Econ-ity » Blog Archives

Tag Archives: investment

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.

nepal-drugs-limited_profit_loss

*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.

Akash Shrestha

About Akash Shrestha

Akash Shrestha is Coordinator of the Research Department at Samriddhi, The Prosperity Foundation where his focus areas are petroleum trade and public enterprises. He also writes newspaper articles, blogs and radio capsules, based on the findings of the studies conducted by The Foundation.

Published by:

Where the private investors are pawns

With the permission given to nine private companies to import and sell petroleum product, and thus break the monopoly of the state-owned Nepal Oil Corporation only on July 10 being scrapped on July 21, the Government of Nepal (GoN) has pulled a massive joke on the Nepalese private sector, and consecutively the Nepalese consumers. On a very serious note, this is an ominous level of policy instability and has sent all kinds of negative signals to the foreign investors that have (or had) been thinking about making investments in Nepal.

If nothing else, the recent trade blockade should have taught us a lesson. Nepal was compromised largely in terms of availability of goods and services that the government has monopolised, for example, petroleum products. Another observation here will be that government to government agreements can sometimes compromise the well-being of the citizens. Because India wanted to make a statement, IOC was forced to do as per the interest of the Indian government. And since IOC is the only supplier and NOC is the only importer, Nepalese people had no way out

Had there been private companies involved in the process, they would be guided by a completely different set of interests – profit, for example. Irrespective of the government’s interests and stance, they’d be looking to make as much profit as possible. This means that the movement of goods and services would continue. And in fact, we saw this happen, too. We saw that some private individuals managed to bring in petroleum products through informal channels. This is how more than three-fourths of Kathmandu’s demand was met. It was illegal, but only because the law barred them from getting involved in the process. But people needed fuel and they were willing to pay. Now imagine if private companies were legally allowed to engage in petroleum trade! The impact of such blockade on Nepal, and most importantly, on the lives of Nepalese people could have been much less.

But now, that’s a thing of the past; and we need to focus more on the future; and we have a lot on our plates already. We need to build infrastructures, we need to invest in education, health, agriculture … you name it. And for this, we need capital to invest. And people invest when there is some prospect of return. In order to see this prospect of return, there needs to be policy stability in place. What policy stability does to prospective investors is that it gives them a sense of predictability. Irrespective of the ideologies of the government, when investors can be secure that the policy environment is going to stay stable for a certain period of time, they can at least plan their investments factoring for other constraints within that time frame and work out possible returns. But when policies change in a matter of days, investors will not bother doing all that maths. What’s worse, if you are a poor nation and need to bring in foreign investors to solve your third-world problems, you’re frankly not even going to make it to the list of possible countries in which to make an investment.

Akash Shrestha

About Akash Shrestha

Akash Shrestha is Coordinator of the Research Department at Samriddhi, The Prosperity Foundation where his focus areas are petroleum trade and public enterprises. He also writes newspaper articles, blogs and radio capsules, based on the findings of the studies conducted by The Foundation.

Published by:

Why I won’t spend my remittance on you

nepali migrant workersPoliticians and opinion leaders, often vociferously comment over the utilization of remittance in consumption and the fact of it not being channeled to productive sectors. Claims are, the country is facing decline of manufacturing and competitiveness, rising wage rates, shortage of labourers in the domestic markets, increasing imports, higher disposable income and conspicuous consumption – in short, signs of Dutch Disease. Living Standards Survey adds, 78.9% of this remittance goes into consumption while capital formation amounts to only 2.9%. The Economic Survey of Nepal 2013/14 reads, “… its utilization in productive sector has been a major concern.”

If we look at the ground realities, on the other hand, it can be clearly understood why things have been going the way they are. And what is more, it is perfectly rational on the consumers’ side that they are consuming and not contributing to capital formation.

Here are some of the reasons why:

– Lots of Nepalese people still face problems like hunger and lack of access to education, health, drinking water, entertainment and more. Irrespective of the poverty rates (which has been brought down by a considerable measure, thanks to remittance), a large chunk of Nepalese populace still has poor standards of living in addition to lack of access to opportunities that can lift them out of their kind of lifestyle (if not for foreign-employment). Therefore, many youngsters acquire loans from friends, family and other networks and head for the foreign land in search of job opportunities. When one has to worry about the fulfillment of his basic needs and repayment of loans he has acquired just to be able to go abroad, it does not require knowledge of rocket science to tell that the person will spend on his basic necessities and loan repayment and not worry about macro-economic indicators of the country.

– The next major sector where the remittance money is spent is on health and education. Although these are not direct forms of capital accumulation, one cannot simply discount the fact that current investment in good education will create an educated future generation that can contribute to the country’s economic growth in the long run. An investment in education today holds the key to prosperity in the future.

– After health and education, what follows is, what is commonly known as “conspicuous consumption” – spending in buying luxury items, cars and land. Considering the fact that saving in banks gives a negative real return in saving (due to higher inflation as compared to the interest rates offered by the banks), it makes more sense to spend the money today and realize its full value than to save money and see its worth decline day by day. Given that the land and vehicle prices generally go up in our country, such spending offers prospect of better returns in future than the returns from saving in financial institutions.

Therefore, if we look at things from an individual’s or a family’s perspective, it is sensible that the remittance money is goes on basic consumption and not on capital accumulation. Individuals have the best knowledge of what their necessities are – better than any opinion leader or any planner – and they make rational choices based on their needs.

Thus, if one expects that remittance money should be channeled to productive sector, instead of making investment in buying a car or a house or even land in one of the cities of the country for that matter, relevant changes need to be made in the policy environment of Nepal. There are no alternative avenues to save at the moment. Doing business is difficult thing in Nepal. Doing Business Report 2014 (World Bank) puts Nepal in 105th position out of 189 countries. If this were easy, people would enterprise in Nepal itself which would create job opportunities for many, leading to mobilization of the youth, creating wealth and reducing the income and social inequalities in Nepal.

Another possible mechanism to channel this money could be that the government issue lucrative bonds (meaning positive real returns) for specific infrastructure projects like hydropower or roads. There have been initiatives of this sort in the past but these have failed utterly in the absence of right marketing and penetration ability. Nepal receives remittance that equals the fiscal budget of the nation. This shows that if there is prospect of return, people have money that could be channeled to capital accumulation. But the current case in Nepal is one of lack of sufficient homework in the part of the state.

Akash Shrestha

About Akash Shrestha

Akash Shrestha is Coordinator of the Research Department at Samriddhi, The Prosperity Foundation where his focus areas are petroleum trade and public enterprises. He also writes newspaper articles, blogs and radio capsules, based on the findings of the studies conducted by The Foundation.

Published by:

Tapping small investments – lesson from IT

ITForeign Investment and Technology Transfer Act (FITTA) 1992 has made a provision whereby a foreign investor can invest in any sector in Nepal except arms and ammunition, tourism, cottage industries, personal service business, engineering and legal services and consultancy services. Other than these sectors, an investor can invest as much money as he/she pleases. However, the practice has been such that a foreign investor has to commit to investing at least $50,000. Not only is this practice completely against the spirit of FITTA, it also limits Nepal prospects of realizing foreign investments and the scale is substantial.

Besides being risk-free sources of investment for a host nation, Foreign Direct Investment (FDI) signifies modern technologies, advanced skill sets and lots of employment opportunities. If the business is profitable enough, foreign investors even contribute to developing infrastructure in the sites of their business operation, therefore reducing the fiscal burden of the government.

Nepal, being mired in political instability, inflexible labor laws, poor infrastructure and weak capital markets, bars itself from attracting very large FDIs. Out of tens of billions worth of FDI commitments, investments worth only around one hundred million dollars have been realized till date. If Nepal is to graduate to a Developing Nation status by 2022, we need more economic activities and smaller FDIs can play a big role in the process – IT sector is an example.

IT is one of the fastest growing sectors in Nepal and there are lots of IT companies running on foreign investments and employing hundreds of Nepalese people. One of the characteristics of this sector is that their projects (mostly developing programs) can be carried out with investments ranging anywhere between $8,000 and $12,000. These projects, if they fail to deliver as per the demands of market can be dropped altogether and new projects can be started. Quite a number of projects in this sector are thus dropped. This very fact makes investing in small clusters more preferred to large investments (like the over-$50,000 ones).
However, a move to introduce a floor on amount of permissible FDI – which stems out from the spirit of protecting domestic industries and curbing crime (as some foreigners were found to be conducting illegal activities in Nepal under the protection of a fake small-scale enterprises), has effectively barred genuine small foreign investors from investing in Nepal.

Nepal needs to muster as much foreign capital as it can attract in order to hasten the pace of economic growth. But the lack of bargaining power as a state, owing to the sorry-state of its business environment means that the prospect of realizing heavy investments is miniscule. Therefore, Nepal needs to tap these smaller but scores of investments.

One of the first things to take care of, then, would be to repeal the stipulation that requires at least $50,000 worth of commitment from foreigners to be eligible to invest in Nepal. The Act itself stipulates no such thing. It was introduced through an administrative process and thus a court decision should suffice.

Akash Shrestha

About Akash Shrestha

Akash Shrestha is Coordinator of the Research Department at Samriddhi, The Prosperity Foundation where his focus areas are petroleum trade and public enterprises. He also writes newspaper articles, blogs and radio capsules, based on the findings of the studies conducted by The Foundation.

Published by: