Business Conditions and Sector Potentials in Nepal A Guide for Norwegian Companies Commissioned by the Royal Norwegian Embassy in Kathmandu, August 2014
Contents Abbreviations ..................................................................................................................... 3 Introduction ........................................................................................................................ 4 Country Context: Political and Economic Conditions ................................................. 5 Business Climate Profile .................................................................................................. 7 PESTEL Framework ........................................................................................................... 8 SWOT Analysis ................................................................................................................. 12 Sectorial Analysis ............................................................................................................ 14 Telecommunications and Information Technology (ICT) ........................................ 14 Aquaculture........................................................................................................................ 16 Tourism............................................................................................................................... 18 Industrial Sector .............................................................................................................. 20 Energy ................................................................................................................................. 23 Solar Energy ................................................................................................................... 23 Wind Energy ..................................................................................................................25 Hydropower .................................................................................................................. 26 Health Sector .................................................................................................................... 29 Financial Services ............................................................................................................30 Doing Business ................................................................................................................ 34 Establishing a Business ................................................................................................. 35 Financing, Risk Mitigation and Advisory Services ...................................................36 Corporate Social Responsibility ................................................................................... 37 Appendix 1: Methodology ............................................................................................... 39 Appendix 2: References ................................................................................................. 40
DISCLAIMER: This publication is a product of Nepal Economic Forum (NEF). The findings, interpretations and conclusions expressed in this publication do not necessarily reflect the views of the Royal Norwegian Embassy in Kathmandu or the Norwegian Ministry of Foreign Affairs. PHOTO CREDITS: Axel Revheim
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Abbreviations AEPC ATM BIPPA BOP BPO FDI FY GDP GoN GWh ICSID INR IPP ISO IT KGS KPO KWh LGCDP MT MDGs MoU MW NEA NEPSE NPR NRB NTC PPA PV SC SD SEBON SME SSRP SWAP SWERA SWH TW USD
Alternative Energy Promotion Center Automated Teller Machine Bilateral Investment Promotion and Protection Agreement Balance of Payment Business Process Outsourcing Foreign Direct Investment Fiscal Year Gross Domestic Product Government of Nepal Giga Watt hour International Center for the Settlement of Investment Disputes Indian Rupee Independent Power Producers International Organization of Standardization Information Technology Kilograms Knowledge Process Outsourcing Kilo Watt hour Local Governance and Community Development Program Metric Ton Millennium Development Goals Memorandum of Understanding Mega Watt Nepal Electricity Authority Nepal Stock Exchange Nepali Rupee Nepal Rastra Bank Nepal Telecommunication Company Power Purchase Agreement Photovoltaic Solar Cookers Solar Dryers Securities Exchange Board of Nepal Small and Medium Enterprise School Sector Reform Program Sector- Wide- Approach Solar and Wind Energy Resources Assessment Solar Water Heater Terra Watt US Dollar
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Introduction The aim of this guide is to provide Norwegian companies with an overview of business conditions in Nepal and identify industries which offer viable opportunities for trade and investments. There is a great potential for further business cooperation between Norway and Nepal. Sectors including hydropower development, IT and telecommunications, industrial production, fisheries and tourism may offer profitable opportunities to Norwegian companies. Likewise, a strengthening of trade and investment activities may bring a number of benefits to Nepal including job creation, increased tax revenues, greater participation of women in the economy, exchange of expertise and technology development. In recent years, Norwegian companies have developed a much stronger interest in exploring market opportunities and establishing businesses in non-OECD countries. Economic forecasts indicate that the greatest future growth will occur in Asia, Africa and Latin America. Entering markets in developing countries, however, will always involve taking risks. In Nepal, there are significant challenges related to weak factors and products markets, poor infrastructure and an opaque legal and institutional framework. The business climate is therefore best described as high-risk, but with potential high returns. Although a number of factors have put severe restrictions on private sector development in Nepal, there are several niche sectors growing and expanding employment. One way to reduce the risk of engaging in trade and investments activities is to have a deep understanding of the country and the special circumstances that apply in the relevant sector. With this guide, the Norwegian Embassy in Kathmandu aims to provide a starting point for Norwegian investors and companies looking to establish themselves in Nepal. A greater involvement of the Norwegian private sector may lead an increase in employment, incomes and welfare, to the mutual benefit of both Norway and Nepal.
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Country Context: Political and Economic Conditions Nepal is a landlocked country in South Asia undergoing rapid change. After a long period of civil unrest and political instability, nation-wide elections were successfully concluded in November 2013, leading to the establishment of a new government and constituent assembly. These recent developments are likely to bring about a more favourable business climate and new opportunities for human and economic development. With its abundance of natural resources, Nepal is increasingly getting the attention of foreign businesses. It has a diverse workforce that can be employed for both high- and low-skilled work as well as a strategic location that enables market expansion to major consumer markets in China and India. The comparative advantages of Nepal for foreign investors include its scenic nature, great water resources, moderately priced labour with a service-minded attitude and generally good English language skills in urban areas. The World Bank has identified hydropower, service industries and high value agriculture as the most important sectors for long-term economic growth.1 With an impressive landscape of mountains, lakes and national parks, Nepal also has a great potential for increasing incomes from high value services in the tourism industry. There are still major barriers to overcome before Nepal embarks on a lasting economic development. Extensive policy reforms began in the early 1990s, but these have not succeeded in transforming the economy or increasing its competitiveness significantly. Prudent fiscal policy has so far led to relative macroeconomic stability, but the bureaucracy is still characterized by low implementation capacity, poor coordination and slow decision-making processes. These hurdles are exacerbated by the frequent replacements of bureaucratic officials. However, there is an adequate regulatory framework in place for foreign trade and investments, which is not too restrictive and can be constructively worked around. The government has also recently implemented a number of policies to strengthen trade relations and facilitate the involvement of foreign investors in the country. Nepal is at an early stage of industrial development and ranks among the world’s poorest countries. Key sources of income include agricultural production, textiles export, tourism and remittances. Current GDP is USD 40.03 billion, with a growth rate of 3.5% in 2013.2 Agriculture employs over 75% of the population and accounts for 33% of GDP. The sector has, however, experienced highly volatile income streams and a low job creation rate, which causes thousands of Nepalese men to seek temporary employment abroad every year. Remittances from this diaspora population now exceed a quarter of GDP. Remittances have been largely channelled into consumption creating inflationary pressures on goods and assets. Only about 2.4% of the money is used for capital formation.3 Monetary growth caused by remittances has also led to abundant liquidity for financial institutions with weak supervision, putting the economy at risk in a number of ways. The increase in imports of consumer goods made possible by remittances has also caused a widening trade deficit. With regards to employment, it is estimated that the informal sector employs about 70% of all workers. 4 Besides agriculture, the private sector is dominated by small, non-exporting 1
Afram, G. G., and Del Pero, A. S. Nepal’s Investment Climate: Leveraging the Private Sector for Job Creation and Growth. World Bank Publications, 2012. 2 Central Intelligence Agency. The World Factbook 2013-14: Nepal. 3 Parajuli, R. B. Consumed but not Invested: An Inquiry into the Remittance-Growth Nexus in Nepal. Centre for South Asian Studies (CSAS), 2013. 4 Afram, G. G., and Del Pero, A. S., 2012.
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enterprises. The two most common industries are manufacturing (about 12%) and hotels and restaurants (about 15%). The formal sector only covers a small portion of the Nepali labour market. Although there has been a steady increase in education provision and school attendance in Nepal, the sector still relies on low-skilled labour. India is Nepal’s main trading partner and the Nepali Rupee (NPR) remains pegged to the Indian Rupee (INR). India is also the largest contributor (44%) to foreign direct investment (FDI).5 Other important trading partners include the United States and Germany. The bilateral trade between Norway and Nepal is not extensive, but Norwegian companies have invested significant amounts in the hydropower sector. Norway and Nepal established diplomatic relations in 1973, and the country has been a large recipient of Norwegian bilateral assistance over the years, particularly in the domain of education, energy and good governance. It is the aim of the Embassy to expand these relations, particularly in the areas of trade and investments.
Figure 1: Economic Indicators, 2008-20126
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Economic Indicator
2008
2009
2010
2011
2012
Per capita GNI, Atlas method ($)
400
440
490
540
GDP growth (% change per year)
5.8
3.9
4.3
3.8
4.6
CPI (% change per year)
7.7
12.6
9.6
9.6
8.3
Fiscal balance (% of GDP)
-2.1
-3.3
-1.9
-2.4
-2.2
Export growth (% change per year)
9.3
-4.7
-6.3
11.7
5.7
Import growth (% change per year)
24.1
8.3
35.5
8.9
4.7
Current account balance (% of GDP)
2.9
4.2
-2.3
-0.9
4.9
External debt (% of GNI)
27.6
27.0
23.5
22.0
Ibid. Sources: ADB. 2013. Asian Development Outlook 2013. World Bank. 2013. World Development Indicators.
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Business Climate Profile A healthy business and investment climate is essential for the success of private sector led economic growth. There have been improvements in Nepal’s business environment with the end of the ten year insurgency, and particularly the successful completion of elections in 2013 and the subsequent formation of a constituent assembly. A review of the country’s performance in global indices, as can be seen in Table 1, indicates a gradual improvement in its business environment.
Table 1: Global Index Rankings of Nepal Index
2011 Ranking
2012 Ranking
2013 Ranking
2014 Ranking
Doing Business Index7
116/183
107/183
103/185
105 / 189
Global Enabling Trade Report8
118/125 (2010)
124 / 132
-
116 / 138
Corruption Perceptions Index9
154/182
139/174
116 / 177
-
Global Competitiveness Report10
125/142
125/144
117 / 148
117 / 148
Logistic Performance Index11
147/155 (2010)
151/155
-
105/ 160
Global Peace Index12
95/153
80/158
82/162
76 / 162
According to the Doing Business Report for 2014, Nepal is ranked 105 out of a total of 189 countries, a steady improvement from its rank in 2011. While the rank has dropped in comparison to 2013, this is due to increased number of countries in the index and not due to decreased performance.13 While Nepal lies below the global average in terms of doing business, it has been on an improving trend and is steadily moving towards a better business environment. Under the Doing Business Index, while Nepal is ranked well below global average in seven areas, it is ranked above the global average in other areas such as registering property, getting credit, and protecting investors, and is close to the global average in areas such as, starting a business and getting electricity. Nepal’s rank in the Global Enabling Trade Index, 14 has improved to stand at 116 out of 138 countries in 2014 from 118 out of 125 countries in 2011. Similarly, there have also been improvements in Nepal’s performance in other indices such as Corruptions Perceptions, Global Competitiveness, Logistic Performance, and Global Peace, further indicative of an improving business environment. The Government of Nepal’s (GoN) steps to promote and facilitate Foreign Direct Investment (FDI) by introducing appropriate policies and legal arrangements to create an enabling environment for investors is also a step in the right direction. As of FY 2012/13, a total of 317 companies were approved for foreign investment in Nepal, bringing up the total number of companies approved for foreign investment to 2,652 and total FDI to NPR 95.08 billion (approx. 7
“Doing Business Report 2014”, International Finance Corporation, http://www.doingbusiness.org/data/exploreeconomies/nepal/ 8 “Global Enabling Trade Report, 2014”, World Economic Forum, http://www.weforum.org/reports/global-enabling-tradereport-2014 9 Corruption Perceptions Index 2013, Transparency International, http://cpi.transparency.org/cpi2013/results/ 10 Global Competitiveness Report 2013-2014, World Economic Forum, http://www.weforum.org/issues/globalcompetitiveness 11 Logistics Performance Index 2014, The World Bank, http://lpi.worldbank.org/international/global 12 Global peace Index, Institute of Economics and Peace, http://www.visionofhumanity.org/terrorismindex/about-the-gti/ 13 See Annex 2 for Ease of Doing Business Rankings 14 The Global Enabling Trade Index assesses the quality of institutions, policies and services facilitating the free flow of goods over borders and to their destinations.
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USD 950 mill). Most of the investments are directed towards manufacturing, service or tourism sub categories. The key trading partners for Nepal are India and China. With investments worth NPR 1.13 billion (approx. USD 11 mill) up to the FY 2012/13, Norway ranks in the top fifteen investors in Nepal.15 A review of foreign investment to Nepal in consecutive years, as shown in Table 2, also show cases a growing trend. FY 2012/13 has shown a significant improvement in the FDI flows to Nepal.
Table 2: Foreign Investment from FY 2008/09 to FY 2012/13 Category
2008/09
2009/10
2010/11
2011/12
2012/13
No. of companies approved for investment
231
171
209
227
317
Foreign Investment (in NPR billions)
6.25
9.10
10.05
7.14
19.93
PESTEL Framework A brief analysis of the business climate in Nepal using the PESTEL framework, which highlights the positives as well as negatives in the business environment, has been provided below.
Political Factors A certain level of political development has taken place in Nepal after the decade long conflict and the political transition faced by the country. As can be seen through the Global Peace Index, the country’s rank has seen a considerable improvement from 95 in 2011 to 76 in 2014. A few key factors resulting in the improved business climate have been listed below: i.
The Maoists, who were a part of the ten year insurgency, have come to the larger fold of parliamentary democracy. Former fighters have either being integrated within the National Army or compensated under different programs.
ii.
The successful conclusion of nation-wide elections in November 2013 and the establishment of a new government and Constituent Assembly have sent a positive message of stability to potential investors to Nepal. Post 2013 elections, there has been a significant decrease in the frequency of strikes and demonstrations within the country.
iii.
The current coalition government holds a positive attitude towards FDI, which is considered an important aspect for economic development. Efforts are being made to ensure an investment-friendly environment in Nepal, with the GoN ready to introduce policy reforms and committed to ensuring the security of foreign investors in Nepal. 16 The current government in its bid to increase FDI in Nepal is considering to open previously FDI restricted sectors. Some of these sectors, as identified in a draft of the Foreign Investment and Technology Transfer Policy, are motion pictures, travel agencies, trekking agencies, water rafting, pony trekking, horse riding, tobacco and alcohol, internal courier services, atomic energy, tourist lodging, poultry farming, fisheries and bee-keeping. In sectors such as multi brand retail stores, investment above NPR 5 billion will be required with prior requirements of similar operations in
15 16
“Industrial Statistics – FY 2012/13”, Department of Industries, Nepal Lekhanath Pandey, “Call for FDI Friendly Climate”, The Himalayan Times, March 30, 2014, http://www.thehimalayantimes.com/fullNews.php?headline=Call+for+FDI-friendly+climate&NewsID=410304
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two other countries. These actions are also in keeping with the country’s commitments to the WTO in 2004 where Nepal promised to open 11 sectors with a maximum foreign equity condition ranging from 51 - 80 %.17
Economic Factors Nepal’s GDP growth has been hovering around the 4% mark for the last few years. Although Nepal’s GDP saw a sluggish growth of 3.85% in FY 2012/13, the Nepali economy is projected to grow at 5.48%18 in FY 2013/14. The improvement in Nepal’s GDP growth can be attributed to favourable monsoons, continued strong remittance flows, and the adoption of a full budget. 19 Some of the factors that have contributed towards cushioning the Nepali economy are listed below: i.
Service sector: This sector attracts one of the highest amounts of foreign investment in Nepal. A high growth rate in service sub-sectors such as transport, hotel and restaurants, health and social services, and communication have also positively influenced economic growth.
ii.
Remittances: Remittance is one of the largest sources of foreign exchange inflows, comprising of approximately 26% of GDP in 2012/13, making Nepal the third highest remittance recipient (in terms of percentage of GDP) in the world. 20 While remittance inflows have been on an incline, their contribution towards GDP will be close to 23% in terms of projected GDP for FY 2013/14.21 Increased remittance flows have led to higher disposable incomes among the Nepali population. Income from remittance is mostly channelled into consumption and only 2.4% of remittance inflows are used for capital formation.22
iii.
Financial sector: While penetration of commercial banks and financial institutions has increased in the economy, the monetary growth stemming primarily from remittances has led to excess liquidity for financial institutions. The financial sector’s underdeveloped capacities, and weak supervision and monitoring mechanisms, has resulted in less than optimum translation of remittance influx into sound credit opportunities, which can fuel further growth for Nepal.
iv.
Private sector: The private sector has been a major engine for economic growth in Nepal creating job opportunities and facilitating employment. The private sector is dominated primarily by small non exporting enterprises, with the two primary industries being manufacturing, and hotels and restaurants. However despite its significant contributions to the GDP, the private sector suffers from a significant lack of transparency.
17
“Government mulls opening restricted areas to foreign investment” The Kathmandu Post, May 05, 2014, http://www.ekantipur.com/the-kathmandu-post/2014/05/05/related_articles/govt-mulls-opening-restricted-areas-toforeign-investment/262477.html 18 “Annual National Accounts of Nepal 2070-71 (2013-14), Press Release”, Central Bureau of Statistics, Nepal 19 Migration and Remittances 2014, World Bank, http://siteresources.worldbank.org/INTPROSPECTS/Resources/3349341288990760745/MigrationandDevelopmentBrief22.pdf 20 Remittance Figures Based on Ten Months Data as per Current Macroeconomic Situation, Nepal Rastra Bank, and projected GDP for FY 2013/14 as per Annual National Account of Nepal 2070-71, Central Bureau of Statistics 21 Parajuli, R. B. Consumed but not Invested: An Inquiry into the Remittance-Growth Nexus in Nepal. Centre for South Asian Studies (CSAS), 2013. 22 Migration and Development Brief 22, World Bank, http://siteresources.worldbank.org/INTPROSPECTS/Resources/3349341288990760745/MigrationandDevelopmentBrief22.pdf
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Social Factors i.
Population: According to the census in 2011, over 57% of the population falls into the 1559 age group category. This alludes to the abundance in workforce as a result of a large active population. A comparison of labour force participation rate, which identifies the percentage of the population aged above 15, and economically active, indicates that Nepali has one of the highest labour force participation rates in the world standing at 83%.23 The labour costs in Nepal are generally below regional and global standards, whereas the literacy rate stands at 65.9%. As per the last Enterprise Survey carried out in 2009 the percentage of skilled labour stood at 64% of the total workforce.24
ii.
Migration: Migration to foreign countries, over the past decade, has increased to 5.42% of the active workforce. In spite of a significant migration, labour in Nepal is still abundant. There is however a gradual decrease in the pool of skilled workforce.
iii.
Consumerism: There is a growing middle class as well as disposable income, a result of the increase in remittances entering the economy.
Technological Factors The Government of Nepal has initiated a number of efforts to strengthen the use and development of information technology in the country. i.
The National Information Technology Centre was established in 2002 to develop and promote the Information Technology sector in Nepal, as identified in the GON’s IT Policy in 2000. Similarly, the IT Park envisioned in the GON’s IT Policy for 2000 is expected to come into operation in the current year. The IT Park has been established with the aim of developing software, promoting IT based businesses, and providing ITES (IT enabled services); however the IT Park has not been able to attract a good number of IT companies and IT entrepreneurs.
ii.
With the IT sector becoming a vital and integral part of doing business, the GoN is committed to develop its IT infrastructure. The E-Governance Plan was initiated in 2008 and covers e-health, e-agriculture, e-education, and other areas. While these policies are in place implementation has still been slow.25
iii.
Due to the availability of skilled computer engineers, Nepal has a number of outsourcing companies. There has been a tremendous increase in the number of IT solution providers in Nepal like Verisk (earlier D2Hawkeye), Deerwalk, and Cloud Factory which are engaging professionals in providing integrated IT solutions, risk assessment, and decision analytics.
iv.
In recent years, there has been significant improvement in telecommunication services in Nepal with a growing number of users and adoption of new technology. As of May 2014, the total penetration rate for telephony services stood at 90.09%, whereas the penetration
23
“Data - Labor Force Participation Rate”, World Bank, http://data.worldbank.org/indicator/SL.TLF.CACT.ZS/countries/BD?display=default 24 Nepal Enterprise Survey, 2009 25 Patricia B. Arinto, Shahid Akhtar, Orbicom, “Digital Review of Asia Pacific 2009 - 2010”
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rate for data and internet services stood at 31.88%.26 The government also adopted the Telecommunication Radio Frequency Distribution and Pricing Policy in 2012, which is aimed at bringing in four more operators for third generation (3G) services.
Environmental Factors Nepal is unique in terms of its geography which allows for incredible biodiversity. Because Nepal relies heavily on water resources from snow and glaciers, climate change is a key issue. Unfavourable climatic conditions and natural disasters often have far-reaching adverse effects to the agriculture sector, which is a key sector in Nepal. Nepal is sensitive to environmental impact. Most of the environmental issues faced have resulted from unplanned urbanization and increased population growth, some of which are listed below. i.
Water pollution resulting from sedimentation and discharge of industrial effluents into rivers.
ii.
Traditional sources such as firewood being a primary source of energy in the rural areas; this often results in deforestation as well as indoor air pollution and respiratory diseases.
iii.
Land degradation resulting from increased population pressures, improper use of agrochemicals and unsustainable use of land holdings.
iv.
Rise in population levels has led to increased demand for wood, and therefore an increase in deforestation. This has resulted in habitat degradation and threatened biodiversity.
Additionally Nepal is prone to natural disasters such as earthquakes, soil erosion, landslides, and glacial lake outbursts due to its geography; topography; climate and geology. Lack of consideration of these factors in infrastructural development and planning therefore leaves the country vulnerable to high environmental risk. While the Government of Nepal has taken a number of steps for the protection of the environment such as the adoption of the requirement for ISO 14001 for environment management, and Environment Protection Act 1997, effective implementation is yet to be seen.
Legal Factors While attempts to liberalize the investment policies in Nepal began in the 1980s, the liberalization process gained ground only after the 1990s. Several acts and major reforms in regulations have been introduced which has not only spurred growth across various sectors, but has also opened up key domestic sectors for foreign investment opportunities in Nepal. However, effective implementation and enforcement of these laws and policies remain a challenge. In 2011, an Investment Board was established with the aim to create and promote an investment friendly environment for both domestic and foreign investors. However, the functions and authorities of the Investment Board have not been clearly laid down in the Investment Board Act.
26
“Management Information System�, Nepal Telecommunication Authority, July 2014
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Although the Government has adopted various policies,27 dispute resolution mechanisms, in the case of labour disputes, tax policy and administration, are not satisfactory and in need of review. Nepal has also taken numerous steps to promote foreign investment by creating favourable conditions for investors. Some of the key institutional arrangements that have been achieved are listed below. i.
Nepal signed the BIPPA (Bilateral Investment Promotion and Protection Agreement) with six nations.28 The Agreements seek to promote and protect investments from either country in the territory of the other by treating investors from these countries at par with Nepali investors and vice versa. Additionally, it also has an elaborate dispute resolution mechanism to help settle disputes between investors and the Nepali government, as well as between the two governments with a view of increasing bilateral investment.
ii.
Nepal has also entered into the Double Taxation Avoidance Agreement 29 with ten countries to avoid double taxation. This treaty avoids levying of tax by two or more jurisdictions on the same declared income, asset or financial transaction. In addition to Norway, Nepal has DTAA with India, Qatar, China, Austria, Republic of South Korea, Mauritius, Pakistan, Sri Lanka, and Thailand
iii.
Nepal is a signatory to the convention on the settlement of Investment Dispute between the State and Nationals of Others States, and a member of the International Centre for the Settlement of Investment Disputes (ICSID), which is associated with the World Bank. This means that in case of a dispute, Nepal has agreed on the terms of international dispute settlement mechanisms.
Overall, the business climate of Nepal is characterized by number of high risk factors, but increased interest in FDI in Nepal alludes to the fact that Nepal also presents a good potential for high investment returns. While there is sufficient regulatory framework in place to guide foreign investors in Nepal, there are gaps in the implementation of these policies.
SWOT Analysis Strengths
Weaknesses
Adequate policy environment, with comprehensive policies such as the Foreign Investment and One-window Policy 1992which identifies the types of foreign investment allowed in the country, facilities and concessions provided, provisions for repatriation, and others being adopted by the government. Abundance of trainable and active workforce at a low cost that can be used for either high or low skilled work. Despite the risky business climate, the return on investments is relatively high.
Recently emerging from political transition. Underdeveloped and poorly maintained infrastructure, and therefore problematic transport, electricity and water supply. Inadequate implementation of policies, laws and regulations, as well as inspection systems and enforcement capacities. High frequency of bureaucratic delays, inefficiency and private sector protectionism policies. Non-transparent legal system and negative attitudes within the bureaucracy makes it difficult for foreign investors to obtain reliable information easily.
27 See Appendix 4: Additional References 28 France, Germany, Britain, Mauritius, Qatar, Finland, and recently India have BIPPA with Nepal. 29 Tax Treaties, Inland Revenue Department, Nepal, http://www.ird.gov.np/ird/index/document-30.html
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Nepal is blessed with unique geography, incredible biodiversity and rich cultural heritage. Rich in water resources; ranked among the countries with the highest potential for hydropower development. Increase in remittance inflow and disposable income leading to increase in domestic demands and in the consumerism culture. Booming Sunrise Sectors: Health Care, Education, MICE (Meetings Incentives Conferencing and Exhibitions) Destination, and Adventure Tourism. Good scope for Lifestyle Enterprises30 with various enterprises flourishing within the economy.
Private sector apprehensive to expand and take advantage of economies of scale. The size of formal firms in the private sector is therefore small. Economy has developed an unhealthy dependence on remittances. The legal framework in terms of securing property has issues as there are more than 60 laws and policies on land, land rights and land use. This has led to the repetition and contradiction of legal provisions relating to property law in Nepal. Topography is considered challenging for infrastructure development.
Opportunities
Threats
Strategic location advantage due to easy access to Indian and Chinese Markets. Therefore high market expansion opportunities for foreign investors. High potential for hydropower generation Because of excess liquidity in the banking system, banks are looking for investment opportunities. Nepali banks can provide loans to companies with foreign investments. Young population with increasing disposable incomes. High potential for tourism because of Nepal’s unique geography, incredible biodiversity and rich cultural heritage. Nepal’s natural and cultural heritage provides opportunities for adventure tourism, health tourism, and cultural tourism is abundant. Opportunities for developing a variety of niche agriculture products and agro-business activities.
Nepal is ranked 116th in the Global Corruption Index out of 177 countries, which alludes to the fact that corruption is rampant in Nepal. Issuance of travel warnings for Nepal in the past has acted as a big threat leading to a sharp drop in tourist arrivals. Multiple trade unions, with strong political associations, have been a hurdle to the smooth operation of companies. Many companies with foreign investment have had to close temporarily because of unresolved labour issues. While exit mechanisms for foreign investors are included in the regulatory framework, there is a lot of resistance from the government to such divestments.
30
A lifestyle business is one that is geared toward supporting the owner’s income and personal requirements rather than maximizing revenue.
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Sectorial Analysis Following is an analysis of seven priority sectors identified for Norwegian trade and investment. These sectors have been based on high growth potential sectors as identified by the Norwegian Embassy, sectors identified in Nepal Trade and Integration Strategy and Nepal’s sunrise sectors. The sectors detailed below support synergies between the Norwegian and Nepali economies. The following areas were analysed to determine the above mentioned priority sectors. i. ii. iii. iv. v.
Analysis of financial returns. All sectors record a Return on Investment (RoI) of above 10%. Analysis of market potential (domestic and export potential) Analysis of enabling environment Analysis of risk factors Analysis of social impact
Telecommunications and Information Technology (ICT) The liberalization of telecommunication and IT services in Nepal began in 1995, when the government allowed the involvement of private actors in the development and expansion of the sector. After liberalisation, there has been a major growth in the telecommunication and IT industry. While subscriber bases and tele-density were very low before 1995, when telecommunication and IT sectors were monopolised by the government, there is a now greater involvement of the private sector. In the last decade, there has been significant growth in mobile subscribers and significant decrease in landline usage. Total mobile subscribers increased from 0.2 million in 2005 to 20 million in 2014 and the number of internet users has accelerated from 0.04 million to 8 million. As of 2014, the penetration rate of voice telephony service is at 90% and internet penetration is at 32%. Nepal fairs better than India, where the voice telephony service penetration is at 87% and internet penetration is 17%. There are two main telecommunication providers: Nepal Telecom (NT) and Ncell, with market shares of about 40% and 50% respectively. NT is a state-owned telecommunication service provider with 85% of its shares owned by the government, whereas Ncell is a privately owned mobile operator and the first to offer GSM services in telecommunications sector. The Swedish/Finnish TeliaSonera Holdings, which owns 80% of Ncell, is currently ranked as the largest foreign investor in Nepal. Other telecom companies that have foreign investments are United Telecom, Smart Telecom, Nepal Satellite, and STM Telecom. Considering the telecom sector in Nepal is at a mature stage, investments in ITC can be geared toward mobile technologies in the form of software applications and mobile banking. Business Process Outsourcing (BPO) is an emerging area in Nepal. These IT entities are often referred to as ITES-BPO (Informational Technology Enable Services-BPO). The Government of Nepal has identified IT and BPO as one of the most promising sectors for exports. It has potential for high growth, investment, and significant profits in the coming years and is expected to be one of the most significant growth contributors for the Nepali economy. There are increasing scales of operation, expansion to new markets (previously only North America; now to EU, Asia and Oceania), and a wide array of services offered to clients. It is estimated that there are over 6,000 BPO companies in Nepal working for international companies around the globe. Of these 6,000 BPO companies, however, only 250 companies are 14
legally registered. The IT and BPO companies offer highly skilled services such as software development, data processing, map digitization, animation, medical transcription services, cloud computing and mobile application development. Some of the renowned IT companies operating in Nepal are Verisk Information Technologies, Javra Software, F1Soft, Incessant Rain Animation, and Cloud Factory. The legal framework of the telecom industry towards foreign investors is highly favourable. Foreign investors are allowed to invest 80% of capital in a company. A minimum of 20% domestic participation is required. According to the technology transfer agreement, investors and suppliers are allowed to repatriate profits. The return on investment for this sector stands at 40%.
Strengths
Weaknesses
Beneficial regulatory framework. The Government of Nepal is supportive of the telecom and IT industry. Investment policies are clear for foreign and private investors along with repatriation policies. Private sector exporters enjoy VAT exemption in foreign currency earnings. The IT firms are in the lower corporate tax bracket of 20% instead of the general 25%. The IT sector is less affected by political disturbances as compared to other sectors. There are currently no labour unions in IT sector. Nepal Telecom Authority is planning to expand optic fibre network in the country with China and India. Optic fibres have already been laid across the east to west highway. The IT Promotion Policy Act encourages development of information technology and related infrastructure via domestic and foreign investment. 5,000 graduates enter into the IT sector every year.
Ineffective implementation of IT related polices/laws such as intellectual property rights. Weak implementation of policies can lead to unwanted leakage of client’s data and information. There is a lack of adequate infrastructure in both the IT and telecom sector. Electricity crisis has increased the cost of running IT business; shortage of petrol fuel has made business operations difficult and unavailability of highspeed internet connectivity pose serious challenges. Furthermore, there is a lack of telecommunication infrastructure in rural areas of Nepal. Data security/data protection issues. Ineffective legal mechanisms in place to enforce such protections and very few companies benchmarked by international standards due to lack of implementation of legal mechanisms. No distinctive brand positioning of Nepal in IT services, as opposed to India, which is well known worldwide for its IT and BPO services. Insufficient effort from the government to support IT innovation.
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Opportunities
Threats
Late adopter of new telecom technology such as 4G and LTE. New players in the market with new technology could be competitive in the industry. Labour costs are increasing in India, which could make Nepal a more attractive IT destination. Global IT/BPO markets have seen increasingly successful trends. There is therefore much scope for growth in this field. There has been strong growth of IT sector in emerging economies such as India and China. Nepal can benefit from its location between these two countries.
Emigration of highly skilled human resources has resulted in brain drain and therefore a smaller pool of resources. Lack of coordination between government ministries and private sector might hamper growth. The bureaucracy has so far not cooperated well with the Computer Association of Nepal (CAN). Effective implementation of IT policies is essential to make improvements in this sector. Many illegal IT companies have been mushrooming despite the laws and regulation in place.
Norway has some of the largest IT companies in Europe specializing in software development, mobile application development and web development. Nepal, on the other hand, has a growing IT sector with many reputed IT companies providing quality service worldwide. With IT companies in Norway specializing in banking payment services and other electronic services, areas where Nepal is lagging behind, there are opportunities for collaboration in terms of knowledge transfer and technology development. Within the telecommunication industry, internet infrastructure and service of broadband internet in the country is very poor. Therefore, investment in ISP has good potential.
Aquaculture Both Nepal and Norway have long, but separate traditions in agriculture and fisheries. There are potential gains for all involved partners if Norwegian companies working within the sector increase their presence in Nepal. In particular, there is great scope for more business collaboration in fish farming, an industry in which Norway has extensive experience and expertise. The Nepal Agriculture Perspective Plan has categorized fisheries and aquaculture as a small but promising sub-sector of agriculture in Nepal. Fisheries have been practiced in Nepal for a long time, but aquaculture is a relatively new activity, starting in the early 1950s, with the introduction of exotic species of common carps from India. Subsequent successful breeding using monoculture practices in the 1960s and 1970s led to its considerable popularity within the private sector. Nepal is the third richest country in the world in terms of its fresh water resources, with its inland water bodies – rivers, streams, lakes and reservoirs – characterized by a high diversity of fish species. The area surface of water in Nepal is approximately 4,121 km2. With the growing demand for fish products in Nepal and the region as a whole the aquaculture industry has grown significantly. Fishery supports a large number of communities in the southern plain (Terai) regions in Nepal; however the current production in Nepal is far less than the demand. Imports in this sector have therefore been on the rise in recent years. In the FY 2011/12, total direct employment generated by fishery was 1.2 million approximately and contribution of fishery to the GDP was 0.94%. In the same fiscal year, fish production from aquaculture practices was 34,500 MT whereas production from capture fisheries was 21,500 MT. It is estimated that annual demand has grown to more than 400,000 MT.
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The compound annual growth of fish production in the last decade has been 7%. Given its fresh water resources and accessibility to huge fish consuming markets such as Bangladesh and India, the current growth rate of production is very low. Bangladesh has per capita fish consumption of 14.5 kg and India 5.2 kg. Daily fish consumption of Kathmandu valley as a whole is 10,000 kg. From a food security perspective, Nepal is in urgent need of increasing its food production. As the third richest country in the world in terms of its fresh water resources, the fisheries and aquaculture sector has a great potential for further development. Norway has a long tradition in successfully developing large-scale fish farming, and key technologies could turn existing smallscale fish farming in Nepal into a commercialized industry guaranteeing employment, income generation and food security among poor rural communities. The return on investment for this sector stands at 41%.
Strengths
Weaknesses
Abundant but under-utilized fresh water resources that could be used for fish farming. Good prospects of running water fish farming for many species of trout. High export potential and as well as high domestic demand of fish. High availability of skilled labour that have been involved in the fishing occupation for generations. Labour cost advantage in comparison to other South-Asian countries. This sector is less affected by political issues.
Lack of commercial scale production and infrastructure that enable large-scale production. Inadequate hatchery to produce enough fingerlings. Lack of feed production for large-scale fish production. Absence of fishery laws and poor enforcement of existing laws. Lack of scientific and technological innovations in the sector of aquaculture. FDI is limited to feed production, hatchery and fingerlings.
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Opportunities
Threats
The sector represents a big domestic market opportunity. Demand for fish within the country is growing. Fish farming provides potential for diversification of agriculture practices. Fish farming communities in Nepal are usually poor. There is therefore a good potential for improving livelihoods in local communities. Potential for ecosystem rehabilitation of overexploited fish species.
Different environmental effects resulting from aquatic pollution and habitat degradation.
Although the aquaculture sector is FDI restricted, foreign investments are allowed in areas of feed production, hatchery, and fingerlings. Norwegian companies may also play a role in developing facilities to produce feed for fish production. Current demand is largely met by imported dried freshwater shrimp from India which is pounded into shrimp meal in Nepal. The supply of these products have been inconsistent and of varying quality. There is therefore potential for investment and development of this sector. With Norway having successfully developed large-scale fish farming, sharing of aquacultural practices, technology transfer, and investment could largely help in turning existing small-scale fish farming in Nepal into a commercialized industry guaranteeing employment, income generation and food security among poor rural communities. With Norway’s extensive experience and expertise in the industry, there is therefore a great scope for furthering greater business collaboration.
Tourism Nepal is well known for its exotic, serene and adventurous image all around the world. With the highest and most famous mountain peaks in the world, unique landscapes and important religious and cultural sites, Nepal attracts a growing number of tourists every year. Tourism is therefore widely known as a sector with comparative advantage and high potential growth. In FY 2012/2013, Nepal saw an influx of 803,142 tourists, an increase of 20.6% compared to FY 2011/2012.31 In FY 2013/14, the tourist inflow was estimated to be at 861,000, an increase of 7.9% compared to the previous year. Tourism is also the second largest employment-generating sector after agriculture, contributing 8.2% to direct and indirect job creation (1.2 million jobs). This figure is expected to rise by 7.1% to 1.34 million jobs by 2023. Tourism is one of the highest contributors towards foreign exchange after remittances, with its total contribution to GDP standing at USD 1.5 billion (8.2% of GDP) in 2013. The estimated growth in contribution for 2014 is at 8.6%.32 In order to promote the image of Nepal in the international market, a Nepal Tourism Vision 2020 was recently introduced. In addition, the government also adopted a Nepal Tourism Policy in 2009, which emphasises the importance of rural tourism, community-based tourism and
31 Nepal Tourism Board (NTB), Tourism Stats 2012 32 Travel and Tourism Economic Impact Nepal 2014,
World Tourism and Travel Council
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homestays. The policy is closely integrated with the poverty alleviation policy and economic and social development, as it aims to increase employment levels. The government aims to double its earnings on tourism and has channelled significant investments into the aviation sector in particular. The sector is growing both in terms of number of tourists and spending. The daily expenditure of tourists was at a three year high of USD 42.80 in 2013, an increase of 18% compared to the previous year. However, the size of Nepal’s tourism cluster is still small relative to other peer countries such as India and Bhutan and the industry is increasingly showing signs of a slide towards a “low-value, high volume” model. There is however great scope for further development of high-value services that can be established around already existing products such as trekking services to religious and recreational purposes to Mustang and Muktinath. Although there are promising actions by the government to promote the tourism sector in Nepal, there are a few hurdles that need to be addressed. There is little reliable information on the structure of the tourism industry in Nepal, or analysis of the key players in the market. The number of travel and trekking agencies has grown rapidly and is dominated by micro enterprises, and there is still an over-capacity of tourist accommodations. Norwegians are currently ranked as the longest-staying visitors to Nepal, with an average stay of 25 days. 3,280 Norwegian tourists came to Nepal in 2012, among whom 2,369 were first-time visitors. Trekking, mountaineering and adventure tourism are important markets to Norwegian visitors. There is therefore good potential for more collaboration between the tourism industry in Nepal and Norwegian tour operators. The potential to engage in a diverse set of activities is an attraction in itself, and also means that there is potential for developing a number of subsectors within the industry. The return on investment for this sector stands at 17%.
Strengths
Weaknesses
Nepal ranks 14th out of 184 countries in growth of tourism sector in 2014 as compared to 25th the previous year. An improved political situation and a more favourable business climate have contributed to this increase in growth of tourism. Recently, the Government of Nepal opened up 104 unexplored peaks and new trekking routes for commercial purposes to boost tourism in the trekking sector. A combination of courteous people, adventurous trekking areas for tourist with scenic natural beauty and rich cultural heritage is an advantage to attract foreign tourists. Nepal offers a variety of tourism products. Nepal is a relatively affordable place to visit in terms of value per dollar spending. Increased air connectivity to Europe through Middle East hubs such as Dubai, Abu Dhabi
The tour operators in Nepal lack efficient promotion in packaging of tourism products. Lack of proper hotel and medical facilities offered in rural areas with high tourist inflow. Most of the popular tourist destinations are situated in rural areas where basic necessities such as sanitation, hygiene, drinking water may be a major problem. Lack of infrastructure, in particular electricity and roads, which raises the cost of tourist operators. Shortage of professional and skilled human resources. Lack of innovation in introducing new tourism products and packages. Inadequate avenues for training manpower to cater for the increasing tourist demand.
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and, more recently, a direct connection to Europe through Istanbul. There has been an increase in domestic tourism, in particular within adventure sports such as rafting and trekking. Avoidance of double tax through Double Taxation Avoidance Agreement with Norway.
Opportunities
Threats
Inadequate promotion of regional tourism in South Asian countries and other continents. Big potential of religious, adventure and rural tourism. Opening of new mountains, new trekking routes and restricted areas especially in Western Nepal. For example, Guerrilla Trek was introduced as a war tourism route for the trekkers to see the routes and hideouts used by the Maoist guerrillas. Possibility of expanding the tourism network through travel agencies and bilateral tourism development. Construction of an international airport in Bhairahawa to be completed by 2017. Immense possibility of developing adventure tourism in the mountains and rivers of Nepal. Growth in tourist arrivals.
Brain drain of qualified human resources. Inadequate tourism infrastructure which is a discouragement to visit Nepal. Militancy of trade unions has created havoc for the overall business climate of the country. The constant demand for increased benefits from labour unions coupled with their attitude towards work means that foreign investors would most likely invest in neighbouring countries such as India and Bhutan, where they can lead a comfortable life as well as earn a reasonable amount of profit.
Industrial Sector The iron and steel sector is an important one in Nepal because of its prominence as supplier of much in demand steel products. Iron and steel industry has witnessed an investment endowment of USD 100 million till date. With around 50 plants running with a cumulative capacity of 2 million tons, Nepal is able to cater to the relatively vast needs of a domestic market, while still allocating the output of around ten of its biggest plants to India (equivalent to USD 147,983,000 in 2008) and Bhutan (equivalent to USD 285,000 in 2008.) The production of these steel products is dependent on the import of MS billets, hot-rolled coil, steel coils, steel sheets, zinc, sponge iron, and wires, among several others. Most of these raw materials are imported from India. As Nepal does not manufacture its own (steel) raw material, the added value of the production is relatively low, although still greater in absolute terms when compared to other industries within the nation.33 Nepal’s most prominent export destinations are India, Bhutan, Egypt, Japan and Tanzania. The first ten months of the current fiscal year has seen a 2.1% increase in the value of iron and steel exports from the 2012/13 period procuring USD 103 million (NPR 10.11 billion,) establishing iron and steel the number one export item.34 The export value within this industry has tripled since 2004, however this change is mainly due to the rise in prices rather than an increase in quantity (as industry production has not increased significantly), especially due to the appreciation of the dollar.35 The most essential import of raw materials of the industry, which constitute roughly 75% 33 34 35
“Nepal Trade Integration Strategy 2010,” Government of Nepal Ministry of Commerce and Supplies, Kathmandu, 2010. “Iron and steel products tops export list,” Republica, June 18, 2014. In July 2008, 1 USD = NPR 70, in July, 2014 1 USD = NPR 97. “Current and Historical Rate Tables,” XE.com.
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to 83% of total production costs, is transported from exporters in South Korea (Posco) Japan (Nippon Steel) and India (TATA Steel and Hindustan Zinc Ltd.). Thus far, USD 537 million (NPR 52.43 billion) worth of MS Blades, one of the top import products of the sector, have been imported into the country. 20% of the total cost of the industry has been identified as the value added in Nepal.36 Despite the effect of changing prices (because of dollar appreciation), Iron and steel products, which have experienced increase in export performance, from USD 55.16 million in 2004 to USD 149.43 million in 2008, still demonstrate high export potential. The socioeconomic impact of the sector is deemed to be good, as it creates employment and job opportunities for more than 15,000 workers in Nepal, 5% of which comprise of women. The industry has relatively little negative impact on the environment in its production of goods (in terms of emissions).37 A majority of production units are located in urban areas (of Terai) rather than rural regions. Due to a large number of growing infrastructure projects and a burgeoning real estate industry in the domestic Nepali economy, there are great investment opportunities in the steel and iron sector of the country. The return on investment for this sector stands at 15%.
Strengths
Weaknesses
Private sector has significant investments in this sector. Latest technology to support products of high quality and steel products produced in companies with improved training for workers and ISO 9001 certification that meet international standards. Several of these companies have been approved by Nepal Standard which in turn has been qualified by The Government of India and Power Grid Corporation of India. Geographic advantage that affords Nepal an ideal location for trade with India, China, Bhutan, Bangladesh, and Pakistan. Production of iron and steel is competitive in the region due to close proximity to nearby markets and Nepal has competitive product price (relative to those in the Indian market) due to cheap labour in Nepal. Good reputation of Nepali producers for timely deliveries of specified quantities and ability to fine-tune their products and engage in customization according to the preference of their customers. Support from Hindustan Zinc Ltd in supplying zinc to Nepal.
Opportunities
36 “Nepal 37 Ibid.
A high degree of reliance on Indian companies for transport of raw materials. Low levels of labour productivity and weak labour relations. Large pre-shipment financing cost. Presence of non-tariff barriers from the Indian market that has imposed additional duties and various discriminatory practices like compulsory registration with the Bureau of Indian Standards, and a discouraging quota system for Nepali exporters. Customs procedure takes a whole day to complete valuation of imported cargoes. Tedious and time consuming customs procedure involving valuation of imported cargoes; difference in the exchange rate used during the procurement of cargo and during the customs clearance.
Threats
Trade Integration Strategy 2010,” Government of Nepal Ministry of Commerce and Supplies, Kathmandu, 2010.
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Duty-free access to Indian market made possible by the Nepal-India Trade Treaty. Growing demand for steel and iron products in (domestic) Nepali economy due to more infrastructure products, growing real estate scene, and demand for hydroelectricity infrastructure. Supply lags behind the demand created by development projects in the domestic markets of India and Bhutan: opportunity for Nepali exporters to provide their products. Decreasing tariffs in various regional markets like Bhutan and Bangladesh.
Constantly fluctuating exchange rate. Dependence on India for the supply of raw materials to produce finished goods. Power-intensive steel processing combined with an unreliable and often restrained supply of electricity, which pushes most companies to fall back on diesel generators (which impose a high operating cost of NPR 20 per kWh as compared to the initial NPR 6 – 7 per kWh) or more recently, gasification plants under biomass power; drive up production costs. Despite the Nepali labour cost advantage, the presence of political unrest/disturbances related to general strikes, labour laws that are being viewed as discriminatory, and demand for bribes, threaten to undermine this promise of progress and create an atmosphere of insecurity. Incentives from Bihar State Government that include subsidies on plant/machinery procurements and tax holidays of up to 20%, likely to pose competition for Nepali suppliers. Volatile and constantly changing Indian trade policies as well as details of Nepal-India Trade and Transit Treaty.
Compared to the rest of the South Asian countries, the share of industry in Nepal as a component of GDP is very low (about 15%). One key sector with huge demand for iron and steel is hydroelectricity. In the hydropower industry, there is a growing demand for high-quality turbines. The feasibility of future hydropower developments largely depends on technological advancements in mechanical equipment in order to prevent erosion to turbines by sediments. Nepal however is not involved in manufacturing of large (above 100kW) hydro-mechanical equipment. There is, therefore, a need for developing domestic competence in the designing and manufacturing of electro-mechanical components required for hydropower projects. A Turbine Testing Lab has also been established at Kathmandu University, with assistance from NORAD, NTNU and Nepali industries. Low speed number Francis turbines with unit 1-5 are in high demand for immediate constructions, while larger turbines with unit size up to 25 MW will be in increasing demand in near future. At present, Nepal is only able to produce Francis turbines up to 5MW to meet the immediate need of the domestic market. More than 50% of turbines needed for the power plants under construction falls under unit size of 1-5 MW. Most of the turbines runners installed in Nepalese Hydropower projects are imported from European manufacturers. Korean and Chinese runners are also operating in some of power plants. Due to low cost, Chinese runners are more popular in small power plants. There are 27 manufacturing companies developing micro hydro turbines, and some of these have the capacity to manufacture turbines up to 5MW size. In terms of opportunities for Norwegian companies, there is a great potential for commercial enterprises offering turbines and turn-key solutions for the hydropower sector. In the case of bigband turbines (5-25 MW and above), these must be custom-designed to each individual flow of 22
water. Additionally, with supply lagging behind the demand created by development projects in the domestic markets of India (which has a forecasted annual construction growth rate of around 10%) and Bhutan, there is greater room and scope for Nepali exporters and potential investors who are looking to boost the activity of these exporters.
Energy Nepal is heavily dependent on traditional energy resources including fuel wood, animal and agricultural residues. Fuel wood from the forest is the largest indigenous energy resource available. Growing concern over deforestation, indoor air pollution, use of valuable forest products and diverted use of fertilizer (cattle dung) makes it necessary to slowly replace this resource with other sources of energy. The most environment friendly energy resources available in Nepal are solar energy, wind energy, and hydro energy. Each of these sub sectors have sizable potential, therefore, the sub sectors have been classified and evaluated individually below. The average return on investment for the energy sector stands at 18%.
Solar Energy Solar energy in Nepal is thought to have been initiated in the mid-1970s by Nepal Telecommunication Corporation (NTC). The organization used solar to power its high frequency communication transceiver in locations without electricity supplied by the national grid. Since then the usage of solar energy technology has been increasing and has become one of the most popular renewable energy technologies in Nepal. The solar radiation that Nepal receives is considered very favourable. If the average daily insulation is 4.7 kWh/m2 and the gross available area for potential PV uses would be 75,477 km2,38 considering only 1% of this area available for PV, the available areas would be 754 x106 m 2. Accordingly the potentiality of solar PV would be 62.5 x 103 MWp. As per the report published by (Alternate Energy Promotion Centre) AEPC in 2008 the commercial potential of solar power for grid connection is 2,100 MW.39 Similarly, the total installed capacity of solar power is 5.17 MW. Of the installed capacity most power is transmitted off grid. At present it is estimated that there are 3 million off-grid households, approximately 97% of which is in the rural areas. The solar off grid lighting has been dominated by Solar Home System (SHS) with 3 Wp to 5 Wp solar panels.40 The current policy regarding solar energy is in place and is favourable to investors. The Renewable energy policy encourages investment from private and foreign investors along with technology transfer. The Renewable energy subsidy policy has provision for installation of small scale solar project but not for large commercial scale solar energy generation. Solar Potential of Nepal Using PV module of 12% efficiency, total energy generated will be 0.12* 4.5 * 147,181*10^6 = 80,000GWh/day = 17.7 TW (assuming peak sun to be 4.5 hours).
38The
total surface area of Nepal is 147,181 sq.km. Out of this 4000 sq.km is water area. Around 25% is covered with forest and arable land share is around 21%. The available area (147181-4000-147181*25%-147181*21%) for potential PV uses would be 75,477 sq.km. Now considering only 1% of this surface area appropriate for PV, the available area would be 754 *10 6sq.m). Using PV module having 12% conversion efficiency and average sunshine hours of 6.8/day, the potentiality of solar PV would be 62.5 x 103MWp 39 Energy Sector Vision 2050 A.D., Government of Nepal, Water and Energy Commission Secretariat 40 Lighting Asia: Solar off-grid Lightning, IFC
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This energy generated is more than the energy required for fulfilling the whole energy demand of the world. The total estimated world energy demand at present is about 13 TW. If we use just 0.01% of the total area of Nepal, we can generate solar electricity of 8 GWh/day that is 2920 GWh/year (which is more than the energy generated by NEA in the year 2003 amounting at 2261 GWh/year). According AEPC, in 2010 the total installed capacity of solar power was 5.17 MW.
Regardless of the existing policy, NEA remains the key institution for mobilization of energy and has a monopoly as a buyer in Nepali electricity market. Energy generated by the public or the private sector needs to go through negotiation with NEA regarding pricing and transmission lines. NEA has been often blamed for prioritizing construction of transmission lines in projects where it is involved while ignoring project build by private and foreign investors. Previously the Government of Nepal was reluctant and had negative attitudes towards solar power but in late 2012 Nepal Electricity Authority (NEA) signed a Power Purchase Agreement (PPA) and connected 680.4 Kilowatt solar plant to the national grid.41 The government has also stated that it will purchase solar power generated by the private sector at a competitive rate and will soon be framing a policy for solar power from the private sector.42
Strengths
Weaknesses
100% FDI is allowed in this sector through equity shares. There are many potential solar energy areas where generation of a good amount of solar energy is feasible. Installation of solar energy system is quick in comparison to hydropower. It is estimated that a solar plant can be set up within 9 months. Solar energy plants can be set up and supplied at a fraction of the cost than hydropower. Nepal has large number of qualified/knowledgeable engineers/highly skilled manpower that is relatively economical in comparison to other South Asian countries. The Government of Nepal is supportive of developing alternative forms of energy. Therefore, positive support from the government might be expected in solar energy generation. Rural Energy Program, a Norwegian assistance in electrification of rural villages by installing solar panel, was a success.
Substantial investments are required to install solar power plants. This will lead to production cost per megawatt to be high. Therefore, it might have difficulty competing with traditional forms of energy on the basis of price. Solar plant might not be able to supply power during the peak hour, which is usually in the evenings. There has been relatively little research conducted on solar energy in Nepal and as a result there is little information available on the same, Poor infrastructure at the site of potential solar energy generation and lack of transmission lines Solar energy is a relatively new concept in Nepal. Rural parts of Nepal have seen development of solar energy in small scale. However, the concept of large scale solar energy production has not been conceptualized and is conceived as an intermittent source of energy. Production of solar energy requires huge area of flat lands which have high agricultural value. However potential areas in Nepal are mostly situated in hilly or mountainous regions.
Opportunities
Threats
There is a chronic electricity supply shortage in Nepal. Solar energy could play a major role in
There are existing competitors in the solar industry that are planning to expand their
41
“Nepal electricity authority to install 20 MW Solar Plant in Trishuli of Nuwakot” assessed on 7/12/2014, cignepal.org.np, http://cignepal.org.np/news/nepal-electricity-authority-install-20-mw-solar-plan-trishuli-nuwakot 42“Government to purchase solar power from private sector”, Accessed on 7/12/2014, July 2014 Ekanitpur, http://www.ekantipur.com/the-kathmandu-post/2014/07/04/money/govt-to-purchase-solar-power-from-pvtsector/264656.html
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meeting Nepal’s growing power need in rural as well as urban areas. At present, the energy situation of Nepal is challenging. Despite the huge hydro potential, hydro energy production has been disappointing and there is desperate need for alternative forms of energy. This therefore creates space for the introduction of solar energy as a feasible/viable option in Nepal. Ministry of Energy is preparing a plan to install large-scale solar plants under public private partnership. Chance of exploiting major solar potential areas in different parts of Nepal. Solar electrification is at an infant stage in Nepal and there is therefore the possibility of reaping the benefits of a first mover advantage.
capacity to locations that have high potential for solar energy. Other forms of renewable energy sources such as wind power and hydroelectricity might be cheaper in price in comparison to solar energy.
After analysing the solar sector of Nepal, there are two possibilities for the investor. Selling solar PV in the Nepali market or establishing solar power plant and selling the energy to national grid. Selling of solar PV in Nepali market has become competitive as there are over 40 companies currently in operation. Some of these companies are selling solar PV’s manufactured in different countries including Norway. An option may be to sell to the trading companies rather than to the retail customers. Norway houses some of the leading companies in solar industry in the world that have expertise in production and innovation of solar products. There are therefore good prospects for generating energy on a large scale and technology transfer. The Government of Nepal is keen to solve the power crisis that exists in Nepal and has shown some interest by signing a Power Purchase Agreement (PPA) and adding solar energy to the national grid.
Wind Energy Wind energy is the least harnessed energy resource in Nepal. The involvement of Nepal in harnessing energy from wind is a comparatively new technology in comparison to hydropower, solar, and biomass. Small scale, non-commercial use of wind to generate power has been successfully implemented in 7 different locations of Nepal. An attempt, in 1989, had been made to harness the wind energy on a large scale. Kagbeni Wind Power Project with wind turbine generators of 20 kW was implemented but the project came to a halt due to poor design and structural failures. In recent years the Government of Nepal as well as the private sector has reconsidered the potential of wind electricity generation. The Solar and Wind Energy Resource Assessment (SWERA) project executed by Alternative Energy Promotion Centre (AEPC) has shown good prospects of wind energy development in Nepal. The outcome of this project indicates that the potential area of wind power in the country is about 6074 km2 with wind power density greater than 300 watt/m2. From the total area of 6074 km2 only 10% has been analysed, and it has been found that more than 3,000 MW of electricity could be generated with consideration of the installed capacity of 5 MW per km2. The study also shows that the most potential areas lie in the high and middle mountains of the country where basic infrastructures
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are unavailable. Therefore, the commercially viable wind potential of the country is estimated to be only about 448 MW. 43 Wind Energy Development in Nepal Charus Development Nepal Pvt. Ltd and two international companies, viz., Suzlon Energy Limited (India) and AGA Middle East Pvt. Ltd Singapore/Hong Kong have submitted proposals to the Government of Nepal for generating more than 200 MW wind energy. Charus Development Nepal Pvt. Ltd has already obtained from the Ministry of Environment, Science and Technology for survey license to carry out detail feasibility study in Annapurna areas for generating 400 MW of electricity. In addition, Suzlon Energy Limited (India) has planned to install wind mast of more than 30 meters high in Kagbeni, Mustang District to measure wind data for further detail study.
The current policy regarding wind energy is in place and is favourable to investors. The Renewable energy policy encourages investment and technology transfer from private and foreign investors. Renewable energy subsidy policy mentions that the subsidy will be provided to wind energy project operating in area where there is no electricity supply and to projects up to 100 kW capacities. Similar to solar energy, regardless of the existing policy, NEA remains the key institution for mobilization of energy and has a monopoly as a buyer in Nepali Electricity market. Energy generated by the public or the private sector needs to go through negotiation with NEA regarding pricing and transmission lines. NEA has been often blamed for prioritizing construction of transmission lines in projects where it is involved while ignoring projects built by private and foreign investors. Therefore, there is a chance that NEA might delay the project to come into operation.
Strengths
Weaknesses
43
100% FDI allowed in this sector. Wind energy is yet to be explored. There are potential benefits of a first-mover advantage. The Solar and Wind Energy Resource Assessment (SWERA) project executed by AEPC has shown good prospects for wind energy development. In comparison to other form of energy, wind power requires less investment and construction, whereas installation of wind turbines is much faster. Government of Nepal is positive on developing and exploring wind energy in Nepal.
There has not been adequate research and development in wind energy generation. Wind data needed for assessing commercial viability of wind power plant is not available. Poor infrastructure at the site of potential wind energy generation and lack of transmission lines. Energy buyer monopoly by NEA has created unfavourable investment environment with no encouragement for private sector investment in wind power. Wind energy is another alternative to hydropower but lack of investment and interested investor has left wind energy generation unexplored.
Opportunities
Threats
Demand for energy is high and energy from wind can be used to fill the gap between demand and supply of energy in Nepal.
Policy shifts that might make generation of wind energy less viable.
SWERA report 2008, AEPC
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Currently there is low quality of domestic wind energy investment. A proper investment with the aim of generating wind energy is needed. High wind potential areas have not been utilized for production of wind energy. The government is slowly leaning toward developing wind energy as research indicates good wind energy potential.
Competition among wind energy developers might create a shortage of potential wind energy development locations.
Hydropower The steep gradient of Nepal’s topography makes the country one of the most promising for hydropower development. Nepal has more than 6,000 rivers and rivulets with an overall average annual run of 225 billion cubic meters of water flowing to the south. The country possesses 2.2% of the world water resources and about 6000 rivers with an annual discharge of 174 billion cubic meters. Sources of water include glaciers, snowmelt from the Himalayas, rainfall and ground water. The current state of hydropower-generated electricity production is only about 700 MW, while the theoretical potential is about 83,000 MW. It is estimated that the economically viable hydro-electricity generation of Nepal is 42,000 MW. Nepal has currently one of the lowest energy consumptions in the world. The population is largely dependent on traditional sources of energy, such as fuel wood, agricultural waste and animal dung (about 85% of all energy consumption). The heavy reliance on traditional energy sources provides limited opportunities for economic development in the rural area but contributes to environmental degradation and negative health impacts. Commercial sources of energy include petroleum products (about 9%), coal (about 3%), electricity (“on- grid”, about 2%) and renewable energy (about 1 %). The use of petroleum products is on the rise, accounting for 19.14% of total imports during FY 2012-13. Nepal itself has no production of crude oil and is increasingly dependent on imports for the supply of petroleum products to meet a rapidly growing national demand. The unstable political situation over many years has impeded foreign investments in the sector, leading to the current experiences of power shortages and a growing petroleum dependency. Availability of electricity is highly seasonal, with daily power outages (“load shedding”) taking place up to 16 hours a day during winter. The situation improves during the summer with the monsoon and the melting of ice. Approximately 70 % of Nepal's households have access to electricity (96 % in urban areas and 63 % in rural areas, which includes about 10% from off-grid sources). Most of the beneficiaries of grid electrification are located around the greater Kathmandu Valley. Demand for electricity is increasing at 7-9% per year, and according to NEA’s forecast, demand for electricity will reach 3600 MW by 2027. There will also be a sharp increase in demand for electricity in the larger South Asia region. Nepal is dependent on private sector investments in meeting the country’s energy needs. Concerning the establishment of new power plants, the sector is open for private development, including foreign ownership. The Ministry of Energy has announced a new Hydropower License Management Procedure for projects above 10 MW, but investors must be prepared for a cumbersome process in obtaining these. There are also certain challenges in the operation and maintenance of hydropower plants. One of the major causes of financial losses is the erosion of 27
turbine parts due to high amounts of sediments present in rivers. Technological advancements are needed to improve the feasibility of future hydropower development, and in particular, turbines need to be designed according to the specific sedimentary composition in the river. Currently, with more than 10 major hydropower stations and more than 80 small scale hydropower stations, the supply of hydro-electricity by domestic generation remains at 3467.93 GWh, 83% of the total supply. The remaining 17%, 792.5 GWh, hydro-electricity is supplied by India. Domestic supply includes 1,175.97 GWh (34%) from Independent Power Producers (IPPs) while the remaining 2,291.96 GWh (66%) is supplied by the Nepal Electricity Authority (NEA) power stations.44
Strengths
Weaknesses
Huge hydropower potential due to availability of vast water resources. Suitable geographic conditions for hydropower projects as well as favourable hydropower policy regarding hydro electricity generation for private and foreign investors 100% FDI allowed in this sector through equity shares. Hydropower industry is comparatively more organized then other investment potential sector with laws and regulation in place. Government of Nepal is planning to introduce cash incentives of up to NPR 10 million on every megawatt of hydroelectricity generated to lure investors towards power sector.
Problem of power distribution due to lack of transmission lines. Lack of political will and policy inconsistencies have led to sluggish growth of hydropower development. PPA rates offered by NEA are very low. Monopoly of NEA over the electricity market and transmission lines. Default risk due to high operational losses incurred by the only off-taker. Absence of power trading market where electricity can be traded as a commodity leading to market risks. Absence of a power trading mechanism with India. There is no clarity on how to address foreign exchange risk in PPAs. Khimti hydropower project, a Norwegian FDI project, faced controversial foreign exchange rate issue when NEA revised and increased the PPA rate from what was previously agreed. Social obstruction and demand might delay the construction and operation of the project for a long period.
Opportunities
Threats
Significant export potential and thus huge opportunity to balance present trade imbalances with neighbouring countries. Huge energy demand and supply gap in Nepal as well as in India. Uplifting the society at site of hydropower construction by social inclusion.
Lack of political stability, good governance and law and order issues. Excessive local demands at construction sites pose as a major hindrance. Potential environmental and sociological impact of building dams and reservoirs. Climate change may affect the availability of water resources. Currently, water availability in dry seasons is getting worse, whereas availability is rising in wet seasons.
Hydropower has been identified as the one of the most lucrative areas for foreign investment in Nepal. Although there is already significant FDI in hydropower more is expected as there is huge electricity demand in the domestic market as well as export market.
44
NEA annual Report 2013.
28
Overall, there is a great scope for private investments in the energy sector by Norwegian companies. As one of the world’s largest producers of hydropower energy, Norway possesses the insight and expertise needed for successful investments in the sector. In particular, Norway has significant technological and regulatory experience with small scale hydropower which is relevant to Nepal. Good relations have already been established between Norway and Nepal in the sector. Many Nepalese engineers have studied at NTNU in Trondheim, and Kathmandu University has a close cooperation with NTNU and SINTEF Energy Research. Norwegian-funded hydropower and turbine laboratories have also contributed to capacity building. Energy is a priority sector in bilateral relations between Norway and Nepal. The Embassy in Kathmandu is currently managing a diverse energy portfolio amounting to about USD 11 million in annual disbursements. Nepal is also one of the main partner countries for bilateral energy collaboration within the framework of the Clean Energy Programme.
Health Sector The health care sector in Nepal consists of publicly and privately run hospitals primarily in urban areas, and health care centres in rural locations. There are 123 public hospitals, 366 private health institutions, and 205 primary health care centres currently operating in Nepal. In recent years, the trend of health spending by Nepalis has been increasing. The spending increased by 25% 29% in the year 2007/08 and 2009/10. In the year 2010/11 the growth slowed to 12%. The contribution of health services to GDP in 2012/13 was 6.95%, with CAGR of 2% in the last decade. Nepal is known for its gynaecology services, cardiac care, and orthopaedic surgery, which are considered on par with international standards. For example, eye care treatment in Nepal has been gaining popularity in other South Asian countries, particularly India. Patients are attracted by the affordability and high quality of eye treatment in Nepal. It is estimated that annually more than 200,000 Indian patients visit Nepal for eye surgery and more than 1.5 million for eye treatments. Also, with the advent of partnerships between Nepali and Indian hospitals, Nepal has benefited from technology transfer as well. For instance Norvic hospital in Nepal and Medanta Medicity in India have entered into an agreement for technology transfer in health care services. Despite these positive developments, there are still significant challenges to be addressed in the sector. The return on investment for this sector stands at 17%
Strengths
Weaknesses
Services, particularly eye care is priced considerably lower than neighbouring countries, leading to a people from India seeking health assistance in Nepal. Some areas of healthcare like eye care and orthopaedic care have shown vast improvement, living up to the standard of Western health care. Potential of developing Ayurvedic health care service due to availability of medicinal herbal plants and good market demand for ayurvedic treatment.
Lack of a clear regulatory framework with regards to the ease of entry of foreign medical practitioners and investors. No international recognition of healthcare facilities. Lack of doctors willing to venture in the rural areas where the need for health care is highest. Migration has led to few number of doctors in the country. Lack of adequate government policies regarding health standards.
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Ayurvedic treatment is very popular in India, Sri Lanka, and Nepal. Increasing number of health institutions where teaching, research, training and health care is provided along with production of medical equipment. The sector has attracted significant FDI from Indian health care providers such as Escorts Fortis. Willingness of the government to improve the healthcare provided to the people, especially those from marginalized communities. Different health related development plan/programs has been carried out in the rural areas regarding drinking water, sanitation, and nutrition. 100% FDI is permissible in the health sector. Hospitals and other medical services, recreational health services (a treatment, service designed to restore, remediate, and rehabilitate a patients level of functioning and independence in life activities) and pharmaceutical and chemical industries fall under the health sector.
Lack of a proper R&D-based industry that aims to improve the health and well-being of patients by developing new method of detection, prevention, and better treatment strategies. Lack of promotion and facilities have not been able to draw attention of possible patients.
Opportunities
Threats
Potential linkage of the health care industry with tourism (medical tourism). Medical tourism refers to travelling across international boarder for the purpose of obtaining health care. Potential of providing healthcare administration service to existing hospitals. Potential of establishing medical college, research and development centre and Ayurvedic drug development centre. Innovation has been witnessed in the form of mobile health care in rural parts of the country.
Skilled human resources may find better opportunities in other countries because of good salary, job benefits, better working environment and living conditions. Probability of illegitimate and politically influenced labour demand by the unions.
Norway has a strong expertise in health care which combined with Nepali health care service can provide economically sound partnerships. Following are areas within the health sector that can be further explored through Norway-Nepal partnerships:
Providing better administrative support by collaborating with existing hospitals in Nepal. Facilitate technology transfer in the field of scientific discovery, particularly in the treatment of cancer. Investment in developing Ayurvedic based drugs by combining Nepali herbs and Norwegian expertise in pharmaceutical sector.
Financial Services The financial sector of Nepal may be broadly categorized into a regulated and an unregulated sector. The regulated sector includes commercial banks, development banks and finance 30
corporations (regulated by NRB, the central bank of Nepal); Nepal Stock Exchange (NEPSE) (regulated by Securities Exchange Board of Nepal (SEBON); and life and non-life insurance industry (regulated by the Insurance Board). The financial sector is dominated by the banking sector, particularly commercial banks. Total deposit of commercial banks amounted to 64.7% of the GDP in the FY 2013/14 whereas the deposits of development banks and financial corporations amounted to 10.3% and 4.2% respectively. Similarly, total credit to GDP amounted to 48.8% for commercial banks; 8.7% for development banks; and 4% for financial institutions respectively. In terms of the relative size of financial sector, total assets and liability amounted to 125% of the GDP.45 Because of a large number of Banks and Financial Institutions (BFIs), there is cut throat competition in this sector. As a result, a few BFIs have undergone mergers to meet capital requirements, as stipulated both by the Central Bank and international directives such as Basel III, and build synergies between them. The Central Bank has also been actively advocating mergers and acquisitions between existing institutions. This was borne out of some financial institutions almost reaching insolvency due to a cocktail of bad corporate governance, over exposure to single sector and liquidity issues. Quantity, sadly, has not led to quality in banking services. Inefficient management, unhealthy competition among banks, low turnover and highly volatile financial markets characterises the financial sector. The financial environment is therefore considered to be relatively weak. Similarly, access to finance to the micro-, small-, and medium-sized enterprises, which make up a large bulk of the economy, is relatively low. The banking sector also lacks creative product development with most banks limited to basic deposit and lending banking services. Despite such issues, major Commercial Banks are some of the most profitable organisations in the country. BFIs form the major portion of the Nepal Stock Exchange. The banking sector is slowly regaining investor confidence in the domestic market which has helped NEPSE index cross the 1000-point mark for the first time in six years this July. The recent positive performance of the commercial banks along with their compliance to capital regulations has led to this rise in Banking and NEPSE indices. It has also led to increased investor interest in the sector. Recently the Central Bank issued directives to non-BFI foreign companies to divest their holdings in Nepali BFIs by mid July 2015. As per the current Banking and Financial Institutions Act (BAFIA), only foreign Banking and Financial Institutions (BFIs) are allowed to invest in Nepali BFIs. There are a couple of commercial banks in Nepal that have non-BFI foreign investment, namely NB International’s 50% holding in Nabil Bank and investment by Yong Lian Realty, a Malaysian company, with a 12.9% stake in NMB Bank. While there are other BFIs with foreign BFI investments, a significant one is Standard Chartered Bank, which has 75% foreign ownership. The BFI sector in Nepal has immense prospects given its present state. There are prospects of SME lending as existing lending practices pose unsupportive lending environment for SMEs. The associated could be mitigated by introducing innovative products and instruments while curbing risk-taking behaviour amongst the players in the financial services sector. Nepal has skipped over the credit card generation and is fertile ground for mobile-based banking using data and/ or NFC technologies.
45
Banking Supervision Report, NRB.
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The return on investment for this sector is above 15%
Strengths
Weaknesses
The financial sector is expanding and has potential for more growth particularly in investment banking, SME funds, and other financing channels for SMEs. Notable changes in the regulatory framework have helped strengthen the sector such as Merger Bylaws introduced by the Central Bank. Extensive growing number of bank branches and ATMs. The corruption watchdog, The Commission for Investigation of Abuse of Authority (CIAA)’s increased vigilance in the financial sector to tackle financial irregularities may provide the foreign investors an investment friendly financial services sector by increasing transparency in this sector. The Central bank had made it mandatory for commercial banks to undergo stress testing to determine the robustness of the bank and whether it will be able to withstand unfavourable economic scenario. The central bank has prepared a standard module to carry out stress test of the banks based on the framework of International Monetary Fund (IMF) and Basel Committee on Banking Supervision, which ensures banks are complying with international financial guidelines.
The banking sector is highly concentrated with commercial banks dominating the scene (in 2013, 73% of total assets and liabilities.) Political unrest and times of conflict have left financial institutions with no choice but to shut down branches in rural areas. Several restraints to the supply of financial services including: requirement of four documents, which are difficult to produce due to informal procedures in Nepal. Speed of loan processing is average. The smaller the firm the greater the barrier to access financial services. Banking Sector requires collateral against lending which makes cash flow based lending impossible.
Opportunities
Threats
The implementation of better Credit Rating and Credit Information system will make background check on lenders effective. Most rural areas do not have access to banking facilities. The Norwegian banking has a long tradition of working together on IT solutions for processing both payments and information. Hence, this could prove as an opportunity for Norwegian companies to exploit in the financial services industry. Banks with international reach such as Himalayan Bank, Standard Chartered Bank can tap into the remittance market. The banks can operate a dedicated remittance service, which can compete with the local companies providing the same service whilst charging less to customers. According to Nepal’s commitment to liberalization, it is now open to foreign banks. By opening the Financial Service Sector (FSS) as
Large firms fail to identify access to finance as a significant determinant of success suggesting they are not engaging in adequate growth that – if it were occurring would call to attention to such a factor. The collateral requirements at 260% of loan value is too high and discourages borrowing. 81% of firms have conveyed a requisite of collateral to secure a loan. Failure of some weak banks in the past have threatened the stability of the financial system. The CIAA’s intervention in the banking sector has not proved popular amongst the bankers, which might cause a tussle between the financial services sector and the regulator. Unorganised unregulated market, which is prevalent in rural areas, is not under supervision, hence, adversely affecting the poor population.
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
a member of WTO, Nepal has allowed foreign banks to initially carry out wholesale banking. Nepal has made 12 major commitments in the opening of financial services for foreign investment during the WTO accession negotiations. The opening includes the acceptance of deposits and other repayable funds from the public and lending of all types (including consumer credit, mortgage credit, factoring and financing of commercial transactions) and financial leasing and all payment and money transmission services are opened.46
Norwegian financial institutions have a progressive mind-set. They are geared to introduce innovative new products and services to make banking services easily accessible to customers. Nepal lags behind in technological advancement in banking sector. Hence, Norwegian expertise in the financial services sectors would provide a competitive advantage to the stagnant financial services industry. Although most commercial banks have introduced mobile and Internet banking, there is much room for improvement. As technology in banking is relatively nascent in Nepal, there is lack of product innovation. This could prove an opportunity for Norwegian companies to explore in the Nepali financial services industry. The development of new products offered to customers should require considerable investment and expertise, and there must be sufficient willingness to make the necessary investment. Hence, concentration on both an organization and a commercial orientation that give a financial institution scope to make a profit on its services must be a priority. Within the financial services, the SME banking industry has a huge market potential. A study done by IFC estimates that there is a USD 2.5 billion worth of untapped market for SME lending in Nepal. SME lending can be a good opportunity for Norwegian investors to step into the financial services in Nepal. Moreover, Norwegian businesses can leverage their expertise of investing in SME business in many developing countries.
46
Foreign Direct Investment in Financial Services: Impact on Nepalese Economy, Centre for Economic Development and Administration (CEDA).
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Doing Business This section provides a brief overview of some of the more practical aspects of doing business in Nepal. It is important to emphasise that the information provided here is only meant to give an indication of the prevailing business conditions. Potential Norwegian investors and companies looking to establish themselves in Nepal should conduct a thorough feasibility study before entering the market. It is also helpful to consult the following reports from the Government of Nepal, World Bank, the U.S. Embassy in Kathmandu and World Economic Forum:
Foreign Investment Opportunities in Nepal is a publication by the Ministry of Industry, UNCTAD and the International Chamber of Commerce. It provides a comprehensive overview of the Nepali economy, business environment and investment procedures. http://www.theiguides.org/public-docs/guides/nepal
World Bank and the International Finance Corporation’s Doing Business 2014: Nepal contains several quantitative measures of regulations for issues such as starting a business, dealing with construction permits, employing workers, registering property, getting credit, protecting investors, trading across borders, enforcing contracts, getting an electricity connection and closing a business. http://www.doingbusiness.org/data/exploreeconomies/nepal/
U.S Embassy in Kathmandu’s 2012 Country Commercial Guide for U.S. Companies presents a comprehensive look at Nepal’s business environment, using economic, political and market analysis. http://photos.state.gov/libraries/nepal/391216/Misc_%20PDF/2012CCG_FINAL_.pdf
World Economic Forum Global Competitiveness Report 2013 – 2014 measures the microeconomic and macroeconomic foundations of national competitiveness. It is a useful complement to the Doing Business ratings, as it gauges several other factors important for business as infrastructural quality, labour qualifications, and private sector development. http://www.weforum.org/reports/global-competitiveness-report-2013-2014
Table 2: Global Competitiveness Index for Nepal47 Rank (out of 148)
Score (1-7)
GCI (2013-2014)
117
3.7
Basic requirements (60.0%)
105
4.0
Institutions
127
3.2
Infrastructure
144
1.9
Macroeconomic environment
41
5.3
Health and primary education
88
5.4
47
World Economic Forum Global Competitiveness Report 2013 – 2014
34
Efficiency enhancers (35.0%)
128
3.2
Higher education and training
130
2.7
Goods market efficiency
127
3.7
Labour market efficiency
133
3.7
Financial market development
95
3.8
Technological readiness
133
2.6
Market size
100
3.1
Innovation and sophistication factors (5%)
132
2.9
Business sophistication
129
3.3
Innovation
129
2.6
The business environment in Nepal remains difficult, even if it has generally improved over the last few years. Notably, the country is ranked above the regional average for South Asia on the ease of doing business (see figure 1). The World Bank has identified factor markets (infrastructure, access to finance, labour regulations and low-skilled work force, little innovation and inadequate technology) and governance (political instability, corruption and crime, regulations, taxes and business licensing) as the main impediments to private sector development in Nepal.48 Potential investors and exporters need to be aware of a number of Nepali regulations, customs and standards on doing business in the country. These may include import tariffs, entry requirements, labelling and marketing requirements, prohibited or restricted imports, customs regulations and product standards. Nepal’s labour laws generally favour employees and strong unions often make it difficult to terminate workers. Investors should be aware that strong foreign capital enterprises are often seen as “soft targets”. Insufficient electricity provision and poor infrastructure are two longer term issues that will pose challenges to most businesses for years to come. In order to successfully engage in Nepal, Norwegian companies should therefore commit sufficient financial and human resources as well as a dedication to long term engagement.
Establishing a Business According to the Doing Business Index 2014 for Nepal, published by the World Bank and International Finance Corporation, potential investors have to complete seven procedures and spend 17 days to register their company before starting a business. This is the same as the average for other countries in South Asia (17.2 days). Close cooperation with reliable local partners will facilitate the process of establishing a business. Particularly useful are partners with a wide network of contacts and knowledge of local investment conditions. It is recommended to include an arbitration clause when entering into 48
Afram, G. G., and Del Pero, A. S. Nepal’s Investment Climate: Leveraging the Private Sector for Job Creation and Growth. World Bank Publications, 2012.
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such agreements, as well as having good legal representation. In the case of a dispute, brokering will often lead to a better and more effective solution than taking the case to the Nepalese judiciary system. Potential investors and business partners are usually granted a six-month visa to conduct research and feasibility studies. Some companies engage accountants and lawyers to work on registration, licenses, permits, taxes and auditing. It is recommended to hire an international accounting firm with thorough knowledge of local conditions. It is important to keep in mind that Norwegian and Nepali business culture differs in many respects. Inter-personal relationships matter more in Nepal, than in a Norwegian context. It is therefore necessary to make use of local representatives when entering the market. It is also important to always seek detailed clarification of any agreement reached.
Financing, Risk Mitigation and Advisory Services There are a number of support schemes in place for Norwegian companies looking to invest in Nepal: The Information Office for Private Sector Development in Developing Countries (Veiledningskontoret) provides specialist advice and guidance, particularly in relation to financing, risk mitigation and advisory services for businesses that plan to invest in or trade with developing countries. NORAD provides support for businesses that are considering establishing operations in developing countries. The objective of the support scheme is to reduce risk and intensify the local development effects of the investment. Businesses can apply for support for feasibility studies, including pilot studies and test production, training of local employees upon start-up, necessary infrastructure investments linked to establishment of the business, environment, health and safety measures, and measures to strengthen compliance with CSR. Applicants must be able to prove a high development impact of their projects. Innovation Norway has a regional office in New Delhi, India that may offer advice on business activities in Nepal. They offer offers business financing, advisory services, networks assistance, competence-building and marketing. Norwegian Guarantee Institute for Export Credits (GIEK) can issue guarantees covering political risks for investments in developing countries. These risks may include losses due to expropriation or confiscation, acts of war, revolution or civil unrest, moratoriums, payment prohibitions or currency restrictions, or Norwegian or international boycotts or sanctions. A guarantee may cover investments in the form of capital, production equipment or other financial payments in connection with establishment abroad. The maximum rate of coverage in respect of political risk is 100%, but normally a smaller percentage is covered. GIEK does not cover any commercial investment risks. FK Norway (Fredskorpset) provides funding for mutual exchange of personnel between companies in Norway and Africa, Asia and Latin America. Exchange can be a good tool to raise companies’ expertise, better communication flow with international partners and improve knowledge about new markets. FK Norway also offers financial support to feasibility studies for companies looking to explore the possibility of exchange with one or more partners. In Nepal,
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there is currently an exchange in place between Multiconsult and Hydro Consult Engineering Limited (HCEL). Nopef (Nordic Project Fund) offers financing for feasibility studies within the fields of the environment, climate and green growth. The feasibility studies should contribute to direct or indirect environmental improvements and increased environmental consciousness in the project countries. Nopef may also be able to engage in risk sharing in connection with the feasibility study.
Corporate Social Responsibility Norway is one of the first countries to develop a comprehensive policy on corporate social responsibility (CSR) and Norwegian businesses are expected to be at the forefront in this area.49 The term CSR is used to describe a wide range of economic, social and environmental initiatives by enterprises that go beyond legal requirements and are voluntary in nature. It means a commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce, their families as well as society at large. Corruption is generally perceived as a challenge for foreign investors. In particular, the extensive use of subcontractors in joint arrangements may pose challenges to foreign investors because it hampers the use of control mechanisms and monitoring requirements. In 2012, Nepal acceded to the United Nations Convention against Corruption. This, together with the country’s AntiCorruption Strategy and Work Plan from 2008 forms the legal and institutional basis for anticorruption work. However, there is still a wide gap between official legislation and actual implementation. For example, the tax system is complex and contains many exceptions that contribute to corruption. In Transparency International’s Corruption Perceptions Index for 2013 Nepal ranks 116th, with 31 points on a scale where 0 denotes the most corrupt and 100 the least. Both “speed-money” and grand-scale corruption are common. Understanding the local culture as well as the political and economic context is crucial for exercising CRS in Nepal. The Embassy in Kathmandu is able to assist Norwegian companies on these matters.
Further information: Corruption and Anti-Corruption in Nepal: Lessons Learned and Possible Future Initiatives by NORAD uses a political economy methodology to analyse the context in which corruption is taking place in Nepal, and the dominant formal and informal institutions and actors relevant for strengthening integrity in Nepal’s development. http://www.norad.no/en/tools-and-publications/publications/publication?key=382812 The 2013 Corruption Perceptions Index measures the perceived levels of public sector corruption in 177 countries and territories around the world, including Nepal. http://www.transparency.org/cpi2012/ OECD Guidelines for Multinational Enterprises are the most comprehensive set of governmentbacked recommendations on responsible business conduct in existence today. The governments
49
See Norwegian Ministry of Foreign Affairs. Report No. 10 (2008–2009) to the Storting: Corporate Social Responsibility in a Global Economy. URL: http://www.regjeringen.no/pages/2203320/PDFS/STM200820090010000EN_PDFS.pdf
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adhering to the Guidelines aim to encourage and maximise the positive impact MNEs can make to sustainable development and enduring social progress. http://mneguidelines.oecd.org/ CSR Risk Check is a free tool provided by CSR Netherlands which processes over 400 data sources to identify risks and recommendations for countries and products. http://www.mvorisicochecker.nl/en
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Appendix 1: Methodology In order to complete the activities described in the aforementioned Scope of Work, the study adopted the following research methodology: Literature Review A literature review of relevant and existing documentation was conducted. Some of these documents include:
Guides and manuals providing information on the investment climate and procedures of Nepal Nepal Trade and Integration Strategy, 2010 Economic Surveys, Ministry of Finance Macroeconomic Situation, Nepal Rastra Bank Doing Business in Nepal, World Bank Private Sector Development and Prospects for Norwegian Trade and Investment Interests in Nepal, NORAD
Consultative Meetings Consultative meetings were organized with key stakeholders such as foreign investors, consultants and lawyers to gain insights into private sector development, and issues faced by concerned stakeholders including foreign investors in Nepal. Comparative Analysis A comparative analysis was done between sectors that Norwegian companies have an expertise in, priority sectors identified through the Nepal Trade and Integration Strategy (NTIS), 2010 and Nepal’s sunrise sector.50 This was done to evaluate the synergies and complementarities, and to eventually identify two additional sectors, keeping in mind the potential of these sectors to facilitate employment generation, improvements in living and working conditions and poverty reduction among women, youth and marginalized groups. Calculation of Return on Investment The average Return on Investment (ROI) for each sector has been calculated by considering the financial statements of a few, randomly selected companies operating in each sector. For each company, a three year average was calculated.
50
Sectors that show potential through their increasing contributions to the GDP and FDI inflows
39
Appendix 2: References Relevant Laws and Acts Foreign Investment and Technology Transfer Act http://www.moics.gov.np/act_regulations/FITTA/FITTA_%201992.pdf Foreign Exchange Regulation Act, 2009 http://www.lawcommission.gov.np/index.php?option=com_remository&Itemid=2&func=startd own&id=636&lang=en Asset or Money Laundering Prevention Act, 2011 http://www.nrb.org.np/fiu/pdffiles/AML-CFT_Act_2008_(English)_20690118.pdf Income Tax Act, 2011 http://www.lawcommission.gov.np/index.php?option=com_remository&Itemid=2&func=startd own&id=1008&lang=en Bank and Financial Institutions Act, 2006 http://www.mocs.gov.np/uploads/Act%20list%20English/banks-and-financial-institutionsact.pdf Company Act. 2006 http://www.nrb.org.np/lgd/acts_ordinances/Company%20Act,%202063_Nepali.pdf Competition Promotion and Market Protection Act, 2007 http://www.mocs.gov.np/uploads/Act%20list%20English/competition-promotion-and-marketprotection-act.pdf Consumer Protection Act, 1999 http://www.lawcommission.gov.np/index.php?option=com_remository&Itemid=2&func=fileinf o&id=292&lang=en Contract Act amended in 2006 http://www.mocs.gov.np/uploads/Act%20list%20English/contract-act.pdf Copyright Act 2002 http://www.mocs.gov.np/uploads/Act%20list%20English/the-copyright-act.pdf Environment Protection Act, 1997 http://www.lawcommission.gov.np/site/en/content/environment-protection-act-2053-1997 Electricity Act 1992 http://www.doed.gov.np/policy/Electricity_Act_2049-english.pdf Insurance Act, 1992 http://www.bsib.org.np/images/download/7972_insurance-act.pdf Investment Board Act, 2010 40
http://www.lawcommission.gov.np/site/en/content/investment-board-act-2068-2010 Labour Act, 1992 http://www.dol.gov.np/uploads/acts%20english/labor-act.pdf Major Foreign Investment Related Policies Foreign Investment and One Window Policy, 1992 http://www.nepalchamber.com.np/policies/foreign.php Nepal Trade and Integration Strategy, 2010 http://www.mocs.gov.np/uploads/NTIS%202010%20exe%20sum%20160610.pdf Industrial Policy, 2010 http://www.lawcommission.gov.np/index.php?option=com_remository&Itemid=2&func=fileinf o&id=1509&lang=en Labour and Employment Policy, 2005 Land Use Policy, 2012 http://www.investnepal.gov.np/portal/index.php?p1=downloadlist&p2=2 Trade policy 2009 http://www.tepc.gov.np/uploads/files/Trade%20policy%20English%20latest,%2020091818.pdf Monetary Policy 2013-14 http://www.nrb.org.np/ofg/monetary_policy/Monetary_Policy_(in_English)--201314_(Full__Text)-new.pdf Treaties and Agreements Double Taxation Avoidance Agreements http://www.ird.gov.np/ird/index/document-30.html Bilateral Investment Promotion and Protection Agreement (BIPPA) http://www.fncci.org/downloads/nepal_india_bipa_agreement.pdf Agreement on the South Asian Free Trade Area (SAFTA) http://www.saarc-sec.org/userfiles/saftaagreement.pdf Major Surveys and Studies World Bank and the International Finance Corporation’s Doing Business 2014: Nepal http://www.doingbusiness.org/data/exploreeconomies/nepal/ U.S Embassy in Kathmandu’s 2012 Country Commercial Guide for U.S. Companies http://photos.state.gov/libraries/nepal/391216/Misc_%20PDF/2012CCG_FINAL_.pdf
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Government of Nepal, Ministry of Industry and Ministry of Commerce and Supplies: Foreign Investment Opportunities in Nepal http://www.mocs.gov.np/uploads/Publication/foreign_investment_opportunities_09.pdf Doing Business in Nepal: A Guide to Indian Investors http://www.nicci.org/pdf/i-guide/i-guide.pdf Study on Private Sector Development and Prospects for Norwegian Trade and Investment Interests in Nepal (NORAD, 2003) http://www.norad.no/no/resultater/publikasjoner/noradsrapportserie/publikasjon?key=109444 Investment Guide to Nepal (UNCTAD, 2003) http://unctad.org/en/docs/iteiia20032_en.pdf U.S. Embassy in Kathmandu 2013 Investment Climate Statement http://www.state.gov/e/eb/rls/othr/ics/2013/204702.htm Industrial Statistics, Ministry of Industry http://www.doind.gov.np/documents/pdf/industrial_statistics_2067-68.pdf Nepal Labor Force Survey, 2008 http://cbs.gov.np/wp-content/uploads/2012/02/NLFS-2008%20Report.pdf Economic Survey, Ministry of Finance http://www.mof.gov.np/en/archive-documents/economic-survey-21.html Nepal Living Standards Survey, 2010-11 http://cbs.gov.np/nada/index.php/catalog/37 Doing Business in Nepal, World Bank http://www.doingbusiness.org/data/exploreeconomies/nepal/ Private Sector Development and Prospects for Norwegian Trade and Investment Interests in Nepal, NORAD http://www.norad.no/en/tools-and-publications/publications/publication?key=109444 Doing Business in Nepal, beed management, March 2013 http://www.beed.com.np/publications-detail-2.php Foreign Direct Investment in Nepal, Nefsearch Issue 05, January 2013, http://nepaleconomicforum.org/publications/detail.php?id=29&cn=nefsearch Financial Frauds, Mitigating Risks, Nefsearch Issue 06, July 2013, http://nepaleconomicforum.org/publications/detail.php?id=32&cn=nefsearch Where are the banks heading?, Nefsearch Issue 02, January 2012, http://nepaleconomicforum.org/publications/detail.php?id=19&cn=nefsearch
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Unleashing Nepal’s Hydropower Potential, Nefsearch Issue 01, December 2011, http://nepaleconomicforum.org/publications/detail.php?id=18&cn=nefsearch Review and Rationalization of the Number of Public Holidays in Nepal, June 2013 http://issuu.com/suman417/docs/public-holidays Regulation and Supervision of Financial Cooperatives, June 2013 http://issuu.com/suman417/docs/cooperatives Alignment of Corporate Taxation of BFIs and Insurance Companies to that of Other Companies, June 2013 http://issuu.com/suman417/docs/tax_parity Creating a Stronger Regulatory Framework for the Insurance Sector, June 2013 http://issuu.com/suman417/docs/insurance Business Opportunities Profile, January 2013 http://nepal.um.dk/en/~/media/Nepal/Documents/BUSINESS%20OPPORTUNITY%20PROF ILE.pdf Corruption and Anti-Corruption in Nepal http://www.norad.no/en/tools-and-publications/publications/publication?key=382812 U.S Embassy in Kathmandu’s 2012 Country Commercial Guide for U.S. Companies http://photos.state.gov/libraries/nepal/391216/Misc_%20PDF/2012CCG_FINAL_.pdf Doing Business in Nepal: A Guide to Indian Investors http://www.nicci.org/pdf/i-guide/i-guide.pdf Investment Guide to Nepal (UNCTAD, 2003) http://unctad.org/en/docs/iteiia20032_en.pdf Foreign Investment and Investment Procedures in Nepal http://www.investnepal.gov.np/portal/index.php?p1=content&p2=9#.U7zA4pSSxh5 Investment Climate in Nepal http://www.investnepal.gov.np/portal/index.php?p1=content&p2=8&mid=16#.U8TrQJSSxh4 Investment Board of Nepal http://www.investmentboard.gov.np/ Norwegian Support Schemes The Information Office for Private Sector Development in Developing Countries (Veiledningskontoret) http://www.veiledningskontoret.no Norwegian Agency for Development Cooperation (NORAD) http://www.norad.no/no/tilskudd 43
Innovation Norway Regional Office in New Delhi http://www.innovasjonnorge.no/no/kontorer-i-utlandet/india Norwegian Guarantee Institute for Export Credits (GIEK) http://www.giek.no FK Norway (Fredskorpset) http://www.fredskorpset.no Nopef (Nordic Project Fund) http://www.nopef.com Business Creates Development. What the Norwegian Authorities are doing to Promote Private Investment in Developing Countries (Norwegian Ministry of Foreign Affairs, 2012) http://www.regjeringen.no/upload/UD/Vedlegg/Utvikling/Business_development_E899E.pdf Chambers of Commerce and Industry Associations Confederation of Nepalese Industries http://www.cnind.org/ Federation of Nepalese Chambers of Commerce and Industry (FNCCI) http://www.fncci.org/ Nepal Chamber of Commerce http://www.nepalchamber.org Government of Nepal Trade Trade and Export Promotion Centre http://www.tepc.gov.np/ Nepal-India Chamber of Commerce and Industry http://www.nicci.org/ Nepal Business Forum http://www.nepalbusinessforum.org/ Information about Nepal Royal Norwegian Embassy Kathmandu http://www.norway.org.np United Nations Nepal Information Platform http://www.un.org.np World Bank Nepal http://www.worldbank.org/en/country/nepal Asian Development Bank Nepal 44
http://www.adb.org/nepal The Norway-Nepal Association http://norgenepalforeningen.wordpress.com/
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