• On mature reflection

    This article was originally published by Labisha Uprety in The Kathmandu Post on October 2, 2016.

    Shree Namsaling Higher Secondary School, established in 2006BS, is a sizeable community school located in Namsaling, Ilam. It has close to 45 ropanis of land but fewer than 350 students. The place is scenic—misty and cool in the mornings.

    A colleague and I were studying a number of private and community schools in the area. The vice principal of the school was kind and welcoming, and answered all my questions patiently. The teachers were, by and large, genuinely interested in teaching the children. The school-ground, where children played happily, was big enough to take long walks on. But one look at the school’s SLC results, and everything else would seem trivial. The 10th graders in particular were performing dismally, especially in Maths, English and Science. Although I believe that SLC results are hardly the best indicator of a child’s performance, exam results are an important means to assess student progress.

    School politics

    However, what began as an assessment of exam results led to an eventual examination of the power structure between the school management committee (SMC) and the institution. Every school has an SMC, which is largely comprised of parents of those studying in the school. But there is also space for ‘donors’, which is usually used by political parties to step formally into the school. The principal of the school is also part of the SMC; so is one teacher elected from the pool of teachers.

    In a very strange turn of events, none of the community schools we visited had an active principal; all were managed by the vice-principal. One was reportedly away on informal visits, and two had mysteriously failed to turn up at the schools when the audit season came. The money that each community school gets—a sum divided under numerous headings such as salaries and scholarships—requires only the principal’s and the head of the SMC’s signature for mobilisation. It then requires no further monitoring throughout the school year and is examined by auditors at the end of the school year, again handled usually by the principal alone. The audit reports list repair and infrastructure costs. But the teachers state that even classrooms have been without doors for a long time.

    We have been more than aware that problems in public schools stem from management practices and the infiltration of politics in them. Private schools are hardly all virtuous, but they deliver better exam results and are generally not an active political breeding ground. One thing missing from community schools is the effective incentivising of the management system and teachers. This is not to say that all private schools practise this. But public schools could begin with incentivising the management system to educate children better rather than pocketing the change with every other transaction.

    Hire and fire policy

    Teachers in public schools may be better trained than those in private schools, but what good is the training when teacher absenteeism is rife? In particular, those teaching Maths, Science and English seem to continually drop out of public schools and opt for entering the bureaucracy formally, leading to dismal results in these subjects.

    A performance-based salary incentive for the contribution—in terms of time, effort and output—for both the SMC members and teachers would perhaps make for a better model, while also allowing for timely checks on monetary transactions. Though the law has provisions for school inspections, this is a rarity in rural areas, where school representatives frankly said that they had never seen a school inspector during their long service at the school.

    Community schools rank fairly low in terms of exam results, but it would be premature to conclude that they have all failed. There are many examples of how certain public schools have managed to draw students. These schools hire private teachers to fill in teaching gaps and charge students—usually only those who are directly taught by the private teachers—a small fee to pay them. The flexibility to hire and fire staff is important in an education system that should be retaining only the best teachers. Of course, this does not mean people can be fired without due reason and process; it simply means that the mechanism should be in place and practised when the need arises.

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  • Let It Die

    -This article was originally published by Akash Shrestha in Republica on September 26, 2016.

    After the 1990 political change, Nepal embarked on the path of economic liberalization. The private sector would from then on lead the economy, with the government offering growth-boosting policies and laws. In this context, between 1990 and 1996, the country grew by 5 percent a year,  hitting an all-time high of 8.2 percent in 1994. This showed that liberalization works in Nepal if we have liberal policies. So in its ninth five-year plan (1998-2002), the National Planning Commission recommended privatizing 30 state-owned enterprises (SOEs).

    But economic liberalization has not been a smooth sailing for Nepal. We have gone through a decade-long civil war, another decade-long peace-building and constitution-drafting transition and various political movements. Meanwhile, economic policy reforms took a back seat.

    Nepali Congress had led the first wave of economic policy reforms. Today, NC is the largest parliamentary party and controls the Ministry of Industries (MoI), the same ministry that was at the forefront of first wave of economic liberalization. It is therefore interesting that MoI itself is looking to revive some of these sick public enterprises (PEs) that were picked for privatization during the 1990s. The ministry, we are told, aims to revive at least three PEs within this fiscal, including the Nepal Drugs Limited (NDL).

    Some arguments in favor of reviving NDL are: It will ensure availability of quality and affordable drugs to the general public; it will save the government money that would have been spent in procuring drugs from outside; it will send a positive signal to private investors; and that it will help create jobs. Let us look at these assumptions.

    First, government running the NDL will not send a positive message to domestic and foreign investors. NDL is only one drug manufacturer in an industry that has more than 50 registered private enterprises. Most of them are making profits. So private investors are already interested in the drug industry, having spent around Rs 20 billion in it. Private drug-makers today meet half the market demand in Nepal. NDL will struggle to compete in this competitive market.

    Nor will reviving it send a more positive signal to investors. Since NDL is a state-owned enterprise, the rules that apply to private companies do not apply to NDL. NDL neither has to depend on investors for its capital, nor on consumers for its revenue. Therefore, it will put NDL at an unfair advantage.

    Second, it is not true that reviving NDL will save government billions of rupees and ensure quality drugs in the market. Yes, NDL could produce drugs that replace some foreign incumbents. But the impact will be minimal. The government distributes a total of 70 drugs (including antibiotics, medicines for diabetes, high blood pressure and heart diseases) for free, spending big money. Going by NDL’s past record, if it is to produce all these drugs, it will do so at a higher cost than the costs of the private companies. NDL has already accumulated over a billion rupees in losses and another half a billion in unfunded employee retirement liabilities. It owes another billion rupees to the government.


    *Source: SOE Information: Yellow Book, Ministry of Finance, 2002/03 – 2015/16
    ** Data for the year 2012/13 could not be accessed

    As is the case with most other sick public enterprises, NDL was also beset by constant political intervention and mismanagement, before it shut down. Millions of rupees have been injected into it to resume its operations (Rs 50 million four years ago being the latest injection of cash). With that track record, there is little prospect for structural reforms in the NDL. Again, with so many successful private enterprises, do we even need NDL?

    As regards quality, 37 private drug industries in Nepal have the World Health Organization’s Good Manufacturing Practice (GMP) certificates. But NDC is yet to acquire GMP certification.

    Third, of course new enterprises create jobs. But the government is not a productive agent in itself. Rather it is a redistributive agent. And, historically, the government-run state enterprises in Nepal have not been known for their job-creation capabilities. The money that is going to be injected into the NDL is going to come from the national budget, which means from taxes, grants and loans.

    In today’s context, every job that the government creates displaces the job that the private entrepreneurs could have created themselves. Government does not create new jobs, it shifts jobs from one industry to another, and puts the human resources to a less efficient use. If it is employment we are worried about, like Milton Friedman said, we could simply ban the use of machines and make everything manually. Voila! Employment all around.

    Fourth, on balance of payment, we export what is of lesser value in the domestic market and import what is of higher value in the local market. If everybody is gaining in value through this trade, should we be imposing a constraint on economic actors? Alternately, if local producers were producing high-value commodities, we would not need to import them. But in our effort to revive the NDL, we are ignoring the contribution of profit-making enterprises and putting our bet on a loss-making, inefficient enterprise. If it is so much about balance of trade, let’s export all electricity to Bihar and import fashion from there.

    Finally, the Ministry has not clarified if the old structure of the NDL will be retrained. And will it be privatized based on public-private partnership (PPP), management contracting, or cooperative model? Saying that NDL will be privatized is not enough.

    Yes, there are flaws in Nepal’s private sector, which indulge in own anti-competitive practices that have often compromised the well-being of consumers. But it is also true that Nepal as a poor country has serious administrative and fiscal deficiencies. If a government with this scale of administrative and fiscal deficiency tries to do it all, it will result in nothing but failure. The government should rather be acting as a facilitator and a monitor guaranteeing that there is a conducive policy regime, no anti-competitive practices and businesses compete to deliver affordable products.

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  • Examining insolvency in policy and practice

    This article was originally published by Labisha Uprety in The Himalyan Times on September 25, 2016.

    Insolvency is a relatively little used term in Nepal – discussions on it are fairly limited to niche circles of business and/or law. However, insolvency is one of three company exit procedures as allowed by the Nepalese legal system – the first two being cancellation of registration and voluntary liquidation of company. Being insolvent simply means that a company is unable to clear its debts and has been running under alarm-triggering losses for a substantial period of time. The Insolvency Act 2006 governs insolvency dealings in the country and allows for a number of parties to file for insolvency at the Appellate Court: the company itself, or creditors/shareholders/debenture-holders of the company. The regulatory body under which the company is registered (such as the Insurance Board for all insurance companies or the Nepal Rastra Bank for all banks and financial institutions in the country) can also file for insolvency if it has amassed substantial evidence that the company in question is unable to pay its debts. There are two options that a company can undergo once the Appellate Court accepts the case – either liquidation (which would imply selling off all assets to settle debts, and closing the company) or restructuration (modifying operations in order to rescue the business by cutting costs and selling assets or even changing ownership if needed).

    The initial process

    After a case is filed under insolvency, the court will review the evidences and host a hearing in 15 days’ time. During this time period, the company in question is allowed to offer evidence-based counter arguments as to why it should not be declared insolvent and forced to liquidate its assets. When the court decides it has found no reason to stall the insolvency procedure, it will appoint an inquiry officer to re-evaluate the company’s financial state of affairs. This investigation often lasts for a period of 90 days after which the inquiry officer will generate a report explaining whether the company could be restructured or needs to be liquidated. The Appellate Court then, based on the inquiry officer’s report, holds a meeting with the applicant on finalizing the best course of action.

    Increased length of proceedings

    Liquidation under insolvency is the last resort for any company. Naturally then, regulatory bodies or creditors of the company will not have filed for application without substantial homework. In particular, when the insolvency filer is a regulatory body – well aware of government proceedings and following due process – the inquiry official appointment, whose work can again be reviewed by the liquidator makes for redundancy. While appointment for an inquiry official is warranted in cases of body/bodies not too familiar with the due process, the decision to twice review a regulatory body’s decision (first by the inquiry official and second by the appointed manager/liquidator) could be relaxed – for it may only work to lengthen the procedure.

    A separate administration office

    Though the law states that there will be a separate provision for an Insolvency Administration Office, no such office exists even after 8 years of the Act having been passed. Currently a number of functions that the law envisages the new office to take over is being handled by the Office of the Company Registrar. This includes registering insolvency practitioners, and issuing and renewing their licenses. It also includes maintaining insolvent companies records – but the OCR is currently burdened with documentation of over 100,000 shell companies alone. These shell companies’ records are ones that OCR should be looking into in order to cancel their registration but has not been doing so for many years. If the law provisions for a separate administration for insolvency, then this would reduce one set of burden fror the OCR – allowing them perhaps to engage more resources in dealing with shell companies.

    Lack of cross-border insolvency policies

    A remarkable absence in the reigning Insolvency Act is the lack of policies for cross-border insolvency. If a parent company based on borders outside of Nepal closes, what does this mean for its branches here? There is a lack of clear policy options for this particular case, and with Nepal housing a large number of international companies’ branches – options to ease this probable concern is a necessity.

    Insolvency may be thought of as fairly uninteresting – but when a company is insolvent, it means it is sitting on resources that could be freed for other uses. Having a smoother facilitative process would allow for companies and people to use these resources better and create newer ventures and better innovation.

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  • Nepal falls behind in economic freedom

    In the Economic Freedom of the World Report 2016 Annual Report, Nepal ranks 108th out of 159 economies, with an overall score of 6.54 (in a scale of 1 to 10 where a higher value indicates a higher level of economic freedom). Nepal has dropped two places down in the global ranking compared to last year’s ranking. Previously, Nepal ranked 106th out of 157 economies with a score of 6.56.

    EFWR 2016

    Nepal scores in key components of economic freedom are:

    • Size of government: dropped to 7.89 from 8.72 in the last year’s report
    • Legal system and property rights: climbed to 4.79 from 4.33
    • Access to sound money: climbed to 6.43 from 6.42
    • Freedom to trade internationally: climbed to 6.72 from 6.47
    • Regulation of credit, labour and business: climbed to 6.87 from 6.85

    About the Economic Freedom Index

    The Economic Freedom of the World Report is world’s premier measurement of economic freedom, measuring and ranking countries in five areas: size of government, legal structure and security of property rights, access to sound money, freedom to trade internationally, and regulation of credit, labour and business. It measures the degree to which the policies and institutions of countries support economic freedom.

    The Fraser Institute produces the annual Economic Freedom of the World report in cooperation with the Economic Freedom Network, a group of independent research and educational institutes in nearly 100 nations and territories. Samriddhi Foundation is member of the Economic Freedom Network and is a co-publisher of the report in Nepal.

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  • The Cost of Starting a Business in Nepal

    The higher the cost of entry, the lesser the number of new enterprises.

    The cost associated with starting a business is a very important factor in determining the number of new businesses that enters a market. The higher the cost of entry, the lesser the number of new enterprises in the industry. Entrepreneurs then tend to prefer the non-formal economy to the formal. The effects of such is far-reaching.

    On one hand, the entrepreneurs are forced to compromise any prospects of growth as operating in the non-formal sector means that their access to finance, volume of business, protection of properties, enforceability of their agreements with other parties are null to limited (at best). On the other hand, the consumers are also worse-off because now the competition in the formal sector is effectively curtailed and as a result, the consumers’ choices in terms of quality of products and prices are also reduced. Clearly then, it is on every party’s best interest to have a low cost of starting a business.

    What are the costs associated?

    First, there is the monetary cost, and then, the non-monetary. According to the World Bank’s Doing Business Report (2016), the monetary cost of starting a business in Nepal is 28.4 percent of GDP per capita (which is more than twenty thousand rupees). And that is only considering the cost of registering at the Office of Company Registrar, the Inland Revenue Office, getting a company rubber stamp, and enrolling the employees in the Provident Fund. But, for an entrepreneur to be able to operate his business (from the moment he starts his company registration process), he needs to get permission from the department of industry/cottage and small industry under concurrence of the associated ministry (say, agriculture or tourism, depending on the nature of the enterprise), register at the local agencies like the municipality/VDC, do an Environmental Impact Assessment (EiA), manage electricity supply for his enterprise, etc. So there is a whole host of other things that the report does not look into, and yet, the monetary cost of starting a business is massive.

    Then, there is the non-monetary cost. For example, there are cases in Nepal where it has taken more than three years for an aspiring entrepreneur to get a clearance on EIA from the Department of Industries. With this, comes a huge opportunity cost. Also, if entrepreneurs got EIA clearances in (say) two weeks, instead of anything between a few months to a few years, the entrepreneur could have already started his business and started making money. The amount of time, energy and forgone revenue are also his costs. And then there are costs associated with acquiring professional/legal services should the aspiring entrepreneur choose to save his personal time and effort – costs that could have been avoided with a clear and simple process.

    Apart from the cost to entrepreneurs, the government also has to bear the cost of administration of the works related to registration of businesses. As there are multiple number of government agencies that are involved in the process of business registration, it has increased the cost of regulating entry (of new businesses into the industry).

    The agencies that are involved in the business registration process are Office of the company registrar, Office of Cottage and Small Industries, Commerce Office and Inland Revenue Office.  Excluding the cost of operation of Office of the Company Registrar, the operation costs of other agencies regarding business registration (which includes only salaries paid to the government officials for the amount of labour hour they have spent on business registration) is more than 250 million rupees. As the government meets all these expenses from tax payer’s money, the ultimate incidence lies on the heads of tax payers.

    Some of the best practices and reforms

    If we look into the World Bank’s Doing Business Report, the best performers share some common features. In these countries the cost of starting a business is very low. It ranges from 0.3 to 2 percent of the GDP per capita. It takes maximum of two days to officially complete the works of registration. The procedures are limited to 2 to 3. Furthermore, an entrepreneur can apply for business incorporation online. This has made business registration process easy and cost efficient.

    Apart from these top performers, some of the average performers have (in recent times) made reforms that have helped them reduce the cost significantly. Azerbaijan made an important reform – it started the operation of one window shop in 2008 for business registration. This single reform reduced the time and cost in starting a new business by half and business registration increased by as high as 40% in just 6 months. Similarly, in 2010 Mexico established an electronic platform for company registration and, in 2011, launched an online one-stop-shop for business registration.

    Lessons that we can draw

    As mentioned above, one potential reform can be establishing a one window shop which administers all the works related to registration. Given the current status of business registration, i.e. having to go to a multiple number of agencies to complete business registration, one stop shop is a good initial target. This can save a lot of time and energy of entrepreneurs, reducing the opportunity cost. Moreover, it reduces the cost of operation of multiple number of offices. The next level reform can be made by initiating electronic registration. Currently, the problem with electronic registration, is lack of agency to verify and regulate the digital signature and lack of provision of electronic payment. Only if these two things are made available, the next level reform will be possible. Registration through electronic platform is more convenient, requires less effort and saves time and money. These reforms will also encourage entrepreneurs operating in the non-formal economy to formalize their businesses.

    This article was originally published in The Himalayan Times on September 11, 2016.

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  • NOC Leaching in Broad Daylight

    This year’s budget speech saw an interesting remark from the former Finance Minister Bishnu Paudel. The government decided to levy a Budhi Gandaki Hydropower tax to the citizens. In its defence, the government also further stated that entire Nepali people would not have to bear the burden of this new tax. The taxes would be charged only on petroleum products, and what’s more noteworthy, they said that the Nepal Oil Corporation would bear the entire burden, without transferring that to the customers of the petroleum monopoly.

    Here is an excerpt from the budget speech:



    Now how would the government extract a tax without burdening the customers? Let’s take a look at the pricing system of NOC.
    NOC Leaching

    Source: NOC Fortnightly Profit and Loss Details (http://www.nepaloil.com.np/uploads/pdf/01August2016-Updated.pdf)

    If you look at the above appendix, we have highlighted three sub headings of this pricing system. An infrastructure tax ( for Budhi Gandaki Hydropower) which is Rs 5 on petrol (gasoline) and so on, which is added onto the government revenue. If we look below, two more things are added into the price that a customer pays, first one is for NOC’s infrastructure development and second one is for NOC’s profit.

    Now, we would expect NOC, a government monopoly to fund infrastructure tax of Rs 5 in petrol, diesel and airplane fuel, from the profit and NOC’s infrastructure development expenses that it charges from the people, which is not at all the case. Instead, what they have done is make use of declining oil prices in the world market which has allowed them to ostensibly “decrease the price” and still scupper huge amounts of profit to fund their bonuses.

    While the government argues that the burden is not spread to the customers or the general public, it is clear that NOC has added the cost to its customers by making use of general decline of world oil prices. The readers are urged to note here that only until 2014 AD, NOC was at a loan burden of  US $410,837,180 that it had acquired from Government of Nepal (GoN), Citizen Investment Trust (CIT), Employees Provident Fund (EPF), Commercial Banks and Indian Oil Corporation (IOC) to fund its inefficient business. All of this loan has now been paid (within a span of just over one year) by nothing but manipulating the price of petroleum products.

    Thus, great profiteering game of NOC and its bonus-seekers rages on, deluding the Nepalese citizenry of the real prices they need to pay under competitive market, which would be much much lower.

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