erratic unseasonal rainfall patterns with impact on the harvesting seasons, crop disease, unprecedented flooding and heat waves. The same report also indicated that province is exposed to a range of natural geo‐climatic hazards including floods, droughts, earthquakes and landslides. Disaster risks are exacerbated by the interaction of these hazards with socio‐economic, infrastructure, environmental vulnerabilities, as well as human and climate‐induced stressors, such as over‐exploitation of natural resources (PPPC 2020). Per capita income. Despite being one of the top three industrial and agricultural hubs in Nepal, the per capita income in 2019/20 was at US$ 992. Bara registered the highest per capita income at US$ 1,480 while Mahottari had the lowest at US$ 681 (PPPC 2020). The wide disparity in per capita income among the eight districts in the province indicates that that the economic benefits of the high output and gross value added are concentrated in just a few areas. Human Development Index. In 2019, the province had the lowest human development index (HDI) of 0.510 compared to the national average of 0.587 (NPC; UNDP 2020). Close to half of the residents in Province 2 lived in multi-dimensional poverty in 2019. It also has the lowest literacy rate.

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

3.2

Lumbini at a glance

Basic facts. Lumbini covers an area of 22,288 sq. km or 15.1% of Nepal. It has five core terai districts, one inner terai and six other hill districts. It has a population of 4,499,272 and a density of 252 persons per square km. HDI in 2019 was 0.563 (NPC; UNDP 2020), which was lower than the national average. It ranked fourth among the seven provinces. Table 10. Snapshot socio-economic profile of Lumbini Province Lumbini: Socio-economic indicators Contribution to national GDP 2019/20 (at base price); ranked 3 rd

14.2%

Percentage contribution of sectors to provincial GDP Agriculture and forestry

33.0%

Wholesale and retail trade

9.9%

Education

9.6%

Construction

8.9%

Manufacturing

5.8%

Hotels and restaurants

1.2%

Multidimensional Poverty Level Human development index

29.9% 0.563

Sources: (MoF 2020); (IIDS 2019)

GDP. The GDP of the province increased from Rs 490,578 million in 2018/19 to Rs 534,111 million in 2019/20. Top contributors to provincial GDP in 2019/20 were: (i) agriculture and forestry – 32.98%; (ii) wholesale and retail trade – 9.88%; and (iii) education – 9.55%. Construction contributed 8.89% to GDP while manufacturing made up 5.83%. Hotels and restaurants accounted for 1.18% of the GDP. (MoF 2020).

Figure 12. Percentage contribution by sector to GDP of Lumbini Province, 2018/19 and 2019/20

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The number of enterprises. Table 11 shows the number of enterprises in Lumbini for each of the focus sectors. Except in the construction sector, Lumbini accounted for more than 10% of the total enterprises in the country. Table 11. Number of enterprises per sector in Lumbini Sector

Number of enterprises located in Province 2

Agriculture Manufacturing

4,087

17%

16,170

16%

143

18,715

14%

303

11%

Construction Tourism

% share to total number of enterprises (national)

ICT Source: (CBS 2019)

Agriculture. The province has both temperate and tropical climates as well as irrigation facilities. In 2018, it had 4,087 agribusinesses. The major crops are paddy, mustard, wheat, maize, sugarcane, vegetables, potato, lentils and cotton. Lumbini is self-sufficient in milk, cereal crops and pulses. Manufacturing. In 2018, the province had 16,170 manufacturing companies. Its vast plains and proximity to India makes the province an attractive location for industries. Likewise, its central location makes it ideal for enterprises targeting to serve the national market. The province has industrial estates and a special economic zone (SEZ). Locators in industrial estates can lease an industrial shed or warehouse. Table 12. Industrial estates in Lumbini Province Location

Year established

Number of workers

Number of enterprises

Industrial estates Nepalgunj

1973

992

Banke District Butwal Rupandehi

33 operating 2 closed

1976

1,859

65 operating 3 closed

Source: IDML 2018 (Khatri 2018)

The Special Economic Zone (SEZ) is solely for export-oriented industries. Locators in SEZs are eligible for 50% tax exemption for the first five years. The Bhairahawa SEZ located in Rupandehi district is the only SEZ in the country that has been established but has some difficulties in attracting locators. Key factors that deter companies from locating in the SEZ are: (i) lack of basic infrastructure (e.g., dedicated electricity, water supply) ; (ii) expensive land lease; and (iii) high export sales percentage requirement (Samiti, Bhairahawa SEZ not in full operation even after 20 years of launch 2021). As of 2019, only one company, Shakti Minerals, has been able to construct its factory and start production within the Bhairahawa SEZ. Another issue raised by potential investors is the poor coordination among government agencies. Contrary to the stipulations in the SEZ Act, for example, that industries can import plants, machinery

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

parts and equipment against the bank guarantee equivalent to prevailing custom duties, investors are still re uired to deposit ‘refundable amount’ (ADB 2019). Tourism. Prior to the Covid-19 crisis, the province had an average of 1.5 million visitors per year with about 75% of domestic tourists. It is one of the major pilgrimage destinations. Major attractions include Lumbini (birthplace of Buddha), Tilaurakot, Dhorpatan, Bardia National Park, Swargadwari Temple, Bageshwori Temple, and Rani Mahal. An international airport is currently under construction. The province has 18,715 enterprises engaged in tourism activities. Impact of climate change. During the recent years, the Lumbini Province has increasingly experienced floods, landslides, earthquakes, epidemics, fires, lightning strikes, and wind and hail-storms. Of these hazards, floods and landslides are the most frequent and have the greatest impact on people's lives and livelihoods. Lumbini also lies in a seismically active zone and has a high probability of earthquake risk. (Gautam, et al. 2019)

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

3.3

Karnali Province at a glance

Basic Facts. The Karnali Province has an area of 30,211 square kilometres, which is about 21.6% of the total area of the country. The province is both the largest and least populated province of the country. Population density is about 60 persons per square kilometre. Table 13. Snapshot socio-economic profile of Karnali Province Karnali: Socio-economic indicators Contribution to national GDP 2019/20 (at base price); ranked 3rd

Percentage contribution of sectors to provincial GDP Agriculture and forestry Wholesale and retail trade Education

34.2% 5.6% 13.9%

Construction

9.8%

Manufacturing

0.9%

Hotels and restaurants

1.9%

Multidimensional Poverty Level - the highest among 7 provinces Human development index

51.2% 0.538

Sources: (MoF 2020); (IIDS 2019)

GDP. The GDP (at producer price) increased from Rs 143,779 million in 2018/19 to Rs 160.738 million in 2019/20. Top contributors to GDP in 2019/20 were: (i) agriculture – 34.17%; (ii) education – 13.94%; and (iii) other community, social and personal service activities – 11.03%. Construction contributed 9.84% to GDP. Manufacturing and tourism sectors contributed 0.88% and 1.88%, respectively. (MoF 2020).

Figure 13. Percentage contribution by sector to GDP of Karnali Province, 2018/19 & 2019/20

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Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

Human Development Index. The HDI in 2019 was 0.538 (NPC; UNDP 2020), which was the 2nd lowest in the country. The province is the poorest and is developmentally challenged because of complex topography and limited road connectivity. About half of the population live in remote areas with limited access to basic infrastructure and service facilities. Number of enterprises. The province has the lowest number of enterprises among all the provinces. As can be gleaned in Table 14, Karnali accounted for less than 10% of the total enterprises in all the focus sectors. Table 14. Number of enterprises by sector in Karnali Province Sector

Number of enterprises located in Province 2

% share to total number of enterprises (national)

Agriculture

1,590

Manufacturing

4,428

108

6,235

Construction Tourism ICT Source: (CBS 2019)

Agriculture. The province is a producer of fruits like apples, oranges, pomegranate and walnut which are traded fresh all over the country. Maize, barley, wheat, millet, and paddy are the staple food crops but generally does not produce enough to cover local needs. The special paddy crop known as “Jumli Marsi‘ is the very popular breed of paddy which is produced in umla. It also grows mustard, soybean, ginger, and hot chili. Owing to weather conditions, cultivation activities are limited to one crop per year or in optimal conditions, three crops in two years in some of the districts of this province. The medicinal and aromatic plants are major produce that sustain economy of many people (DVN 2018). Only about 10% of the agricultural land is irrigated (KPPC 2020). The province has 1,590 agribusinesses. Manufacturing. The province had 4,428 manufacturing enterprises. There is little value-added processing activities in the province. Aside from an insufficient supply base of raw materials, , the province does not have direct access to India and has some of the most remote locations in the country that are better connected to regions in Tibet than in Nepal. The Birendranaga Industrial Estate in Surkhet District, which was established in 1981, has 22 active enterprises. During the past years, some of the locators have stopped operations due to frequent power outages. The challenging topography and lack of transport infrastructure hinder the development of a robust manufacturing sector and undermine price competitiveness in both domestic and export markets. Tourism. Karnali is host to the pristine and underexplored Himalaya within Karnali (including Rara National Park), coupled with the gateway to Kailash Mansorabar which attract international tourists and pilgrims. However, the province lacks basic infrastructure to judiciously utilize its natural assets. It had 6,235 tourism enterprises in 2018. The province has enormous hydro‐power generation capacity of approximately 18,000 MW which would enable it to become a net exporter of energy (KPPC 2020). However, water levels appear to be fluctuating which can be a threat to viability of hydropower projects in the medium term.

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Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

Impact of climate change. There has been increasing incidences of torrential rains and flooding as well as landslides in the province. Drought is also a key problem in the province. Infrastructure including residential houses are generally not disaster resistant. Poverty and vulnerability. The province has the highest level of multi-dimensional poverty index. Only about 65% the households have drinking water pipe facility and 22% percent have electricity facility.

The Governor of Nepal Rastra Bank appreciating the work for Access to Finance by the Purnima programme (2017 to 2022) funded by FCDO, UK and implemented by Mott MacDonald.

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

Impact of Measures Undertaken to Curb COVID-19

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

4 Impact of Measures Undertaken to Curb COVID-19 After three consecutive years of over six percent GDP growth, the country’s economy contracted by 2.1% in 202017. This decline in the GDP was mainly due to movement restrictions and lockdowns imposed by the government to contain the spread of the COVID-19 infection. Other factors that contributed to the decline in the country’s economy even prior to the pandemic included a delayed monsoon, outbreak of armyworms, tightening domestic credit conditions, continued low execution rates of public investment projects, deceleration in remittances growth and slowdown in tourism receipts. This section describes the impact of COVID-19 movement restrictions on sales and employment. It also provides insights on characteristics that seem to make companies and supply chains more vulnerable to the shocks brought about by the COVID-19 crisis.

Key takeaways Except in the ICT sector, the lockdown and movement restriction caused a decline in sales and employment across all sectors, albeit unevenly. Shocks experienced by companies resulting to decline in income and number of workers can be categorized as: (i) demand shocks; (ii) supply shocks; and (iii) external shocks external shocks (e.g., global factors such as international tourist arrivals). Companies (e.g., construction and manufacturing) that were highly dependent on India for materials, equipment, and labour experienced the highest decline in sales due to supply chain disruption than those who sourced locally. Enterprises with established relationships with suppliers and customers as opposed to those who relied on spot transactions were able to resume operations more quickly as soon as movement restrictions were eased. The limited retained earnings among enterprises (e.g., tourism enterprises with seasonal operations) compounded by difficulties in accessing affordable credit increased the vulnerability to adverse shocks to revenues. The lack of facilities for intermediate processing among upstream actors in the agriculture sector aggravated the impact of movement restrictions across the whole chain. The crisis appeared to have accelerated Nepal’s digital transformation and e-commerce agenda. The pandemic emphasizes the importance of building business resilience in three key aspects (KPMG 2020) : (i) financial resilience - the ability to withstand the financial impact on liquidity, income, and assets; (ii) operational resilience - the ability to withstand operational shocks and continue to deliver core business; and (iii) commercial resilience - the ability to respond to changing market and consumer pressures.

https://www.worldbank.org/en/country/nepal/overview#1

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Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

Text box 2: Main initiated Government interventions have been through government budget, monetary policies and sectoral policies. … MEs sector has been hardly hit by the COVID, specifically in the sector of production and supply of skills labour, operationalisation the market and overall supply chain management. Measures included waving of taxes, relaxing of loan repayment, survey and close coordination with local government to minimize impact of COVID. Mr. Ekdev Adhikari, Under Secretary, Ministry of Industry, Commerce and Supplies (at the Virtual Roundtable on 18 august 2021, organised by Mott MacDonald)

4.1

Agribusiness: impact of measures taken to curb COVID-19

Impact on sales. The annual sales of respondents in 2020 was lower compared to 2019. In 2019, about 53% of agribusinesses had income “above U $ 1 million but less than U $ 3 million” and 7% said that income was between “U $ 3 million but less than U $ 15 million.” In 2020, only 7% of the agribusinesses had income “above U $ 1 million but less than U $ 3 million”. All the rest had income between “U $ 100,000 and U $ 1 million.” Respondents who indicated income less than U $ 100,000 in 2017 were able though to sustain their graduation to income between “U $ 100,000 and U $ 1 million” even in the midst of COVID-19 lockdowns.

Figure 14. Breakdown of agribusiness respondents by annual sales: 2017, 2019, and 2020 Impact on workers and jobs. About 60% of the respondents indicated that they had to reduce their number of workers due to reduced activities and, consequently, income. The cut in the number of workers though was not massive as can be seen in Figure 11. In a survey conducted by Asia Foundation, average reduction in number of workers in agribusinesses as of 1 st quarter of 2021 was about 11% (Asia Foundation 2021).

Figure 15. Breakdown of agribusiness respondents by number of workers: 2017 and 2021

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

Agriculture and forestry are the main contributor to GDP in Province 2, Lumbini and Karnali. Major shocks and disruptions faced by the agribusinesses due to COVID-19 related measures led to decline in sales and workers. This resulted from the decline in demand, difficulties in sourcing raw materials, high post-harvest losses, high operational cost, lack of capital. The lack of facilities for intermediate processing among upstream actors in the agriculture sector aggravated the impact of movement restrictions across the whole chain.

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

Major shocks and disruptions faced by agribusinesses resulting to decline in sales and workers included the following: ● Difficulties in sourcing raw materials. Rice mills, for example, experienced limited paddy stock. Yield of many of the agricultural crops especially of staple food crops fell due to disruptions in input supply chains particularly for imported materials and lack of cash among farmers to buy inputs. The Federal Ministry of Agriculture and Livestock Development created “rapid response teams” at different administrative levels to provide services to farmers to tackle their immediate problems in marketing and input supply, though they have not been as effective as planned because of lack of vertical and horizontal coordination with other related Ministries, especially the Ministry of Health and Population and the Ministry of Home Affairs (Adhikari, et al. 2020). Information flow between farmers and agribusinesses was also weak resulting to unsold produce or harvest while agribusinesses lacked the supply. Fragmented supply chains increase vulnerabilities to shocks as well as hinder market competitiveness improvement. ● Decrease in demand. Agrovets indicated a 60-80 percentage decrease in sales (Winrock 2020). This was mainly due to the decrease in the number of customers visiting the agrovet to buy inputs and the limited supply of agri-inputs available. Farmers also did not have the money to buy inputs as they were not able to sell their produce or got low prices for their harvest. Traders experienced 70-90% reduction in sales due to shutdown of restaurants and hotels as well as reduced spending among households (Winrock 2020) ● High postharvest losses/Deterioration of product quality. Many of the enterprises faced difficulties in accessing markets due to movement restrictions and slowdown of consumer demand. Enterprises with perishable products were the most affected. This pointed out the need to improve processing and storage technologies to extend shelf life. Vegetables, poultry, and dairy were the hardest hit subsectors (Joshi, et al. 2021). Other affected subsectors were fishery, tea, and banana. During the past months, an increasing number of farmers and enterprises invested in processing of dairy and vegetables as well as improved storage technologies to cope with the impact of COVID-19 quarantine measures (Climate & Development Knowledge Network 2020). ● High operational costs. Limited trading hours and transportation significantly increased overhead costs compounded by low and slow turnover of stocks. ● Lack of capital. There has been a reduced inflow of remittances, which is the main source of financing for many of the agribusinesses. Subsidies and discounted interest on interest loans may not be sufficient to address credit constraints faced by agribusinesses (Sinclair and Russell 2020). This signifies the need for more innovative and affordable financial products to assist agribusinesses to recover from business downturn during the COVID-19 crisis. Adoption of digital tools and technology is a positive change catalysed by COVID-19. On the other hand, the COVID-19 crisis has helped foster the adoption and use of digital technologies in the agriculture sector. Farmers' associations and local leaders became more aware of online platforms that provided information on sowing, planting, intercultural operations, harvesting and post-harvest processes. Online marketing is also increasingly being utilized by farmer associations and agribusinesses. (Climate & Development Knowledge Network 2020) Text box 3: "We have been collecting and selling milk from local farmers for two years as per the agreement with milk buyers. Farmers are now being harassed by buyers for not paying on time, making many excuses, and saying they have problems buying milk. Due to a lack of technical knowledge and lack of proper management of marketing, we have run the dairy at a loss. This has caused frustration among the local dairy farmers." Kamal GC , Manager, Gutu Dairy , Kranali Province, Nepal

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

4.2

Manufacturing sector: impact of measures taken to curb COVID-19

Impact on sales. Annual sales of most of the respondents went down to the 2017 level. Businesses struggled to meet their operation cost. According to the World Bank report, industrial capacity utilization dropped from a pre-COVID baseline of 75% to 80% to 46% in June 2020 (World Bank 2021). The Federation of Handicraft Associations of Nepal (FHAN) reported a 70-80 percent fall in exports and an over 80 percent decline in domestic sales due to the 2020 COVID-19 lockdowns. A number of handicraft shops closed down permanently (New Business Age 2021).

Figure 16. Breakdown of respondents in manufacturing sector by annual sales: 2017, 2019 & 2020

Impact on workers and jobs. Ninety-two percent of the respondents indicated that they terminated workers as a result of slowdown in business. The reduction in workers was mainly among enterprises with less than 50 workers prior to the start of the COVID-19 crisis. Daily wage workers were the most vulnerable to income and food shocks especially that the country had a weak social protection system. The Asia Foundation survey results showed an average of 26% decrease in number of workers as a result of the COVID-19 lockdown (Asia Foundation 2021).

Figure 17. Breakdown of respondents in manufacturing sector by number of workers, 2017 & 2021

The following were the key disruptions and shocks experienced by the manufacturing sector, which led to decline in sales and number of workers: ● Decrease in demand/customers. Consumer spending went down with non-essential goods most affected. The very low number of tourists severely affected manufacturers of handicrafts and souvenir products ● Difficulties in sourcing materials. Enterprises who used a significant percentage of imported raw materials were more severely affected by the lockdowns than those who depended on local inputs. The COVID 19 crisis highlighted the lack of resilient supply networks.

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

4.3

Tourism sector: impact of measures taken to curb COVID-19

Impact on sales. All of the respondents had sales between “U $ 100,000 and U $ 1 million” in 2020. About 8% of the respondents indicated an increase in isales in 2020 over 2019 while 69% reported a decline in revenue. About 23% of the respondents were in the same isales level as in 2019.

Figure 18. Breakdown of respondents in the Tourism Sector by annual sales: 2017, 2019, and 2020 Reduction in GDP contribution. Although there were a few respondents who were able to quickly shift their marketing to target domestic tourists and, thus, were able to sustain or increase their revenues in 2020 over 2019 figures, the general trend was a decline in sales. Contribution of the tourism sector to the gross domestic product (GDP) decreased from US$ 2,089 million in 2019 to US$ 1,114.7 million in 2020 (WTTC 2021) or a decline of 47%. Impact on workers and jobs. All of the respondents said that they cut down the number of employees. Informal and seasonal workers were among the first who lost their jobs. Permanent employees faced either pay cuts or an unpaid leave. According to the World Travel and Tourism Council, 207,000 workers in tourism establishments in Nepal lost their jobs in 2020. Number of workers employed in the tourism sector decreased from 1.042 million in 2019 to 0.835 million in 2020 (WTTC 2021) or a decline of 20%.

Figure 19. Breakdown of respondents in the Tourism Sector by number of workers, 2017 & 2021

The following were the key disruptions and shocks experienced by the tourism industry, which led to decline in sales and number of workers:

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

● Decline in tourist arrival. Number of international tourists decreased from 1.19 million in 2019 to 230,000 in 2020. Rate and strength of business recovery will be tied to the ability to provide assurances and confidence to the public that traveling to Nepal is safe and with minimal risk of getting infected with COVID-19 in addition to delivery of tourism products and services that match the demand of the travel market. ● Decline in tourist spending. Total tourist spending in 2020 was 51% lower than 2019 figures. It should also be noted that during the last five years, the tourism industry generated more revenue from domestic tourists than from foreign tourists. Percentage share of tourism receipts from domestic tourists increased from 57% in 2019 to 73% in 2020. The COVID-19 crisis has further driven home the importance of promoting domestic tourism to improve resilience of the industry.

Figure 20. International and domestic visitor spending (in US$ million) in Nepal: 2019 and 2020 ● Limited financial reserves. A key challenge faced by tourism enterprises is sustaining their cash flow to cover cost of operations. Many of enterprises in the tourism industry have limited retained earnings to survive economic shocks (Sinclair and Russell 2020). ● Debt burden due to cancellation of Visit Nepal 2020. In anticipation of the Visit Nepal 2020 programme of the government which targeted 2 million international tourist arrivals, businesses in the tourism industry invested heavily in infrastructure financed through government loans. Many of the enterprises are facing difficulties in paying back their loan.

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

The tourism sector, which contributed 8% to the country’s GDP and enabled 570,000 jobs in 2018, is suffering a 47% reduction in profits because of the measures adopted to curb the spread of COVID19. The key disruptions and shocks experienced by the tourism industry which led to decline in sales and workers include decline in tourist arrival, decline in tourist spending, limited financial services, cancellation of Visit Nepal 2020 and the resulting debt burden on the small businesses.

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

4.4

Construction sector: impact of measures taken to curb COVID-19

Impact on sales. All of the respondents reported that their income declined in 2020 due to the COVID19 lockdown. About 18% said that decline in income was not so steep since government allowed them to continue work if they can provide on-site housing for workers. For majority of the respondents, income in 2020 was more or less at the same level as in 2017.

Figure 21. Breakdown of respondents in the Construction Sector: 2017, 2019, and 2020

Impact on workers and jobs. Respondents reduced their number of workers when the lockdown was imposed. Many of the construction workers also opted to go home to their villages. The construction firms retained their permanent workers. During the 2020 lockdown, estimated number of construction workers in Nepal that were displaced was about 1.33 million (The Asia Foundation 2021).

Figure 22. Breakdown of respondents in the Construction Sector by number of workers, 2017 and 2021

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

Major shocks and disruptions faced by businesses resulting to decline in sales and workers included the following: ● Difficulties in sourcing materials and equipment/High prices of materials. Construction materials were in short supply and prices were higher than before the COVID-19 crisis. Likewise, deliveries of both equipment and materials were delayed. The increase in price of materials was beyond contingency costs anticipated by contractors. The COVID-19 crisis highlighted more than ever the need for standardized pricing and quality specification of construction materials. Inconsistent quality of materials also increases the risk of building damage during disaster events. To a significant extent, these problems can be also traced to information asymmetry and have been exacerbated due to transportation and movement restrictions to contain surge of COVID-19 infections both in India and Nepal. ● Labour shortage. When construction projects with on-site housing were allowed to resume work, they experienced delays due to shortage of labour. Many of the workers (Nepali and Indians) returned to their villages when the first lockdown was imposed. There was a general lack of information and coordination as well as guidance on occupational safety and health. ● Liquidity problems due to project delays. Contractors faced liquidity crisis due to delays and deferrals and have requested the release of the refundable deposits on the basis of bank securities (Samiti, FCAN demands motivation, security in construction sector 2021). Project delays and deferrals may jeopardise project profitability.

During the 2020 lockdown, estimated number of construction workers in Nepal that were displaced was about 1.33 million (The Asia Foundation 2021). The major shocks and disruptions faced by the construction due to the COVID-19 measures include difficulties in sourcing raw materials, labour shortage and liquidity problems.

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

4.5

ICT sector: impact of measures taken to curb COVID-19

Impact on sales. The COVID-19 lockdowns did not negatively affect the ICT companies. Respondents indicated that annual sales in 2017 were between US$ 100,000 to US$ 1 million. In 2019 and 2020, annual income of respondents was “above U $ 1 million but less than U $ 3 million.” All of the respondents indicated they employed from 10 to 14 workers in 2017 and 2021.

Inequalities – the deepening digital divide. The COVID-19 crisis opened market opportunities for the ICT sector. The COVID-19 crisis though has highlighted the inadequacy of current ICT infrastructure. The distribution of access in the urban and rural areas have created two-tier of inequalities between: (i) SMEs located in urban vs rural areas; and (ii) large and micro enterprises who can barely afford to access the internet and lack the skills to optimize the use of internet in their business.

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

Cross-Sectoral Barriers to Growth

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

5 Cross-Sectoral Barriers to Growth Even before the pandemic, the private sector in Nepal faced serious barriers to growth which are systemic in nature and were further exacerbated by the COVID related challenges to the economy. This section discusses the systemic cross-sectoral barriers to growth that were rated by survey respondents across all the five focus sectors as “moderate to severe problem.” The issues are further elaborated and collaborated by findings from recent studies, whenever available. Key takeaways Respondents across all sectors identified the following as severe to moderate barriers to growth: (i) high cost of transportation; (ii) limited access to financial services, (iii) poor accessibility to roads; (iv) unreliable electricity/power utilities; (v) high cost of electricity utilities; and (vi) weak price competitiveness. While these issues and challenges are not new, they remain unaddressed in the three provinces with Lumbini and Karnali most severely affected.

High cost of transportation is most severe among enterprises in Karnali and Lumbini as well as women-owned enterprises. Factors that contributed to the high cost of transportation include: (i) inadequate transport facilities and infrastructure; (ii) monopoly of the cargo service by a few of truck operators; (iii) no cargo consolidation services; and (iv) poor operationalization of the direct trans-shipment system.

Poor accessibility to roads affects not only core operations of enterprises but also exacerbates their access to financial and other services. It also affects consumers in the form of high prices of goods. Poor accessibility was primarily a result of a combination of the following: (i) low road density; (ii) seasonality of road access; (iii) poor road maintenance; (iv) poorly designed roads; and (v) inequitable distribution of roads.

Although Province 2 and Lumbini have high electricity access at 99.05% and 91%, respectively, frequency of power outages has increased in 2020. In Karnali, respondents faced both the problem of lack of electricity access and power outages. Electricity access in Karnali is at 34.5%.

Electricity tariff in Nepal is one of the highest in the South Asian countries and this has adversely hindered the growth of enterprises especially in Karnali and Lumbini.

Weak price competitiveness can primarily be attributed to low productivity and high variable costs. Among the seven provinces in Nepal, Province 2 has the lowest value added per worker which is most likely also a reflection of the low human development index and literacy rate.

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

5.1

High cost of transportation

The high cost of transportation was most felt by respondents in Karnali followed by Lumbini. It was also among the top constraints faced by women.

Figure 23. Extent that high cost of transportation hinders business growth in the three provinces

This barrier was attributed to the following factors: ● Inadequate transport facilities and infrastructure. Owing to its challenging topography, transport infrastructure in Karnali is limited both in terms of coverage and quantity. People in remote areas rely on mule tracks and trails to transport goods. Consequently, transportation cost in Karnali is very expensive. Lumbini has also inadequate transportation facilities and roads especially in remote areas. Province 2 has relatively better transport infrastructure compared to other provinces. It has functional air, rail, and road transportation facilities which cater to passenger and freight transport within the province and neighbouring Bagmati and Karnali as well as to India via the southern border. There is also an ongoing bilateral negotiation with India, which may soon enable Province 2 via the Koshi River to access Indian waterways at Sahibgunj (Jharkhanda) ultimately connecting Haldia seaport in Kolkata (PPPC 2020). The planned water transport can significantly decrease the cost of freight transport, which will benefit the import and export of raw materials, intermediates, and finished products which are extensively consumed and produced in Province 2 (PPPC 2020). ● Monopoly of the cargo service by a few of truck operators. The cartel sets the price and does not allow new operators to enter the market. Government has initiated actions to dismantle the cartel but it seems that during the recent months the truck operators have banded together and unilaterally increased the fares. ● No cargo consolidation services. Indian seaports do not have less than container load shipment services. ● Poor operationalization of the direct trans-shipment system. The Direct Transhipment Model (DTM) was meant to alleviate the hassles, clearance procedures and hidden costs that Nepali traders faced while bringing goods from Indian ports. Nepali importers had hoped that this mechanism would be more efficient than the previous Customs Transit Declaration (CTD) and would save time and resources when bringing goods from Kolkata Port to Birgunj. But instead, the mechanism, put into practice from 3 February 2019, has increased the cost of transporting a single cargo container by up to 50 percent. It is alleged that increase in costs in the transit and transportation of goods is because of the vested interests of a few shipping companies and the business syndication by them (Khanal 2020). February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

5.2

Poor accessibility to roads and financial services

The barrier of poor accessibility is most severe in Karnali followed by Lumbini. Poor accessibility also hinders enterprises from accessing financial services. Many of the banks prefer immoveable collaterals with good road access. Land and building without adequate road access receive a low valuation which compounds challenges of accessing finance for businesses.

Figure 24. Extent that poor accessibility hinders business growth Poor accessibility was a result of any or a mix of the following factors: ● Low road density. Among the three provinces, Karnali had the lowest road density. There are still many areas in Karnali which are only passable by mules and sheeps. Residents in these areas have to walk three to four days to reach trading places. In Lumbini, some roads going to tourism sites are still in a state of disrepair making travel longer and expensive. Province 2 has the highest road density among the three provinces but the quality of road surface is deteriorating which impacts safety, reduces speeds and increases travel time to the extent that the existing road asset is underutilised and underperforming (PPPC 2020).

Province

Type of Road and Length (in kilometers) Mud/Unpaved

Gravelled

Black Topped

Total Road (in km)

Road Density (per sq km)

Province 2

2,696

2,831

344

5,871

0.61

Lumbini

5,293

2,793

845

8,931

0.40

Karnali

2,453

193

2,725

0.10

Source: Ministry of Federal Affairs and General Administration as of mid-March 2020; (MoF 2020) ● Seasonality of road access. Road network of Nepal spans about 70,000 kilometres. Only about 26% of total road network provides year-round transport facilities in the country (Paudel 2019). ● Poor road maintenance. Over half of the local road network constructed is no longer useable because of lack of maintenance (Paudel 2019). The roads require reconstruction or rehabilitation.

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

● Poorly designed roads. Many roads have design flaws such as narrow width lane, lack of safety barriers, lane markings or drainage systems, thin or low-quality surfacing). Increased vehicles traffic, heavy trucks and monsoon rains lead to quick deterioration and surface cracks and potholes. During rainy season the risk of landslides or floods that may block roads, is significantly increased. (WFP n.d.) ● Inequitable spatial distribution of road facilities. Most of the strategic road networks are concentrated in the lowland. In hill areas, one-third of residents walk more than four hours to reach an all-season road and this is worse in the mountain regions (Paudel 2019). Poor road infrastructure makes transport risky and causes prices of basic commodities to increase significantly during rainy season.

5.3

Unreliable electric/power utilities

A greater percentage of respondents in Karnali suffer from unreliable electric power utilities than in Lumbini and Province 2. Among the three provinces, Karnali has the lowest electricity access at 34.5%. Electricity access in Province 2 and Lumbini is at 99.05% and 91%, respectively (MoPID 2021). Industrial estates and SEZ in these provinces have suboptimal performance due to electricity problems among others.

Figure 25. Extent that unreliable electric utilities hinder business growth

Incidence of power outages in 2020 was higher compared to the last four years. The outages were attributed to ‘forced load-shedding’ to meet the demand. (Ghimire 2021). Others attributed the outages to poorly maintained transmission lines and low water level in rivers (Kumar 2020).

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

5.4

High cost of power utilities

Electricity tariff in Nepal is one of the highest in the South Asian countries and this has impacted consumption by both the households and industrial sector.

Figure 26. Extent that high cost of power utilities hinders business growth The Nepal Electricity Authority (NEA) is charging an average of Rs 10+ and Rs 30 per unit for households and industrial users, respectively even if the cost per unit for the state-owned power utility has come down to Rs 2 per unit (Republica 2021).

5.5

Weak price competitiveness

Nepalese SMEs are currently facing challenges to compete with imported products in the domestic market as well as in the international markets. In most sectors, Nepal’s exports are curbed by high costs.

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

Figure 27. Extent that weak price competitiveness hinders business growth

Some of the reasons for weak price competitiveness are the following: ● Lowest value added per worker. Among South Asia countries, Nepal has the lowest value added per worker in agriculture, industry, and services. During the past five years, compound annual growth rate of value added per worker in all sectors was just about 1%.

Figure 28. Value added per worker in South Asia countries, 2015 to 2019

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Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

Among the seven provinces in Nepal, Province 2 had the lowest gross value added per worker. This, perhaps, explain the high percentage of respondents who said that price competitiveness was a serious problem. The low productivity of workers in Province 2 compared to other provinces may be linked to the low human development index. Karnali had the highest gross value added per worker among the three focus provinces.

Figure 29. Indicative value added per worker per province

● High variable costs. High variable costs due to factors such as costly and unreliable electricity and high transportation costs.

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

Sector Specific Barriers to Growth

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Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

6 Sector Specific Barriers to Growth The barriers to growth affect each sector differently. This section outlines the sector specific barriers to growth as identified by survey respondents. Findings from recent studies, whenever available, are presented to further provide contextual background and information to the issues.

Key Takeaways: barriers to growth disaggregated by sectors Agribusinesses Inconsistent application of customs and trade regulations: The problems faced by enterprises were not on the regulations itself but rather on procedural obstacles and inconsistencies as well as inadequate warehousing facilities, which caused delay in cargo clearance and increased the cost of transaction. Lack of testing laboratories: Many of the testing laboratories are located in Kathmandu and majority do not have international accreditation. Enterprises are not generally aware of the testing facilities and services offered by the DoFTQC, which are recognized by India. Insufficient supply of raw materials: Many of the raw material problems can be traced to fragmented supply chains and information asymmetry. Likewise, given that many of the farmers are not organized, the costs incurred by agribusinesses when sourcing from hundreds of small farmers is high. Limited access to storage facilities: The most pressing problem among market actors is the lack of cold storage facilities for perishable products especially during peak harvest season. Need for higher end business development services: Services aimed at helping enterprises comply with tax obligations and those intended for start-up businesses appear to be welldeveloped. Respondents, however, were not satisfied with the more technical, strategic and technology-oriented services. Inadequacy of the financial services: Agribusinesses were satisfied with the services received from the banks. However, only about a third of the respondents have availed of financial services from venture capitalists and were generally not satisfied especially those from Lumbini and Karnali. Inadequacy of financial services is linked to the type of financial services and the location.

Manufacturing Corruption is a key challenge: Key issues were the kickbacks and facilitation payments when getting permits and other business requirements. Business licensing and registration processes add to the burden of compliance: The introduction of the online business-registration system has reduced the time to register an enterprise. However, compliance with the various requirements appears to be still a bottleneck. Informal payments and hiring of intermediaries to fast track the registration process are among the procedural obstacles. Inadequate business development services: Except for accounting services, business continuity planning, and advertising services, manufacturing companies were not fully satisfied with the other existing services. Training services for workers did not also fully meet the expectations of companies.

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

Key Takeaways: barriers to growth disaggregated by sectors Inconsistent access to financial services: Enterprises were happy with the services of the banks and fairly satisfied with venture capitalists. They were not satisfied with the services of the money lenders because of the high interest rates but appreciated the quick release of loans with very little paperwork.

Information & Communication Technology (ICT) Inadequately educated or skilled workforce. The challenge currently faced by ICT enterprises is the limited availability of workers with higher level skills and management expertise. Employees also tend to leave after having been trained by the companies. Weak market penetration: This is attributed to: (i) lack of skilled workforce to expand services and markets beyond Nepal; (ii) poor infrastructure and internet connectivity limit the domestic demand for ICT services; and (iii) lack of adequate infrastructure and payment gateways. Inadequate business development services: Existing services related to technology transfer and training of workers appear to be not fully aligned with needs of the companies. Financial services: Companies were satisfied with the services received from the banks. Outreach of other providers such as venture capitalists in the ITC sector was low.

Construction Unstable supply, quality, and price of construction materials: This was a serious problem at the height of the movement restrictions to curb COVID-19 restrictions. Even prior to the pandemic though, the quality assurance and control for construction materials was already fragmented. High tax rates: Tax rate on business profits is a flat 30 percent but when other charges on corporate profit are added, the total rate goes up to 45 percent, which is higher than neighbouring countries like Bangladesh, Bhutan and India. Inadequate business development services: Services geared for start-ups or early-stage businesses are well-developed and accepted by construction companies. Services that received low rating were those related to upgrading of workers and technologies and market diversification. Financial services do not have a wide reach: Although respondents had access to banks, a high percentage still borrowed from informal sources, which may be an indication that enterprises require more flexibility and agility than the formal financial system is currently providing.

Tourism Decline in tourist spending stem from deeper issues: Key factors that contributed to decline in tourist spending include: (i) inadequacies in destination level management; (ii) lack of higher quality services/products catering to higher value tourists; (iii) seasonality of tourism products/services; and (iv) weak integration in global value chains resulting to leakages in tourism earnings.

Limited and low quality of internet connectivity: The internet penetration in Nepal is primarily driven by 2G networks while broadband connectivity including mobile and fixed remains low. According to the World Bank 21% of the population was using Internet in 2017 compared to February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

Key Takeaways: barriers to growth disaggregated by sectors 1.79% in 200918. The international bandwidth per internet user was 21 kbit/second in 201719.Limited internet connectivity discourages tourists from staying in the area for a longer period. Furthermore, it hinders marketing effort and the set-up of online payment system that could benefit Nepalese enterprises instead of Indian and Chinese operators. Inadequate business development services: Accounting services, advertisements, and market information services were the most used and appreciated services. Uptake of strategic services was generally low. Training for workers did not fully meet expectations of companies. Inconsistent coverage of financial services: Enterprises were satisfied with the services from the banks. Financial services of other types of financial services providers did not fully meet expectations of companies.

6.1

Agribusiness: barriers to growth

This section provides a detailed description of the constraints faced by businesses for the agriculture sector. 6.1.1

Customs and trade regulations

All women-owned enterprises and exporters rated customs and trade regulations as “serious problem.” Majority of the agribusinesses in Lumbini and arnali considered it a “serious problem.”

Figure 30. Extent that customs and trade regulations hinder business growth of Agribusinesses

https://data.worldbank.org/indicator/IT.NET.USER.ZS?locations=NP

https://www.itu.int/en/ITU-D/Statistics/Dashboards/Pages/Digital-Development.aspx

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Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

Key factors that inhibit growth and impact competitiveness of agribusinesses include trade and customs regulations, lack of testing laboratories, insufficient supply of raw material, limited access to storage facilities, limited business development services and challenges in accessing finance.

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Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

Challenges in the trade gateways. It is possible that some of the challenges experienced by respondents in Lumbini and Karnali were in relation to the Birgunj Inland Container Depot (ICD) and Integrated Check Post (ICP) in Province 2, which is the most important international trade gateways in the country. Some of the problems in the Birgunj ICD and ICP are: (Bajracharya 2021) ● Congestion due to inadequate warehousing facilities resulting to increased cargo clearance time. ● Lack of clear understanding regarding the scope of work hindered coordination between concerned bodies such as the municipalities, trade associations, agent associations, and the chamber of commerce, which ultimately affects the efficiency of overall trade. ● Poor digital infrastructure at customs which results in physical paperwork for clearance of goods. ● Delayed release of consignments due to unprofessional attitude of agents. In some cases, goods were damaged due to poor handling. ● Sanitary and phytosanitary standards (SPS) testing have to be conducted in laboratories far from customs points. ● Delay in customs clearance at the Kolkata ports, which increased demurrage cost, thereby increasing trade cost as well as contribute to deterioration of product quality. ● Poor toilet facilities in ICD and ICP and lack of accommodation facilities and eateries. Trade facilitation challenges in Lumbini. In a Time Release study conducted in the Bhairahawa Customs Office (Lumbini Province), which is the second largest Customs station in terms of trade volume, revenue collection, and declarations, the following were the key findings: (DoC 2020) ● Delays in custom clearance and payments were caused by lack of documentation requirements due to ignorance of requirements by importers or exporters. Some of the importers, exporters and freight forwarders were not aware of the complete customs processing system. ● Delays were also caused due to lack of customs staff. ● Laboratories for testing the foodstuffs and similar goods are situated far from the customs premise which caused extended customs processing time. Likewise, the certification required multi-layer approval which made the process complex and time consuming. ● Slow internet speed, poor network connection and lack of compatible devices also caused delays in processing. ● Disputes in valuation necessitated extended time for customs clearance.

Procedural obstacles in customs clearance. Based on studies from the Asian Development Bank and the International Trade Centre, the following are the key procedural obstacles related to customs clearance: (ADB 2019) (ITC 2017) ● Delays in customs clearance due to shortage of human resources, lack of automation, and corruption. ● Procedures, regulations, and requirements are applied inconsistently at customs. ● Excessive documentation requirements cause significant loss of time and cost. ● Lack of coordination and cooperation among various government bodies as well as among quarantine posts and checkpoints lead to the need to obtain approval from several entities. ● Producers lack proper information on necessary processes and requirements to export. Some had to hire agents which increased the cost of the products which eroded price competitiveness.

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Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

6.1.2

Lack of testing laboratories

The lack of testing laboratory was identified as a serious problem predominantly among respondents in Lumbini.

Figure 31. Extent that lack of testing laboratories hinders business growth of Agribusinesses

Key impediments. The following are the key impediments to access to testing laboratories: ● The laboratories are located mainly in Kathmandu. ● Many of the laboratories (public and private) are not internationally accredited. There is also a lack of adequate testing facilities and competent staff. ● The producers are not aware of the testing facilities and services offered by the Department of Food Technology and Quality Control (DoFTQC) (ADB 2019). In 2019, India has agreed to recognize the certified certificates issued by DoFTQC on various 20 exportable items (tea, coffee, juice, jam, fruits, vegetables, refined honey, ginger, cardamom and various medicinal herbs). ● The DoFTQC also conducts sampling of food products sold in the domestic market. Nepal’s Food Act stipulates a penalty of Rs 50,000 or a jail term of five years or both for firms for those found to be guilty of selling substandard food.

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6.1.3

Insufficient supply of raw materials

Although none of the respondents considered insufficient supply of raw materials to be a “serious problem”, a greater majority especially in Lumbini and arnali saw it as a “moderate problem.”

Figure 32. Extent that insufficient supply of raw materials hinders business growth of Agribusinesses

Shortage of supply. In some cases, shortage of supply was caused by extreme weather conditions resulting to low yield. In other instance, the difficulties in accessing sufficient supply were due to the COVID-19 lockdown. Others pointed out that supply issue was not necessarily in terms of quantity but more of getting sufficient volume of materials of the right quality. Many of the raw material problems can be traced to fragmented supply chains, weak vertical relationships, and information asymmetry. Likewise, given that many of the farmers are not organized, the costs incurred by agribusinesses when sourcing from hundreds of small farmers is high.

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Status of production of major crops. Table 15 shows the indicative status of production of major crops in the country in 2017. Although there may have been some changes in the volume, what is evident is that greater inter-provincial coordination can potentially help the country curb importation and improve self-sufficiency. The table also shows that production of most crops except for some spices were not enough or just sufficient to meet domestic needs. Improved access to supply and market information can potentially guide market actors in their production decisions. Table 15. Status of production of major commodities, 2017 Crops

Status of Production Province 3

Net Balance

Rice

Sufficient

Deficit

Surplus

Highly deficit

Sufficient

Slightly deficit

Wheat

Slightly deficit

Surplus

Highly deficit

Deficit

Surplus

Highly deficit

Sufficient

Maize

Surplus

Deficit

Sufficient

Deficit

Slightly deficit

Vegetables

Sufficient

Deficit

Sufficient

Deficit

Sufficient

Potato

Surplus

Deficit

Sufficient

Deficit

Sufficient

Slightly deficit

Deficit

Sufficient

Pulse crops

Deficit

Surplus

Highly deficit

Slightly deficit

Surplus

Deficit

Sufficient

Deficit

Oilseed crops

Deficit

Highly deficit

Deficit

Sufficient

Deficit

Highly deficit

Mango

Deficit

Seasonal surplus

Deficit

Seasonal sufficient

Deficit

Banana

Deficit

Seasonal surplus

Deficit

Seasonal surplus

Deficit

Apple

Deficit

No production

Deficit

Seasonal surplus

Deficit

Citrus

Deficit

Highly deficit

Deficit

Surplus

Deficit

Onion

Deficit

Seasonal surplus

Deficit

Seasonal surplus

Deficit

Tea

Highly surplus

No production

Deficit

No production

Deficit

Coffee

Deficit

No production

Surplus

Deficit

Cardamon

Highly surplus

No production

Deficit

Surplus

Ginger

Surplus

Deficit

Sufficient

Deficit

Sufficient

Surplus

Deficit

Surplus

Goat meat

Sufficient

Deficit

Highly deficit

Sufficient

Deficit

Poultry meat

Surplus

Deficit

Highly surplus

Deficit

Sufficient

Deficit

Sufficient

Pork

Surplus

Deficit

Surplus

Deficit

Sufficient

Buffalo meat

Sufficient

Highly deficit

Sufficient

Deficit

Sufficient

Slightly deficit

Egg

Deficit

Sufficient

Deficit

Sufficient

Milk

Surplus

Deficit

Sufficient

Deficit

Sufficient

Slightly deficit

Source: Agriculture statistics book, MoAD, 2017; (DVN 2018)

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6.1.4

Limited access to storage facilities

The problem on limited access to storage facilities was more prevalent among respondents in Karnali followed by Lumbini. The most pressing problem among market actors is the lack of cold storage facilities for perishable products. During peak harvest seasons, market actors are compelled to sell fresh produce immediately. This results into supply glut and, consequently, low prices. Processors are also only able to take in volume according to their production capacity. Once the peak season lapses, the market resorts to importation to fill up the demand. The lack of adequate and appropriate storage facilities also depresses further potential surpluses for export sales and processing. Products are also damaged due to poor storage practices. Among agribusinesses engaged in the production and/or trade of cardamon, for example, the general sentiment is that access to a warehouse will help improve their bargaining position as they can store the cardamon for a longer period of time. The stored produce can also serve as collateral for taking loans from local banks under a warehouse receipt system. Warehouse can also improve the bargaining positions of other crops.

Figure 33. Extent that limited access to storage facilities hinders business growth of Agribusinesses

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6.1.5

Business development services (BDS)

Services aimed at helping agribusinesses comply with tax obligations such as accounting services appear to be quite well developed. Furthermore, agribusinesses appeared to be satisfied with services that facilitate increased access to domestic market. It can be seen, however, from the table that services that could help agribusiness to improve their products and competitiveness received low satisfaction rating. This, to a significant extent, also explains the weak ability of agribusinesses to penetrate and compete in markets especially those with more stringent requirements. Respondents availed of the services from private business support organizations followed by family and friends.

Table 16. Agribusiness respondents: Satisfaction rating of BDS availed Category

Service

Satisfaction Rating Province 2

Lumbini

Karnali

% who availed

Disaster preparedness

Climate change technologies

20%

Environmental management

60%

Infrastructure

Training/TA - IT capabilities

93%

Business incubator

87%

Storage facilities

93%

Input supply

Linkages with suppliers

100%

Financial and legal obligations

Accounting services

100%

Financial and taxation advice

100%

Market access

Planning

Standards

Technology, product development, and productivity

Legend: Satisfied Fairly satisfied

February 2022

TA - meeting laws and regulations

87%

Advertising/promotion service

93%

Market information (domestic)

100%

Market information (export)

67%

Marketing services

87%

Business continuity planning

100%

Feasibility studies/business plan

73%

TA -voluntary social standards

80%

Testing and certification laboratories

73%

Design services

67%

Productivity programmes

93%

Quality assurance and management programmes

100%

Technology transfer

87%

Training of workers

67%

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

6.1.6

Financial services

As the World Bank notes in a 2018 report on Nepal, “Improved access to finance, improved intermediation, and the development of long-term finance will be crucially important to channel finance (foreign or local) to productive activities. 20” In a 2019 survey, the Nepal Stock Exchange (NEPSE) and the Milken Institute examined access to finance. Relevant findings from the survey indicate: (i) companies rank access to finance as their top obstacle; (ii) access to finance as business obstacle does not appear to mean an inability to access bank lending; (iii) bank loans and other current funding sources are generally insufficient for growth; (iv) a large majority of firms are exposed to interest rate fluctuations; (v) most firms would use derivatives if these products were available and (vi) demand is also strong for new corporate financing sources, particularly Foreign Direct Investment 21. For the agribusiness and forestry sector, in particular, access to finance appears to be a severe constraint. Nearly half—46 % percent—of these identified it as their top obstacle. Meanwhile, just 14% of firms in the tourism and hospitality sector counted access to finance as their primary obstacle, while 29 percent cited lack of regulations/policy clarity. Likewise, only 5% of firms in manufacturing selected access to finance as their primary obstacle, while 26% identified an inadequately educated workforce. According to a recent study funded by USAID, only 45% of Nepalis use formal banks. Instead, much of Nepal’s mostly rural population either stores cash at home or takes credit from the informal sector where interest rates can soar as high as 48%. Commercial banks are committed to reaching the underserved and providing agriculture-specific loans, but they lack the appropriate networks and technical knowledge needed to do so. Further, the operational costs to open full-time bank branches to directly reach these segments of the population are far too high. One solution is branchless banking (BLB), which brings financial services to hard-toreach customers through mobile agents who operate from existing businesses. Yet, despite some success, BLB has struggled to reach farmers and the agriculture sector. The following table provides the satisfaction rating and % number of agribusinesses who avail financial services by different types of providers. Table 17. Agribusiness respondents: Satisfaction rating of financial services providers Providers

Satisfaction Rating Province 2

Lumbini

Karnali

% no. who have availed

Banks

93%

Non-bank financial institutions

53%

Private equity

33%

Microfinance institutions

40%

Moneylenders, families, and friends

40%

Legend Satisfied Fairly satisfied Not satisfied

Agribusiness respondents in all the three provinces were satisfied with the financial services provided by banks. Banks also were the top providers of financial services among agribusinesses. This may

“Nepal Development Update: Maximizing Finance for Development” World Bank, November 2018 , h p: documents.worldbank.org/curated/en/149861540823062828/Nepal-Development-Update-Maximizing-Finance-for- Development. 20

https://milkeninstitute.org/sites/default/files/2019-12/Access%20to%20Finance%20in%20Nepal.pdf

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Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

be a reflection that the ongoing reforms under the government and development programmes are aligned to the needs of agribusinesses. Non-bank financial institutions received a satisfactory rating only among respondents in Province 2 and Lumbini. Agribusinesses in Karnali were not satisfied with their services. Only 53% of the respondents availed of financial services from non-bank financial institutions. Agribusinesses were generally fairly not satisfied with the services provided by venture capitalists, MFIs, and informal lenders. Only a third of respondents have availed of financial services from venture capitalists and appeared to be not so happy with it especially those from Lumbini and Karnali.

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

6.2

Manufacturing: barriers to growth

This section provides a detailed description of the constraints faced by businesses for the manufacturing sector. 6.2.1

Customs and trade regulations

A greater percentage of manufacturing enterprises than agribusinesses in Province 2 are negatively impacted by customs and trade regulations. In Lumbini, a smaller percentage of manufacturing enterprises than agribusinesses find the customs and trade regulations to be cumbersome and hindrance to growth. Manufacturing enterprises face the same challenges as the agribusinesses in relation to customs clearance and procedures which are discussed in 6.1.1.

Figure 34. Extent that customs and trade regulations hinder business growth in the Manufacturing Sector

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Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

Key barriers to growth faced by the manufacturing businesses include customs and trade regulations, corruption, difficulty in accessing business licences and permits, limited availability of business development services and challenges in accessing finance.

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

6.2.2

Corruption

A greater majority of the manufacturing enterprises in the two provinces perceived corruption to be a serious to moderate problem. Key issues were the kickbacks and facilitation payments when getting permits and other business requirements.

Figure 35. Extent that corruption hinders business growth of enterprises in Manufacturing Sector

In 2020, Nepal ranked 117 out of 180 countries on Transparency International’s Corruption Perceptions Index, with a score of 33 placing it in the “more corrupt” category. The Prevention of Corruption Act is the country’s key anti-corruption law, criminalizing corruption, bribery, money laundering, abuse of office, and facilitation payments (GAN Integrity 2020). Some of the challenges in eliminating corruption are: (Shrestha 2019) ● Poor implementation and enforcement of rules and regulations ● Weak institutional capacity of oversight institutions ● Increasing impunity due to negligible departmental and legal actions against those guilty of corruption and several corruption cases remaining uncovered or punished ● Increased bribery in the form of “facilitation payments” in the distribution of permits and approvals, public procurement, contract awards, and when registering a business.

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6.2.3

Business licensing and permits

Majority of enterprises in Province 2 rated business licensing and permits as “serious” and “moderate” problem. In Lumbini, business licensing was considered by 50% of respondents as a “moderate” problem while the remaining half said it was a “minor” problem.

Figure 36. Extent that getting a business license is a problem for enterprises in the Manufacturing Sector Online business registration. Although the introduction of the online business-registration system at the Office of Company Registration (OCR) has reduced the time to register a company, new entrants (particularly corporations) encounter difficulties in complying with the various requirements. Some new businesses hire intermediaries to help in the business registration which increased the cost of starting a business. Others pay facilitation fees to accelerate the processing of their registration and other pertinent permits.

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

6.2.4

Business development services

Except for accounting services, business continuity planning, and advertising services, respondents in the manufacturing sector were generally not fully satisfied with existing BDS. It implies that the existing services are not aligned to the needs of the enterprises. In both Province 2 and Lumbini, respondents were generally not satisfied with the training services for workers. There appears to be a lack of industry led training centres and the link between training providers and the industry is weak. Table 18. Manufacturing companies: Satisfaction rating of BDS availed Category

Services

Satisfaction Rating Province 2

Lumbini

Disaster preparedness

Climate change technologies

Environmental management

Infrastructure

Training/TA - IT capabilities

85%

Business incubator

92%

Warehouse facilities

46%

Input supply

Linkages with suppliers

92%

Financial and legal obligations

Accounting services

Market access

Planning

% who availed 0% 8%

100%

Financial and taxation advice

85%

TA - meeting laws and regulations

77%

Advertising/promotion services

92%

Market information (domestic)

100%

Market information (export)

46%

Marketing services

92%

Business continuity planning

100%

Feasibility studies/business plan

62%

Standards

TA -voluntary social standards

77%

Technology, product development, and productivity

Design services

69%

Productivity programmes

92%

Quality assurance and management programmes

92%

Technology transfer

77%

Training of workers

69%

Legend Satisfied Fairly satisfied Not satisfied

Services related to climate change technologies seem to be not available in the two provinces or, perhaps, respondents were not familiar with these. Similarly, availing of environmental management services was low. Main providers of the services were private business support organizations. A few of the respondents relied on family and friends for assistance in operational challenges they faced.

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

6.2.5

Financial services

Banks were the top providers of financial services to the manufacturing sector. Respondents in both provinces were satisfied with the services from the banks. Non-bank financial institutions were the second top providers of financial services. While Lumbini respondents were happy with the services, the respondents in Province 2 were only fairly satisfied. Venture capitalists and informal lenders were the third ranking providers of financial services. Respondents were fairly satisfied with the services of venture capitalists. Respondents were not satisfied with the services of moneylenders. Although they appreciated the “ uick disbursement” of loans from moneylenders, they were not happy with the high interest rates. Microfinance institutions had the least number of clients among respondents in the manufacturing sector. Respondents in Province 2 were not satisfied with the services while those in Lumbini were fairly satisfied. Table 19. Manufacturing companies: Satisfaction rating of financial services providers Providers

Satisfaction Rating Province 2

Lumbini

% no. who availed

Banks

92%

Non-bank financial institutions

77%

Private equity

62%

Microfinance institutions

31%

Moneylenders, families, and friends

62%

Legend Satisfied Fairly satisfied Not so satisfied

February 2022

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6.3 6.3.1

Information and Communication Technology (ICT) Sector: barriers to growth Inadequately educated or skilled workforce

All of the respondents in Province 2 and Lumbini rated “inade uately educated or skilled workforce” as a moderate problem. Firms, however, are constrained from scaling up or moving up the quality ladder due to a lack of higher-level skills and management expertise needed to expand their services. Companies invest in hiring and skilling fresh graduates but only a few remain to become managers. This may also be a symptom of problems related to employee retention that could be due to the lack of/poor HR policies and organizational capacity. 6.3.2

Weak market penetration

Difficulty in getting new clients was rated by all respondents as a moderate problem. Weak market penetration is attributed to: (i) lack of skilled workforce that will enable enterprises to expand services as well as be competitive in the export market; (ii) poor infrastructure and internet connectivity limit the domestic demand for ICT services; and (iii) lack of adequate infrastructure as well as payment gateways to facilitate ecommerce transactions. The internet penetration in Nepal is primarily driven by 2G networks while broadband connectivity including mobile and fixed remains low. 92 % of the population is covered by a network tower, 54% of the population is covered by a 3G network and 14% by a 4G network (2017).

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

6.3.3

Business development services

Respondents were generally satisfied with the services they availed of except for those related to technology transfer and training of workers. ICT companies did not avail of services that would help them address climate change impact, access export/international market intelligence, and comply with voluntary social standards. Table 20. ICT companies: Satisfaction rating of BDS availed Category

Service

Satisfaction Rating Province 2

Lumbini

% who availed

Disaster preparedness

Climate change technologies

Environmental management

Infrastructure

Business incubator

100%

Input supply

Linkages with suppliers

100%

Financial and legal obligations

Accounting services

100%

Financial and taxation advice

100%

TA - meeting laws and regulations Market access

33%

Advertising/promotion services

100%

Market information (domestic) Market information (export)

Planning

100% -

Marketing services

100%

Business continuity planning

100%

Feasibility studies/business plan

Standards

TA -voluntary social standards

Technology, product development, and productivity

Productivity programmes

100%

Quality assurance and management programmes

100%

Legend Satisfied Not satisfied

February 2022

67% -

Technology transfer

33%

Training of workers

67%

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

6.3.4

Financial services

Table 21. ICT companies: Satisfaction rating of financial services providers Providers

Satisfaction Rating Province 2

Banks

% no. who availed

Lumbini 100%

Non-bank financial institutions

33%

Private equity

33%

Moneylenders, families, and friends

33%

Legend Satisfied Fairly satisfied

Banks are the main providers of financial services. Outreach of other financial services providers was reported to be low by the respondents. Respondents were satisfied with services received from banks and venture capitalists. Those who availed of financial services from non-bank financial institutions and informal lenders were fairly satisfied.

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

The key barriers to growth faced by the construction businesses include unstable supply, quality and priced of construction materials, high tax rates, limited availability of the range business development services. A high percentage of respondents borrow from informal sources of finance, despite their access to formal sources of credit. Formal sources of finance need to be more agile and flexible to meet the evolving and emergent needs of the businesses.

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

6.4 6.4.1

Construction Sector: barriers to growth Unstable supply, quality, and price of construction materials

Half of the respondents indicated that the unstable supply and price of construction materials posed a serious problem to their business while the remaining 50% said that it was a moderate problem. The problem on price, quality, and supply of construction materials was exacerbated during the height of the COVID-19 lockdown when cement, concrete, and steel were not readily available and/or sold at very high prices. Importation of materials (wires, pipes, paints, steel, and coal) was suspended which disrupted the operations of factories of construction materials. According to a news report in March 2021, there is a new wave of investment in the construction materials production sector especially in the Birgunj-Bara-Parsa Industrial Corridor (New Business Age 2021) . The new factories though were apprehensive that there may be an oversupply of materials if the government will not step-up spending on infrastructure projects given that most of the budget is being spent on containing the COVID-19 infection. A USAID private sector landscape assessment indicated that quality assurance and control for construction materials is fragmented. According to the study, there is a lack of uniform standards and effective verification system which undermine consumer confidence and raises the risk exposure of Nepalese to adverse impact of disaster events on economic activities (Shakya, et al. 2020). The National Bureau of Standards and Metrology has standards for bricks, cement, and steel but none for sand and aggregates. There is no robust monitoring on the compliance of these standards. Likewise, there is a lack of standards and enforcement of proper product handling practices as the materials move across wholesalers and distributors which can cause the deterioration of product quality. 6.4.2

High tax rates

A greater majority of the respondents in the construction sector felt that high tax rates hindered the growth of their businesses. Tax rate on business profits is a flat 30 percent but when other charges on corporate profit are added, the total rate goes up to 45 percent, which is higher than neighbouring countries like Bangladesh, Bhutan and India (Shah 2019). High tax rates can compound cash flow problem of small construction firms as well as reduce their profitability and, hence, capacity to invest on upgrading. Figure 37. Extent that high tax rate hinders business growth in the Construction Sector 6.4.3

Business development services

Respondents were generally satisfied with services geared for start-ups or early-stage businesses. Services that received low rating were those related to upgrading of workers and technologies and market diversification. Uptake of services was generally high except for environmental management and market information. None of the respondents acquired services that would help them address climate change impact. For market information, contractors generally just monitored government and donor funded projects and biddings.

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

Table 22. Construction companies: Satisfaction rating of BDS availed Category

Services

Satisfaction Rating

% who availed

Province 2 Disaster preparedness

Infrastructure

Climate change technologies

Environmental management

33%

Training/TA - ICT capabilities

83%

Business incubator

100%

Material supply

Linkages with suppliers

100%

Financial and legal obligations

Accounting services

100%

Financial and taxation advice

100%

TA - meeting laws and regulations Market access

Planning

Technology, product development, and productivity

Legend Satisfied Fairly satisfied

February 2022

83%

Advertising/promotion services

100%

Market information (domestic)

33%

Marketing services

83%

Business continuity planning

100%

Feasibility studies/business plan

100%

Productivity programmes

100%

Quality assurance and management programmes

100%

Technology transfer

83%

Training of workers

83%

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

6.4.4

Financial services

Respondents were generally satisfied with the financial services received from the different providers except from informal lenders. It is interesting to note, however, that a high percentage of enterprises still borrowed from informal sources despite their access to formal sources of loans. This may be an indication that enterprises require more flexibility and agility than the formal financial system is currently providing. Table 23. Construction companies: Satisfaction rating of financial services providers Providers Banks: private and state-owned

Satisfaction Rating: Province 2

% no. who availed 100%

Private equity/venture capital

67%

Non-bank financial institutions

100%

Moneylenders, friends, relatives, etc.

83%

Legend Satisfied Fairly satisfied

Access to Finance Solutions Lab organised by the Purnima programme (2017 to 2022) funded by FCDO, UK and implemented by Mott MacDonald.

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

6.5

6.5.1

Tourism: barriers to growth

Decline in tourist spending/number of tourists

Majority of the respondents in the tourism sector rated decline in tourist spending/number of tourists to their areas as a moderate problem. The decline in tourists was experienced during the lockdown. Prior to the COVID-19 lockdowns, the greater challenge faced by tourism enterprises was getting higher spending tourists. At that time then, many of the tourist areas experienced significant increase in visitors but this did not necessarily translate to increased income for tourism businesses. Tourists who visit Lumbini, for example, usually stayed less than an hour to visit the birthplace of Buddha and do not really spend so much. It is also said that tour operators in Nepal do not really earn much from the Buddhist pilgrimage since most of the tour packages are handled by Indian operators (S. Prasain 2019). Lumbini also suffers from a lack of tourism products that can encourage tourists to spend more. It also suffers from a seasonal pattern of tourists.

Figure 38. Extent that decline in tourist spending / tourist volume hinders growth of businesses in the Tourism Sector

Among the seven provinces, Karnali is the least developed in terms of tourism infrastructures, governance, policies, and marketing campaigns (MoITFE 2020). It has also the lowest number of tourists. Tourism is focused mainly on Rara Lake in Mugu and Shey Phoksundo Lake in Dolpa. The province focuses on home stay facilities for tourists but it seems that indigenous communities have very little participation (Mahat 2019). Humla receives the largest number of visitors consisting primarily of Indian pilgrims who use Simikot as a transit point to visit Mt Kailash. They usually spend little time in the district capital.

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

The major barriers to the growth of the tourism businesses include dependence on volume due to lack of high value tourism products, limited tourism infrastructure, limited internet connectivity including digital payments, inadequate marketing campaigns, lack of coordinated policy action, insufficient business development services, challenges in accessing finance and reliance on informal sources of finance.

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

The Karnali Tourism Master Plan 2020/21-2029/30 identified the following weaknesses of the tourism sector resulting to low volume of tourists and tourism receipts: (MoITFE 2020) (i) poor conditions of roads transportation/connectivity; (ii) inadequate tourism services and facilities including skilled human resources; (iii) inadequate infrastructure for health and safety measures, facilities and services; (iv) lack of adequate tourism information; (v) lengthy and complicated permit getting process for the tourists; (vi) lack of coordination between public and private sectors for the promotion and marketing of the Karnali tourism; and (vii) expensive destination due to high air tariff, camping based accommodation, high vehicle rental cost, lack of local produces and lack of local skilled guides and trekking agencies for ground handling. Inability of Province 2 to attract more tourists and increase tourism receipts generally revolve around the lack of recreational facilities, accredited hotels, organized travel tour operators, tour transport facilities, and publicity and promotion (PPPC 2020). Tourists in Province 2 are mainly Indian pilgrims who arrive with their own bus arranged by Indian operators going up to Muktinath. Most of them bring their own food or do their own cooking since there is no certified Hindu vegetarian food in the province. 6.5.2

Limited internet connectivity

Limited internet connectivity was perceived by all respondents in Province 2 to be a hindrance to growth. In Karnali, 88% of the respondents said that limited internet connectivity was a serious to moderate problem. About 75% of the Lumbini respondents rated it as serious to moderate problem.

Figure 39. Extent that limited internet connectivity hinders growth of tourism enterprises

Tourism enterprises felt that unstable internet connection and limited access to broadband internet discourage tourists from staying in the area for a longer period. Likewise, it hinders their marketing effort as well as the set-up of online payment system that benefits Nepalese enterprises instead of Indian and Chinese operators. Market players like eSewa, Khalti, Fonepay, and others have initiated the digital payment system in collaboration with banks but uptake has been hampered by government restriction on transaction limit to NRs.5.000, NRs.10.000, and NRs.50.000 at one time, daily and monthly payments respectively (R. Acharya 2021). Improved connectivity as well as utilization of digital technologies can also improve efficiency across the supply chain. February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

Aside from unreliability of internet connection, the cost of internet in Nepal is relatively high. According to the Inclusive Internet Index 2021 for affordability, Nepal ranked 77 th out of 128 countries. 6.5.3

Business development services

Accounting services, advertisements, and market information services were the most used services among respondents. Uptake of strategic services, however, was generally low. Services aimed at upgrading competencies of workers received low rating among respondents. In Karnali, none of the respondents availed of training for their workers. Among the three provinces, Karnali seems to have the weakest supply of business development services as far as quality is concerned and its alignment to the needs of enterprises. Table 24. Tourism enterprises: Satisfaction rating of BDS availed Category

Service

Satisfaction Rating Province 2

Lumbini

Karnali

% who have availed

Disaster preparedness

Climate change technologies

Environmental management

Infrastructure

Training/TA - ICT capabilities

100%

Business incubator

92%

Input supply

Linkages with suppliers

77%

Financial and legal obligations

Accounting services

Market access

Planning

100%

Financial and taxation advice

77%

TA - meeting laws and regulations

62%

Advertising/promotion services

100%

Market information (domestic)

92%

Market information (export)

69%

Marketing services

69%

Business continuity planning

100%

Feasibility studies/business plan

38%

Standards

TA -voluntary social standards

54%

Technology, product development, and productivity

Design services

54%

Productivity programmes

54%

Quality assurance and management programmes

69%

Technology transfer

62%

Training of workers

31%

Legend Satisfied Fairly satisfied Not satisfied

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

6.5.4

Financial services

Respondents in all three provinces were satisfied with services from the banks. MFIs had the lowest outreach among respondents. Respondents in Karnali who availed of financial services from MFIs were not satisfied. Karnali respondents who worked with venture capitalists were satisfied with the services.

Table 25. Tourism enterprises: Satisfaction rating of providers Providers

Satisfaction Rating Province 2

Banks

Lumbini

% no. who availed Karnali 100%

Non-bank financial institutions

62%

Private equity

38%

Microfinance institutions

20%

Moneylenders, families, and friends

46%

Legend Satisfied Fairly satisfied Not satisfied

Respondents who availed of loans from informal sources were fairly satisfied. Informal sources ranked third in terms of outreach among respondents. However, this is fraught with the risk of falling a prey to the loan sharks for small businesses.

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

Systemic Constraints to Building Back Greener

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

7 Systemic Constraints to Building Back Greener This section discusses the root causes of the constraints to transformative growth in five growth potential sectors. Studies focusing on these sectors and constraints were reviewed to identify the root causes of the constraints.

7.1

7.1.1

Infrastructure and Transportation

Limited and low quality of roads

Roads in Nepal are classified as strategic road network (SRN) and local road network (LRN). The SRN is under the jurisdiction of the Department of Roads. The LRN consists of the districtroad core network and village roads (VR) under the jurisdiction of the Department of Local Infrastructure Development and Agricultural Roads (DoLIDAR). The following are the range of systemic constraints that contributed to poor road network and limited road connectivity: (IMF, 2020; Bhagat, 2017; ADB, 2018; FNCCI, 2021; World Bank, 2019; DOR, 2018; World Bank, 2020; SEJON; PEI, 2020; DOLIDAR, 2016; Sudmeier-Rieux, McAdoo, Devkota, Lal Rajbhandar, & Howell, 2019) ● Underutilization of annual government budget allocated for roads due to weak capacity for procurement, contract management, and implementation. ● Lack of coherence between infrastructure plan and other development plans due to: (i) planning and prioritization in the road sector tend to be strongly influenced by political priorities; and (ii) weakness of the Public Investment Management (PIM) system in Nepal in the implementation of functions such as project screening, prioritization, budgeting, assessment and management of fiscal risks and project implementation (World Bank 2019). ● Lack of clarity on roles, responsibilities, and accountabilities of different agencies in-charge of road networks and maintenance ● Weak enforcement of environmental regulations (e.g., unauthorized extraction of sand and stone from river and illegal deforestation resulting to landslides, flood, damaged bridges and roads). ● Weak legal and regulatory framework for managing the road network, weak enforcement of existing regulations (e.g., maximum load capacity of roads and bridges not respected) ● Funds collected by the Roads Board of Nepal for routine, recurrent, periodic and emergency maintenance of roads are almost always not sufficient to ensure proper road maintenance. ● Weak institutional capacity to promote, manage, and implement public private partnership road network projects (World Bank 2019). ● Limited technical expertise on road design and construction material standards particularly in relation to reducing people’s vulnerability to effects of climate change and increasing gender equality and social inclusion. ● Low climate-proofing investments on road networks which contributes to fast deterioration of road condition. ● Lack of training of drivers on safe and proper road use (e.g. control of overloaded vehicles).

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

7.1.2

High cost of transportation and logistics services

The following are some of the underlying causes of high cost of transport and logistic services:

● Poor quality of roads ● Weak regulatory enforcement which: (i) opens up opportunities for arbitrary pricing; and (ii) continued operation of poorly maintained vehicles. ● Dominance of transport syndicates or cartel which inhibits competition; weak enforcement of the Competition Promotion and Market Protection Act 2007 ● Poor maintenance of transport facilities which may be because of lack of competition and weak appreciation of the benefits of well-maintained vehicles. ● Proliferation of low-capacity vehicles operating on high-volume route which contributes to weak economies of scale and traffic congestion ● High vehicle density and narrow roads result to heavy traffic and, consequently, high transport cost (e.g., main highway - Mechi to Mahakari). ● Lack of cargo consolidation services which is necessary given that individual enterprises most often lack the ability to fill up a 20-footer container

7.1.3

High cost and unreliable supply of energy

Some of the key root causes of high cost and unstable supply of energy: ● Slow construction of transmission and distribution networks 22. ● High system losses in distribution network. ● Poor condition of electricity infrastructure resulting to supply fluctuations and unstable supply. ● Limited capacity of local government units to plan and commission generation projects and develop their own regulations for the distribution of electricity at the local level. ● Limited capacity to access new sources of financing from domestic and international capital markets and investors, including institutional investors to meet projected demand and realize export potential.

7.1.4

Underdeveloped SEZs

The concept of SEZ in Nepal was initiated in 1998. In 2013, a Special Economic Zone Development Committee was established under Ministry of Industry to: (i) prepare the SEZ law and relevant rules and regulations; (ii) conduct a pre-feasibility and feasibility studies for the establishment of SEZ in different areas of the country; and (iii) construct the required infrastructure in SEZ areas throughout Nepal. In 2016, the Special Economic Zone Act 2016 was passed and the Special Economic Zone Authority (SEZA) was established. The Special Economic Zone Regulation was passed in 2017. The SEZ Act and SEZ regulations were drafted with technical assistance from the DFID-funded Economic Policy Incubator (EPI). The revised SEZ Act was passed in 2019 with support from EPI.

The political economy of the different initiatives including BRI and MCC led projects needs careful navigation.

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

The government has conducted pre-feasibility and feasibility studies for the establishment and operation of SEZ in 14 locations throughout Nepal. To date, only Bhairahawa Special Economic Zone (BSEZ) has been established but with only one locator currently operational. The Panchkhal SEZ and Simara SEZ (Province 2) are under construction. According to the Lesson Product Report of EPI, the slow development of SEZs is due to: (Wagle 2019) (ADB 2019)

● Inadequate water and sanitation, drainage, road, electricity, and other infrastructure facilities. ● Limited technical expertise to manage and operate industrial estates and SEZs. ● Lack of harmonization between SEZ Act and national legislations particularly in terms of concessions and benefits of locating in the SEZ (e.g., Customs Department and other tax agencies are reluctant to provide tax benefits and concessions on the basis of the provisions of the SEZ Act). Likewise, the benefits and concessions provided to locators in SEZs are not much attractive in comparison to those provided by the Industrial Enterprise Act (IEA). ● Provision on mandated export sales discourages potential locators. Although the 2019 amendment to the ACT reduced the export requirement to 60%, the enterprise is still exposed to the following legal consequences if the enterprise exceeds the allowed domestic sales percentage after one year of operations: (i) a fine equal to the amount of local sales; (ii) removal of the tax incentives and benefits for the fiscal year; and (iii) possible cancellation or closure of factory. The mandatory export requirement for locators is not rational given Nepal’s level of industrialization and exports. ● Restriction on relocation of already established industries except for those considered to be of special nature as published in the Nepal Gazette. ● Institutional and organizational issues and challenges faced by the Special Economic Zone Authority (e.g., lack of autonomy, understaffing both in terms of number and required skill sets, weak planning capacity, etc.). ● Weak collaboration and coordination between SEZA and the other government agencies involved in SME and export development. ● Problem in land acquisition for other SEZs in the pipeline (e.g., land valuation acceptable to landowners/community; private-public partnership scheme in the development of the SEZ requires private investors to handle land acquisition). ● Terms of public-private partnership scheme for the development of SEZ not so attractive for investors (e.g., developers are required to transfer the SEZ to government after a period of 30-35 years of operation, governance of the SEZs including monthly lease to be paid by industries within SEZs is administered by SEZA, land acquisition responsibility of investor or developer). ● Lack of support services; delay in the establishment of a one-window unit

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

7.2

7.2.1

Market access

Weak quality infrastructure system

Below are the underlying reasons for the weak quality infrastructure system where a quality infrastructure system is defined as a combination of initiatives, institutions, organizations, activities and people. It includes a national quality policy and institutions to implement it, a regulatory framework, quality service providers, enterprises, customers.

Sanitary and phytosanitary standards (SPS) ● Absence of a systems approach to food safety in existing regulations including Good Agricultural Practices (GAP), Good Manufacturing Practices (GMP), and Hazard Analysis Critical Control Point (HACCP). The government has formulated the Good Agricultural Practices but this has not yet been implemented. Foot and mouth disease remains a problem. ● Food safety legislations not fully harmonized with international standards. The Food Act is mostly concerned with the final product and not on food safety. It is mainly concerned with the production, sale, and distribution of food only within the country (ADB 2019). ● Lack of traceability system and regulatory framework; difficulties in implementing a traceability system due to dominance of spot transactions. ● SPS related regulations on food contact materials and handling guidelines are inadequate. ● Lack of international certified training laboratories; lack of a national accreditation body; limited number of competent food inspectors, risk analysis related personnel, quality control officers, animal quarantine officers, veterinary officers, plant protection officers, plant quarantine officers, and laboratory technicians; limited products and parameters are covered by the existing SPS infrastructure in Nepal and, as such, testing has to be done abroad substantially raising the associated financial and time costs. There is also a lack of awareness among exporters of testing facilities available within the country (ADB 2019). ● Lack of providers of services that can help enterprises across the different functions of the chain comply with food safety standards and implement quality control system; lack of awareness and willingness among market actors to adopt food safety standards. ● Although there are already some upgraded storage and warehouse facilities established by the private sector, these are not sufficient. ● “All-in” one price for all range of uality procurement practice of market actors discourages investments in product quality; lack of formal grading system

Technical barriers to trade (TBT) ● Gaps in mandatory standards related to non-food and nonpharmaceutical products leave many Nepalese producers unable to meet strict international requirements. Many of the manufactured products are not subject to any process or production requirements such as GMP which results to inconsistent quality and hinders aggregation of production outputs (e.g., standards for bricks are voluntary and not mandatory; no guidelines for process control to produce good quality brick). ● There is a lack of labelling, marking, and packaging requirements for non-food and nonpharmaceutical products. A greater percentage of end users base purchasing decision based on local norms and quality information provided by suppliers.

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

Tourism ● Market actors compete primarily on price paying little attention to quality and differentiation (World Bank 2018). The industry is not meeting adequate quality and safety standards which has portrayed Nepal a budget destination. Anecdotal stories as well a recent documentary featured by CNA showed the lack of safety measures in place for Mount Everest expeditions. ● Poor planning and budgeting of small and medium tourism infrastructures with little attention given to tourist and market needs. The National Tourism Strategic Plan (NTSP) for the period 2016-2025 lacks a clear approach towards revenue generation and sustainable destination management (World Bank 2018).

7.2.2

Weak value chain governance and interfirm collaboration

Supply chains in Nepal can generally be characterized as fragmented and disconnected, which reduces cooperation, coordination, and flows of information. Market linkages that do not permit close collaboration between players contributes little to systemic upgrading of the chain. Dominance of spot transactions stifles innovation and results to weak supply chain governance. The prevalence of arm’s length transactions makes market actors more vulnerable to price fluctuation, which can make them wary of investing in upgrading and business expansion. Likewise, unless producers become more organized, joining together for activities such as collective procurement of inputs and bulk marketing, individual transaction costs will remain high for the majority of enterprises Some of the underlying factors that hinder the formation of win-win vertical and horizontal relationships are the following: ● Weak contract enforcement limits the use of structured/formal supply relationships. Based on the World Bank’s Doing Business index 2020, the country ranked 151 out of 190 countries in enforcing contracts. ● Big companies are generally not enthusiastic to work with small enterprises due to high monitoring costs, inconsistent/poor quality, perceived unreliability, constant need for cash advances, and inadequate volume/unstable supply of raw materials. For example, while Nepal is among the top producers of ginger in the world, a multinational company based in the country, which is engaged in production and distribution of consumer goods, imports ginger from Kenya. ● Poor flow of information on supply and demand. ● Limited access to information on export market opportunities. 7.2.3

Limited range of value-added products for export trade and concentration on a few markets

The limited range of export products and markets may be attributed to: ● Weak product development skills; low investment on product innovation and new technologies. ● Insufficient understanding of export market characteristics and trends; limited access to market intelligence that can help them identify new product and market opportunities. ● Unstable supply of quality raw materials. ● Sub-optimal utilization of preferential market access schemes due to enterprises’ limited awareness of such opportunities and knowledge of market access conditions and buyers. ● Difficulties in availing of the Cash Incentive Scheme for Exporters. ● Risk aversion.

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

7.2.4

Sub-optimal utilization of digital technologies to boost market integration

Some of the key underlying factors that hinder the optimal utilization of digital technologies: ● Lack of convenient and efficient payment solutions and expensive logistics deter adoption of ecommerce, which can potentially boost the participation of Nepal in global value chains. ● Limited broadband access across the country and other digital connectivity infrastructure. ● Lack of skilled human resources particularly for managerial and highly technical positions. ● Non-enforcement of bandwidth and infrastructure-sharing policies, which increases the cost to consumers and limits access and options in remote areas.

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

7.3

7.3.1

Capacity building/Business development services

Weak market responsiveness and orientation of training providers.

The inability of the training system to produce sufficient number of workers with the skills and competencies needed by businesses to improve productivity and competitiveness is due to the following underlying factors: ● Limited access of teachers/trainers to training and upgraded technologies. ● Limited practical skills of teachers/trainers. ● Weak coordination between schools, private sector/enterprises, and trade unions. ● Obsolete facilities and equipment in training centres. ● Low uptake among workers due to various reasons such as lack of wage differential between skilled and unskilled, poor quality training, training not aligned to learning aptitude of students, curricula are outdated and involve little practical training, and affordability issues. ● Uptake of training among women workers is also low due to cultural norms and gender-based stereotypes, gender pay gap, and financial and accessibility constraints.

7.3.2

Limited availability of quality strategic services

While markets for services geared for start-up enterprises are relatively well-developed, the availability and uptake of strategic services are still low due to the following: ● Limited technical competencies of providers; weak understanding among providers of the needs of enterprises and the requirements to penetrate higher value markets. ● Limited capacity among providers to develop, package, and deliver strategic services. ● Weak uptake of strategic services among enterprises due to affordability issues as well as low awareness and appreciation of such services given the intangibility of benefits in the short-term. The perceived "lack of value" of strategic services may probably arise from a poor experience with consultants. Examples of strategic services needed across sectors include: ● Services to facilitate compliance to mandatory and voluntary standards. ● Technology transfer and commercialization services. ● Productivity improvement programs. ● Market intelligence/Market development services/Brand development services. ● Design and product development services. ● Quality assurance programs. ● Trade facilitation services. ● Environmental, social, and governance (ESG) services.

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

7.4

7.4.1

Financial Services

Current financial products are not fully aligned to enterprise needs

Banks only extend credit on collateral of land and buildings with a preference for immoveable assets. Many of the SMEs do not have or have insufficient immoveable collateral. Furthermore, many SMEs are reluctant to seek formal sector credit because they consider the process complicated and overly bureaucratic. Instead, they continue to depend on informal credit, despite high interest rates, owing to its easy and timely availability. The limited range of financial products other than collateralized loans is attributed to: ● Lack of adequate storage facilities and dominance of spot transactions hinder the implementation of warehouse receipts financing. ● Nepal does not have a specific legal and regulatory framework for private equity. Currently, private equity firms cater mainly to medium and large-scale enterprises. ● Foreign Investment and Technology Act, 2019 (ITA) is prohibitive for attracting Foreign Direct Investment, for example due to investment threshold ● Credit Bureau covers only about 1.7% of the adult population; credit information reporting and sharing is limited. The Credit Information Bill is under review in the Federal Parliament. The bill aims to systematise the credit information system by collecting and preserving information regarding the credit issued by entities including bank and financial institutions. ● Low uptake of recently introduced financial products which may be due to limited awareness, knowledge, and appreciation among enterprises of these products. ● Limited number of branches to provide access to finance in rural and remote areas. ● Limited investment of banks in invest in their technology and security and need for bank to provide additional incentives toward digital transition.

7.4.2

Limited availability of long-term credit

Factors that constrain the availability of long-term credit are the following: (World Bank Group 2018) (i) limited products offering long-term deposits; (ii) low uptake of corporate bonds; and (iii) nonexistent yield curve and the shallowness of the capital market; and (iv) regulatory cap on the spread of interest rates that financial institutions can offer above their base rate reduces the ability of credit providers to accurately price in the risk of lending. 7.4.3

Suboptimal utilization of financial products/loans

Some enterprises are also not able to judiciously utilize their loans due to limited financial management skills/financial literacy. It is also difficult for banks to evaluate many of the SMEs since they often do not have proper accounting systems and their credit risk is not obvious for lending institutions. Banks do not provide credit to unregistered businesses in accordance with existing regulations.

February 2022

Mott MacDonald | Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

7.5 7.5.1

Climate change resilience Low uptake of innovative low carbon/climate smart infrastructure and technologies

● Weak enforcement of environmental laws and regulations (e.g., land-use policies, waste collection requirements, pollution standards, environmental monitoring and reporting requirements, etc.) undermine the sustainable use and management of biodiversity and natural resources, and hamper action on climate change and pollution. ● Weak economic incentives, which are critical to promoting green outcomes because they change behaviour in a manner that typically leads to least cost solutions. ● Weak organization and coordination among value chain actors. ● Limited technical capacity among enterprises to “green” their businesses ● Limited capacity of providers to design, package, and deliver services that can help the greening of enterprises. ● Lack of green financial products. 7.5.2

Limited coverage of social protection

The Nepal’s social protection sector is comprised of numerous programmes that are fragmented across several ministries and departments. Informal enterprises with majority owned by women are among those who have the least access to social protection.

7.6 7.6.1

Regulatory compliance procedures High informality of enterprises

Informal enterprises play an important role in the economy but they also represent a sector with poor working conditions and absence of social security. Business registration is important for enterprises to have access to financial from financial institutions and non-financial services from the government. Some of the underlying root causes of informality are the following: ● Belief that cost of formalization outweighs benefits; low perceived value of formalization (e.g., formalization = taxes = working more hours to have the money to pay taxes) ● Enterprises perceive the regulatory framework governing formalization processes to be quite complex; lack of accurate information or knowledge about registration. ● Socio-cultural barriers and constraints from within their households especially among womenowned enterprises (e.g., permission needed from male members of the household, reproductive roles and expectations left women with not having the time to complete the registration process). ● Uncertainties about business viability. ● Few businesses in their locality or immediate circle had registered giving “legitimacy” to informality. ● Trust issues/mistrust of government.

7.6.2

Complex customs/border trade procedures

This is attributed to: ● Unpredictable and inconsistent clearance procedures, unsupported by modern tools and exacerbated by informal payments. ● Shortage of requisite human resource capacity for a modern customs administration.

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Opportunities for Transformative Change

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8 Opportunities for Transformative Change The section describes the vision and objectives that can contribute to a green transformation of the Nepal economy. Climate changes and resilience are then discussed as a key design consideration to a sustainable economy before specific opportunities are discussed.

8.1

Prospects for transformative growth in Nepal

In order to catapult the economy of Nepal into growth mode, our overarching vision is to promote inclusive growth at scale in key industry sectors in Nepal which are characterized by the following features: Competitiveness Industry players including businesses are able to effectively innovate, upgrade, improve productivity and add value to their products to match market demand, maintain and/or grow market share in existing markets, and penetrate new markets especially in developed economies.

Inclusion Delivering a sustainable flow of benefits across all actors in supply chains and to society as a whole especially women and marginalised communities.

Resilience

GRID-alignment

Vision and interventions are aligned with the Green, Resilient, Inclusive Development (GRID)23, which represents a shift from crisis response to long-term green growth and sustainable development for all.

The above vision is anchored on the following broad objectives: a. Promotion of the judicious and profitable utilization of resources through adoption of the circular economy concept and allocation of a fair cost in the determination of the price received by actors across all functions in the chains. b. Fostering of continuous productivity and efficiency improvement across all functions in the chains to lower cost of production and transaction as well as mitigate impact of price and demand fluctuations through improvements in physical and digital connectivity, regulatory compliance processes, technologies, and interfirm collaboration. c. Facilitation of access of market actors to financial and non-financial services that will enable them to build and judiciously utilize assets (human capital, financial, social, physical, and environment/natural) within the context of sustainability in order for them to take on added value functions that will allow them to obtain a larger share of the value in the chains. d. Strengthening of the ability of key economic sectors to penetrate differentiated markets in equitable terms and, thus, enable them to provide more opportunities for the gainful participation of all actors in the chain especially women and marginalized communities. e. Making the economy resilient to climate change and its adverse effects parallel to decoupling economic growth from environmental degradation.

Development partners have established GRID to scale up and align actions to implement this longer-term strategic approach to development.

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8.2

Climate change resilience and transformative growth in Nepal

High vulnerability to climate change. Nepal is one of the most vulnerable countries to climate change, with frequent flash floods, glacial outbursts, droughts, landslides, heat waves, cold spells, and unpredictable rainfall. The country ranked 128th out of 181 countries in the 2019 NDGAIN Index, which summarizes a country's vulnerability to climate change and other global challenges in combination with its readiness to improve resilience. Economic impact of climate change in Nepal. In the 2014 study on the economic impact of climate change, it was estimated that the direct cost of extreme weather events was equivalent to 1.5 to 2% of the gross domestic product (approximately US$ 270 – 360 million/year in 2013 prices) (IDS-Nepal, PAC and GCAP 2014). In extreme years, costs reached to 5% or more of the GDP. Inclusion of additional indirect and macroeconomic costs could increase the economic costs by 25% to 100%. These costs are significant and can prevent Nepal from achieving key growth and development objectives. Or, on a positive note, mitigation of climate change impact can save the country millions of dollars that can be spent for development. Awareness and ability to take climate action. Survey results indicate that majority of the enterprises are not knowledgeable of climate smart technologies. Many of the roads are not yet climate proofed. Institutions and support markets need to be strengthened to build climate adaptation and resilience at all levels. Inclusive business and green business are often highly interlinked. Inclusion without greening can lead to pollution, ecosystem decay and depletion of natural resources – all of which ultimately harm the poor. Focusing on greening to the exclusion of the poor can create resistance and make climate smart business models increasingly difficult to implement. What is needed, therefore, is a business model that is both climate change resilient and meets the needs of the poorest and most vulnerable. Social and economic impacts from green growth initiatives will be greater and broad-based if efforts at the outset are made to make the business model inclusive. Promoting green inclusive business models is a particularly promising approach in shifting towards transformative growth patterns. Business case for greener growth is clear. Building climate resilience simultaneously advances other goals, including respecting human rights, increasing inclusivity, empowering women, improving the safety and health of workers and communities, and managing supply chains. The “business case” for greening value chains includes improving the country’s brand image and the possibility of securing price premiums for sustainably produced products. Green value chains can potentially provide higher return on labour inputs than conventional chains. Business case for transparency. Building inclusive and transparent supply chains and business models are increasingly in demand from the evolving consumer base which creates incentives to invest in transparency, people and planet. These considerations feed into our future recommendations for Nepal.

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8.3

Proposed enabling services and structure

Centred around four key themes, our proposed interventions for kick-starting economic growth are transformative, build on ongoing projects and are aimed at systematically addressing the constraints faced by SMEs. The study shows that adequate and adequately reliable infrastructure, industrial finance, reinvigoration of SEZs and industrial estates, upgrading capacity of SMEs and diversification of markets are critical to catapult the economy into growth mode. Based on the findings of the study and taking into account the above suggested Approach and Objectives, we suggest a set of related but distinct interventions grouped under 11 main work streams, (which are suggested in the order of importance mentioned by the respondents). The proposed interventions are transformative as these are aimed at systematically addressing the constraints faced by the firms. The proposed interventions also build on the lessons learned from previous projects – see Appendix for further details.

8.3.1

Enabling Infrastructure and environment for business growth

8.3.1.1

Improvement of road connectivity

The proposed interventions outlined below take into consideration the ongoing World Bank – Government of Nepal project “Nepal: Strategic Road Connectivity and Trade Improvement Program (SRCTIP)” which addresses road connectivity under the following components: Component 2: Regional Connectivity Enhancement • • •

Nagdhunga Naubise Mugling (95 km) 2 laning with paved shoulders Kamala Dhalkebar Pathlaiya (130 km) upgrading from 2 to 4 lane Safe Corridor Demonstration Program (SCDP) covering 250 km

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Component III: Institutional Strengthening • • •

Support to National Road Safety Council Capacity enhancement to Department of Roads DoR Periodic Maintenance Program 3,400 lane km of Core Road Network

Proposed interventions ● Strengthen capacity of policymakers at the federal, provincial, and district levels to develop and implement provincial road development policies, programmes and action plans that support the achievement of sustainable development goals and promote green growth strategies. A first step can be the conduct of an updated mapping of areas of production and its connectivity to road networks. Clustering of production areas will be important to promote economies of scale and justify investments in road network, storage facilities, internet infrastructure, and other similar infrastructure. ● Facilitate public- private partnership (PPP) in the construction of strategic roads and upgrading and climate proofing of existing road systems. Interventions may include: (i) development of a clearly defined project screening and prioritization process as basis for the establishment of a PPP pipeline; (ii) standardization and improvement of processes and tools for PPP proposals and assessment, licenses, and permits; (iii) introduction of more investment friendly policies and regulations; and (iv) strengthening of PPP communication and campaign strategy. ● Technical assistance to the Roads Board Nepal (RBN) and other concerned agencies at the provincial level in the further development of cost recovery schemes/user fee collection to ensure sufficient funds for road maintenance and improved enforcement of road safety regulations. ● Technical assistance in the review and upgrading of strategic and local road standards to ensure well-designed and constructed roads parallel to ensuring climate resilience, road safety, and occupational safety and health. ● Development of providers to provide assistance to contractors and suppliers on how to comply with the quality standards and incorporate engineering/climate change adaptation solutions in the design, construction/production, operations, and maintenance phases.

8.3.1.2

Improvement of reliability and efficiency of electricity supply

The proposed interventions take into consideration the proposed ADB loan to the Government of Nepal for the Electricity Grid Modernization Project which has the following expected outputs: (ADB 2020) • • •

Output 1: Electricity transmission capacity in project areas strengthened and modernized to reduce system losses and improve quality of electricity supply. Output 2: Electricity distribution system in project areas strengthened and modernized. Output 3. Output 3: Capacity of Nepal Electricity Authority to implement its Corporate Development Plan strengthened.

Proposed interventions ● Upgrade capacity of national, provincial, and local operators to manage and operate transmission and distribution systems. ● Technical assistance to federal, provincial, and district government in the development of schemes to mobilise private sector investment and financing for the modernization of transmission and distribution systems. ● Support the design and implementation of gender-responsive SME awareness campaigns and educational programmes on safe and efficient use of electricity including the development of services providers for the implementation of the campaign ● Improvement of land transportation system

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● Assistance to relevant federal, provincial, and district government agencies and private stakeholders in the formulation of an updated gender responsive sustainable transport strategy in line with the economic development plan and its implementation. ● Technical assistance in the updating of guidelines and toolkits for public transport system with a focus on road safety, reduction of carbon emission and other negative environmental impact, occupational safety and health, and proper cargo handling to reduce risk of quality deterioration. ● Development of providers to assist operators to comply with the guidelines. ● Assistance to the relevant federal, provincial, and district government agencies and financial institutions in development of schemes to mobilise private sector to invest in modern and sustainable transport system and increase number of operators to reduce control by syndicates.

8.3.1.3

Improvement of land transportation system

● Assistance to relevant provincial government agencies and private stakeholders in the formulation of an updated gender responsive sustainable transport strategy in line with the economic development plan and its implementation. ● Technical assistance in the updating of guidelines and toolkits for public transport system with a focus on road safety, reduction of carbon emission and other negative environmental impact, occupational safety and health, and proper cargo handling to reduce risk of quality deterioration. ● Development of providers to assist operators to comply with the guidelines. ● Assistance to relevant provincial government agencies and financial institutions in development of schemes to mobilise private sector to invest in modern and sustainable transport system.

8.3.1.4

Revitalization and reinvigoration of SEZs and industrial estates

● Assistance to SEZA in the identification of the different forms of SEZs and corresponding adaptation of regulations and policies based on empirical analysis of the stage of development of the industries. Explore new SEZ models focused on incubating business activities that promote sustainable development. ● Assistance to existing and new SEZs and industrial estates in piloting the necessary business and infrastructure reforms to kick start industrialization in the area. ● Facilitate the development of clusters and linkages in surrounding economies to boost the attractiveness of SEZs/industrial estates to investors. ● Establish, monitor and enforce ESG performance indicators for SEZ investors. Support the development of supporting services and training programmes in ESG factors. Explore the possibility of integrating ESG performance in the incentive schemes. ● Explore the feasibility of common service facilities/shared facilities (toll processing, logistics, digital technologies, labelling and packaging, etc.) as among the locators in SEZ/industrial estates to: (i) promote value addition among small enterprises; (i) facilitate access of small enterprises to upgraded climate smart technologies: (iii) enable small enterprises to comply with international SPS, social and environmental standard: and (iv) promote consolidation and economies of scale. In parallel, broaden incentive schemes to support local supplier development. ● Explore the viability of using SEZ or cluster to promote tourism targeting mid- to high-end market segment. Environmental protection and sustainable, green development including COVID-19 health and safety protocols can be better administered in the confined area of the SEZs than in the national territory at large. ● Support the development of providers of productivity improvement related services, product development, testing and certification, and other strategic services and the corresponding business models for the delivery of services (e.g., inclusion in rental fees specific number of consulting hours, etc.). Parallel to this, incentivise upgrading and export diversification. February 2022

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8.3.2

Upgrading firm capacity to embrace growth

8.3.2.1

Upgrading of capacity of SMEs to comply with quality standards

The interventions outlined below take cognizance of the ongoing World Bank – Government of Nepal project “Nepal: Strategic Road Connectivity and Trade Improvement Program (SRCTIP)” which addresses trade facilitation under Component 1 which focuses on: (i) augmentation of infrastructure/facilities at select cross border points; (ii) sanitary and phytosanitary management; and (iii) knowledge support and capacity building. Proposed interventions ● Technical assistance to relevant government agencies in development or updating of national standards for tourism products and other major export products. This should be supported by agreement with market actors to align their procurement and pricing practices with the agreed standards. ● Development of local capacity to provide services that will enable SMEs to comply with standards. Support services may focus on: (i) developing a quality culture among SMEs; (ii) interpreting and addressing market access (TBT and SPS) and buyer requirements; (iii) quality-related tools and techniques for process improvement, quality assurance and quality control; (iv) specialized tools and support in areas such food safety, social responsibility and sustainability, health and safety, environmental management, energy management, organic production and certification, and quality management systems; (v) packaging and labelling; and (vi) storage and warehouse facilities, fumigation, and other related services. ● Development of financial schemes/products in collaboration with financial institutions to assist SMEs in complying with the standards.

8.3.2.2

Upgrading of skills of workers and productivity improvement

● Development and/or upgrading (including green and digital skills, productivity improvement) of existing training packages in partnership with TVET institutions, training centres, trade unions, and employers’ organizations business membership organizations. This should include integration of occupational safety and health, labour rights and standards, gender, and sexual and reproductive rights in training curricula. ● Training of trainers, assessors, and in-company instructors on the implementation of updated training packages and methodologies. ● Design and implementation of internship and apprenticeship learning packages for selected occupations. ● Development of local providers of services that can help enterprises improve their productivity. ● Social marketing campaigns to stimulate rural students and workers especially women and girls to enrol in TVET/training courses. ● Work with existing labour placement agencies in the further development of career guidance and labour market information systems to aid workers and the youth in making career choices, reduce job search costs, improve job matching, reduce information asymmetries, and improve information flow between jobseekers, employers offering jobs and the training institutions. ● Campaigns for businesses to: (i) invest in product, process, and function upgrading; and (ii) provide on-the-job training. ● Development of financial schemes/products in collaboration with financial institutions to assist SMEs in improving their productivity and upgrading their operations.

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8.3.2.3

Formalisation of enterprises

● Support relevant agencies in: (i) streamlining and simplifying the registration, licensing, and compliance (tax and social security payments, etc.); (ii) incentivising formalisation (e.g., increased social security coverage, reduced taxes for a specific period/no retroactive taxation, access to financial and non-financial services, market access, etc.); and (iii) reducing corruption so as to restore confidence of enterprises in the government and their willingness to formalise. ● Encourage the formalisation of groups comprised mainly of informal enterprises and through them make the benefits of formalisation available to individuals. ● Conduct social marketing campaigns to address socio-cultural and other informal norms that hinder formalisation of enterprises.

8.3.3

Innovative financing for growth

8.3.3.1

Harnessing the economic and social benefits of remittances

The proposed interventions build on the Finance Against Remittances (FAR), a blockchain-based banking ecosystem Multi-interface Financial Exchange (MiFiX) that addresses the data asymmetry and inefficiencies associated with the provision of credit, implemented by New Street in collaboration with Al-Fardan Exchange in the United Arab Emirates, Laxmi Bank in Nepal and United Nations Capital Development Fund (UNCDF). The FAR is being implemented in the United Arab Emirates - Nepal corridor to collaterise the flow of remittances and harness the potential of remittances as a source of finance. (OECD 2021) Proposed interventions ● Support the expansion of the coverage of the FAR to include other major migrant destination countries as well as marketing campaigns to reach a larger segment of the Nepali rural population and gain their trust. ● Intensify financial literacy education for migrants and their families to encourage remittances to be invested productively. ● Development of campaign in collaboration with financial institutions to encourage migrants and their families to send remittances through formal channels. ● Introduce policy reforms to promote entrepreneurship among migrant families with a focus on providing support from establishment to growing the business with emphasis on value addition and penetrating differentiated markets. ● Support the further development of remittance linked financial products to attract investment by receiving households including possible tax incentives and preferential treatment for diaspora investors.

8.3.3.2

Expansion of range of financial products for SMEs

● Strengthen credit information systems and increase its outreach. ● Support the development and/or effective delivery of financial products (including innovative financial products) other than collaterised loans. This would be influenced by the industry/value chain structure and flow of transactions. ● Assistance to financial institutions in embedding ESG into their strategies and financial products. In Nepal the hydro power projects that get finance have responsible Environmental, Social and Governance (ESG). ● Linking ESG to credit. Some climate funds could be created o incentivise the private sector to make incremental changes through climate action.

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8.3.4

Linking businesses, markets and entering global value chains

8.3.4.1

Strengthening of interfirm collaboration

● Development or upgrading of the capacity of providers to deliver training and coaching services aimed at helping enterprises, associations, and cooperatives to implement CSR, supply chain management, and traceability at the enterprise and supply chain levels. ● Assistance to lead firms and associations in the implementation of inclusive business models and CSR, supply chain management, and traceability system. ● Documentation and dissemination of emerging good practices through forums and tri-media. ● Development of capacity of relevant local government units, civil society organizations, and other private providers to facilitate the formation or strengthening of collective enterprises and provide related support such as business planning, gender training, organizational development support, occupational safety and health, labour rights and standards, and enterprise management. ● Organization of formal and informal events that allow sensitization and socialization between market actors and low risk initiatives to foster vertical collaborations and test synergies. ● Use ICT for enabling collaborations, sharing information and creating effective linkages. This is critical for inclusive business models, supply chain management, transparency and traceability.

8.3.4.2

Product and market diversification

● Establishment of a pool of local providers of product development and design services and market information services in close collaboration with global merchandisers and designers. It may also be supported with competitions to further stimulate investment in product development. ● Foster connections between Nepalese lead firms and global buyers with a focus on niche and differentiated markets given that production volume tends to be small. ● Support the design and implementation of marketing campaigns. ● Effective use of ICT as an enabler for product development, marketing and trading.

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Appendix

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Appendix

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102

A.1. Lessons Learned from Past Projects We researched relevant development projects in Nepal to draw out critical lessons which can be useful for designing future projects and can feed into designing and delivering more sustainable success, creating deeper, wider impact. The suggestions in the previous section are based on the lessons learned from these projects. The list of projects examined are provided in the table below.

Table A.1. Projects examined in the study Title

Years of Implementation

Agriculture/Agribusiness Agriculture Sector Development Project

2017-2024

Commercial Agriculture Development Project (CADP)

2007 - 2014

Feed the Future: Knowledge-Based Integrated Sustainable Agriculture in Nepal (KISAN)

KISAN I: 2013 – 2017; KISAN II: 2017-2022

Ginger Competitiveness Project

2012-2014

High Mountain Agribusiness and Livelihood Improvement Project

2011-2019

High Value Agriculture Project in Hill and Mountain Areas (HVAP)

2011 – 2019

Inclusive Development of the Economy (INCLUDE) Programme

2014 - 2016

Nepal Economic, Agriculture, and Trade

2010 - 2013

Raising Incomes of Small and Medium Farmers Project (RISMFP)

2011 - 2018

Samarth- Nepal Market Development Programme (NMDP)

2012 - 2019

Western Uplands Poverty Alleviation Project

2003 - 2016

Manufacturing EU-Nepal Trade and Investment Programme (TIP)

2020 - 2023

Pashmina Enhancement and Trade Support (PETS)

2013 - 2017

Sustainable Carpet and Pashmina

2014 - 2017

SME/Financial Services/Employment/Trade Access to Finance for the Poor

2013 - 2021

Decentralized Rural Infrastructure and Livelihood Project

2004 – 2018 (?)

Micro Enterprise Development Programme (MEDEP) Phase IV

2013 - 2018

Nepal: Trade Promotion Programme

2013 - 2017

Reducing Non−Tariff Barriers to Enhance Cross−Border Trade

2013-2016

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mottmac.com Mehnaz.Bhaur@mottmac.com February 2022

Unlocking Opportunities for the Private Sector in Nepal Promoting greener and more inclusive growth

Articles inside

Figure 39. Extent that limited internet connectivity hinders growth of tourism enterprises

Figure 38. Extent that decline in tourist spending / tourist volume hinders growth of businesses in the Tourism Sector

Figure 37. Extent that high tax rate hinders business growth in the Construction Sector

Figure 36. Extent that getting a business license is a problem for enterprises in the Manufacturing Sector

Figure 35. Extent that corruption hinders business growth of enterprises in Manufacturing Sector

Figure 32. Extent that insufficient supply of raw materials hinders business growth of Agribusinesses

Figure 33. Extent that limited access to storage facilities hinders business growth of Agribusinesses

Figure 34. Extent that customs and trade regulations hinder business growth in the Manufacturing Sector

Figure 31. Extent that lack of testing laboratories hinders business growth of Agribusinesses

Figure 30. Extent that customs and trade regulations hinder business growth of Agribusinesses

Figure 23. Extent that high cost of transportation hinders business growth in the three provinces

Figure 26. Extent that high cost of power utilities hinders business growth

Figure 29. Indicative value added per worker per province

Figure 25. Extent that unreliable electric utilities hinder business growth

Figure 17. Breakdown of respondents in manufacturing sector by number of workers, 2017 & 2021 35 Figure 18. Breakdown of respondents in the Tourism Sector by annual sales: 2017, 2019, and 2020

Figure 24. Extent that poor accessibility hinders business growth

Table 9. Number of enterprises located in Province 2 by focus sector, 2018

Figure 3. Distribution of Construction and ICT enterprises by province

Figure 5. Breakdown of respondents by major market

Figure 10. Percentage contribution of each province to GDP, 2019/20

Figure 9. Providers of financial services

Figure 8. Sources of funds for business expansion

Figure 7. Sources of funds for purchase of fixed assets

Figure 6. Sources of working capital