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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.

Ashesh Shrestha

About Ashesh Shrestha

Ashesh Shrestha is an independent researcher. He has an Economics background and is interested in Monetary economics and Public finance.

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Across Borders

In light of the economic blockade faced by the country, trading across border has become a major topic for discussion among the Nepali people. However, even without the blockade, doing business across border is difficult in Nepal. In a recently released report by the World Bank titled ‘Doing Business 2016: Measuring Regulatory Quality and Efficiency’, Nepal ranked 99 out of 189 countries for ease of doing business. This, coupled with its poor performance in trading across border, shows that it is challenging for Nepali entrepreneurs to do business internationally, regardless of the economic blockade. The border and document compliance costs are high, ample amount of time is wasted at ports, and in contrast to other countries, Nepal’s performance is very poor.

Ongoing scenario

Amidst the current embargo, it is taking many days for the shipments to reach their destination, while a lot of them are stuck at the border for months now. But even before India’s unofficial blockade, one can argue that on-time delivery of shipments was not our strong suit. Ideally, to fulfil all the border compliances, it takes 60 hours for exports and only 30 hours for imports. These compliances include obtaining, preparing and submitting documents during port or border handling, customs clearance and inspection procedures. A number of factors contribute to this delay, but especially for goods that are being exported, one of the reasons is the non-accreditation of the Nepal Bureau of Standards and Metrology (NBSM) approved tests by the Bureau of Indian Standards (BIS). This obstacle has led to increased time and cost, as samples have to be sent to labs abroad for approval. If the Indian side, regardless of the present blockade, has not been accrediting our tests, then NBSM should improve its standardised tests to meet Indian standards.

The goodwill of any business largely depends on its ability to deliver goods on time. The government obviously would want to promote exports, but the existing strenuous domestic compliances on exports, that do nothing but delay the delivery, is unreasonable.  Ten different documents are obligatory for international trade in Nepal, while other countries such as Serbia, Botswana, Japan, two of which are landlocked countries, require much less. Also, it is no surprise that to comply with all the documents required for trade, it takes 19 hours for exports and 48 hours for imports (as per the latest Doing Business report), probably owing to the lack of clarity in roles and responsibilities among ministries, departments and implementing agencies.

Other countries that export at a larger volume or have more variety of trading products have lower compliance costs. For instance, compliance costs in Sweden and Netherlands are only $55 and $0 respectively. One cannot expect Nepal to be at a par with them, but the current cost of almost $311 for exports from Nepal is huge.

Being a landlocked country, Nepal relies heavily on imports. If the required volume of essential commodities does not reach the country for some reason, shortages loom and prices rise. Also, when the cost of doing business through official channels is high, it is likely that unofficial channels would be used, which boosts the underground economy, or black marketeering. Lower cost of trade would encourage people do to business through official channels.

Overcoming challenges

One might argue that even if the government makes favourable policies for international trade, Nepal, being a landlocked country, does not have access to sea. Nor does it have railway systems or efficient airports. And thus, its performance gets adversely affected. But other landlocked countries such as Serbia, Bhutan and Czech Republic fare better than Nepal. Bhutan, for instance has a similar transport system as Nepal. It has one international airport, no railway system, and international trade takes place via road, just like in Nepal. However, in these countries, border compliances are more lenient and only four documents need to be submitted which takes far less time than in Nepal.

The quantitative indicators, as presented in the Doing Business report, reflect how a country performs in ten different components. Our performance in trading across borders shows that, regardless of the current embargo, there are some policy loopholes that need to be addressed. First, redundant documents required for international trade can be removed or combined if possible. Also, a one-window policy for some, if not all, documents would reduce the time and effort taken for document compliance. In addition, an integrated database system, interlinked between ministries, departments and related agencies can also be a viable option to improve coordination. The costs incurred during trading across borders need to be re-evaluated. This would make trade cheaper and encourage businesses to expand. In addition, creating mechanisms that aid in reducing border compliance time would make trade more professional. Policies that incentivise businesses in delivering their products on time would smoothen and boost trade across borders. There are landlocked countries that have strong economies and are competitive in the world market; if they can do it so can we!

This article was originally published in The Kathmandu Post on the 14th of January, 2016. The article was authored by Abyaya Neopane. For the original version of the article, please click here

Abyaya Neopane

About Abyaya Neopane

Abyaya Neopane is an independent researcher. He comes from an Economics background.

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Doing Business In Nepal: Ins and Outs of Opening a Private School in Nepal

Education Rules, 2002, and amendments following it necessitate presenting seventeen different documents to establish and run a private school in Nepal.  The process to prepare all these documents involves reaching out to a number of government offices to get approvals. This article intends to talk of the time and cost factor associated with it, at length. A snapshot of the private school registration process is presented below: School Registration Process

Firstly, a school needs to be registered as a company and acquire a certificate that proves successful registration of a company which takes around 3 days and requires a registration fee in accordance to capital invested. But similar to other legal procedures in place in Nepal, common men fail to comprehend the technicalities, and turn to a law professional.  One usually hires an external lawyer which could take up to 5 days for a charge of Rs.5000-10000 as lawyer consultant fee. After obtaining registration certificate from the Office of Company Registrar, Personal Account Number (PAN) registration is required which adds up one more day.  Next is to obtain a recommendation letter from VDC/municipality.

In order to ensure the so-called “friendly competition,” it is necessary to obtain letter of approval from two similar schools which adds up more than a week. If we dig down a little into this requirement, this holds the potential to creating a syndicate, and a cartel in the education system in the country. For a person running a company, the lesser the number of competitors, the higher the prospect of profits. When law requires any new entrant to get permission from the existing players, the existing players can very well collude and bar new entrants from entering the industry. With possible new entrants at check, the existing players can then manipulate the fees, facilities, teaching standards and everything else that they are responsible for providing.

Coming back to the registration process, when the DEO calls for letter of application, one needs to submit the application form which costs RS.1000 along with all other stipulated documents before end of Poush (December). Within three months of submission of form, the DEO sends a school inspector to inspect the doc­uments and infrastructure of the said school, the school management board and other facilities to be provided by the school, who then, submits the report to the DEO. Once the decision is made, the DEO calls the founder of the school to officially grant  permission to operate said school, 30 days prior to the commencement of new session.

Thenafter, one needs to make a certain amount of security deposit at one of the stipulated banks. After submission of the deposit slip, the DEO gives the permission to establish and run the school. The total time consumed to obtain all the documents is 23-25 days and an additional 3 months (of waiting for a process that is concluded in 1 day) to acquire permission from the DEO, and the total cost incurred to register a school is minimum Rs. 56,000 and increases upon the type of school and level being registered.

However, DEO does not inform those schools which have not been granted permission to operate. One needs to follow up with DEO to know the verdict and the reasons for not granting approval are also not specified.

Interviews with school-heads during the research saw a number of them reflecting on the cumbersome and generally long process of opening a school with a sense of need for change. Instead of approaching OCR, DEO, VDC/municipality, SMC in order to collect documents, it would rather be easy if the government followed a one stop policy and made SMC as the only institution to grant the permission. The procedure of having to obtain letters of approval from the VDC and other schools is the most complained about step by the applicants as it is very time consuming and having to take approval letter from three places deems unnecessary.  Plus, it takes three months for the DEO to give its decision. It is also necessary to clear out issues on why a school is being rejected as it gives direction to where the applicant needs to reform in order to apply next year.

Deekshya Nakarmi

About Deekshya Nakarmi

Deekshya Nakarmi is Communications and Outreach Assistant at Samriddhi, The Prosperity Foundation. She is a student of Development Studies.

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